<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BOX HILL SYSTEMS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW YORK 3572 13-3460176
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
BOX HILL SYSTEMS CORP.
161 AVENUE OF THE AMERICAS
NEW YORK, NY 10013
TELEPHONE: (212) 989-4455
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PHILIP BLACK
CHIEF EXECUTIVE OFFICER
BOX HILL SYSTEMS CORP.
161 AVENUE OF THE AMERICAS
NEW YORK, NY 10013
TELEPHONE: (212) 989-4455
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-------------------------
COPIES TO:
<TABLE>
<S> <C>
IRWIN A. KISHNER, ESQ. THOMAS A. COLL, ESQ.
DAVID LUBIN, ESQ. CARL R. SANCHEZ, ESQ.
HERRICK, FEINSTEIN LLP COOLEY GODWARD LLP
TWO PARK AVENUE, 21ST FLOOR 4365 EXECUTIVE DRIVE, SUITE 1100
NEW YORK, NY 10016 SAN DIEGO, CALIFORNIA 92121
TELEPHONE: (212) 592-1400 TELEPHONE: (619) 550-6000
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
promptly as practicable after this Registration Statement becomes effective and
after the effective time of the proposed merger described in this Registration
Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value..... 10,324,797 shares $1.913 $19,751,336.66 $5,490.87
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the number of shares of common stock, including shares issuable
upon exercise of options, of the Registrant which may be issued to former
securityholders of Artecon, Inc. ("Artecon") pursuant to the merger
described herein.
(2) Each share of common stock of Artecon will be converted into 0.40 of a share
of common stock of the Registrant pursuant to the merger described herein,
and each outstanding share of preferred stock of Artecon will be converted
into that fraction of a share of common stock of the Registrant as is
determined by dividing (x) the number obtained by dividing (1) $4,988,318 by
(2) the closing sales price per share of common stock of the Registrant as
traded on the New York Stock Exchange Composite Transactions Tape on the
last trading day immediately preceding the closing of the merger, by (y)
2,494,159. Pursuant to Rule 457(f) under the Securities Act of 1933, as
amended, the registration fee has been calculated based on the average of
the high and low sale prices per share of Artecon's common stock as of June
9, 1999 as reported on the Nasdaq National Market System.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION, DATED JUNE 10, 1999
PRELIMINARY PROSPECTUS/JOINT PROXY STATEMENT
[BOX HILL LOGO] [ARTECON LOGO]
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Box Hill Systems Corp. and Artecon, Inc. have
each unanimously approved a merger agreement which provides for the merger of
Artecon and Box Hill, whereby Artecon will become a wholly-owned subsidiary of
Box Hill.
If the merger is completed, holders of Artecon common stock will receive
0.40 of a share of Box Hill common stock for each share of Artecon common stock
they own. This is a fixed exchange ratio that will not be adjusted for changes
in the stock price of either company. In addition, holders of Artecon preferred
stock will receive that fraction of a share of Box Hill common stock in exchange
for each share of Artecon preferred stock that they own as is determined:
- by dividing $4,988,318 by the closing sales price per share of Box Hill
common stock on the New York Stock Exchange on the last trading day
before the closing of the merger; and
- then dividing that number by 2,494,159.
The shareholders of Box Hill will continue to own their existing shares
after the merger. Box Hill expects to issue approximately million
shares of Box Hill common stock to Artecon stockholders in connection with the
merger (and reserve shares to be issued upon the exercise of Artecon
options that will be assumed by Box Hill in the merger). As a result, the former
Artecon stockholders will own approximately % of the outstanding Box Hill
common stock after the merger and the current Box Hill shareholders will own the
remaining %.
We cannot complete the merger unless the shareholders of both companies
approve the matters proposed in this prospectus/joint proxy statement. Approval
of these matters is virtually assured because, as part of the merger
negotiations, holders of a majority of the shares of both Box Hill and Artecon
have agreed to approve these matters.
Each board recommends that its respective shareholders approve the matters
described in this document. Your vote is very important.
We have scheduled special meetings for the shareholders of Box Hill and
Artecon to vote on the merger. Whether or not you plan to attend your special
meeting, please take the time to vote by completing and mailing the enclosed
proxy card to us. If you sign, date and mail your proxy card without indicating
how you want to vote, your proxy will count as a vote in favor of the merger.
If the required approvals of the shareholders of Box Hill and Artecon are
received and the other conditions to the merger are satisfied or waived, we
expect that the merger will be consummated on or promptly after ,
1999.
You may vote at your special meeting if you own shares as of the close of
business on , 1999. The dates, times and places of the special
meetings are as follows:
<TABLE>
<S> <C>
For Box Hill shareholders: For Artecon stockholders:
, 1999 , 1999
a.m. local time a.m. local time
Herrick, Feinstein LLP 6305 El Camino Real
Two Park Avenue, 21st floor Carlsbad, CA 92009-1606
New York, NY 10016
</TABLE>
This document is both the prospectus of Box Hill for the Box Hill common
stock to be issued in connection with the merger and the joint proxy statement
of Box Hill and Artecon for their respective meetings. This document provides
you with detailed information about the proposed merger. We encourage you to
read the entire document carefully, including "Risk Factors" beginning at page
.
<TABLE>
<S> <C>
Philip Black James L. Lambert
Chief Executive Officer President and Chief Executive Officer
Box Hill Systems Corp. Artecon, Inc.
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED OR DISAPPROVED THE BOX HILL COMMON STOCK TO BE ISSUED
IN CONNECTION WITH THE MERGER OR DETERMINED IF THIS PROSPECTUS/JOINT PROXY
STATEMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus/Joint Proxy Statement dated , 1999 and first mailed to
shareholders on or about , 1999.
<PAGE> 3
PRELIMINARY PROSPECTUS/JOINT PROXY STATEMENT
[BOX HILL LOGO]
161 AVENUE OF THE AMERICAS
NEW YORK, NY 10013
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1999
To our Shareholders:
We will hold a special meeting of Box Hill Systems Corp. shareholders on
, 1999 a.m., local time, at the offices of Herrick, Feinstein
LLP, Two Park Avenue, 21st floor, New York, New York 10016, for the following
purposes:
1. To consider and vote upon (i) the approval and adoption of the
Agreement and Plan of Merger, dated as of April 29, 1999, among Box Hill,
Artecon, Inc., a Delaware corporation, and BH Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Box Hill, and (ii) the approval
of the issuance of shares of common stock of Box Hill to the stockholders
of Artecon. Upon consummation of the merger, Artecon will become a
wholly-owned subsidiary of Box Hill. A copy of the merger agreement is
attached as Appendix A to the prospectus/joint proxy statement accompanying
this notice.
2. To consider and vote upon an amendment to Box Hill's certificate of
incorporation to provide for (i) the change of the name of Box Hill to
" " and (ii) a classified board of directors whereby the board
of directors will be separated into three classes with members of each
class serving for a three-year term. A copy of the proposed amendment to
the Box Hill certificate of incorporation is attached as Appendix B to the
prospectus/joint proxy statement accompanying this notice.
3. To consider and vote upon an increase of an additional 500,000
shares of Box Hill common stock authorized for issuance under the 1997 Box
Hill Employee Stock Purchase Plan.
4. To consider and vote upon an increase of an additional 2,000,000
shares of Box Hill common stock authorized for issuance under the amended
Box Hill 1995 Stock Incentive Plan.
5. To transact such other business as may properly come before the Box
Hill special meeting or any adjournment or postponement of the meeting.
Proposals 1 and 2 are mutually dependent, which means that a vote for or against
Proposal 1 will constitute a vote for or against, respectively, Proposal 2 and a
vote for or against Proposal 2 will constitute a vote for or against,
respectively, Proposal 1. These proposals are more fully described in the
disclosure document that accompanies this notice.
Shareholders of record at the close of business on , 1999 are
entitled to notice of, and to vote at, the Box Hill special meeting and any
adjournments or postponements of the meeting.
<PAGE> 4
All shares represented by properly executed proxies will be voted in
accordance with the specifications on the proxy card. If no such specifications
are made, proxies will be voted for approval and adoption of the proposals
above.
All shareholders are cordially invited to attend the Box Hill special
meeting in person. Whether or not you expect to attend, WE URGE YOU TO SIGN AND
DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
THE BOARD OF DIRECTORS OF BOX HILL UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
EACH OF THE PROPOSALS DESCRIBED ABOVE.
BY ORDER OF THE BOARD OF DIRECTORS
Mark A. Mays
Secretary
New York, New York
, 1999
<PAGE> 5
PRELIMINARY PROSPECTUS/JOINT PROXY STATEMENT
[ARTECON LOGO]
6305 EL CAMINO REAL
CARLSBAD, CALIFORNIA 92009-1606
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Artecon,
Inc., a Delaware corporation, will be held on , 1999, at a.m.,
local time, at Artecon's offices at 6305 El Camino Real, Carlsbad, California,
for the following purposes:
1. To consider and vote upon the approval and adoption of the
Agreement and Plan of Merger dated as of April 29, 1999, among Artecon, Box
Hill Systems Corp., a Delaware corporation, and BH Acquisition Corp., a
Delaware corporation and wholly owned subsidiary of Box Hill and the
approval of the merger of BH Acquisition Corp. with and into Artecon. Upon
consummation of the merger, Artecon will become a wholly-owned subsidiary
of Box Hill. A copy of the merger agreement is attached as Appendix A to
the prospectus/joint proxy statement accompanying this notice.
2. To transact such other business as may properly come before the
special meeting or any adjournment or postponement of the meeting.
Stockholders of record at the close of business on , 1999 are
entitled to notice of, and to vote at, the special meeting and any adjournments
or postponements of the meeting.
All shares represented by properly executed proxies will be voted in
accordance with the specifications on the proxy card. If no such specifications
are made, proxies will be voted for approval and adoption of the merger
agreement and the merger.
You are cordially invited to attend the special meeting in person. Whether
or not you expect to attend, WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY
CARD AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
THE BOARD OF DIRECTORS OF ARTECON UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
BY ORDER OF THE BOARD OF DIRECTORS
James L. Lambert
Chief Executive Officer and President
Carlsbad, California
, 1999
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADDITIONAL INFORMATION...................................... 1
Cautionary Statements Concerning Forward-Looking
Statements............................................. 1
Where You Can Find More Information....................... 1
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 3
SUMMARY..................................................... 5
BOX HILL SYSTEMS CORP. SELECTED HISTORICAL FINANCIAL
INFORMATION............................................... 13
ARTECON, INC. SELECTED HISTORICAL FINANCIAL INFORMATION..... 15
UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL
INFORMATION............................................... 17
COMPARATIVE PER SHARE DATA.................................. 20
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS................................................ 22
RISK FACTORS................................................ 30
Risks Relating to the Merger.............................. 30
Risks Relating to Both Box Hill and Artecon............... 34
Risks Specific to Either Box Hill or Artecon.............. 40
THE BOX HILL SPECIAL MEETING................................ 41
THE ARTECON SPECIAL MEETING................................. 44
THE MERGER.................................................. 46
General................................................... 46
Merger Consideration...................................... 46
Treatment of Artecon Stock Options........................ 47
Stock Ownership Following the Merger...................... 47
Post-Merger Management of Box Hill........................ 47
Conversion of Shares; Procedures for Exchange of
Certificates........................................... 48
Background of the Merger.................................. 49
Box Hill's Reasons for the Merger......................... 52
Artecon's Reasons for the Merger.......................... 54
Opinion of Box Hill's Financial Advisor................... 55
Opinion of Artecon's Financial Advisor.................... 65
Material Federal Income Tax Matters....................... 75
Restrictions on Resales by Affiliates..................... 78
Anticipated Accounting Treatment.......................... 78
Government and Regulatory Matters......................... 78
Absence of Appraisal Rights of Holders of Artecon and Box
Hill Common Stock...................................... 79
Appraisal Rights of Holders of Artecon Preferred Stock.... 79
</TABLE>
i
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MATERIAL TERMS OF THE MERGER AGREEMENT...................... 81
Representations and Warranties............................ 81
Covenants of the Parties.................................. 82
Conditions to the Merger.................................. 86
Termination............................................... 88
Expenses and Termination Fees............................. 89
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND RELATED
AGREEMENTS................................................ 90
Management of Box Hill.................................... 90
Employment Agreements..................................... 93
Indemnification........................................... 94
Voting Agreements......................................... 94
Security Ownership of Management.......................... 96
INFORMATION RELATING TO BOX HILL............................ 98
Business.................................................. 98
Box Hill Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 108
Box Hill Management....................................... 116
Certain Transactions of Box Hill.......................... 120
Security Ownership of Certain Beneficial Owners and
Management of Box Hill................................. 122
INFORMATION RELATING TO ARTECON............................. 123
Business.................................................. 123
Artecon Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 137
Artecon Management........................................ 147
Certain Transactions of Artecon........................... 150
Security Ownership of Certain Beneficial Owners and
Management of Artecon.................................. 152
COMPARISON OF CAPITAL STOCK................................. 155
Description of Box Hill Capital Stock..................... 155
Description of Artecon Capital Stock...................... 157
COMPARISON OF SHAREHOLDERS' RIGHTS.......................... 159
AMENDMENT TO BOX HILL'S CERTIFICATE OF INCORPORATION........ 167
AMENDMENT TO INCREASE THE NUMBER OF SHARES AUTHORIZED UNDER
BOX HILL'S 1997 EMPLOYEE STOCK PURCHASE PLAN AND 1995
INCENTIVE STOCK OPTION PLAN............................... 168
EXPERTS..................................................... 170
LEGAL MATTERS............................................... 170
INDEX TO FINANCIAL STATEMENTS............................... F-1
FINANCIAL STATEMENT SCHEDULES............................... S-1
</TABLE>
ii
<PAGE> 8
THE FOLLOWING APPENDICES ALSO CONSTITUTE PART OF THIS PROSPECTUS/JOINT
PROXY STATEMENT:
<TABLE>
<S> <C> <C>
A -- Agreement and Plan of Merger
B -- Proposed Amended and Restated Box Hill Certificate of
Incorporation
C -- Opinion of Salomon Smith Barney Inc.
D -- Opinion of Tucker Anthony Incorporated
E -- Section 262 of the Delaware General Corporation Law
</TABLE>
iii
<PAGE> 9
ADDITIONAL INFORMATION
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have each made forward-looking statements in this document that are
subject to risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future benefits of the merger to
either company, including future results of operations of Box Hill, Artecon or
the combined company. When we use such words as "believes," "expects,"
"anticipates" or similar expressions, we are making forward-looking statements.
You should understand that the following important factors, in addition to those
discussed elsewhere in this document and in the documents which are incorporated
by reference, and in our other public filings and press releases, could affect
the future results of Box Hill and the combined company, and could cause actual
results to differ materially from those expressed in our forward-looking
statements. Note that the merger and an investment in securities of Box Hill
involves risks and uncertainties that could affect the future financial results
of Box Hill. Some of these risks include:
- risks relating to the respective businesses of Box Hill and Artecon;
- risks associated with a fixed exchange ratio;
- risks related to the integration of Box Hill and Artecon; and
- other risks and uncertainties discussed under "Risk Factors" and
elsewhere in this document.
Neither Box Hill nor Artecon intends to update these forward-looking
statements.
WHERE YOU CAN FIND MORE INFORMATION
Box Hill Systems Corp. is a New York corporation. Box Hill's principal
executive offices are located at 161 Avenue of the Americas, New York, New York
10013, and its telephone number is (212) 989-4455. Box Hill's website is
www.boxhill.com. Web site materials are not part of this prospectus/joint proxy
statement. The Box Hill common stock is quoted on the New York Stock Exchange.
The trading symbol for Box Hill is "BXH."
Artecon, Inc. is a Delaware corporation. Artecon's principal executive
offices are located at 6305 El Camino Real, Carlsbad, California 92009-1606, and
its telephone number is (760) 931-5500. Artecon's website is www.artecon.com.
Web site materials are not part of this prospectus/joint proxy statement. The
Artecon common stock is quoted on the Nasdaq National Market. The trading symbol
for Artecon is "ARTE."
Box Hill and Artecon file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may inspect and copy such
material at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the SEC's regional
offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain
copies of filed materials from the SEC at prescribed rates by writing to the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. You may also inspect reports and other information concerning Box Hill at
the offices of the New York State Exchange, 11 Wall Street, New York, New York
10005.
1
<PAGE> 10
Please call the SEC at 1-800-SEC-0330 for more information on the public
reference rooms. You can also find the SEC filings of Box Hill and Artecon on
the SEC's website at www.sec.gov.
Box Hill filed a registration statement on Form S-4 to register with the
SEC the Box Hill common stock to be issued to Artecon stockholders in the
merger. This prospectus/ joint proxy statement is a part of that registration
statement and constitutes a prospectus of Box Hill in addition to being a proxy
statement of Box Hill and Artecon for the meetings.
Box Hill has supplied all information contained or incorporated by
reference in this prospectus/joint proxy statement relating to Box Hill, and
Artecon has supplied all such information relating to Artecon.
You should rely only on the information contained in this prospectus/joint
proxy statement to vote on the Box Hill proposals and the Artecon proposals. We
have not authorized anyone to provide you with information that is different
from what is contained in this prospectus/joint proxy statement. This
prospectus/joint proxy statement is dated , 1999. You should not
assume that the information contained in the prospectus/joint proxy statement is
accurate as of any date other than such date, and neither the mailing of this
prospectus/joint proxy statement to shareholders nor the issuance of Box Hill
common stock in the merger shall create any implication to the contrary.
-------------------------
This prospectus/joint proxy statement contains trademarks and registered
trademarks of Box Hill, Artecon and other companies.
2
<PAGE> 11
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: AS A HOLDER OF ARTECON COMMON STOCK, WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive 0.40 of a share of Box Hill common stock in exchange for
each share of Artecon common stock that you own. For example, if you own 100
shares of Artecon common stock, you will receive 40 shares of Box Hill
common stock in exchange for your shares. No fractional shares will be
issued. You will receive cash for any fractional share you would otherwise
receive.
Q: AS A HOLDER OF ARTECON PREFERRED STOCK, WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive that fraction of a share of Box Hill common stock in
exchange for each share of Artecon preferred stock that you own as is
determined:
- by dividing: $4,988,318 by the closing sales price per share of Box Hill
common stock on the New York Stock Exchange on the last trading day
before the closing of the merger; and
- then dividing that number by 2,494,159.
For example, if there are 2,494,159 shares of Artecon preferred stock
outstanding immediately before the merger and the closing sales price per
share of Box Hill common stock on the last trading day before the merger is
$6.00 per share, you will receive 0.33 of a share of Box Hill common stock
in exchange for each share of Artecon preferred stock that you own. No
fractional shares will be issued. If you are entitled to receive a
fractional share, such fraction will be rounded up to the next whole share.
Thus, if you own 150 shares of Artecon preferred stock, you will receive 50
shares of Box Hill common stock in the merger in exchange therefor.
Q: WHAT HAPPENS TO ARTECON STOCK OPTIONS AS A RESULT OF THE MERGER?
A: Each option to purchase Artecon common stock will convert into an option to
purchase 40% as many shares of Box Hill common stock at an adjusted per
share exercise price. For example, if you have an option to purchase 100
shares of Artecon common stock at an exercise price of $4.00 per share,
after the merger you will have an option to purchase 40 shares of Box Hill
common stock at an exercise price of $10.00 per share.
Q: AS A BOX HILL SHAREHOLDER, WILL I RECEIVE ADDITIONAL SHARES OF BOX HILL
COMMON STOCK IN THE MERGER?
A: No. You will continue to hold the same number of shares of Box Hill common
stock after the merger.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: The merger is intended to be a tax-free reorganization for federal income
tax purposes. Generally, Artecon stockholders will not recognize taxable
gain or loss on the exchange of their stock, except that Artecon
stockholders may be taxed on cash received for a fractional share. Box Hill
shareholders will not recognize any taxable gain or loss in connection with
the merger. Tax matters, however, are complicated, and the tax consequences
of the merger to you will depend on the facts of your particular situation.
We encourage you to contact your tax advisors to determine the tax
consequences of the merger to you. To review the tax consequences to Box
Hill and Artecon stockholders in greater detail, see pages 75 through 77 of
this prospectus/joint proxy statement.
3
<PAGE> 12
Q: IF I AM NOT GOING TO ATTEND THE SHAREHOLDER MEETING, SHOULD I RETURN MY
PROXY CARD INSTEAD?
A: Yes. Please fill out and sign your proxy card and mail it to us in the
enclosed return envelope as soon as possible. Returning your proxy card
ensures that your shares will be represented at the special meeting.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE AFTER I HAVE MAILED MY PROXY CARD?
A: Send in a later-dated, signed proxy card to your company's corporate
secretary before the special meeting or attend the special meeting in person
and vote.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at your meeting. In order
to assure that your vote is obtained, please give your proxy as instructed
on your proxy card even if you currently plan to attend a meeting in person.
The Board of Directors of each of Box Hill and Artecon recommends that its
shareholders vote in favor of the merger.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be permitted to vote them on the
merger. You should therefore be sure to provide your broker with
instructions on how to vote your shares.
If you do not give voting instructions to your broker, you will not be
counted as voting for purposes of the merger unless you appear in person at
your meeting.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send Artecon stockholders written
instructions for exchanging their stock certificates. Box Hill shareholders
will keep their current certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working towards completing the merger as quickly as possible.
Assuming that both Box Hill and Artecon satisfy or waive all of the
conditions to closing contained in the merger agreement, we anticipate that
the merger will occur on or before , 1999.
Q: WHOM SHOULD SHAREHOLDERS CALL WITH ADDITIONAL QUESTIONS?
A. Box Hill shareholders who have questions about the merger should call Box
Hill's Investor Relations Department at (212) 989-4455. Artecon stockholders
who have questions about the merger should call Artecon's Investor Relations
Department at (760) 931-5500.
4
<PAGE> 13
SUMMARY
This summary highlights selected information found in greater detail
elsewhere in this prospectus/joint proxy statement. This summary does not
contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should carefully read this entire document and the documents to
which we have referred you.
THE COMPANIES
BOX HILL SYSTEMS CORP.
161 AVENUE OF THE AMERICAS
NEW YORK, NY 10013
(212) 989-4455
Box Hill is an independent provider of high-performance data storage and
storage area network, or "SAN," solutions. Box Hill designs, manufactures,
markets and supports data storage systems, and markets and supports data storage
back-up systems for the open systems computing environment. Its storage
solutions encompass a broad range of scalable products and services targeting
high-end customers. Box Hill was among the first to develop and successfully
commercialize a hot-swappable SCSI Disk Array storage system and a redundant
array of inexpensive/independent disks, or "RAID," storage system for the UNIX
operating system. In 1997, Box Hill introduced the Fibre Box(R), one of the
first Fibre Channel storage systems. In the United States, Box Hill targets
data-intensive industries, primarily financial services, telecommunications,
health care, government/ defense and academia. Abroad, Box Hill teams up with
local resellers to provide storage solutions to customers. Box Hill was
incorporated in New York in April 1988 and is listed on the New York Stock
Exchange under the symbol "BXH."
ARTECON, INC.
6305 EL CAMINO REAL
CARLSBAD, CA 92009-1606
(760) 931-5500
Artecon designs, manufactures, markets and supports a broad range of
scalable, fully integrated data storage products for the open systems computing
environment, focusing its efforts in the Sun Microsystems, UNIX and PC-LAN
markets. Artecon's enterprise storage product line includes scalable RAID
systems marketed to enterprise and users, resellers and commercial and
telecommunications/internet OEMs. Artecon also markets rack-mount solutions for
commercial off-the-shelf workstations and servers and provides systems
integration and a variety of other service and support programs. Artecon was
incorporated in Delaware under the name "Storage Dimensions, Inc." in November
1992 and in March 1998 changed its name to Artecon, Inc. in connection with the
consummation of a merger between Storage Dimensions, Inc. and Artecon, Inc., a
California corporation. Artecon is quoted on the Nasdaq National Market under
the symbol "ARTE."
OUR REASONS FOR THE MERGER
We believe that the combined companies can be run more efficiently and more
profitably than either company on its own. Achieving these benefits depends on
our ability to obtain the necessary approvals for the merger, to integrate the
businesses of Box Hill and Artecon successfully after the merger, and to deal
with the other risks and
5
<PAGE> 14
uncertainties described on pages 30 through 40. To review the reasons for the
merger in greater detail, see pages 52 through 57.
RISK FACTORS MERITING SPECIAL ATTENTION
Before you decide to vote for the adoption of the merger or for the
approval of the Box Hill proposals, you should consider the following risk
factors, which are more fully described in the "Risk Factor" section beginning
on page 31 of this document, and the other risk factors described in said
section. WE URGE YOU TO READ ALL THE RISK FACTORS CAREFULLY AND IN THEIR
ENTIRETY.
- the exchange ratio of .40 share of Box Hill common stock for one share of
Artecon common stock is fixed whether or not there is an increase or
decrease in the market price of the Artecon common stock or the Box Hill
common stock;
- the degree to which Box Hill is able to successfully integrate Artecon
and realize the anticipated synergies for the merged companies may affect
the operating results of the combined company;
- customers may seek alternative sources of product supply or service due
to, among other reasons, a desire not to do business with the new
combined company; and
- following the merger, the directors and officers of Box Hill are expected
to own % of the outstanding Box Hill common stock, and such
ownership may have a significant effect on matters submitted to a vote of
Box Hill shareholders.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS OF BOX HILL AND ARTECON
The boards of directors of both Box Hill and Artecon believe that the
merger is fair to and in the best interests of both Box Hill and Artecon and
their respective shareholders. The boards of directors of both companies
unanimously recommend that you vote "FOR" the approval of the merger agreement
and the merger. The Box Hill board further unanimously recommends that you vote
"FOR" the issuance of the Box Hill common stock in the merger, the approval of
the certificate of amendment of Box Hill's certificate of incorporation to
provide for a classified board of directors and to change Box Hill's name to
" " and to increase the shares reserved for issuance under Box
Hill's employee stock purchase plan and stock incentive plan.
OPINIONS OF FINANCIAL ADVISORS
In deciding to approve the merger, each board of directors considered the
opinion of its financial advisor. Box Hill received an opinion from its
financial advisor, Salomon Smith Barney Inc., that, as of the date of the
opinion and subject to the limitations set forth in the opinion, the exchange
ratios for converting the Artecon shares into Box Hill shares were fair to Box
Hill from a financial point of view. Artecon received an opinion from its
financial advisor, Tucker Anthony Incorporated, that the consideration to be
received by holders of Artecon's common stock and preferred stock was fair, from
a financial point of view, to the Artecon stockholders. The full texts of the
Salomon Smith Barney and Tucker Anthony opinions are attached as Appendices C
and D, respectively, to this document. We encourage you to read these opinions
carefully and in their entirety.
6
<PAGE> 15
WHAT THE ARTECON STOCKHOLDERS WILL RECEIVE IN THE MERGER
In connection with the merger, you will receive .40 of a share of Box Hill
common stock for each share of Artecon common stock you hold. Thus, if you hold
100 shares of Artecon common stock, you will receive 40 shares of Box Hill
common stock. The common stock exchange ratio is fixed and, regardless of the
fluctuation in market prices of Artecon's or Box Hill's common stock, will not
change between now and the date that the merger is completed. Moreover, neither
Artecon nor Box Hill has the right to terminate the merger agreement or
renegotiate the exchange ratio as a result of market price fluctuations of
either party's common stock.
The holders of Artecon preferred stock will also receive Box Hill common
stock in the merger. Each share of Artecon preferred stock will be exchanged for
that fraction of a share of Box Hill common stock as is determined by:
(a) dividing $4,988,318 by the closing sales price per share of Box
Hill common stock on the New York Stock Exchange on the last trading day
before the closing of the merger; and
(b) dividing the result of (a) by 2,494,159.
In addition, any fractional shares will be rounded up to the next whole
share. Thus, if you hold 150 shares of Artecon preferred stock, and assuming Box
Hill common stock closes at $6.00 per share on the day before the closing of the
merger, you would receive 50 shares of Box Hill common stock in exchange for
your Artecon preferred stock. Although the number of shares of Box Hill common
stock that the holders of Artecon preferred stock will receive will change as a
result of fluctuations in the market price of Box Hill's common stock, the total
value of such shares (based on the closing sales price per share of Box Hill
common stock on the New York Stock Exchange on the last trading day before the
consummation of the merger) will remain the same (an aggregate of $4,988,318).
OWNERSHIP OF BOX HILL FOLLOWING THE MERGER
It is impossible to know, until the end of business on the day prior to the
closing of the merger, the exact number of shares of stock that Box Hill will
issue to Artecon preferred shareholders since the number of Box Hill shares to
be issued to such holders is dependent on the closing share price of Box Hill
common stock on the day before the closing of the merger. For example, assuming
a closing price of $6.00 for Box Hill common stock on the day before the closing
of the merger and based upon the number of shares of Artecon common stock and
preferred stock issued and outstanding on the record date, an aggregate of
approximately shares of Box Hill common stock would be issued in
connection with the merger. The former holders of Artecon common stock and
preferred stock would then hold approximately % of the total number of
shares of Box Hill common stock issued and outstanding after consummation of the
merger, based on the number of Box Hill and Artecon shares outstanding as of
.
REQUIRED VOTE
A majority of the Box Hill shares cast, provided that the total votes cast
represent over 50% in interest of all shares of Box Hill common stock as of the
record date is required to approve and adopt the merger agreement and approve
the merger, to approve the issuance of the Box Hill common stock in the merger
and to increase the number of authorized shares under the Box Hill purchase plan
and stock option plan. A majority of the outstanding shares of Box Hill common
stock as of the record date is required to
7
<PAGE> 16
amend the certificate of incorporation of Box Hill to add a classified board and
change the name of Box Hill to " ".
A majority of the shares of Artecon common stock and preferred stock
outstanding as of the record date, voting as a single class, is required to
approve and adopt the merger agreement and approve the merger.
VOTING AGREEMENTS
Dr. Benjamin Monderer, individually and as trustee for the Monderer 1999
GRAT u/a/d March 1999 Trust, and Mark A. Mays, each a director and executive
officer of Box Hill, together held approximately 53.7% of the Box Hill common
stock outstanding as of the date of the merger agreement. These shareholders
have agreed to vote their shares in favor of the approval and adoption of the
merger agreement and the approval of the merger, the issuance of Box Hill common
stock in the merger and approval of the certificate of amendment. Such
shareholders have granted Artecon irrevocable proxies to such effect. The
affirmative vote of these shareholders alone will be sufficient to approve the
proposals with respect to Box Hill.
James L. Lambert and his wife, Pam Lambert, W.R. Sauey (and several related
affiliates) and Dana Kammersgard, each directors or executive officers of
Artecon, together held approximately 52.3% of the Artecon voting stock
outstanding as of the date of the merger agreement. These individuals have
agreed to vote their shares in favor of the approval and adoption of the merger
agreement and the approval of the merger, and have granted Box Hill irrevocable
proxies to such effect. The affirmative vote of these stockholders alone will be
sufficient to approve the merger agreement and the merger with respect to
Artecon.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the boards of directors of Artecon
and Box Hill that you vote in favor of the merger, you should be aware that
several of the current directors of Artecon and Box Hill will serve on the board
of Box Hill after the merger. In addition, several members of senior management
of Artecon and Box Hill will enter into employment arrangements with Box Hill in
connection with the merger. Box Hill will also maintain indemnification and
insurance arrangements for the Artecon directors and officers. As a result,
these persons have interests in the merger that may be different from, or in
addition to, yours.
CONDITIONS TO THE MERGER
Box Hill and Artecon will complete the merger only if a number of
conditions are either satisfied or waived. These conditions include:
- the continued accuracy of the parties' representations and warranties and
fulfillment of each party's promises contained in the merger agreement;
- receiving the required vote of the Artecon and Box Hill shareholders to
approve the merger agreement and the merger, and with respect to Box
Hill's shareholders, approving the issuance of the Box Hill common stock
in the merger and the certificate of amendment;
- the receipt of a letter from the independent public accountants of Box
Hill concurring with both companies' management that the merger will
qualify for pooling of interests accounting treatment and the receipt of
a letter from the
8
<PAGE> 17
independent public accountants of Artecon concurring with Artecon's
management that no condition exists that would preclude Artecon's ability
to be a party in the merger to be accounted for as a pooling of
interests;
- the receipt of opinions from the parties' respective tax attorneys that
the merger will constitute a tax-free reorganization;
- the authorization for listing on the New York Stock Exchange of the Box
Hill common stock to be issued in the merger; and
- the absence of any restraining orders, injunctions or other orders
preventing the consummation of the merger or other certain litigation or
administrative actions or proceedings.
TERMINATION OF THE MERGER AGREEMENT
The boards of directors of both companies can jointly agree to terminate
the merger agreement at any time without completing the merger. In addition,
either company can terminate the merger agreement if:
- the merger is not completed by September 30, 1999;
- there is a general suspension of trading on the NYSE or the Nasdaq Stock
Market for five consecutive days;
- the required vote of the shareholders of Box Hill or Artecon is not
received;
- the board of directors of either company determines in good faith that
failure to terminate the merger agreement may constitute a breach of such
board's fiduciary duties to its shareholders; or
- a triggering event occurs with respect to the other party;
A "triggering event" with respect to a company includes:
- the withdrawal of the board's unanimous recommendation to the
shareholders to vote in favor of the merger;
- the approval by the board of a company of an alternate merger or other
business combination or sale of assets; or
- the failure to reject or oppose a tender or exchange offer or another
proposed merger, business combination or similar transaction.
TERMINATION FEES
If Box Hill's or Artecon's shareholders do not approve the merger, the
merger agreement requires the non-approving company to reimburse the other
company for 120% of all fees and expenses (up to a maximum of $2,500,000)
incurred by the other company in connection with the merger.
In addition, if the merger agreement is terminated because of a triggering
event or a company's board determines in good faith that the failure to
terminate the merger agreement may constitute a breach of the board's fiduciary
duties to the company's shareholders, then the terminating company must pay the
other company a break-up fee of $2,500,000.
9
<PAGE> 18
TAX MATTERS
The exchange of Box Hill common stock for the shares of Artecon common
stock and preferred stock will be tax-free to the Artecon stockholders for
federal income tax purposes. Such holders may, however, be required to pay taxes
if they receive cash in exchange for fractional shares. The tax basis in the
shares of Box Hill common stock received in the merger will equal the holders
current tax basis in their Artecon common stock and preferred stock. However,
such tax basis will be reduced by the basis allocable to any fractional share
interest for which cash is received.
TAX MATTERS CAN BE COMPLICATED, AND THE TAX CONSEQUENCES OF THE MERGER WILL
DEPEND ON THE FACTS OF EACH STOCKHOLDER'S OWN SITUATION. YOU SHOULD CONSULT YOUR
OWN TAX ADVISORS TO FULLY UNDERSTAND THE TAX CONSEQUENCES OF THE MERGER TO YOU.
ANTICIPATED ACCOUNTING TREATMENT
We expect the merger to be accounted for as a "pooling of interests," which
means that we will treat our companies as if they had always been combined for
accounting and financial reporting purposes.
APPRAISAL RIGHTS
Under applicable Delaware and New York law, neither the holders of the
common stock of Artecon nor the shareholders of Box Hill are entitled to
dissenters' or appraisal rights in connection with the merger. However, holders
of Artecon preferred stock are entitled to appraisal rights under Delaware law
in connection with the merger.
BOARD OF DIRECTORS OF BOX HILL FOLLOWING THE MERGER
Upon the closing of the merger, Box Hill will have a classified board of
directors with the terms of the Class I, Class II and Class III directors
expiring at Box Hill's 2000, 2001 and 2002 annual shareholders' meetings,
respectively. The designees for the Box Hill board after the closing of the
merger are named below.
<TABLE>
<S> <C> <C>
Philip Black (Class I) C.S. Park (Class II) W.R. Sauey (Class III)
Norman Farquhar (Class I) Dr. Benjamin Monderer (Class II) James Lambert (Class III)
Benjamin Brussell (Class II) Carol Turchin (Class III)
</TABLE>
MARKETS AND MARKET PRICES
Box Hill common stock is quoted on the New York Stock Exchange under the
symbol "BXH." Artecon common stock is quoted on the Nasdaq National Market
System under the symbol "ARTE." Following the consummation of the merger, Box
Hill common stock will continue to be quoted on the NYSE and Artecon's common
stock will cease to be quoted on the Nasdaq.
The actual prices of Box Hill or Artecon common stock prior to or at the
time the merger is consummated cannot be guaranteed or predicted. We urge
holders of Box Hill and Artecon stock to obtain current market quotations for
Box Hill common stock prior to the special meetings.
10
<PAGE> 19
BOX HILL
The following table sets forth the closing price per share of Box Hill
common stock as reported on the NYSE and the closing sale price per share of
Artecon common stock on April 29, 1999, the last trading day before the
announcement of the merger, and on , 1999, the last trading day
prior to the printing of this prospectus/joint proxy statement.
<TABLE>
<S> <C>
Stock Price Preceding Announcement:
Box Hill.................................................. $ 6.00
Artecon................................................... $2.375
Stock Price Preceding Printing:
Box Hill.................................................. $ --
Artecon................................................... $ --
</TABLE>
The equivalent Artecon per share price based on the exchange ratio of 0.40
of the price of one share of Box Hill common stock on April 29, 1999 and on
, 1999, the last trading day prior to the printing of this
prospectus/joint proxy statement would have been $2.40 and $ ,
respectively.
The following table sets forth, for the fiscal quarters indicated, the
range of high and low sale prices per share of Box Hill common stock as reported
on the NYSE.
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
- ---------------- ------ ------
<S> <C> <C>
Fiscal year ended December 31, 1997:
3rd Quarter from September 17, 1997....................... $20.81 $17.80
4th Quarter............................................... 19.31 9.50
Fiscal year ended December 31, 1998:
1st Quarter............................................... $13.69 $ 9.63
2nd Quarter............................................... 13.69 6.63
3rd Quarter............................................... 9.06 6.19
4th Quarter............................................... 8.25 5.00
Fiscal year ending December 31, 1999:
1st Quarter............................................... $ 6.94 $ 4.19
2nd Quarter (through , 1999).................
</TABLE>
As of the record date, there were shares issued and outstanding
which were held by holders of record of Box Hill common stock, as
shown on the stock records of Box Hill.
Box Hill has never paid any cash dividend on its capital stock and
anticipates that, for the foreseeable future, it will continue to retain any
earnings for use in the operation of its business.
ARTECON
The following table sets forth, for the fiscal quarters indicated, the
range of high and low sale prices per share of Artecon common stock as reported
on the Nasdaq National Market, since March 31, 1998. On March 31, 1998, Artecon
concluded a merger with Storage Dimensions, Inc. The stock prices reflected
below for periods prior to that time
11
<PAGE> 20
were those of Storage Dimensions, Inc. and were reported on Nasdaq under the
symbol "STDM."
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
- ---------------- ------ -----
<S> <C> <C>
Fiscal year ended December 31, 1997 ("STDM"):
1st Quarter (from March 11, 1997)......................... $ 7.25 $6.50
2nd Quarter............................................... 14.50 5.38
3rd Quarter............................................... 8.38 4.50
4th Quarter............................................... 6.38 3.50
Fiscal year ended December 31, 1998:
1st Quarter............................................... $ 4.38 $2.63
Fiscal year ended March 31, 1999 ("ARTE"):
1st Quarter............................................... $ 5.25 $2.00
2nd Quarter............................................... 3.00 1.38
3rd Quarter............................................... 3.00 1.00
4th Quarter............................................... 6.00 0.94
Fiscal year ending March 31, 2000:
1st Quarter (through June 3, 1999)........................ $ 4.56 $1.03
</TABLE>
As of the record date, there were shares of Artecon common stock
issued and outstanding and were held by approximately 2,400 holders of record,
as shown on the stock records of Artecon.
Artecon has never paid any cash dividends on its capital stock.
Because the exchange ratio for the Artecon common stock is fixed, changes
in the market price of Box Hill common stock will affect the dollar value of Box
Hill common stock to be received by holders of Artecon common stock in the
merger. We urge holders of Artecon common stock and preferred stock to obtain
current market quotations for Box Hill common stock prior to the Artecon special
meeting.
12
<PAGE> 21
BOX HILL SYSTEMS CORP.
SELECTED HISTORICAL FINANCIAL INFORMATION
Box Hill is providing the following financial information to aid you in
your analysis of the financial aspects of the merger. Box Hill derived the
information as of December 31, 1997 and 1998 and for each of the years ended
December 31, 1996, 1997 and 1998 from their audited consolidated financial
statements and related notes thereto included elsewhere in this prospectus/joint
proxy statement. The financial information as of December 31, 1994, 1995 and
1996 and for the years ended December 31, 1994 and December 31, 1995, has been
derived from Box Hill's audited consolidated financial statements which are not
included in this prospectus/joint proxy statement. The financial information as
of March 31, 1999 and for the three-months ended March 31, 1998 and 1999 has
been derived from the unaudited consolidated condensed financial statements of
Box Hill and related notes thereto included elsewhere in this prospectus/joint
proxy statement, which have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of Box Hill's financial position and results of operations.
The following financial information should be read in conjunction with Box
Hill's financial statements and related notes thereto and Box Hill's
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere in this prospectus/joint proxy statement.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1994(1) 1995(1) 1996(1) 1997(1) 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.................... $55,232 $40,225 $50,027 $70,344 $72,476 $16,045 $14,285
Cost of goods sold.............. 33,568 24,067 33,028 45,528 47,403 10,519 9,393
------- ------- ------- ------- ------- ------- -------
Gross profit.................. 21,664 16,158 16,999 24,816 25,073 5,526 4,892
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Shareholder officers'
compensation(2)............. 15,174 9,067 6,347 7,538 1,275 319 319
Engineering and product
development................. 1,420 1,634 2,071 2,324 2,617 646 673
Sales and marketing........... 2,405 3,150 5,325 6,699 8,731 1,999 2,118
General and administrative.... 1,351 1,931 2,348 3,465 4,634 963 1,307
------- ------- ------- ------- ------- ------- -------
Total operating expenses.... 20,350 15,782 16,091 20,026 17,257 3,927 4,417
------- ------- ------- ------- ------- ------- -------
Operating income.............. 1,314 376 908 4,790 7,816 1,599 475
Interest expense (income),
net........................... 62 33 (144) (681) (1,924) (506) (442)
------- ------- ------- ------- ------- ------- -------
Income before income taxes...... 1,252 343 1,052 5,471 9,740 2,105 917
Income taxes.................... 426 311 226 413 3,806 810 353
------- ------- ------- ------- ------- ------- -------
Net income...................... $ 826 $ 32 $ 826 $ 5,058 $ 5,934 $ 1,295 $ 564
======= ======= ======= ======= ======= ======= =======
Basic net income per share...... $ .08 $ $ .08 $ .45 $ .42 $ .09 $ .04
======= ======= ======= ======= ======= ======= =======
Diluted net income per share.... $ .08 $ -- $ .08 $ .42 $ .39 $ .09 $ .04
======= ======= ======= ======= ======= ======= =======
</TABLE>
13
<PAGE> 22
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
------- ------ ------- ------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short term
investments........... $ 2,037 $3,478 $ 994 $50,202 $57,714 $62,603
Working capital......... 10,645 7,269 8,069 57,440 63,915 64,582
Total assets............ 15,927 13,945 17,416 73,817 83,869 85,725
Shareholders' equity.... 7,911 7,943 8,769 58,548 65,150 65,756
</TABLE>
- -------------------------
(1) Prior to its initial public offering in September 1997, Box Hill was taxed
as an S Corporation. In connection with its initial public offering, Box
Hill terminated its S Corporation status and became a C corporation. The
provision for income taxes for the year ended December 31, 1997, consists of
income taxes on the C Corporation's pro rata portion of Box Hill's 1997
taxable income, New York City taxes, state franchise taxes and a one-time
tax benefit of $855,000, related to the recognition of the net deferred tax
asset recorded by Box Hill upon terminating its S Corporation status. For
all years prior to 1997, the provision for income taxes consists of New York
City taxes and state franchise taxes.
(2) In connection with its initial public offering, Box Hill executed employment
agreements with its three shareholder officers that significantly reduced
its shareholder officers' compensation expense.
14
<PAGE> 23
ARTECON, INC.
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial information of Artecon, Inc. as
of March 31, 1998 and March 31, 1999 and for the years ended March 29, 1997,
March 31, 1998 and March 31, 1999 are derived from the audited consolidated
financial statements of Artecon and related notes thereto included elsewhere in
this prospectus/joint proxy statement. The selected historical financial
information as of March 25, 1995, March 30, 1996 and March 29, 1997 and for each
of the years ended March 25, 1995 and March 30, 1996 has been derived from the
audited consolidated financial statements of Artecon which are not included in
this prospectus/joint proxy statement. The financial information for the three
months ended March 31, 1998 and 1999 have been derived from Artecon's unaudited
financial statements, which have been prepared on the same basis as the audited
consolidated financial statements and in the opinion of management, contain all
adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of Artecon's results of operations for such periods. Artecon's
selected historical consolidated financial information includes financial
information of Falcon Systems, Inc. following their acquisition of Falcon in
August 1997 and of Storage Dimensions, Inc. following the acquisition of Storage
Dimensions in March 1998. The following financial information should be read in
conjunction with Artecon's financial statements and related notes thereto and
the Artecon Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this prospectus/joint proxy
statement.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
--------------------------------------------------------- ---------------------
MARCH 25, MARCH 30, MARCH 29, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues................ $47,833 $47,172 $55,317 $ 66,340 $95,879 $ 13,739 $18,327
Gross margin................ 9,586 12,455 12,926 15,395 33,518 (226) 6,508
Operating expenses:
Selling & service......... 6,092 6,928 7,643 11,422 26,108 3,152 5,442
General &
administrative.......... 1,795 1,996 1,663 3,584 5,347 864 1,313
Research and
development............. 1,134 1,405 2,392 3,199 7,329 808 1,340
Restructuring expense..... -- -- -- -- 1,404 -- --
Impairment of intangible
assets.................. -- -- -- -- 867 -- 287
Acquired in-process
research and
development............. -- -- -- 18,200 -- 14,500 --
Operating income (loss)..... 565 2,126 1,228 (21,010) (7,537) (19,550) (1,874)
Net income (loss)........... $ 453 $ 1,590 $ 641 $(19,288) $(5,350) $(17,674) $ 1,094
======= ======= ======= ======== ======= ======== =======
Basic net income (loss) per
share..................... $ 0.09 $ 0.30 $ 0.12 $ (3.30) $ (0.25) $ (2.84) $ 0.05
======= ======= ======= ======== ======= ======== =======
Diluted net income (loss)
per share............... $ 0.05 $ 0.19 $ 0.08 $ (3.30) $ (0.25) $ (2.84) $ 0.04
======= ======= ======= ======== ======= ======== =======
</TABLE>
15
<PAGE> 24
<TABLE>
<CAPTION>
AS OF
---------------------------------------------------------
MARCH 25, MARCH 30, MARCH 29, MARCH 31, MARCH 31,
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 299 $ 793 $ 746 $ 7,992 $ 2,093
Working capital...................... 4,935 6,772 6,810 16,819 14,952
Total assets......................... 13,984 14,382 15,194 57,345 43,161
Total long-term debt................. 2,500 2,941 2,921 10,484 11,908
Total stockholders' equity........... 3,553 4,720 5,097 19,679 14,814
</TABLE>
16
<PAGE> 25
UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
We expect that the merger will be accounted for as a pooling of interests,
which means that for accounting purposes, we will treat our companies as if they
had always been combined. We have presented below unaudited selected pro forma
combined financial information that gives effect to the merger accounted for as
a pooling of interests, assuming that 0.40 of a share of Box Hill common stock
is issued in exchange for each share of Artecon common stock and 0.33 of a share
of Box Hill common stock is issued in exchange for each share of Artecon
preferred stock (assuming a Box Hill closing date stock price of $6.00 per
share). The unaudited pro forma combined statements of operations for each of
the years ended December 31, 1996, 1997 and 1998 and for the three-month periods
ended March 31, 1998 and 1999, combine the historical consolidated statements of
operations of Box Hill for the periods then ended with the historical statements
of operations of Artecon for the fiscal years ended March 29, 1997, March 31,
1998 and March 31, 1999 and for the three-month periods ended March 31, 1998 and
1999, respectively, as if the merger had occurred at the beginning of the
earliest period presented and reflect adjustments to properly restate income
taxes on a combined basis. The unaudited pro forma combined balance sheet as of
March 31, 1999 gives effect to the merger as if it had occurred on March 31,
1999, and combines the balance sheet of Box Hill and the balance sheet of
Artecon and reflects an adjustment to accrue estimated transaction costs of $5.0
million, which will be charged to operations upon consummation of the merger.
The following pro forma statements of operations do not reflect a charge for
these or other anticipated costs of integrating the operations of the two
companies or other restructuring costs which may occur as a result of the
merger. This data should be read in conjunction with the companies' unaudited
pro forma combined condensed financial statements and the separate historical
consolidated financial statements of Box Hill and Artecon and the notes thereto,
all of which are included elsewhere in this prospectus/joint proxy statement.
The unaudited pro forma combined financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that would have been achieved had the merger been
consummated on the dates indicated and should not be construed as representative
of future operations.
17
<PAGE> 26
<TABLE>
<CAPTION>
PRO FORMA THREE
PRO FORMA YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------ ------------------
1996(1) 1997(1) 1998 1998 1999
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.................... $105,344 $136,684 $168,355 $ 29,784 $32,612
Cost of goods sold.............. 75,419 96,473 109,764 24,484 21,212
-------- -------- -------- -------- -------
Gross profit.................. 29,925 40,211 58,591 5,300 11,400
-------- -------- -------- -------- -------
Operating expenses:
Shareholder officers'
compensation(2)............ 6,347 7,538 1,275 319 319
Engineering and product
development................ 4,463 5,523 9,946 1,454 2,013
Sales and marketing........... 12,968 18,121 34,839 5,151 7,560
General and administrative.... 4,011 7,049 9,981 1,827 2,620
Acquired in-process research
and development costs...... -- 18,200 -- 14,500 --
Restructure expenses.......... -- -- 1,404 -- --
Impairment of intangible
assets..................... -- -- 867 -- 287
-------- -------- -------- -------- -------
27,789 56,431 58,312 23,251 12,799
-------- -------- -------- -------- -------
Operating income (loss).... 2,136 (16,220) 279 (17,951) (1,399)
Other income (expense), net..... (10) (124) 395 (47) 380
Gain (loss) on foreign currency
transactions.................. 45 (141) (14) 44 11
Interest income (expense),
net........................... (138) (139) 906 151 178
-------- -------- -------- -------- -------
Income (loss) before income
taxes.................... 2,033 (16,624) 1,566 (17,803) (830)
Income tax provision
(benefit)..................... 566 (2,394) 982 (1,424) (241)
-------- -------- -------- -------- -------
Net income (loss)............... $ 1,467 $(14,230) $ 584 $(16,379) $ (589)
======== ======== ======== ======== =======
Basic and diluted net income
(loss) per share.............. $ 0.11 $ (1.00) $ 0.02 $ (0.93) $ (.02)
======== ======== ======== ======== =======
Shares used in computing basic
net
income (loss) per share....... 12,827 14,279 23,725 17,537 23,825
======== ======== ======== ======== =======
Shares used in computing diluted
net income (loss) per share... 13,618 14,279 24,533 17,688 23,825
======== ======== ======== ======== =======
</TABLE>
18
<PAGE> 27
<TABLE>
<CAPTION>
PRO FORMA AS OF
MARCH 31, 1999
---------------
<S> <C>
BALANCE SHEET DATA:(3)
Cash, cash equivalents and short term investments........... $ 59,696
Working capital............................................. 74,534
Total assets................................................ 123,886
Total long-term debt........................................ 12,391
Shareholders' equity........................................ 75,570
</TABLE>
- -------------------------
(1) Prior to its initial public offering in September 1997, Box Hill was taxed
as an S Corporation. In connection with its initial public offering, Box
Hill terminated its S Corporation status and become a C corporation. The
provision for income taxes for the year ended December 31, 1997, consists of
income taxes on the C Corporation's pro rata portion of Box Hill's 1997
taxable income, New York City taxes, state franchise taxes and a one-time
tax benefit of $855,000 related to the recognition of the net deferred tax
asset recorded by Box Hill upon terminating its S Corporation status. For
all years prior to 1997, the provision for income taxes consists of New York
City taxes and state franchise taxes.
(2) In connection with its initial public offering, Box Hill executed employment
agreements with its three shareholder officers that significantly reduced
its shareholder officers' compensation expense.
(3) Box Hill and Artecon estimate they will incur combined direct transaction
costs of approximately $5.0 million associated with the merger, which costs
will be charged to operations in the quarter in which the merger is
consummated. The pro forma combined income statement data does not reflect
the estimated direct transaction costs. The pro forma combined financial
information does not include additional costs, which costs are not currently
estimable, expected to be incurred relating to integrating the companies.
19
<PAGE> 28
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of Box
Hill and Artecon and combined per share data on an unaudited pro forma basis
after giving effect to the merger as a pooling of interests. This data should be
read in conjunction with the selected historical financial information of Box
Hill and Artecon and notes thereto and the unaudited selected pro forma combined
financial information, included elsewhere in this prospectus/joint proxy
statement. The unaudited pro forma combined per share data are not necessarily
indicative of the operating results or financial position that would have
occurred if the merger had been consummated at the beginning of the periods
presented, nor is it necessarily indicative of future operating results or
financial position.
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------- -----------------------------
1996 1997 1998 1998 1999
------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL -- BOX HILL:
Net income per share -- basic.... $0.08 $ 0.45 $ 0.42 $ 0.09 $0.04
Net income per
share -- diluted............... $0.08 $ 0.42 $ 0.39 $ 0.09 $0.04
HISTORICAL -- ARTECON:
Net income (loss) per share --
basic.......................... $0.12 $(3.30) $(0.25) $(2.84) $0.05
Net income (loss) per share --
diluted........................ $0.08 $(3.30) $(0.25) $(2.84) $0.04
PRO FORMA COMBINED (1):
Per Box Hill share -- basic...... $0.11 $(1.00) $ 0.02 $(0.93) $(.02)
Per Box Hill share -- diluted.... $0.11 $(1.00) $ 0.02 $(0.93) $(.02)
Equivalent per Artecon share --
basic(2)....................... $0.05 $(0.40) $ 0.01 $(0.37) $(.01)
Equivalent per Artecon share --
diluted(2)..................... $0.05 $(0.40) $ 0.01 $(0.37) $(.01)
BOOK VALUE PER SHARE(3):
Historical Box Hill.............. $ 4.55 $4.59
Historical Artecon............... $ 0.66 $ .66
Pro forma combined per Box Hill
share(1)....................... $3.18
Equivalent pro forma combined per
Artecon share(2)............... $1.27
HISTORICAL DIVIDENDS:
Box Hill......................... -- -- -- -- --
Artecon.......................... -- -- -- -- --
</TABLE>
- -------------------------
(1) Box Hill and Artecon estimate they will incur combined direct transaction
costs of approximately $5.0 million associated with the merger, which will
be charged to operations upon consummation of the merger. The pro forma and
equivalent pro forma combined book value per share data gives effect to the
estimated direct transaction costs as if such costs had been incurred as of
the respective balance sheet dates. The pro forma combined book value per
share data does not include additional costs, which costs are not currently
estimable, expected to be incurred relating to integrating the companies.
The direct transaction costs and integration related charges are not
included in the pro forma combined net income per share data.
(2) The Artecon equivalent pro forma combined amounts are calculated by
multiplying the Box Hill combined pro forma amounts by the exchange ratio of
0.40 per share.
20
<PAGE> 29
(3) The historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period including all shares of Artecon preferred stock on an
as-converted basis. The pro forma combined book value per share is computed
by dividing pro forma stockholders' equity by the pro forma number of shares
of common stock outstanding as of March 31, 1999.
21
<PAGE> 30
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements combine the
historical consolidated statements of operations of Box Hill for the years ended
December 31, 1996, 1997 and 1998 and for the three-months ended March 31, 1998
and 1999 with the historical consolidated statements of operations of Artecon
for the fiscal years ended March 29, 1997, March 31, 1998 and March 31, 1999 and
for the three-month periods ended March 31, 1998 and 1999, respectively, as if
the merger had occurred at the beginning of the earliest period presented, using
the "pooling of interest" method of accounting. The unaudited pro forma combined
balance sheet as of March 31, 1999 gives effect to the merger as if it had
occurred on March 31, 1999, and combines the historical unaudited consolidated
balance sheet of Box Hill and the historical audited consolidated balance sheet
of Artecon as of such date.
Box Hill and Artecon estimate that they will incur direct transaction costs
of approximately $5.0 million associated with the merger, which will be charged
to operations in the quarter in which the merger is consummated. In addition, it
is expected that following the merger, the combined company will incur
additional costs, which cannot currently be estimated, associated with
integrating the operations of the two companies. Integration-related costs are
not included in the accompanying unaudited pro forma combined financial
statements. The pro forma combined statements of operations do not reflect any
of these costs.
Unaudited pro forma combined condensed financial information is presented
for illustrative purposes only and is not necessarily indicative of the
financial position or results of operations that would have actually been
reported had the merger occurred at the beginning of the earliest period
presented, nor is it necessarily indicative of future financial position or
results of operations. These unaudited pro forma combined financial statements
are based upon the respective historical consolidated financial statements of
Box Hill and Artecon and notes thereto, included elsewhere in this
prospectus/joint proxy statement. These unaudited pro forma combined financial
statements do not incorporate, nor do they assume, any benefits from cost
savings or synergies of operations of the combined company.
22
<PAGE> 31
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
BOX HILL ARTECON ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and
short-term investments........... $62,603 $ 2,093 $ (5,000)(A) $ 59,696
Accounts receivable, net............ 11,207 12,231 -- 23,438
Inventories......................... 7,648 11,673 -- 19,321
Prepaid expenses and other.......... 1,428 1,970 -- 3,398
Prepaid income taxes................ 389 -- -- 389
Deferred income taxes............... 984 3,239 -- 4,223
------- -------- -------- --------
Total current assets........ 84,259 31,206 $ (5,000) 110,465
Property and equipment, net........... 1,275 1,636 -- 2,911
Other assets.......................... -- 114 -- 114
Goodwill, net......................... -- 1,252 -- 1,252
Other intangible assets, net.......... -- 1,059 -- 1,059
Deferred income taxes................. 191 7,894 -- 8,085
------- -------- -------- --------
$85,725 $ 43,161 $ (5,000) $123,886
======= ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................... $10,921 $ 9,663 -- $ 20,584
Accrued expenses.................... 3,765 4,721 -- 8,486
Customer deposits................... 2,053 -- -- 2,053
Deferred revenue.................... 2,938 1,387 -- 4,325
Current portion of long-term debt... -- 483 -- 483
------- -------- -------- --------
Total current liabilities........ 19,677 16,254 -- 35,931
------- -------- -------- --------
Deferred rent and other long-term
liabilities........................... 292 133 -- 425
Borrowings under credit line.......... -- 10,552 -- 10,552
Long-term debt........................ -- 1,356 -- 1,356
Minority interest..................... -- 52 -- 52
------- -------- -------- --------
Total liabilities........... 19,969 28,347 -- 48,316
------- -------- -------- --------
Shareholders' equity:
Preferred stock..................... -- 12 (12)(B) --
Common stock........................ 144 109 (12)(B) 241
Additional paid-in capital.......... 57,198 39,596 24(B) 96,818
Foreign currency translation
adjustments...................... -- (62) -- (62)
Retained earnings (accumulated
deficit)......................... 8,414 (24,841) (5,000)(A) (21,427)
------- -------- -------- --------
Total shareholders'
equity.................... 65,756 14,814 (5,000) 75,570
------- -------- -------- --------
$85,725 $ 43,161 (5,000) $123,886
======= ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
23
<PAGE> 32
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
PRO FORMA YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
BOX HILL ARTECON
YEAR ENDED YEAR ENDED PRO FORMA
DECEMBER 31, 1996 MARCH 29, 1997 COMBINED
----------------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues....................... $50,027 $55,317 $105,344
Cost of goods sold................. 33,028 42,391 75,419
------- ------- --------
Gross profit.................. 16,999 12,926 29,925
------- ------- --------
Operating expenses:
Shareholder officers'
compensation.................. 6,347 -- 6,347
Engineering and product
development................... 2,071 2,392 4,463
Sales and marketing.............. 5,325 7,643 12,968
General and administrative....... 2,348 1,663 4,011
------- ------- --------
16,091 11,698 27,789
------- ------- --------
Operating income.............. 908 1,228 2,136
Other expense, net................. -- (10) (10)
Gain on foreign currency
transactions, net................ -- 45 45
Interest income (expense), net..... 144 (282) (138)
------- ------- --------
Income before income taxes.... 1,052 981 2,033
Income taxes....................... 226 340 566
------- ------- --------
Net income......................... $ 826 $ 641 $ 1,467
======= ======= ========
Basic net income per share......... $ 0.08 $ 0.12 $ 0.11
======= ======= ========
Diluted net income per share....... $ 0.08 $ 0.08 $ 0.11
======= ======= ========
Shares used in computing basic net
income per share................. 9,900 5,202 12,827
======= ======= ========
Shares used in computing diluted
net income per share............. 10,691 8,410 13,618
======= ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
24
<PAGE> 33
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
PRO FORMA YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
BOX HILL ARTECON
YEAR ENDED YEAR ENDED PRO FORMA
DECEMBER 31, 1997 MARCH 31, 1998 COMBINED
----------------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues......................... $70,344 $ 66,340 $136,684
Cost of goods sold................... 45,528 50,945 96,473
------- -------- --------
Gross profit.................... 24,816 15,395 40,211
------- -------- --------
Operating expenses:
Shareholder officers'
compensation.................... 7,538 -- 7,538
Engineering and product
development..................... 2,324 3,199 5,523
Sales and marketing................ 6,699 11,422 18,121
General and administrative......... 3,465 3,584 7,049
Acquired in-process research and
development costs............... -- 18,200 18,200
------- -------- --------
20,026 36,405 56,431
------- -------- --------
Operating income (loss)......... 4,790 (21,010) (16,220)
Other expense, net................... -- (124) (124)
Loss on foreign currency
transactions, net.................. -- (141) (141)
Interest income (expense), net....... 681 (820) (139)
------- -------- --------
Income (loss) before income
taxes......................... 5,471 (22,095) (16,624)
Income tax provision (benefit)....... 413 (2,807) (2,394)
------- -------- --------
Net income (loss).................... $ 5,058 $(19,288) $(14,230)
======= ======== ========
Basic net income (loss) per share.... $ 0.45 $ (3.30) $ (1.00)
======= ======== ========
Diluted net income (loss) per
share.............................. $ 0.42 $ (3.30) $ (0.99)
======= ======== ========
Shares used in computing basic net
income (loss) per share............ 11,120 5,841 14,279
======= ======== ========
Shares used in computing diluted net
income (loss) per share............ 12,167 5,841 14,279
======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
25
<PAGE> 34
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
PRO FORMA YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
BOX HILL ARTECON
YEAR ENDED YEAR ENDED PRO FORMA
DECEMBER 31, 1998 MARCH 31, 1999 COMBINED
----------------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues........................... $72,476 $95,879 $168,355
Cost of goods sold..................... 47,403 62,361 109,764
------- ------- --------
Gross profit...................... 25,073 33,518 58,591
------- ------- --------
Operating expenses:
Shareholder officers' compensation... 1,275 -- 1,275
Engineering and product
development....................... 2,617 7,329 9,946
Sales and marketing.................. 8,731 26,108 34,839
General and administrative........... 4,634 5,347 9,981
Restructure expenses................. -- 1,404 1,404
Impairment of intangible assets...... -- 867 867
------- ------- --------
17,257 41,055 58,312
------- ------- --------
Operating income (loss)........... 7,816 (7,537) 279
Other income, net...................... -- 395 395
Loss of foreign currency transactions,
net.................................. -- (14) (14)
Interest income (expense), net......... 1,924 (1,018) 906
------- ------- --------
Income (loss) before income taxes...... 9,740 (8,174) 1,566
Income tax provision (benefit)......... 3,806 (2,824) 982
------- ------- --------
Net income (loss)...................... $ 5,934 $(5,350) $ 584
======= ======= ========
Basic net income (loss) per share...... $ 0.42 $ (0.25) $ 0.02
======= ======= ========
Diluted net income (loss) per share.... $ 0.39 $ (0.25) $ 0.02
======= ======= ========
Shares used in computing basic net
income (loss) per share.............. 14,283 21,549 23,725
======= ======= ========
Shares used in computing diluted net
income (loss) per share.............. 15,053 21,549 24,533
======= ======= ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
26
<PAGE> 35
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------
PRO FORMA
BOX HILL ARTECON COMBINED
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues.................................. $16,045 $ 13,739 $ 29,784
Cost of goods sold............................ 10,519 13,965 24,484
------- -------- --------
Gross profit............................. 5,526 (226) 5,300
------- -------- --------
Operating expenses:
Shareholder officers' compensation.......... 319 -- 319
Engineering and product development......... 646 808 1,454
Sales and marketing......................... 1,999 3,152 5,151
General and administrative.................. 963 864 1,827
Acquired in-process research and development
costs.................................... -- 14,500 14,500
------- -------- --------
3,927 19,324 23,251
------- -------- --------
Operating income (loss).................. 1,599 (19,550) (17,951)
Other expense, net............................ -- (47) (47)
Gain on foreign currency transactions, net.... -- 44 44
Interest income (expense), net................ 506 (355) 151
------- -------- --------
Income (loss) before income taxes........ 2,105 (19,908) (17,803)
Income tax provision (benefit)................ 810 (2,234) (1,424)
------- -------- --------
Net income (loss)............................. $ 1,295 $(17,674) $(16,379)
======= ======== ========
Basic net income (loss) per share............. $ 0.09 $ (2.84) $ (0.93)
======= ======== ========
Diluted net income (loss) per share........... $ 0.09 $ (2.84) $ (0.93)
======= ======== ========
Shares used in computing basic net income
(loss) per share............................ 14,221 6,214 17,537
======= ======== ========
Shares used in computing diluted net income
(loss) per share............................ 15,065 6,214 17,537
======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
27
<PAGE> 36
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-----------------------------------------------
PRO FORMA
BOX HILL ARTECON ADJUSTMENTS COMBINED
-------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues...................... $14,285 $18,327 $ -- $32,612
Cost of goods sold................ 9,393 11,819 -- 21,212
------- ------- ------- -------
Gross profit................. 4,892 6,508 -- 11,400
------- ------- ------- -------
Operating expenses:
Shareholder officers'
compensation................. 319 -- -- 319
Engineering and product
development.................. 673 1,340 -- 2,013
Sales and marketing............. 2,118 5,442 -- 7,560
General and administrative...... 1,307 1,313 -- 2,620
Impairment of intangible
assets....................... -- 287 -- 287
------- ------- ------- -------
4,417 8,382 -- 12,799
------- ------- ------- -------
Operating income (loss)...... 475 (1,874) -- (1,399)
Other income, net................. -- 380 -- 380
Gain of foreign currency
transactions, net............... -- 11 -- 11
Interest income (expense), net.... 442 (264) -- 178
------- ------- ------- -------
Income (loss) before income
taxes...................... 917 (1,747) -- (830)
Income tax provision (benefit).... 353 (2,841) 2,247(C) (241)
------- ------- ------- -------
Net income (loss)................. $ 564 $ 1,094 $(2,247) $ (589)
======= ======= ======= =======
Basic net income (loss) per
share........................... $ 0.04 $ 0.05 $ (0.02)
======= ======= =======
Diluted net income (loss) per
share........................... $ 0.04 $ 0.04 $ (0.02)
======= ======= =======
Shares used in computing basic net
income (loss) per share......... 14,341 21,653 23,825
======= ======= =======
Shares used in computing diluted
net income (loss) per share..... 14,998 25,680 23,825
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
28
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
(A) Reflects estimated direct transaction costs of approximately $5.0 million
associated with the merger, which will be charged to operations upon
consummation of the merger.
(B) Reflects the elimination of 2,494 Convertible Preferred A shares and 21,707
Common shares of Artecon outstanding as of March 31, 1999 and the related
issuance of approximately 9,680 of Box Hill's common shares to Artecon's
shareholders in accordance with the terms of the merger agreement.
(C) To adjust the income tax provision to reflect estimated income taxes on a
combined basis.
(D) Pro forma earnings per share has been calculated assuming the conversion of
Artecon preferred stock using an estimated closing price of Box Hill common
stock of $6.00. The following table sets forth a reconciliation of shares
used to compute pro forma earnings per share:
<TABLE>
<CAPTION>
PRO FORMA FISCAL
YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------ ---------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT THE EXCHANGE RATIO):
<S> <C> <C> <C> <C> <C>
Shares used in basic and diluted per
share computation:
Historical Artecon -- Common
Stock........................... 5,202 5,841 21,549 6,214 21,653
Exchange Ratio -- Common Stock..... 0.40 0.40 0.40 0.40 0.40
------ ------ ------ ------ ------
2,080 2,336 8,619 2,485 8,661
------ ------ ------ ------ ------
Historical Artecon -- Preferred
Stock.............................. 2,567 2,494 2,494 2,517 2,494
------ ------ ------ ------ ------
Exchange Ratio -- Preferred Stock.... .33 .33 .33 .33 .33
------ ------ ------ ------ ------
847 823 823 831 823
------ ------ ------ ------ ------
Historical Box Hill.................. 9,900 11,120 14,283 14,221 14,341
------ ------ ------ ------ ------
Pro Forma Combined -- Basic.......... 12,827 14,279 23,725 17,537 23,825
====== ====== ====== ====== ======
Historical Artecon -- Common Stock
equivalents(1)..................... -- -- 96 -- --
------ ------ ------ ------ ------
Exchange Ratio -- Common Stock
equivalents(1)..................... 0.40 0.40 0.40 0.40 0.40
------ ------ ------ ------ ------
-- -- 38 -- --
------ ------ ------ ------ ------
Historical Box Hill -- Common Stock
equivalents(1)..................... 791 -- 770 -- --
------ ------ ------ ------ ------
Pro Forma Combined -- Diluted........ 13,618 14,279 24,533 17,537 23,825
====== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) Using the treasury stock method, except in periods where the result would be
antidilutive.
29
<PAGE> 38
RISK FACTORS
In addition to the other information included in this document, the risk
factors described below should be considered by Box Hill shareholders in
determining whether to approve the Box Hill proposals and by the Artecon
stockholders in determining whether to vote to adopt the merger agreement and
approve the merger. Some of these risk factors relate to the merger described in
this document. Other risks apply to both Box Hill and Artecon as independent
companies. Still other risks apply specifically to either Box Hill or Artecon.
Please bear in mind that those risks applicable to Box Hill or Artecon, as
separate companies, will become risks of the combined company. Also remember
that the risks described below are not the only risks facing Box Hill, Artecon
or the combined company.
In addition, you should keep the following factors in mind when you read
"forward-looking" statements elsewhere in this document. Forward-looking
statements are statements that relate to future events and time periods or our
expectations of future results. Generally, the words "anticipates," "believes,"
"expects," "intends" and similar expressions identify forward-looking
statements. Forward-looking statements involve risks and uncertainties. Future
events, circumstances and results could differ materially from those anticipated
in the forward-looking statements.
RISKS RELATING TO THE MERGER
INTEGRATION OF BOX HILL AND ARTECON -- WE MAY HAVE DIFFICULTY AND INCUR
SUBSTANTIAL COSTS IN INTEGRATING OUR TWO COMPANIES.
Box Hill and Artecon have entered into the merger agreement with the
expectation that the merger will result in certain benefits, including, without
limitation, cost savings, operating efficiencies, revenue enhancements and other
synergies. We cannot assure you, however, that Box Hill will realize any of the
anticipated benefits of the merger. Integrating Box Hill and Artecon will be a
complex, time-consuming and expensive process. Before the merger, Box Hill and
Artecon operated independently, each with its own business, culture, products,
customers, employees and systems. After the merger, Box Hill and Artecon must
operate as a combined organization using common:
- information and communication systems;
- operating procedures;
- financial controls; and
- human resource practices, including benefit, training and professional
development programs.
There may be substantial difficulties, costs and delays involved in integrating
Box Hill and Artecon. These factors may include:
- diverting management resources from the business of the combined company;
- potential incompatibility of business cultures;
- perceived adverse change in customer service standards, business focus,
billing or pricing practices, or product offerings available to
customers;
- perceived uncertainty in career opportunities, benefits and the long-term
value of stock options available to employees;
- costs and delays in implementing common systems and procedures and costs
and delays caused by communication difficulties; and
- potential inefficiencies in delivering products to the customers of the
combined company.
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Any one or all of these factors may cause increased operating costs, lower
than anticipated financial performance or the loss of clients and employees.
Many of these factors are also outside the control of either company. The
failure to timely and efficiently integrate Box Hill and Artecon could have a
material adverse effect on the combined company's business.
INTEGRATION OF PRODUCT LINES -- THE COMBINED COMPANY MAY HAVE DIFFICULTY
INTEGRATING THE PRODUCT LINES OF BOX HILL AND ARTECON.
If Artecon and Box Hill complete the proposed merger, the combined company
will need to integrate the two independent businesses. Key issues will be the
integration of the product offerings of Artecon and Box Hill, the coordination
of research and development activities and the convergence of the technologies
supporting the various products. There are many risks associated with the
integration of the product lines. For example, Box Hill's Fibre-Channel based
storage system, the Fibre Box(R), performs Redundant Array of
Independent/Inexpensive Disks, or "RAID", and Storage Area Network, or "SAN",
functionality through software. Artecon has adopted a hardware RAID solution for
its Fibre Channel storage system. If the combined company chooses to offer both
hardware and software Fibre Channel-based RAID solutions to customers, the
company will incur the expenses involved with supporting and producing two
different product lines. If the combined company chooses one solution over the
other, the company is subject to risks associated with having fewer product
offerings and fewer alternatives in the event that product shortcomings or other
issues arise.
INCREASED DISTRIBUTION CHANNELS -- THE COMBINED COMPANY'S DISTRIBUTION CHANNELS
COULD CONFLICT WITH ONE ANOTHER.
The combined company will have more distribution channels than either
Artecon or Box Hill had prior to the merger. Domestically, Artecon sells
products directly to the customer as well as through third party channels,
including VARs and OEMs, while Box Hill sells directly to customers.
Internationally, Box Hill sells its products only through resellers, while
Artecon engages both resellers and a direct sales force. The combined company's
resellers and direct sales force may target similar sales opportunities, which
could lead to an inefficient allocation of sales resources. These overlapping
sales efforts could also adversely affect relationships with resellers and other
sales channels, and result in resellers being less willing to market our
products aggressively. The combined company will need to effectively address any
overlaps and efficiently allocate its sales resources. Failure to do this could
have an adverse affect on the combined company.
LARGER COMPANY -- THE COMBINED COMPANY COULD FACE MANY DIFFICULTIES IN MANAGING
A LARGER COMPANY.
In deciding whether to authorize the proposed merger, you should bear in
mind that the larger, combined company will create new challenges for existing
management. If the combined company fails to meet those challenges, the market
price of Box Hill's shares may decline. Artecon has grown recently, combining
with both Storage Dimensions and Falcon. On the other hand, Box Hill has never
undergone a corporate transaction of this type before, and has no experience in
corporate acquisitions or mergers.
After the merger, the combined company will have a workforce of
approximately twice the size of the work forces of the two companies prior to
the merger, and a greater international presence. This growth could strain
management control systems and resources, including decision support, accounting
and management information systems. The combined company will need to improve
financial and management controls and reporting systems and procedures to
effectively manage employees and facilities.
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Further, the composition of the senior management team of Box Hill will
change significantly as a result of the merger, and key employees may be rotated
to new assignments. James Lambert and Philip Black will act as Co-Chief
Executive Officers, Dana Kammersgard will be the Chief Technical Officer, Carol
Turchin will be the Executive Vice President of Domestic Sales, and Dr. Benjamin
Monderer will the Executive Vice President of Applications
Engineering/Professional Services. The combined company's future success in the
market place will be dependent on the ability of its management team to manage
the combined company, implement its business strategies and retain key
employees.
FIXED EXCHANGE RATIO -- THE VALUE OF THE MERGER CONSIDERATION WILL FLUCTUATE
WITH THE BOX HILL STOCK PRICE.
At the effective time of the merger, each outstanding share of Artecon
common stock will be exchanged for .40 of a share of Box Hill common stock. This
exchange ratio will not increase or decrease despite fluctuations in the market
price of either company's stock. Accordingly, holders of Artecon common stock
will not know the actual market value of Box Hill common stock to be received in
connection with the merger when they vote upon the merger proposals. Stock price
variations could be the result of changes in the business, operations or
prospects of Box Hill, Artecon or the combined company, market assessments of
the likelihood that the merger will be consummated within the anticipated time,
general market and economic conditions and other factors both within and beyond
the control of Box Hill or Artecon. Neither Box Hill nor Artecon intend to
obtain an updated fairness opinion from their respective financial advisors
prior to the completion of the merger. Market prices for Box Hill common stock
have fluctuated since the merger agreement was signed on April 29, 1999. We
expect further fluctuations through the closing date. Recent market prices of
Box Hill common stock and Artecon common stock are set forth on pages 11 and 12.
We encourage Artecon stockholders to obtain current market quotations for
Box Hill common stock and Artecon common stock. The market prices of Box Hill
common stock and Artecon common stock cannot be guaranteed or predicted.
CERTIFICATE OF AMENDMENT -- BOX HILL'S PROPOSED AMENDMENT TO ITS CERTIFICATE OF
INCORPORATION TO ESTABLISH A CLASSIFIED BOARD OF DIRECTORS COULD DELAY OR
PREVENT A CHANGE IN CONTROL OF BOX HILL.
In connection with the merger, Box Hill's certificate of incorporation will
be amended to provide that the board of directors will be separated into three
classes with members of each class serving for a three-year term. A classified
board of directors, together with the other provisions of Box Hill's certificate
of incorporation and provisions of the Business Corporation Law of the State of
New York described on page 160, may discourage acquisition proposals or delay or
prevent a change in control, which could harm Box Hill's common stock price.
Furthermore, the Box Hill shareholders may have less influence over the
management and policies of Box Hill.
CONCENTRATED SHARE OWNERSHIP -- THE CONCENTRATION OF SHARE OWNERSHIP AFTER THE
MERGER COULD DELAY OR PREVENT A CHANGE IN CONTROL OF BOX HILL.
Immediately following the merger, the executive officers and directors of
the combined company will own beneficially approximately % of the
outstanding Box Hill common stock (assuming a closing sales price of $6.00 for
Box Hill common stock on the day before the merger closes). As a result of their
share ownership, they will be able to elect a majority of Box Hill's board of
directors and approve all matters requiring shareholder approval, and will have
significant control over the combined company and the
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conduct of its business. Such concentration of ownership, along with the
classified board of directors of Box Hill, may delay, defer or prevent a change
in control of Box Hill that might otherwise be beneficial to the other
shareholders.
POTENTIAL BUSINESS DISRUPTION -- THE MERGER MAY RESULT IN A LOSS OF CUSTOMERS,
SUPPLIERS AND EMPLOYEES.
Certain customers may seek alternative sources of product, supply and/or
service after the announcement of the transaction due to, among other reasons, a
desire not to do business with the combined company. Management of Box Hill and
Artecon anticipate that the combined company could experience some customer
attrition after the merger. Difficulties in combining operations can also result
in the loss of key employees or suppliers. There can be no assurance that any
steps by management to counter such potential increased customer, supplier and
employee attrition will be effective. Failure by management to control attrition
would adversely affect Box Hill's future growth and profitability.
POOLING OF INTERESTS ACCOUNTING -- THE COMBINED COMPANY'S FAILURE TO QUALIFY FOR
"POOLING OF INTERESTS" ACCOUNTING TREATMENT WOULD CREATE THE NEED TO ACCOUNT FOR
THE PURCHASE OF GOODWILL, WHICH GOODWILL WILL NEGATIVELY IMPACT THE FUTURE
EARNINGS OF THE COMBINED COMPANY.
The merger is intended to be treated for accounting purposes as a "pooling
of interests." If, however, this expected accounting treatment does not occur,
and the merger is nevertheless consummated, the combined company will have to
account for Box Hill's purchase of Artecon's goodwill and other intangible
assets. Purchase accounting will negatively affect the combined company's
earnings as goodwill and other intangible assets would be amortized over a
period of years, thereby decreasing earnings for each quarter during those
years. Although Box Hill will receive a letter from their independent public
accountants concurring with the companies' management that the merger will
qualify for pooling of interest accounting treatment and Artecon will receive a
letter from their independent public accountants concurring with Artecon's
management that no conditions exist that would preclude Artecon's ability to be
a party in the merger to be accounted for as a pooling of interests, such
opinions are not binding on the Securities and Exchange Commission and do not
take into account transactions that may occur subsequent to the merger date that
would disallow pooling of interests accounting.
BENEFITS TO INSIDERS -- EXECUTIVE OFFICERS AND DIRECTORS OF BOX HILL AND ARTECON
WHO ARE ASKING STOCKHOLDERS TO APPROVE THE MERGER PROPOSAL WILL RECEIVE
ADDITIONAL BENEFITS IN THE MERGER.
As discussed below under "Interests of Certain Persons in the Merger and
Related Agreements," a number of executive officers and directors of Artecon
have interests in the merger that may be different from, or in addition to, your
interests as stockholders. You should be aware of these conflicts of interest
and the benefits available to such persons when considering the boards'
recommendations to approve the merger proposals. Some of these benefits include:
- the following individuals who are currently directors of either Artecon
or Box Hill are expected to be named directors of the combined company:
W.R. Sauey, James Lambert, Norman Farquhar, C.S. Park, Carol Turchin, Dr.
Benjamin Monderer, Philip Black and Benjamin Brussell.
- the following individuals will receive employment contracts with the
combined company, which contracts will provide for bonus compensation and
severance
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payments upon termination: James Lambert, Philip Black, Dana Kammersgard, Carol
Turchin, Mark Mays and Dr. Benjamin Monderer.
- the following individuals will hold positions as officers of the combined
company: James Lambert, Dana Kammersgard, Philip Black, Carol Turchin,
Dr. Benjamin Monderer, Mark Mays and R. Robert Rebmann, Jr.
TRANSACTION EXPENSES -- SUBSTANTIAL EXPENSES WILL BE INCURRED AND PAYMENTS MADE
EVEN IF THE MERGER IS NOT CONSUMMATED.
Shareholders must always bear in mind that the merger may not be
consummated. Whether or not the merger is consummated, Box Hill and Artecon will
incur substantial expenses in pursuing the merger. In addition, if the merger is
terminated under certain circumstances, the terminating party may be required to
pay the non-terminating party a termination fee in an amount up to $2.5 million.
See "Material Terms of the Merger Agreement -- Expenses and Termination Fees" on
page .
RISKS RELATING TO BOTH ARTECON AND BOX HILL
RAPID TECHNOLOGICAL AND CUSTOMER PREFERENCE CHANGES -- ARTECON AND BOX HILL MAY
BE UNABLE TO KEEP PACE WITH THE RAPID CHANGES IN THEIR INDUSTRY.
The open systems data storage market in which Box Hill and Artecon operate
is characterized by rapid technological change, frequent new product
introductions and evolving industry standards. Customer preferences in that
market are difficult to predict and changes in those preferences could render
Box Hill's or Artecon's current or future products unmarketable. The
introduction of products embodying new technologies by Box Hill's and Artecon's
competitors and the emergence of new industry standards could render existing
products as well as new products being introduced obsolete and unmarketable. For
example, if customers were to turn away from open systems computing, Box Hill's
and Artecon's revenue would decline dramatically.
The success of Artecon and Box Hill depends upon their ability to address
the increasingly sophisticated needs of customers, to enhance existing products
and to develop and introduce, on a timely basis, new competitive products
(including new software and hardware and enhancements to existing software and
hardware) that keep pace with technological developments and emerging industry
standards. If Box Hill and Artecon cannot successfully identify, manage,
develop, manufacture or market product enhancements or new products, their
businesses will be materially and adversely affected.
SOLE SOURCE AND KEY SUPPLIERS -- THE LOSS OF ONE OR MORE SUPPLIERS COULD
ADVERSELY AFFECT BOX HILL'S AND ARTECON'S ABILITY TO OBTAIN KEY COMPONENTS FOR
PRODUCTS.
Box Hill relies on other companies to supply certain key components of its
products, and certain products that it resells, which are available only from
limited sources in the quantities and quality demanded by Box Hill. Box Hill
purchases substantially all of its disk drives and all of its Fibre Channel
drives from Seagate Technology, Inc. and all of its DLT tape drives from Quantum
Corporation. Quantum is the only supplier of DLT tape drives. Box Hill purchases
its hardware RAID controllers only from CMD Technology, Inc. If Box Hill faced a
shortage of Seagate drives, DLT tape drives, CMD controllers or other various
components, manufacture and shipment of certain Box Hill products could be
delayed indefinitely as long as there continued to be no alternative sources of
supply. In addition, Box Hill could be subject to price increases, late delivery
and poor component quality. Even if alternative sources of supply became
available, the incorporation of such components from alternative suppliers and
the manufacture and shipment of such products
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could be delayed while necessary modifications to Box Hill's products and
accompanying software are made to accommodate the introduction of alternative
suppliers' components.
Box Hill resells the products of Storage Technology Corporation, or
"StorageTek," including StorageTek tape libraries, as well as the products of
Legato Systems, Veritas Software, and other companies. During 1998,
approximately 34% of Box Hill's total purchases were for StorageTek products,
which products were then resold to customers. If Box Hill were to face a
shortage of StorageTek, Legato, Veritas or such other products in the future,
Box Hill could, after some modification, integrate the products of other
manufacturers into its storage solutions. However, due to the market acceptance
of StorageTek, Legato and Veritas products, Box Hill believes that a substantial
number of customers would not be satisfied with the products of an alternate
manufacturer.
Artecon also relies upon a limited number of suppliers of several key
components used in the assembly of Artecon's products including Seagate,
Quantum, IBM, Infortrend, Intel, Mylex, Sony and American Megatrends, Inc.
Because of such reliance, Artecon is potentially vulnerable to, among other
things:
- an inadequate supply of required components; and
- price increases; late deliveries; and poor component quality.
These risks are particularly significant with respect to suppliers of disk
drives because, in order to meet product performance requirements, Box Hill and
Artecon must obtain disk drives with extremely high quality and capacity. In
addition, there is currently a significant market demand for disk drives, tape
drives and RAID controllers, and from time to time both Box Hill and Artecon may
experience component shortages, selective supply allocations and increased
prices of such components. Box Hill has experienced a shortage of DLT tape
drives in the past, and no one can guarantee that either company will not
experience shortages of these or other components in the future.
Disruption or termination of the supply of these components could delay
shipments of Box Hill's and Artecon's products, resulting in decreased revenues.
Such delays could also damage relationships with current and prospective
customers.
CONCENTRATED CUSTOMER BASE -- AN ECONOMIC DOWNTURN IN AN INDUSTRY OR
GEOGRAPHICAL AREA IN WHICH BOX HILL OR ARTECON CONCENTRATES COULD MATERIALLY
ADVERSELY AFFECT REVENUES.
Box Hill's revenues to date have been derived primarily from sales to
customers in the financial services industry and the telecommunications
industry, with net sales to such industries in 1998 constituting approximately
47% and 15%, respectively, of total net revenue. In addition, a large percentage
of Box Hill's revenue comes from the sale of products to a small number of
significant clients within such industries and to customers based in the
Northeast region of the United States.
Artecon also has a concentrated customer base. In fiscal year 1999, four
customers accounted for an aggregate of 26% of Artecon's total revenues. Artecon
expects that a high percentage of Artecon's sales for the foreseeable future
will continue to come from a relatively small number of customers. Further, a
significant portion of Artecon's revenue is derived from sales to customers in
the telecommunications/internet services provider and government sectors.
An economic downturn in any industry or geographical area targeted by Box
Hill or Artecon, or the loss of one or more customers, particularly a
significant customer, could result in a material decrease in revenues, thereby
adversely affecting Box Hill or Artecon.
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NARROW MARKET -- A DECLINE IN MARKET ACCEPTANCE OF UNIX SYSTEMS WINDOWS NT OR
CHANGES IN SUN MICROSYSTEMS PRODUCTS OR POLICIES COULD MATERIALLY ADVERSELY
AFFECT BOX HILL'S AND ARTECON'S BUSINESS.
Substantially all of Box Hill's revenues to date have been concentrated in
the UNIX marketplace. A significant portion of Box Hill's and Artecon's revenues
are associated with versions of UNIX manufactured by Sun Microsystems, Inc. If
Sun Microsystems were to change its policy of supporting open systems computing
environments and if Box Hill's products were thereby rendered incompatible with
Sun Microsystems' products, Box Hill's business, financial position and results
of operations could be materially and adversely affected.
LACK OF PATENT PROTECTION -- BOX HILL'S AND ARTECON'S LACK OF INTELLECTUAL
PROPERTY PROTECTION MAY AFFORD COMPETITORS WITH AN OPPORTUNITY TO COMPETE
EFFECTIVELY.
Box Hill 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. Competitors, all of whom have
legitimate access to any non-proprietary technical standards utilized by Box
Hill in any of its products or systems (such as those established by the
American National Standards Institute, or "ANSI") may be successful in
developing similar technology independently. If competitors are successful in
effectively commercializing the same technology as Box Hill, the business of Box
Hill may be adversely affected.
Artecon currently relies on a combination of patent, copyright and
trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights and seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. Artecon has registered numerous trademarks
and will continue to evaluate the registration of additional trademarks as
appropriate. Artecon generally enters into confidentiality agreements with its
employees and with key vendors and suppliers. As of March 31, 1999, Artecon had
been issued a total of 7 U.S. patents covering certain elements of its products.
Artecon cannot guarantee that issued patents will provide a meaningful
competitive barrier or that any pending patents will ever be issued, that
Artecon will develop proprietary products or technologies that are patentable,
that any patent issued in the future will provide Artecon with any competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have a material adverse effect on Artecon's ability to do
business. Artecon believes that the rapidly changing technology in the computer
storage industry makes future success dependent more on the technical competence
and creative skills of its personnel than on any patents it may be able to
obtain.
Despite Artecon's and Box Hill's efforts to protect proprietary rights,
unauthorized parties may attempt to copy aspects of their products or to obtain
and use information that the companies regard as proprietary. For example, in
February 1998, Artecon filed a suit against certain former employees alleging,
among other things, trade secret misappropriation. In addition, the laws of some
foreign countries do not protect proprietary rights to as great an extent as do
the laws of the United States. Artecon and Box Hill cannot be certain that its
means of protecting its proprietary rights will be adequate or that its
competitors will not independently develop similar technology, duplicate
products or design around patents issued to Artecon or other intellectual
property rights.
INTENSE COMPETITION -- THE COMPUTER STORAGE MARKET IS HIGHLY COMPETITIVE.
The storage system market is intensely competitive. Artecon and Box Hill
compete with traditional suppliers of computer systems such as Hewlett-Packard,
Sun Microsys-
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tems, IBM, SGI, Compaq Corporation, Hitachi, Data General Corporation, Digital
Equipment Corporation, and Dell Computer Corp., which market storage systems as
well as other computer products, and which seem to have become more focused on
storage recently. For example, Data General recently announced plans to
dramatically increase the size of the sales force of its storage division,
Clariion. Artecon and Box Hill also compete against independent storage system
suppliers to the high-end market including, but not limited to, EMC Corporation,
StorageTek, Network Appliance, Inc., nStor Technologies Inc., LSI Logic
Corporation, Ciprico Inc., MTI Technologies, Inc., Andataco, Inc., Procom
Technology Inc., the Clariion division of Data General and Storage Computer
Corp. In providing tape backup, Box Hill competes with suppliers of tape-based
storage systems such as Datalink Corporation, MTI Technologies, Inc., Dallas
Digital, Cranel, Inc. and others.
Many of these competitors are significantly larger than Box Hill and
Artecon, and have significantly greater financial, technical, marketing,
purchasing and other resources than either 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 resources to the development, promotion and sale
of products than either Box Hill or Artecon, or to deliver competitive products
at a lower end-user price.
Increased competition is likely to result in price reductions, reduced
operating margins and loss of market shares, any of which could have a material
adverse effect on Artecon's and Box Hill's businesses, operating results or
financial conditions. In fact, competitive pricing pressures have had, and may
continue to have an adverse effect on Box Hill's revenues and earnings.
If Box Hill and Artecon are unable to develop and market products to
compete with the products of competitors, the businesses of Box Hill and Artecon
will be materially adversely affected. In addition, if major customers who are
also competitors cease purchasing Artecon or Box Hill's products so that they
can concentrate on sales of their own products, Artecon's and Box Hill's
businesses could be adversely affected.
INTERNATIONAL RISKS -- BOX HILL'S AND ARTECON'S INTERNATIONAL BUSINESS
ACTIVITIES SUBJECT THEM TO RISKS THAT COULD ADVERSELY AFFECT BUSINESS.
Box Hill's international sales represented approximately 12% of net
revenues for the fiscal year ended December 31, 1998. Artecon's international
sales represented approximately 10% of its total revenues for the fiscal year
ended March 31, 1999. Both Artecon and Box Hill believe that continued growth
and profitability will require expansion of international operations,
particularly in Europe and Japan. Box Hill's and Artecon's international
operations are subject to a variety of risks associated with conducting business
internationally, including the following, any of which could have a material
adverse effect on business, operating results and financial condition:
- longer payment cycles;
- unexpected changes in regulatory requirements;
- import and export restrictions and tariffs, and increases in tariffs,
duties, price controls or other restrictions on foreign currencies;
- the burden of complying with a variety of foreign laws;
- potentially adverse tax consequences;
- currency exchange rate fluctuations;
- the imposition of trade barriers or price controls;
- political and economic instability abroad;
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- difficulties in staffing and managing international operations;
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world; and
- problems in collecting accounts receivable.
Box Hill effects sales in U.S. dollars. However, a significant portion of
Artecon's international business is currently conducted in currencies other than
the U.S. dollar. Foreign currency translation gains and losses arising from
normal business operations are credited to or charged against earnings in the
period incurred. As a result, fluctuations in the value of the currencies in
which Artecon conducts its business relative to the U.S. dollar will continue to
cause currency translation gains and losses which Artecon has experienced in the
past and continues to experience. Due to the substantial volatility of currency
exchange rates, among other factors, Artecon cannot predict the effect of
exchange rate fluctuations upon future operating results. Artecon cannot be
certain whether it will experience currency losses in the future. Artecon has
not previously undertaken hedging transactions to cover its currency exposure
but may hedge a portion of its currency exposure in the future as management
deems appropriate.
Proprietary rights and intellectual property may be more difficult to
protect outside of the United States. Also, both Box Hill and Artecon have
limited experience in marketing and distributing their products internationally.
Neither Box Hill nor Artecon can be certain that it will be able to successfully
grow its international presence in a timely manner, which could have a material
adverse effect on the business, operating results and financial condition.
LACK OF LONG TERM CONTRACTS -- DELAYS OR CANCELLATIONS OF CUSTOMER ORDERS COULD
MATERIALLY ADVERSELY AFFECT BOX HILL'S AND ARTECON'S OPERATING RESULTS.
Both Box Hill and Artecon generally do not enter into long-term volume
purchase contracts with customers, and customers generally have certain rights
to extend or to delay the shipment of their orders, as well as the right to
return products and cancel orders under some circumstances. The cancellation or
rescheduling of orders placed by our customers, or the return of products
shipped to them, could materially and adversely affect Box Hill's or Artecon's
business.
PRODUCT DEFECTS -- ARTECON'S AND BOX HILL'S BUSINESSES WILL MATERIALLY SUFFER IF
EITHER COMPANY ENCOUNTERS SIGNIFICANT PRODUCT DEFECTS.
Storage system products like those offered by Box Hill and Artecon may
contain undetected software errors or failures when first introduced or as new
versions are released. Box Hill and Artecon cannot be certain that, despite
testing, errors will not be found in new products after commencement of
commercial shipments.
Both Box Hill's and Artecon's standard warranties provide that if a system
does not function to published specifications the companies will repair or
replace the defective component without charge. Significant warranty costs could
have a material adverse effect on Artecon's and Box Hill's business.
AVAILABILITY OF COMPETING PRODUCTS -- SALES OF COMPETING PRODUCTS BY
DISTRIBUTORS AND VARS COULD MATERIALLY ADVERSELY AFFECT BOX HILL'S AND ARTECON'S
SALES.
In the United States, Artecon sells its products both through a direct
sales force and through value-added resellers (VARs). Outside of the United
States, Box Hill sells its products through distributors. Artecon's and Box
Hill's distributors and VARs may also carry competing product lines, and could
reduce or discontinue sales of Artecon's and Box Hill's products, which could
have a material adverse effect on operating results. In
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addition, we cannot assure you that existing end-user customers will not
purchase their storage equipment from the manufacturer that provides their
network computing systems and, as a result, reduce or eliminate purchases from
Artecon and Box Hill.
LENGTHY SALES CYCLES -- BOTH ARTECON AND BOX HILL DEPEND ON LARGE ORDERS AND
UPON SALES WHICH MAY HAVE LENGTHY CYCLES.
Customer orders for both Box Hill and Artecon can range in value from a few
thousand dollars to over a million dollars. The length of time between initial
contact with a potential customer and sale of a product, or "sales cycle", also
can vary greatly and can be as long as three to twenty-four months. This is
particularly true for the sale and installation of complex, turnkey solutions,
which often are sold directly to end users. Revenue for Box Hill and Artecon is
likely to be affected by the timing of larger orders, which makes it difficult
for the companies to predict such revenue. Revenue for a quarter could be
reduced if large orders forecasted for a certain quarter are delayed or are not
realized. The factors that could delay or defer an order include:
- time needed for technical evaluations by customers;
- customers budget restrictions and changes to budgets during the course of
a sales cycle;
- customer internal review and testing procedures; and
- engineering work needed to integrate a storage solution with a customer's
system.
YEAR 2000 ISSUES -- THE STORAGE BUSINESS MAY BE HARMED BY YEAR 2000 ISSUES.
Many currently installed computer systems and software products are coded
to accept only two digit entries or some other method in the date code field.
Beginning in the year 2000, these date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists in the software industry concerning the potential effects associated with
such compliance. The cost of making Artecon's and Box Hill's products Year 2000
compliant is not expected to be material. For a more complete description of the
Year 2000 issue and its impact on Artecon's and Box Hill's businesses, you
should read, "Information Relating to Box Hill -- Box Hill Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance" and "Information Relating to Artecon -- Artecon Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Compliance."
Both Artecon and Box Hill believe that Year 2000 issues may affect the
purchasing patterns of customers and potential customers in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase products such as those offered by our
companies. Other companies are delaying purchases of computer equipment,
particularly equipment that contains new technology, until after the Year 2000.
Also, Year 2000 issues could cause a significant number of companies, including
current customers, to reevaluate their current information system needs, and as
a result consider switching to other systems or suppliers. Any of the foregoing
could have a material adverse effect on Artecon's or Box Hill's business,
operating results and financial condition.
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<PAGE> 48
RISKS SPECIFIC TO EITHER ARTECON OR BOX HILL
OPERATING LOSSES -- ARTECON HAS A HISTORY OF RECENT OPERATING LOSSES.
For the fiscal years ended March 31, 1999 and 1998 Artecon incurred a loss.
Artecon's operating results for the fiscal years ended March 31, 1999 and 1998
included expenses incurred as a result of the acquisition of Falcon and the
acquisition of Storage Dimensions by Artecon.
If the combined company is unable to generate net income from operations,
the business of the combined company will be adversely affected and its stock
price will likely suffer a decrease in value.
ON-GOING LITIGATION -- BOX HILL AND CERTAIN OFFICERS AND DIRECTORS CURRENTLY ARE
SUBJECT TO A SHAREHOLDER CLASS ACTION LAWSUIT.
A shareholder class action lawsuit has been filed in the United States
District Court for the Southern District of New York against Box Hill, Philip
Black, Carol Turchin, Dr. Benjamin Monderer, Mark Mays and the underwriters of
Box Hill's September 16, 1997 initial public offering. The putative class
actions were filed on behalf of purchasers of Box Hill stock during the period
between September 16, 1997 through 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 Box Hill's
registration statement and prospectus issued in connection with the public
offering and in statements allegedly made by Box Hill and certain of its
officers and directors subsequent to the offering.
Box Hill believes that it has meritorious defenses to plaintiffs' claims
and intends to vigorously defend against the claims. However, Box Hill expects
to incur significant legal expenses and beyond defending this litigation. Such
defense costs and other costs connected to this litigation will be expensed as
incurred and will reduce Box Hill's future operating results.
In addition to the action discussed above, both Box Hill and Artecon are
subject to various other legal proceedings and claims, which arise in the
ordinary course of business, and the outcome of any such claim cannot be
predicted with certainty.
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<PAGE> 49
THE BOX HILL SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
This document is being furnished to the holders of Box Hill common stock in
connection with the solicitation of proxies by the Box Hill board for use at the
Box Hill special meeting to be held at the offices of Herrick, Feinstein LLP,
located at Two Park Avenue, 21st floor, New York, New York, on , 1999
at a.m. local time.
MATTERS TO BE CONSIDERED AT THE BOX HILL SPECIAL MEETING
At the Box Hill special meeting, Box Hill shareholders will be asked to
consider and vote upon the following proposals:
- the approval and adoption of the merger agreement and the approval of the
merger, and the approval of the issuance of shares of Box Hill common
stock in the merger;
- the approval of an amendment to Box Hill's certificate of incorporation
to change the name of Box Hill to " " and to provide for a
classified board of directors whereby the directors will be separated
into three classes with members of each class serving for a three-year
term;
- the approval of an increase of an additional 500,000 shares of Box Hill
common stock authorized for issuance under the 1997 Box Hill Employee
Stock Purchase Plan;
- the approval of an increase of an additional 2,000,000 shares of Box Hill
common stock authorized for issuance under the 1995 Stock Incentive Plan
of Box Hill, as amended; and
- such other matters as may be properly brought before the meeting, or any
adjournment or postponement thereof.
BOX HILL BOARD RECOMMENDATION
The Box Hill board of directors unanimously approved and adopted the merger
agreement and the merger, the issuance of shares of Box Hill common stock in the
merger, the amendment to Box Hill's certificate of incorporation, and the
increase in the number of shares of Box Hill common stock available for issuance
under Box Hill's option plan and stock purchase plan. The board unanimously
recommends that holders of Box Hill common stock vote for approval of each of
the proposals.
VOTES REQUIRED AND OUTSTANDING SHARES
The approval of a majority of the votes cast, provided that the total votes
cast represent over 50% in interest of all shares, is required for each of the
proposals except that the affirmative vote of the holders of a majority of all
of the outstanding shares of Box Hill common stock present in person or
represented by proxy and entitled to vote at the Box Hill special meeting is
required to approve the amendment to Box Hill's certificate of incorporation. If
the merger proposals or the proposal to amend the certificate of incorporation
are not approved, the amendment to increase the number of shares issuable under
the stock purchase plan and the option plan will not become effective.
Only holders of record of Box Hill common stock at the close of business on
, 1999 will be entitled to notice of and to vote at the Box Hill
special meeting. At the close of business on the record date there were
shares of Box Hill common
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<PAGE> 50
stock outstanding and entitled to vote. These shares were held by approximately
holders of record. Each holder of record of Box Hill common stock on the
record date will be entitled to one vote for each share held on all matters to
be voted upon at the Box Hill special meeting.
Except for the shareholders identified herein under "Information Relating
to Box Hill -- Security Ownership of Certain Beneficial Owners and Management of
Box Hill," as of the record date, to the knowledge of Box Hill, no other person
beneficially owned more than 5% of the outstanding Box Hill common stock.
QUORUM, ABSTENTIONS AND BROKER NON-VOTES
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Box Hill common stock entitled to vote at
the Box Hill special meeting is necessary to constitute a quorum. Abstentions
will be counted towards the tabulation of votes cast on proposals presented to
the shareholders and will have the same effect as negative votes on each
proposal. Broker non-votes (which occurs when a nominee holding shares for a
beneficial owner does not vote on a proposal because the nominee does not have
discretionary voting power and has not received instructions from the beneficial
owner) are counted towards a quorum, but are not counted for any purpose in
determining whether a matter has been approved.
VOTING OF PROXIES
All shares of Box Hill common stock that are entitled to vote and are
represented at the Box Hill special meeting by properly executed proxies
received prior to or at the Box Hill special meeting, and not revoked, will be
voted at the Box Hill special meeting in accordance with the instructions
indicated on such proxies. If no instructions are indicated, such proxies will
be voted for approval of the Box Hill proposals.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. Proxies may be revoked by filing with
the corporate secretary of Box Hill at Box Hill's principal offices a written
notice of revocation or a duly executed proxy bearing a later date. Proxies may
be revoked by attending the meeting and voting in person. Attendance at the
meeting will not, by itself, revoke a proxy.
SOLICITATION
The Box Hill proxy card accompanying this prospectus/joint proxy statement
is being solicited on behalf of the Box Hill board of directors for use in
voting at the Box Hill special meeting. The cost of the solicitation of proxies
from holders of Box Hill common stock and all related solicitation costs will be
paid by Box Hill. In addition, Box Hill may reimburse brokerage firms and other
persons representing beneficial owners of shares for their expenses in
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of Box
Hill. No additional compensation will be paid to directors, officers or other
regular employees for such services.
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VOTING AGREEMENTS
Pursuant to voting agreements dated April 29, 1999, Benjamin Monderer, Mark
A. Mays and Benjamin Monderer, as the trustee for the Monderer 1999 GRAT u/a/d
March 1999 trust, who collectively held approximately 53.7% of the outstanding
voting power of Box Hill common stock as of the date of the merger agreement,
have agreed to cause all shares of Box Hill common stock over which they have
voting power or control to be voted in favor of:
- the approval and adoption of the merger agreement and approval of the
merger;
- the approval of the issuance of shares of Box Hill common stock in the
merger; and
- the approval of the amendments to Box Hill's certificate of
incorporation.
The vote of these shareholders alone is sufficient to approve the
proposals.
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THE ARTECON SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
This document is being furnished to the holders of Artecon common stock and
preferred stock in connection with the solicitation of proxies by the Artecon
board for use at the Artecon special meeting to be held at Artecon's principal
offices, located at 6305 El Camino Real, Carlsbad, California, on ,
1999 at a.m. local time.
MATTERS TO BE CONSIDERED AT THE ARTECON SPECIAL MEETING
At the Artecon special meeting, Artecon shareholders will be asked to
consider and vote upon:
- the approval and adoption of the merger agreement and the approval of the
merger;
- such other matters as may be properly brought before the meeting, or any
adjournment or postponement thereof.
ARTECON BOARD RECOMMENDATION
The Artecon board of directors unanimously approved the merger agreement
and the merger and unanimously recommends a vote for approval of the merger
proposal.
VOTES REQUIRED AND OUTSTANDING SHARES
The approval of the merger proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of Artecon common stock and
preferred stock, voting as a single class.
Only holders of record of Artecon common stock and preferred stock at the
close of business on , 1999 will be entitled to notice of and to vote
at the Artecon special meeting. At the close of business on the record date
there were shares of Artecon common stock and 2,494,159 shares of
Artecon preferred stock outstanding and entitled to vote. Each holder of record
of Artecon common stock on the record date will be entitled to one vote for each
share held on all matters to be voted upon at the Artecon special meeting. In
addition, the holders of Artecon preferred stock will be entitled to one vote
for each share of Artecon common stock into which such preferred stock is
convertible.
Except for the shareholders identified herein under "Information Relating
to Artecon -- Security Ownership of Certain Beneficial Owners and Management of
Artecon," as of the record date, to the knowledge of Artecon, no other person
beneficially owned more than 5% of the outstanding Artecon common stock or
preferred stock.
QUORUM, ABSTENTIONS AND BROKER NON-VOTES
The presence, in person or by properly executed proxy, of the holders of a
majority of the shares entitled to vote at the Artecon special meeting is
necessary to constitute a quorum. Abstentions will be counted for purposes of
determining a quorum. For purposes of obtaining the required vote of a majority
of the outstanding shares for approval and adoption of the merger agreement and
the approval of the merger, the effect of an abstention or a broker non-vote
will be the same as a vote against the proposal.
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VOTING OF PROXIES
All shares of Artecon common stock and preferred stock that are entitled to
vote and are represented at the Artecon special meeting by properly executed
proxies received prior to or at the Artecon special meeting, and not revoked,
will be voted at the Artecon special meeting in accordance with the instructions
indicated on such proxies. If no instructions are indicated, such proxies will
be voted for approval of the merger proposal.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
corporate secretary of Artecon at Artecon's principal offices, a written notice
of revocation or a duly executed proxy bearing a later date, or it may be
revoked by attending the meeting and voting in person. Attendance at the meeting
will not, by itself, revoke a proxy.
SOLICITATION
This prospectus/joint proxy statement was mailed to all Artecon
stockholders of record as of the record date and constitutes notice of the
Artecon special meeting in conformity with the requirements of Delaware law. The
cost of the solicitation of proxies from holders of Artecon common and preferred
stock and all related solicitation costs will be borne by Artecon. In addition,
Artecon may reimburse brokerage firms and other persons representing beneficial
owners of shares for their expenses in forwarding solicitation materials to such
beneficial owners. Original solicitation of proxies by mail may be supplemented
by telephone, telegram or personal solicitation by directors, officers or other
regular employees of Artecon. No additional compensation will be paid to
directors, officers or other regular employees for such services.
VOTING AGREEMENTS
Pursuant to voting agreements dated April 29, 1999, W.R. Sauey, Seats,
Inc., Flambeau Corporation, Flambeau Products Corporation, the W.R. and Floy A.
Sauey Grandparents Trust, James L. Lambert, Pam Lambert and Dana W. Kammersgard,
who collectively held approximately 52.3% of the outstanding voting power of
Artecon as of the date of the merger agreement, have agreed to cause all shares
of Artecon common stock and preferred stock over which they have voting control
to be voted in favor of the approval and adoption of the merger agreement and
approval of the merger. The vote of these shareholders alone is sufficient to
approve the merger proposal.
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<PAGE> 54
THE MERGER
The following discussions of the merger, the merger agreement, the certificate
of amendment to Box Hill's certificate of incorporation and the related
transactions are qualified in their entirety by reference to the merger
agreement, the certificate of amendment and related agreements, copies of which
are attached hereto as appendices or filed as exhibits to this prospectus/joint
proxy statement.
GENERAL
The merger agreement provides for the merger of Artecon with BH Acquisition
Corp., a Delaware corporation that is a wholly owned subsidiary of Box Hill and
which was created solely to effect the merger. As a result of the merger,
Artecon will be the surviving corporation in the merger and will become a wholly
owned subsidiary of Box Hill. The former stockholders of Artecon will become
shareholders of Box Hill. The merger will become effective upon the filing of a
certificate of merger with the Secretary of State of the State of Delaware. The
effective time shall occur no later than the second business day after the
satisfaction or waiver of all the conditions to closing which are set forth in
the merger agreement. It is currently anticipated that the effective time will
occur on or before , 1999.
In connection with the merger, Box Hill will amend its certificate of
incorporation and bylaws to provide for a classified board of directors whereby
the directors of Box Hill will be separated into three classes, with the members
of each class serving for a three year term. The amendment to Box Hill's
certificate of incorporation is sometimes referred to herein as the "certificate
of amendment."
MERGER CONSIDERATION
ARTECON COMMON STOCK. At the effective time, each share of Artecon common
stock then outstanding will be converted into the right to receive .40 of a
share of Box Hill common stock (the "exchange rate").
ARTECON PREFERRED STOCK. At the effective time, each share of Artecon
preferred stock then outstanding will be converted into that fraction of a share
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's common stock as
traded on the New York Stock Exchange Composite Transactions Tape on the last
trading day immediately prior to the closing date of the merger, by (ii)
2,494,159. If any shares of the preferred stock are converted into shares of
Artecon common stock prior to the closing of the merger, such converted shares
of Artecon common stock will be converted into Box Hill common stock at the
exchange rate. In such event, the number used to determine the fraction that
each share of Artecon preferred stock, i.e., 2,494,159 will be converted into
Box Hill shares will be adjusted accordingly.
NO FRACTIONAL SHARES. No fractional shares of Box Hill common stock will
be issued in connection with the merger. Instead, any holder of Artecon common
stock (after aggregating all fractional shares of Box Hill common stock issuable
to such stockholder) will be entitled to receive cash, without interest. The
amount of cash will be determined by multiplying the fraction of a share by the
closing price of a share of Box Hill common stock on the New York Stock Exchange
on the closing date of the merger. Any fractional shares of Box Hill common
stock due to the holders of Artecon preferred stock will be rounded up to the
nearest whole share of Box Hill common stock.
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TREATMENT OF ARTECON STOCK OPTIONS
Upon the consummation of the merger, all outstanding options to purchase
Artecon common stock (collectively, "Artecon options") will be assumed by Box
Hill in accordance with their terms. The Artecon options will become rights to
purchase Box Hill common stock. From and after the consummation of the merger:
- the number of shares of Box Hill common stock that will be issuable upon
the exercise of an Artecon option will be equal to the number of shares
of Artecon common stock that would have been issued immediately prior to
the effective time multiplied by the exchange rate, rounding down to the
nearest whole share;
- the per share exercise price of each Artecon option shall be adjusted by
dividing the per share exercise price of the option by the exchange rate
and rounding up to the nearest cent; and
- any restriction on the exercise of an Artecon option shall continue in
full force and effect and the term, exercisability, vesting schedule and
other provisions of the Artecon option shall otherwise remain unchanged
(except that the vesting of certain options held by the directors of
Artecon will accelerate pursuant to their terms).
STOCK OWNERSHIP FOLLOWING THE MERGER
Based upon the number of shares of Artecon common stock and Artecon
preferred stock issued and outstanding as of the Artecon record date, and
assuming a closing sales price of $6.00 for Box Hill common stock on the day
before the consummation of the merger, an aggregate of approximately 9,531,963
shares of Box Hill common stock will be issued to security holders of Artecon.
Based upon the number of shares of Box Hill common stock issued and outstanding
as of the Box Hill record date and assuming no exercise of outstanding options,
warrants or other rights to purchase Box Hill common stock, the former holders
of Artecon common stock and preferred would hold and have voting power with
respect to approximately of Box Hill's total issued and outstanding
shares of common stock after consummation of the merger.
POST-MERGER MANAGEMENT OF BOX HILL
The directors (and their respective classes) of Box Hill after the
consummation of the merger will be as follows:
W.R. Sauey (Chairman) (class III)
James Lambert (class III)
Carol Turchin (class III)
C.S. Park (or another outside director chosen by Artecon) (class II)
Dr. Benjamin Monderer (class II)
Benjamin Brussell (or another outside director chosen by Box Hill) (class
II)
Philip Black (class I)
Norman Farquhar (or another outside director chosen by Artecon) (class I)
The class I directors shall serve until Box Hill's 2000 stockholder
meeting, the class II directors shall serve until Box Hill's 2001 stockholder
meeting and the class III directors shall serve until Box Hill's 2002
stockholder meeting.
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The officers of Box Hill after the consummation of the merger will be as
follows:
<TABLE>
<S> <C>
James Lambert Co-Chief Executive Officer, President and
Chief Operating Officer
Philip Black Co-Chief Executive Officer and Executive Vice
President -- International Sales and
Operations
Dana Kammersgard Chief Technical Officer
Carol Turchin Executive Vice President, Domestic Sales
Dr. Benjamin Monderer Executive Vice President,
Applications Engineering/Professional
Services
R. Robert Rebmann, Jr. Chief Financial Officer
Mark Mays Secretary
</TABLE>
The certificate of incorporation and bylaws of Artecon, the surviving
corporation in the merger, will be amended and restated upon the consummation of
the merger to conform to the certificate of incorporation of BH Acquisition
Corp. with the exception that the name of the surviving subsidiary corporation
shall be changed from "BH Acquisition Corp." to "Artecon, Inc." Immediately
after the consummation of the merger, the directors and officers of the
surviving corporation will be as follows:
Directors:
Carol Turchin
Dr. Benjamin Monderer
Philip Black
Mark Mays
Officers:
Philip Black -- President, Treasurer
Mark Mays -- Vice President, Secretary
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
As soon as practicable after the consummation of the merger, the exchange
agent will mail to the registered holders of Artecon common stock and Artecon
preferred stock a letter of transmittal and instructions for surrendering valid
certificates representing shares of Artecon common stock and Artecon preferred
stock in exchange for certificates representing Box Hill common stock. Upon
surrender of an Artecon stock certificate to the exchange agent for
cancellation, together with a duly executed letter of transmittal and such other
documents as may reasonably be required by the exchange agent or Box Hill, the
shareholder shall be entitled to receive a certificate representing the whole
number of shares of Box Hill common stock that such shareholder has the right to
receive along with any cash due as the result of fractional shares.
If any Artecon stock certificate has been lost, stolen or destroyed, Box
Hill may require the owner of such lost, stolen or destroyed Artecon stock
certificate to provide an appropriate affidavit as indemnity against any claim
that may be made against Box Hill or Artecon with respect to such Artecon stock
certificate.
Artecon stockholders should not surrender their Artecon stock certificates for
exchange until they receive a letter of transmittal from the exchange agent.
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BACKGROUND OF THE MERGER
At the May 1998 Salomon Smith Barney Storage Conference in New York City,
James Lambert, Artecon's Chief Executive Officer, met briefly with Philip Black,
Box Hill's Chief Executive Officer, and discussed their respective businesses
and the market.
On December 11, 1998, at a telephonic meeting of the Artecon board of
directors, the Artecon board and members of senior management began to discuss
strategic alternatives that might be available to the company in order to raise
additional capital to fund ongoing operations and scheduled future expansion of
its business. After considerable discussion, the board authorized Mr. Lambert to
explore strategic alternatives that might satisfy the company's objectives.
On December 14, 1998, Carol Turchin, Box Hill's Executive Vice President
Strategic Planning, telephoned Mr. Lambert to discuss the current business
environment and the challenges facing Artecon and Box Hill and explore the
possibility of a strategic transaction. After discussing some conceptual issues
regarding a potential strategic transaction, Ms. Turchin and Mr. Lambert agreed
to meet within the next week or so to continue discussions.
On December 23, 1998, representatives of both Artecon and Box Hill,
including Ms. Turchin and Messrs. Monderer, Lambert, Sauey, Black and
Kammersgard, met at O'Hare Airport in Chicago, Illinois to review more detailed
terms regarding a potential merger between the companies. The parties discussed
the current financial condition of each of the companies and the current
prospects for each company as a stand-alone entity. In addition, the parties
discussed potential efficiencies that might be realized if the two companies
were to merge. The parties agreed that a merger, under the right circumstances,
could potentially provide the two companies with a stronger business model to
further the growth of the companies. At the conclusion of the meeting, the
parties agreed to further explore the viability of a merger between the two
companies and entered into a preliminary mutual confidentiality agreement so
that each company could obtain access to limited confidential information about
the other party.
On January 5, 1999, at a telephonic meeting of Artecon's board, Mr. Lambert
informed the board of his December 23rd meeting with the Box Hill
representatives in Chicago and summarized the potential benefits of proceeding
with a merger with Box Hill. After Mr. Lambert's presentation, the Artecon board
continued discussions relating to other possible strategic alternatives. Messrs.
Lambert and Sauey advised the board that they had been in discussions with the
financial advisory firm of Sucsy, Fischer & Company regarding a potential
private placement of securities of Artecon.
On January 29, 1999, at a regularly scheduled meeting of the Box Hill board
of directors, Mr. Black gave a detailed presentation to the full board regarding
Artecon and its business, and the potential synergies and associated risks,
which could result from combining the two companies. The directors discussed the
presentation and authorized certain officers to pursue a possible transaction
with Artecon.
On February 8, 1999, Mr. Sauey met with Ms. Turchin and Valerie Greenberg,
Box Hill's in-house counsel, in New York. Mr. Sauey and Ms. Turchin discussed a
merger of the two companies, particularly the structural aspects of a combined
company.
On February 10, 1999, Mr. Black met with Mr. Lambert at Mr. Lambert's home
in Carlsbad, California to continue discussions regarding a potential merger.
The parties
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discussed in more detail the potential synergies and cost savings that might be
realized by a merger of the two companies.
On February 18, 1999, Ms. Turchin and Mr. Monderer met with Messrs. Sauey,
Lambert and Kammersgard at the Four Seasons Hotel in Carlsbad, California. The
parties discussed the current status of Box Hill and Artecon. In addition, the
parties discussed post-merger issues, including the possible structure and
management of the combined company, the markets in which the combined company
would focus and the products and services that the combined company would offer.
On February 22, 1999, Ms. Turchin and Ms. Greenberg met with
representatives of Salomon Smith Barney Inc. to discuss the potential
transaction with Artecon.
On March 4, 1999, representatives of Box Hill, Salomon Smith Barney, and
Tucker Anthony met at Artecon's facilities in Carlsbad, California to conduct
financial, operational and legal due diligence. At such meeting, members of
Artecon's management made presentations to the group.
On March 8, 1999, Artecon formally engaged Tucker Anthony Incorporated to
serve as its exclusive financial advisor with respect to a possible sale or
merger of Artecon to Box Hill.
On March 24 and 25, 1999, representatives of Arthur Andersen LLP, Box
Hill's independent public accountants, met with representatives of Deloitte &
Touche LLP, Artecon's independent public accountants, at Deloitte & Touche's
offices in Costa Mesa, California, and with Mr. Lambert at Artecon's offices in
Carlsbad, California in which each party began tax, accounting and financial due
diligence with respect to the other party. Such due diligence was ongoing
through April 27th.
On March 29, 1999, Ms. Turchin and Dr. Monderer met with Messrs. Lambert
and Kammersgard at the Hyatt Hotel in San Francisco, California to continue
discussions related to the merger. At the meeting, the parties again focused on
the post-merger operational structure of the combined company and discussed
details related to the pricing of the transaction.
On April 12,1999, Herrick, Feinstein LLP, outside counsel to Box Hill,
circulated the first draft of the proposed merger agreement to Artecon, Box Hill
and their respective representatives and advisors.
On April 12 and 13, 1999, Mr. Lambert, representatives from Tucker Anthony
and representatives from Deloitte & Touche LLP met with representatives of Box
Hill at their offices in New York, New York to continue operational, financial
and accounting due diligence by Artecon.
The parties decided that at this point it was prudent for each of the
companies to undertake more in-depth business, legal and accounting due
diligence with respect to the other company.
On April 14, 1999, the parties executed a mutual nondisclosure and
standstill agreement to enable the parties to provide more detailed information
for due diligence.
On April 16, 1999, Box Hill's board met to discuss the proposed merger.
Present at the meeting were all of the directors of Box Hill and representatives
from Salomon Smith Barney and Herrick, Feinstein LLP. The executive officers of
Box Hill presented a detailed analysis of the proposed merger, including
combined product lines, geographic markets and
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industry sectors to be covered by the combined company, and the organization of
the combined company.
Between April 12 and April 28, 1999, representatives of Herrick, Feinstein
LLP and Cooley Godward LLP, outside counsel to Artecon, held numerous phone
calls to negotiate the terms of the merger agreement and the ancillary documents
related to the merger. During such time, the directors of Box Hill received from
Box Hill management reports on the status of the merger negotiations and draft
copies of the merger agreement and ancillary documents.
On April 20, 1999, Artecon's board held a meeting to discuss the proposed
merger. Mr. Lambert summarized for the board the results of the due diligence
conducted with respect to Box Hill to date. After Mr. Lambert's presentation,
the board discussed pricing issues related to the proposed merger.
On April 23, 1999, the Artecon board met again telephonically to discuss
the proposed merger. Present at the meeting were each of the directors,
including Mr. Lambert, Dana Kammersgard of Artecon, and representatives from
Tucker Anthony and Cooley Godward LLP. Representatives of Tucker Anthony
summarized for the board Tucker Anthony's analysis of comparable transactions
and the pricing information available on similarly structured mergers. In
addition, the Tucker Anthony representative discussed the potential advantages
and disadvantages of and risks associated with various other strategic
alternatives potentially available to Artecon. The Board also discussed due
diligence reviews that had been done of Box Hill.
On April 28 and April 29, 1999, the parties and their respective advisors
negotiated and resolved various open issues regarding the proposed transaction,
including issues relating to the merger consideration, scope of the parties'
representations and warranties, and conditions to the parties' obligations to
consummate the merger.
On April 29, 1999, the board of Box Hill held a special meeting to discuss
the transaction, including the increase in the merger consideration from that
previously presented to the board. At the special meeting, representatives of
Salomon Smith Barney reviewed certain financial terms of the proposed merger,
and presented financial analyses regarding the proposed merger. Salomon Smith
Barney then rendered its fairness opinion to the board. The members of the board
then discussed the employment agreements to be received by certain members of
Box Hill and Artecon management and the timing of the announcement of the
transaction. The board resolved to approve the merger and the merger agreement
and all related transactions.
At 12:00 p.m. Pacific Daylight Time, on April 29, 1999, the board of
Artecon held a telephonic special meeting to discuss the progress of the
negotiations with Box Hill and to receive an update on the due diligence review
of Box Hill. At the special meeting, certain senior level management personnel
and representatives of Tucker Anthony and Cooley Godward reviewed the terms of
the proposed merger and reported on the results of the due diligence review of
Box Hill. In particular, the Tucker Anthony representative made a presentation
regarding the financial terms of the proposed merger, explaining to the board in
detail the analysis undertaken by Tucker Anthony regarding the proposed merger.
In addition, the Cooley Godward representative discussed in detail the terms of
the merger agreement and related exhibits with the Artecon board. Specifically,
the Cooley Godward representative discussed the material terms of the proposed
merger, including the structure of the merger, the tax and accounting treatment
for the merger, the exchange ratio, the post-merger composition of the board of
directors and management of Box Hill, proposed
51
<PAGE> 60
employment arrangements, and the planned relocation of Box Hill's corporate
headquarters to Carlsbad, California. At this point, the board agreed to hold
another meeting later that afternoon to discuss the results of further
negotiations.
At 3:00 p.m., Pacific Daylight Time, on April 29, 1999, the Artecon board
held another telephonic meeting. The Cooley Godward representative reviewed for
the board the results of negotiations with Box Hill's representatives subsequent
to the prior Board meeting. The Tucker Anthony representative then rendered the
opinion of Tucker Anthony, subsequently confirmed in writing, that, as of such
date, the consideration to be received by the stockholders of Artecon was fair
from a financial point of view to such stockholders. After such presentations
and discussions, the Artecon board voted unanimously to approve the proposed
merger with Box Hill, the merger agreement and all related transactions.
Following the approval of the Box Hill board and the Artecon board, the
merger agreement and related documents in their respective definitive forms were
executed and delivered by the parties on the evening of April 29, 1999. On April
30, 1999, Box Hill and Artecon issued a joint press release publicly announcing
the merger.
BOX HILL'S REASONS FOR THE MERGER
The meeting of the Box Hill board was held on April 29, 1999. After due
consideration, the Box Hill board unanimously:
- determined that the merger agreement, the merger and the issuance of
shares of Box Hill common stock to the holders of Artecon stockholders,
the amendment to the Box Hill's charter and the related transactions were
fair to and in the best interest of Box Hill and its shareholders;
- approved the merger agreement, the merger, the certificate of amendment
and the related transactions; and
- determined to recommend that the shareholders of Box Hill approve the
merger, including the issuance of Box Hill common stock in the merger and
the certificate of amendment.
Accordingly, the Box Hill board recommends that the Box Hill shareholders
vote "FOR" the approval of the merger agreement, the merger, the issuance of
shares of common stock in the merger and the charter amendment.
In approving the transaction and making these recommendations, the Box Hill
board consulted with Box Hill's legal and financial advisors as well as with Box
Hill's senior management. In addition, the board considered a number of
strategic factors associated with the Artecon business and opportunities
presented by combining the two companies. The board believed that:
- Artecon's significant technological expertise in both the software and
hardware areas, could complement Box Hill's expertise and product and
service offerings;
- Artecon's market on the West Coast, as well as in the ISP and government
sectors, could allow Box Hill to penetrate those markets more quickly
than if Box Hill remained as a stand alone entity;
- Artecon's international distribution capabilities and infrastructure,
could enhance sales of Box Hill's existing products by providing a
broader distribution network;
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<PAGE> 61
- the combined research and development staff of the two companies, could
allow a sharper focus on the key competencies of each company;
- the efficiencies of combining certain functions, like operations, finance
and administration, which could result in cost savings by eliminating
certain fixed costs;
- the increased size of the combined company, could enhance its ability to
attract and retain executives and research and development personnel; and
- the increased depth and reach of the combined company's sales force,
support and application engineering coverage, could enhance its ability
to serve and attract high-end customers.
The board also considered the following factors:
- the intended treatment of the merger as a pooling of interests for
financial reporting and accounting purposes;
- the ability to complete the merger as a tax-free reorganization for U.S.
federal income tax purposes;
- the fact that the Box Hill shareholders would hold approximately %
of the outstanding stock of Box Hill after the merger;
- the terms and conditions of the merger agreement, including the
conditions to closing and the termination fees payable under certain
circumstances (See "Material Terms of the Merger Agreement -- Conditions
to the Merger" and "-- Termination" on page 86 and page 88);
- the role that current management would play in the management of the
combined company and the composition of the combined companies' boards of
directors;
- the financial analyses presented by Salomon Smith Barney and Salomon
Smith Barney's written opinion to the effect that as of April 29, 1999,
and based upon and subject to the various conditions set forth in the
opinion, the exchange ratios of Artecon stock into Box Hill shares were
fair to Box Hill from a financial point of view;
- the fact that the form and amount of consideration and that the number of
shares of Box Hill common stock to be issued to the Artecon common
stockholders was based on a fixed per share ratio; and
- the opportunity to achieve a larger and more stable platform from which
strategic acquisitions would be better served by a larger, combined
company.
In addition to the foregoing factors, the Box Hill board also considered a
number of risks and potentially negative factors in its deliberations concerning
the merger, including:
- the significant challenge in integrating two large companies;
- the risk of diverting management resources from operating the day-to-day
business and from focusing on other strategic alternatives;
- the potentially adverse impact on employees and senior management of the
company that may occur as a result of the merger between the two
companies;
- the recent operating losses incurred by Artecon and their effect on
earnings per share;
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<PAGE> 62
- the risk that the combined company might not be able to achieve expected
revenue or operating efficiencies; and
- the adverse effects of one-time charges expected to be incurred in
connection with the costs of the merger and the subsequent integration of
the companies.
The foregoing discussion of the negative factors considered by the Box Hill
board is not intended to be exhaustive. See "Risk Factors." We urge you to read
and consider these factors in their entirety.
After considering the potential advantages and disadvantages of the merger,
the Box Hill board did not believe that the negative factors were sufficient,
either individually or in the aggregate, to outweigh the potential benefits of
the merger.
In analyzing the proposed merger, the Box Hill board did not view any
single factor as determinative and did not quantify or assign weight to any of
the factors. Rather, the board made its determination based upon the total mix
of information available to it. In addition, different members of the board of
Box Hill may have accorded different values to different factors. The Box Hill
board believes that the combined company will be more effective in competing in
the data storage industry, and after taking into account all of the factors, the
board unanimously determined that the potential benefits of the merger
outweighed the overall risks associated with the merger.
ARTECON'S REASONS FOR THE MERGER
The Artecon board of directors believes that, despite increased sales of
products and services, increased competition and industry consolidation may make
it increasingly difficult for Artecon to continue to grow from internal
resources. In addition, the board believes that Artecon's need for significant
working capital to grow the company may not be satisfied through revenue alone
and that raising capital from alternative financing sources may be difficult on
terms that would be favorable to the company. Prior to approving the merger, the
Artecon board considered various alternatives for raising capital and growing
its business, including a private placement of equity securities and increased
borrowings under existing or new credit lines. After considering such
alternatives, the Artecon board identified several potential benefits that it
believes would result from the merger. The board believes that:
- the cash position and financial strength of Box Hill would provide the
financial resources to enable Artecon to grow more quickly and compete
more effectively than if it remained as a stand-alone entity;
- the expanded product line of the combined company would allow Artecon to
increase sales to its existing customer base and would allow it to offer
its products to existing customers of Box Hill, thereby increasing
revenue;
- Box Hill's strength in the financial services sector of the industry in
which Artecon operates would give Artecon quicker access to such market;
- the combined company's increased revenue base and stronger balance sheet
would enhance its ability to access equity and debt capital on terms that
would be substantially more favorable than if Artecon remained as an
independent entity;
- the combined company would be able to offer new products more quickly as
a result of a larger research and development capability;
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<PAGE> 63
- the combined company would likely realize operating efficiencies as a
result of eliminating or reducing overlapping functions, such as finance
and administration;
- the benefits associated with receiving shares of Box Hill common stock
that is quoted on the NYSE would potentially provide more value to the
Artecon stockholders;
- the combined company would benefit from experienced management team; and
- the tax-free nature of the merger would be beneficial to the Artecon
stockholders.
The Artecon board of directors also considered a number of potentially
negative factors in its deliberations concerning the merger, including:
- the risk that the combined company may not be able to achieve revenues
equal to the sum of the anticipated revenues of Box Hill and Artecon as
stand alone entities;
- the adverse effects of one-time charges expected to be incurred in
connection with the merger and the subsequent integration of the
companies;
- the fixed nature of the exchange ratio for the common stock and the
possibility of an adverse fluctuation in the market price of Box Hill
common stock; and
- the possibility that the merger would be viewed negatively and would have
an adverse effect on Artecon's sales, employees, customers and other
business relationships.
In view of the wide variety of factors considered by the Artecon board in
determining to approve the merger proposal, including the factors set forth
above, the board did not find it practicable to quantify or otherwise assign
relative values to the positive and negative factors considered. In addition,
different members of the Artecon board may have assigned different weights to
different factors in the considerations. However, after taking into account all
of the factors, the board unanimously determined that the potential benefits of
the merger outweighed the overall risks associated with the merger. For a
discussion of the interest of certain members of Artecon's management and board
of directors in the merger, see "Interest of Certain Persons in the Merger and
Related Agreements."
OPINION OF BOX HILL'S FINANCIAL ADVISOR
Box Hill retained Salomon Smith Barney in a letter agreement dated April 5,
1999 to review the fairness to Box Hill of the exchange ratio to be used with
respect to the Artecon common stock and exchange ratio to be used with respect
to the Artecon preferred stock in the merger. Salomon Smith Barney rendered an
opinion to the Box Hill board of directors on April 29, 1999 to the effect that,
based upon and subject to the considerations and limitations set forth in such
opinion, as of such date, the exchange ratio to be used with respect to the
Artecon common stock and the exchange ratio to be used with respect to the
Artecon preferred stock in the merger were fair, from a financial point of view,
to Box Hill.
The full text of Salomon Smith Barney's opinion, which sets forth the
assumptions made, general procedures followed, matters considered and limits on
the review undertaken, is included as Appendix C to this document. The summary
of Salomon Smith Barney's opinion set forth below is qualified in its entirety
by reference to the full text of
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such opinion. You are urged to read the Salomon Smith Barney opinion carefully
and in its entirety.
In connection with rendering its opinion, Salomon Smith Barney reviewed,
among other things, the following:
- the merger agreement;
- publicly available information concerning Box Hill and Artecon;
- financial information concerning Box Hill and Artecon, including
financial forecasts, furnished to Salomon Smith Barney by Box Hill and
Artecon, respectively;
- publicly available information concerning the trading of, and the trading
market for, Box Hill common stock and Artecon common stock;
- publicly available information with respect to other companies that
Salomon Smith Barney believed to be comparable to Box Hill or Artecon and
the trading markets for such other companies' securities; and
- publicly available information concerning the nature and terms of other
transactions that Salomon Smith Barney considered relevant to its
inquiry.
Salomon Smith Barney also considered such other information, financial
studies, analyses, investigations and financial, economic and market criteria
that it considered relevant. Salomon Smith Barney also discussed the past and
current business operations and financial conditions of Box Hill and Artecon, as
well as other matters Salomon Smith Barney believed relevant to its inquiry,
with certain officers and employees of Box Hill and Artecon.
In its review and analysis and in arriving at its opinion, Salomon Smith
Barney assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to it or publicly available and neither
attempted independently to verify nor assumed any responsibility for verifying
any of such information. Salomon Smith Barney did not conduct a physical
inspection of any of the properties or facilities of Box Hill or Artecon, did
not make or obtain or assume any responsibility for making or obtaining any
independent evaluations or appraisals of any of such properties or facilities,
and was not furnished with any such evaluations or appraisals. With respect to
financial forecasts regarding Box Hill and Artecon, Salomon Smith Barney relied
on estimates provided by the management of Box Hill and Artecon, and assumed
that the estimates had been reasonably prepared and reflected the best currently
available estimates and judgments of the management of Box Hill and Artecon, as
to the future financial performance of Box Hill and Artecon. Salomon Smith
Barney expressed no view with respect to those financial forecasts or the
assumptions on which they were based. Salomon Smith Barney assumed that the
merger will qualify as a tax-free reorganization for United States federal
income tax purposes, will be accounted for as a pooling of interests for
financial reporting purposes, and will be consummated in accordance with the
terms of the merger agreement, without waiver of any of the conditions to the
merger contained in the merger agreement.
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In conducting its analysis and arriving at its opinion, Salomon Smith
Barney considered such financial and other factors as it deemed appropriate
under the circumstances including, among others, the following:
- the historical and current financial position and results of operations
of Box Hill and Artecon;
- the business prospects of Box Hill and Artecon;
- the historical and current market for Box Hill common stock, Artecon
common stock and the equity securities of certain other companies that
Salomon Smith Barney believed to be comparable to Box Hill or Artecon;
and
- the nature and terms of other merger and acquisition transactions that
Salomon Smith Barney believed to be relevant.
Salomon Smith Barney also took into account its assessment of general
economic, market and financial conditions as well as its experience in
connection with similar transactions and securities valuation generally. Salomon
Smith Barney was not asked to consider, and its opinion does not address, the
relative merits of the merger as compared to any alternative business strategy
that might exist for Box Hill. Salomon Smith Barney's opinion necessarily was
based on conditions as they existed and could be evaluated on the date of the
opinion and Salomon Smith Barney assumed no responsibility to update or revise
its opinion based upon circumstances or events occurring after that date.
Salomon Smith Barney's opinion does not constitute an opinion or imply any
conclusion as to the price at which Box Hill common stock will trade following
consummation of the merger. Salomon Smith Barney's opinion was, in any event,
limited to the fairness, from a financial point of view, of the exchange ratios
to Box Hill and did not address Box Hill's underlying business decision to
effect the merger or constitute a recommendation of the merger to Box Hill or a
recommendation to any holder of Box Hill common stock as to how such holder
should vote with respect to the merger.
In connection with rendering its opinion, Salomon Smith Barney made a
presentation to the Box Hill board of directors on April 29, 1999, with respect
to the analyses performed by Salomon Smith Barney in evaluating the fairness of
the exchange ratios. The following is a summary of that presentation. The
summary of the financial analyses includes information presented in tabular
format. In order to understand the financial analyses used by Salomon Smith
Barney, the tables below must be read together with the text of each summary.
The tables alone do not constitute a complete description of the financial
analyses. The following quantitative information, to the extent it is based on
market data, is, except as otherwise indicated, based on market data as it
existed at or prior to April 27, 1999 and does not necessarily reflect current
or future market conditions. The exchange ratio to be used in the merger with
respect to the Artecon common stock is sometimes referred to below as the common
stock exchange ratio, and the exchange ratio to be used in the merger with
respect to the Artecon preferred stock is sometimes referred to below as the
preferred stock exchange ratio.
HISTORICAL TRADING ANALYSES.
Salomon Smith Barney performed analyses based on the historical trading
prices of Box Hill common stock and Artecon common stock and the relationship
between the two.
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HISTORICAL TRADING DATA. Salomon Smith Barney reviewed the daily closing
prices of Box Hill common stock for the period from January 2, 1998 through
April 27, 1999 and Artecon common stock for the period from March 3, 1997
through April 27, 1999. Salomon Smith Barney derived average closing prices for
Box Hill common stock and Artecon common stock for each of the following
calendar periods ended April 27, 1999:
<TABLE>
<CAPTION>
BOX HILL ARTECON
COMMON STOCK COMMON STOCK
------------ ------------
<S> <C> <C>
Last 12 months........................... $6.65 $2.03
Last 6 months............................ 5.79 1.62
Last 3 months............................ 5.33 1.44
Last 30 days............................. 5.37 1.93
</TABLE>
IMPLIED HISTORICAL EXCHANGE RATIOS. Salomon Smith Barney derived implied
historical exchange ratios for the Box Hill common stock and the Artecon common
stock by dividing the closing price per share of Artecon common stock by the
closing price per share of Box Hill common stock for each trading day in the
calendar period from April 27, 1998 through April 27, 1999. Salomon Smith Barney
calculated that the latest implied exchange ratio (as of April 27, 1999) was
0.38, the highest implied exchange ratio during the period was 0.55, and the
lowest implied exchange ratio during the period was 0.17. Salomon Smith Barney
also calculated the average implied exchange ratios for each of the following
calendar periods ending April 27, 1999:
<TABLE>
<S> <C>
Last 12 Months.............................................. 0.30
Last 6 Months............................................... 0.28
Last 30 Days................................................ 0.35
Last 10 Days................................................ 0.46
</TABLE>
IMPLIED PREMIUM/DISCOUNT ANALYSIS. Salomon Smith Barney analyzed the
implied premium or discount to a holder of a share of Artecon common stock
represented by the common stock exchange ratio. In conducting this analysis,
Salomon Smith Barney compared a variety of historical closing and average prices
for Artecon common stock, to the product of the common stock exchange ratio and
- the closing price of Box Hill common stock as of April 27, 1999 ($5.75);
or
- the average closing price of Box Hill common stock for the 30 trading
days ended April 27, 1999 ($5.13).
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By multiplying the common stock exchange ratio by the relevant price of a share
of Box Hill common stock and comparing it to the price of a share of Artecon
common stock, Salomon Smith Barney derived the following implied premiums and
discounts:
<TABLE>
<CAPTION>
PREMIUM/(DISCOUNT)
USING THE BOX HILL
PREMIUM/(DISCOUNT) AVERAGE CLOSING PRICE
USING THE BOX HILL FOR THE THIRTY
CLOSING PRICE TRADING DAYS
AS OF APRIL 27, 1999 ENDED APRIL 27, 1999
ARTECON PRICE ($5.75) ($5.13)
- ------------- -------------------- ---------------------
<S> <C> <C>
Closing Price as of April 27, 1999
($2.19)................................. 5.1% (6.2)%
High Closing Price for the 52 weeks ended
April 27, 1999 ($3.00).................. (23.3)% (31.6)%
Low Closing Price for the 52 weeks ended
April 27, 1999 ($1.00).................. 130.0% 105.1%
Average Closing Price for the 10 Trading
Days ended April 27, 1999 ($2.48)....... (7.1)% (17.1)%
Average Closing Price for the 30 Trading
Days ended April 27, 1999 ($1.68)....... 36.5% 21.8%
</TABLE>
Based on this data, Salomon Smith Barney noted that, although the common
stock exchange ratio represents a premium to the average closing price of
Artecon common stock for the 30 trading days ended April 27, 1999 and the low
closing price for the 52 weeks ended April 27, 1999, it represents a discount to
the average closing price of Artecon common stock for the 10 trading days ended
April 27, 1999 and the high closing price for the 52 weeks ended April 27, 1999,
and it represents a premium or discount to the closing price of Artecon common
stock as of April 27, 1999 depending on whether, with respect to Box Hill common
stock, the closing price as of April 27, 1999 (premium) or the average closing
price for the thirty trading days ended April 27, 1999 (discount) is used in the
analysis.
IMPLIED VALUATION ANALYSES.
Salomon Smith Barney performed analyses using publicly available
information concerning certain comparable companies and transactions to derive
implied valuation information for Box Hill and Artecon.
COMPARABLE COMPANY ANALYSIS. Salomon Smith Barney reviewed certain
publicly available financial, operating and stock market information for Box
Hill, Artecon and nine other publicly traded companies that operate in the data
storage and related industries (Auspex Systems, Inc.; Ciprico Inc.; EMC
Corporation; Exabyte Corporation; MTI Technology Corporation; Network Appliance,
Inc.; Overland Data, Inc.; Procom Technology, Inc.; and Storage Technology
Corporation). In connection with this analysis, Salomon Smith Barney concluded
that these nine companies were reasonably similar to Box Hill and Artecon
insofar as they participate in business segments similar to those of Box Hill
and Artecon, but noted that none of these nine companies has the same
technology, management, capital structure, operations and combination of
businesses and markets as does Box Hill or Artecon.
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For Box Hill, Artecon and each of the comparable companies, Salomon Smith
Barney calculated and compared, among other things:
- the ratio of each company's closing stock price on April 27, 1999 to (a)
its earnings per share for the latest 12-month period, (b) its estimated
earnings per share for 1999, and (c) its estimated earnings per share for
2000; and
- the ratio of each company's firm value to (a) its revenues for 1998, (b)
its estimated revenues for 1999, (c) its earnings before taking into
account interest expense and taxes ("EBIT") for 1998, and (d) its
estimated EBIT for 1999.
For the purposes of this analysis, forecasted earnings per share for the
comparable companies were based on estimates published by First Call Corporation
and forecasted revenues and EBIT for the comparable companies were based on
equity research reports published by certain investment banks. Firm value was
calculated as the sum of the value of:
- all shares of common stock, assuming the exercise of all in-the-money
options, warrants and convertible securities, less the proceeds from such
exercise;
- non-convertible indebtedness;
- non-convertible preferred stock;
- minority interests;
- out-of-the-money convertible securities; less,
- investments in unconsolidated affiliates and cash.
All earnings figures were adjusted to eliminate unusual and non-recurring items.
The following table sets forth the results of these calculations:
<TABLE>
<CAPTION>
COMPARABLE COMPANIES PARTIES
RATIO OF CLOSING PRICE --------------------------------- -------------------
ON APRIL 27, 1999 TO: RANGE MEAN MEDIAN BOX HILL ARTECON
- ---------------------- -------------- ----- ------ -------- -------
<S> <C> <C> <C> <C> <C>
(a) Earnings Per Sharefor
the Latest 12
Months................ 9.5x to 142.4x 58.2x 19.8x 14.7x N/C
(b) Estimated Earnings Per
Share for 1999........ 7.1x to 94.5x 46.4x 53.1x 17.5x 16.9x
(c) Estimated Earnings Per
Share for 2000........ 6.0x to 63.4x 32.4x 37.9x 11.5x 4.9x
Ratio of Firm Value to:
(a) Revenues for 1998..... 0.2x to 18.0x 4.1x 0.8x 0.3x 0.6x
(b) Estimated Revenues for
1999.................. 0.2x to 11.3x 3.0x 0.7x 0.3x 0.7x
(c) EBIT for 1998......... 4.8x to 93.6x 32.0x 16.3x 3.1x N/C
(d) Estimated EBIT for
1999.................. 4.1x to 61.3x 24.6x 16.4x 4.0x 50.4x
</TABLE>
N/C means that Salomon Smith Barney was unable to calculate the ratio because
Artecon did not have positive earnings in the relevant period.
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Salomon Smith Barney noted that the multiples for Box Hill were within but
closer to the lower end of the range calculated for the comparable companies in
all cases, except for the ratio of firm value to EBIT for 1998 and the ratio of
firm value to estimated EBIT for 1999 which were below the lower end of the
range calculated for the comparable companies. Salomon Smith Barney also noted
that the multiples for Box Hill were below the mean and median multiples for the
comparable companies in all cases. With respect to Artecon, Salomon Smith Barney
noted that the multiples it was able to calculate for Artecon were within the
range calculated for the comparable companies in all cases, except for the ratio
of closing stock price on April 27, 1999 to estimated earnings per share for
2000 which was below the lower end of the range calculated for the comparable
companies. Salomon Smith Barney also noted that the multiples it was able to
calculate for Artecon were below the mean and median multiples for the
comparable companies in all cases, except for the ratio of firm value to
estimated revenues for 1999 which was below the mean but equal to the median
calculated for the comparable companies.
Using the data calculated with respect to the comparable companies, Salomon
Smith Barney derived a reference range for the implied value of a share Artecon
common stock of $1.50 to $2.25. Salomon Smith Barney noted that the implied
value of the per share consideration to be paid in the merger derived by
multiplying the common stock exchange ratio by the closing price of Box Hill
common stock on April 27, 1999 ($5.75) is $2.30, which is above the upper limit
of the reference range. Salomon Smith Barney further noted that the implied
value of the per share consideration to be paid in the merger derived by
multiplying the common stock exchange ratio by the average closing price of Box
Hill common stock for the thirty trading days ended on April 27, 1999 ($5.13) is
$2.05, which is within the reference range.
PRECEDENT TRANSACTIONS ANALYSIS. Salomon Smith Barney reviewed certain
publicly available financial, operating and stock market information for
twenty-one selected pending or completed merger or acquisition transactions in
the data storage and related industries announced since March 1993. The
following transactions were reviewed (in each case, the acquiror's name is
listed first and the acquired Company or business second): (i) NSTOR
Technologies Inc./ANDATACO Inc.; (ii) Advanced Digital Information Corporation/
EMASS, Inc.; (iii) LSI Logic Corporation/Symbios, Inc.; (iv) Quantum
Corporation/ ATL Products, Inc.; (v) Ampex Corporation/MicroNet Technology,
Inc.; (vi) Artecon/ Storage Dimensions, Inc.; (vii) Seagate Technology,
Inc./Quinta Corporation; (viii) Sun Microsystems, Inc./Encore Computer
Corporation; (ix) IPL Systems Inc./ANDATACO Inc.; (x) Anacomp Inc./ Data/Ware
Development, Inc.; (xi) Kendall International (Tyco International (US)
Inc.)/Nashua Corporation's tape products division; (xii) Singapore Technologies
Pte Ltd./ Micropolis Corporation's disk drive division; (xiii) Hyundai
Electronics America/Maxtor Corporation; (xiv) Seagate Technology, Inc./Conner
Peripherals, Inc.; (xv) Seagate Technology, Inc./Applied Magnetics Corporation's
tape head division; (xvi) Quantum Corporation/Digital Equipment's data storage
business; (xvii) Read-Rite Corporation/Sunward Technologies, Inc.; (xviii)
Interpoint Corporation/ Advanced Digital Information Corporation; (xix) Hyundai
Electronics America/Maxtor Corporation; (xx) Storage Technology Corporation /
Amperif Corporation; and (xxi) Network Imaging Corporation/Optix S.A. In
presenting the results of its precedent transaction analysis, Salomon Smith
Barney noted that the merger and acquisition transaction environment varies over
time because of, among other things, macroeconomic factors such as the
availability of financing and conditions in equity markets. In addition, no
precedent transaction reviewed was identical to the merger because of, among
other things, differences in the subject companies and the form of consideration
paid. As a
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result, Salomon Smith Barney noted that an evaluation of the results of its
precedent transaction analyses necessarily involves judgments beyond the purely
mathematical, such as an assessment of macroeconomic factors and the evaluation
of differences between the financial and operating characteristics of the
subject companies involved in the precedent transactions, on the one hand, and
those of Box Hill and Artecon, on the other hand.
If the necessary data was available, Salomon Smith Barney calculated the
following for each of the precedent transactions:
- the ratio of the aggregate value of the transaction to (a) revenue of the
target company for the last 12 months prior to the announcement of the
transaction, and (b) earnings before taking into account interest
expense, taxes, depreciation and amortization ("EBITDA") of the target
company for the last 12 months prior to the announcement of the
transaction;
- the ratio of the per share consideration paid in the transaction to (a)
the target's earnings per share for the last 12 months prior to the
announcement of the transaction, and (b) the target's estimated earnings
per share for the 12 months following the announcement of the
transaction;
- and the premium per share paid in the transaction to the closing stock
price of the target (a) four weeks prior to the announcement of the
transaction, and (b) one day prior to the announcement of the
transaction.
With respect to the companies involved in the precedent transactions, Salomon
Smith Barney relied on estimates of earnings per share published by First Call
Corporation.
The following table sets forth the results of these calculations:
<TABLE>
<CAPTION>
RATIO OF AGGREGATE VALUE TO: RANGE MEAN MEDIAN
- ---------------------------- ---------------- ----- ------
<S> <C> <C> <C>
(a) Target Revenue for Last 12 Months Prior
to Announcement........................ 0.2x to 4.2x 1.1x 0.6x
(b) Target EBITDA for Last 12 Months Prior
to Announcement........................ 5.3x to 39.0x 19.2x 20.4x
Ratio of Per Share Consideration to:
(a) Target Per Share Earnings for Last 12
Months Prior to Announcement........... 7.78x to 44.6x 20.9x 12.5x
(b) Target Estimated Earnings Per Share for
12 Months Following Announcement....... 5.6x to 32.6x 18.2x 17.3x
Premium Paid to Target Closing Price:
(a) 4 Weeks Prior to Announcement.......... (11.4%) to 63.2% 51.1% 51.0%
(b) 1 Day Prior to Announcement............ 8.4% to 43.3% 25.2% 28.9%
</TABLE>
Salomon Smith Barney compared these values to certain implied ratios in
connection with the merger. Salomon Smith Barney noted that based on the common
stock exchange ratio and the closing price of Box Hill common stock as of April
27, 1999 ($5.75), the ratio of the implied firm value to 1998 revenues for
Artecon was 0.7x, and the ratio of the implied price of a share of Artecon
common stock to Artecon's estimated earnings per share for 1999 was 17.8x.
Salomon Smith Barney also noted that based on the common stock exchange ratio
and the average closing price of Box Hill common stock for the thirty
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trading days ending April 27, 1999 ($5.13), the ratio of the implied firm value
to 1998 revenues for Artecon was 0.6x, and the ratio of the implied price of a
share of Artecon common stock to Artecon's estimated earnings per share for 1999
was 15.8x. Salomon Smith Barney noted that each of these implied ratios was
below the median and mean of the comparable ratios for the precedent
transactions.
Using the data calculated with respect to the precedent transactions,
Salomon Smith Barney derived a reference range for the implied value of a share
of Artecon common stock of $1.75 to $2.50. Salomon Smith Barney noted that the
implied value of the per share consideration to be paid in the merger derived by
multiplying the common stock exchange ratio by the closing price of Box Hill
common stock on April 27, 1999 ($5.75) is $2.30, which is within the reference
range. Salomon Smith Barney further noted that the implied value of the per
share consideration to be paid in the merger derived by multiplying the common
stock exchange ratio by the average closing price of Box Hill common stock for
the thirty trading days ended on April 27, 1999 ($5.13) is $2.05, which also is
within the reference range.
MERGER CONSEQUENCES ANALYSES.
Salomon Smith Barney performed analyses regarding the effect of the merger
on the financial condition and results of Box Hill and Artecon.
CONTRIBUTION ANALYSIS. Salomon Smith Barney analyzed the relative
contributions of each of Box Hill and Artecon to the pro forma merged entity
with respect to certain market and financial data.
The following table compares the relative contributions of Box Hill and
Artecon, respectively, to the proposed combined entity in certain categories.
The computations in the table were based on historical financial data for each
of Box Hill and Artecon at or for the twelve months ended December 31, 1998,
forecasted financial information for each of Box Hill and Artecon for 1999, and
the closing prices of Box Hill common stock and Artecon common stock as of April
27, 1999. In performing this analysis, Salomon Smith Barney did not take into
account any anticipated cost savings, revenue enhancements or other potential
effects of the merger.
<TABLE>
<CAPTION>
BOX HILL ARTECON
CONTRIBUTION CONTRIBUTION
------------ ------------
<S> <C> <C>
Revenue for 1998...................................... 44.3% 55.7%
Total Assets for 1998................................. 65.5% 34.5%
Common Shareholders' Equity for 1998.................. 82.8% 17.2%
Estimated Revenue for 1999............................ 48.5% 51.5%
Estimated EBITDA for 1999............................. 60.2% 39.8%
Estimated EBIT for 1999............................... 83.8% 16.2%
Estimated Net Income for 1999......................... 63.9% 36.1%
Estimated Total Assets for 1999....................... 70.3% 29.7%
Estimated Common Shareholders' Equity for 1999........ 81.1% 18.9%
</TABLE>
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Salomon Smith Barney compared each of these percentage contributions to the
pro forma 61.2% ownership stake Box Hill stockholders would have in the merged
entity based on the exchange ratios.
ACCRETION/DILUTION ANALYSIS. Salomon Smith Barney performed an analysis of
the impact of the merger on future per share operating earnings of Box Hill.
Salomon Smith Barney made pro forma adjustments to estimated combined operating
earnings based on estimates of the managements of both companies as to:
- a charge in connection with the reorganization of the combined company's
sales force, estimated to be $3.0 million in 1999;
- a charge in connection with merger-related expenses, estimated to be $1.4
million in 1999; and
- synergies consisting of pre-tax cost savings, estimated to be $1.6
million in 1999 and $5.4 million in 2000.
The following table shows the accretion or dilution to the estimated
earnings per share of Box Hill calculated to result from the merger.
<TABLE>
<CAPTION>
ACCRETION/DILUTION
BOX HILL COMBINED ENTITY TO BOX HILL
-------- --------------- ------------------
<S> <C> <C> <C>
Estimated 1999 Earnings Per Share.... $0.33 $0.29 (11.2)%
Estimated 2000 Earnings Per Share.... $0.50 $0.75 49.7%
----- ----- -----
</TABLE>
* * *
The foregoing is a summary of the material financial analyses furnished by
Salomon Smith Barney to the Box Hill board of directors, but it does not purport
to be a complete description of the analyses performed by Salomon Smith Barney
or of its presentations to the Box Hill board of directors. The preparation of
financial analyses and fairness opinions is a complex process involving
subjective judgments and is not necessarily susceptible to partial analysis or
summary description. Salomon Smith Barney made no attempt to assign specific
weights to particular analyses or factors considered, but rather made
qualitative judgments as to the significance and relevance of the analyses and
factors considered. Accordingly, Salomon Smith Barney believes that its analyses
(and the summary set forth above) must be considered as a whole, and that
selecting portions of such analyses and of the factors considered by Salomon
Smith Barney, without considering all of such analyses and factors, could create
a misleading or incomplete view of the processes underlying the analyses
conducted by Salomon Smith Barney and its opinion. With regard to the comparable
public company analysis summarized above, Salomon Smith Barney selected
comparable public companies on the basis of various factors, including the size
of the public company and similarity of the line of business; however, no public
company utilized as a comparison in such analysis, and no transaction utilized
as a comparison in the precedent transaction analysis summarized above, is
identical to Box Hill or Artecon, any business segment of Box Hill or Artecon or
the merger. As a result, these analyses are not purely mathematical, but also
take into account differences in financial and operating characteristics of the
subject companies and other factors that could affect the value of the companies
and transactions to which Box Hill, Artecon and the merger are being compared.
In its analyses, Salomon Smith Barney made numerous assumptions with respect to
Box Hill, Artecon, industry performance, general business, economic, market
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and financial conditions and other matters, many of which are beyond the control
of Box Hill and Artecon. Any estimates contained in Salomon Smith Barney's
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than those
suggested by such analyses. Estimates of values of companies do not purport to
be appraisals or necessarily to reflect the prices at which companies may
actually be sold. Because such estimates are inherently subject to uncertainty,
none of Box Hill, Artecon, the Box Hill board of directors, Salomon Smith Barney
or any other person assumes responsibility if future results or actual values
differ materially from the estimates. Salomon Smith Barney's analyses were
prepared solely as part of Salomon Smith Barney's analysis of the fairness of
the common stock exchange ratio and the preferred stock exchange ratio to Box
Hill and were provided to the Box Hill board of directors in that connection.
The opinion of Salomon Smith Barney was one of the factors taken into
consideration by the Box Hill board of directors in making its determination to
approve the merger agreement and the merger.
Salomon Smith Barney is an internationally recognized investment banking
firm engaged in, among other things, the valuation of businesses and their
securities in connection with mergers and acquisitions, restructurings,
leveraged buyouts, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Box Hill selected Salomon
Smith Barney to act as its financial advisor on the basis of Salomon Smith
Barney's international reputation and Salomon Smith Barney's familiarity with
Box Hill. Salomon Smith Barney and its predecessors and affiliates had
previously rendered investment banking and financial advisory services to Box
Hill and Artecon, for which they received customary compensation. In addition,
in the ordinary course of business, Salomon Smith Barney and its affiliates may
actively trade the securities of Box Hill and Artecon for their own accounts and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities. Salomon Smith Barney and its affiliates
(including Citigroup Inc. and its affiliates) may have other business and
financial relationships with Box Hill and Artecon.
Pursuant to Salomon Smith Barney's engagement letter, Box Hill agreed to
pay Salomon Smith Barney the following fees: (1) $150,000, payable upon
execution of the engagement letter, (2) $250,000, payable upon execution of the
merger agreement, (3) $400,000, payable upon consummation of the merger, and (4)
$200,000, payable at Box Hill's discretion based on Salomon Smith Barney's
performance in connection with the merger. Box Hill has also agreed to reimburse
Salomon Smith Barney for its reasonable travel and other out-of-pocket expenses
incurred in connection with its engagement (including the reasonable fees and
disbursements of its counsel) and to indemnify Salomon Smith Barney against
certain liabilities and expenses relating to or arising out of its engagement,
including certain liabilities under the federal securities laws. Salomon Smith
Barney received approximately $3,465,000 as Box Hill's investment banker and the
lead underwriter in Box Hill's initial public offering in September 1997.
OPINION OF ARTECON'S FINANCIAL ADVISOR
Artecon retained Tucker Anthony in March 1999 to provide financial advice
and consultation regarding a possible merger with Box Hill. Tucker Anthony
helped to develop an overall strategy for the transaction, advise on the
valuation of Artecon and Box Hill and structure the merger transaction. It also
assisted in negotiations and related strategy and analysis.
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Artecon selected Tucker Anthony for a number of reasons including its
familiarity with Artecon. Artecon also considered Tucker Anthony's knowledge of
the data storage segment of the technology industry and its experience and
reputation in the area of valuation and financial advisory work generally, and
in relation to transactions of the size and nature of the proposed merger
specifically. Tucker Anthony is a nationally recognized investment banking firm
and is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, private placements and valuations for corporate and other
purposes. From time to time, Tucker Anthony and its affiliates may hold long or
short positions in Artecon and/or Box Hill common stock.
Artecon requested that Tucker Anthony render its opinion as to the
fairness, from a financial point of view, of the consideration to be received by
the holders of Artecon common stock and preferred stock. Tucker Anthony rendered
its opinion orally to the Artecon board on April 29, 1999, to the effect that,
as of April 29, 1999, the consideration to be received by the holders of Artecon
common stock and preferred stock was fair, from a financial point of view, to
the holders of Artecon common stock and preferred stock. Tucker Anthony has not
been requested and will not update its fairness opinion in connection with the
merger, unless the board of directors of Artecon requests such opinion be
updated. Artecon's board has advised Tucker Anthony that it will not seek an
update to the fairness opinion unless:
- there is a material modification to the terms of the merger consideration
or other material amendment to the merger agreement that the board
determines would be reasonably likely to impact the overall fairness of
the merger to the Artecon stockholders; or
- a material event occurs with respect to the business or operations of
Artecon or Box Hill which the Artecon board determines would be
reasonably likely to affect Tucker Anthony's fairness opinion if such
opinion was reissued taking into account such event.
Artecon's board has informed Tucker Anthony that as of the date of this
prospectus/joint proxy statement, there has been no change in terms of the
merger consideration and there has been no material event that the board
believes would be reasonably likely to affect Tucker Anthony's fairness opinion
since Tucker Anthony rendered such opinion.
The full text of the opinion letter delivered by Tucker Anthony to the
Artecon board dated April 29, 1999, which sets forth the assumptions made,
general procedures followed, matters considered and limitations on the scope of
review undertaken by Tucker Anthony in rendering its opinion, is attached as
Appendix D to this prospectus/joint proxy statement and is incorporated herein
by reference. The Tucker Anthony opinion is directed only to the fairness, from
a financial point of view, of the exchange ratio to the holders of Artecon
common stock and preferred stock, and does not constitute a recommendation to
any Artecon shareholder as to how each shareholder should vote with respect to
the merger. The summary of Tucker Anthony's opinion set forth below is qualified
in its entirety by reference to the full text of such opinion attached hereto as
Appendix D. Holders of Artecon common stock and preferred stock are urged to
read the entire opinion carefully.
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In conducting its investigation and analysis and in arriving at its
opinion, Tucker Anthony reviewed the information and took into account the
financial and economic factors as it deemed relevant and material under the
circumstances. The material actions Tucker Anthony undertook in its analysis
were as follows:
- reviewed internal financial information concerning the business and
operations of Artecon and Box Hill furnished to Tucker Anthony for
purposes of its analysis, as well as publicly available information
including but not limited to Artecon's and Box Hill's recent filings with
the SEC;
- reviewed the merger agreement in the form presented to Artecon's board;
- compared the historical market prices and trading activity of Artecon
common stock and Box Hill common stock with those of other publicly
traded companies Tucker Anthony deemed relevant;
- compared the financial position and operating results of Artecon and Box
Hill with those of other publicly traded companies Tucker Anthony deemed
relevant;
- compared the proposed financial terms of the merger with the financial
terms of other business combinations Tucker Anthony deemed relevant; and
- Tucker Anthony held discussions with members of Artecon's and Box Hill's
respective senior management concerning Artecon's and Box Hill's
historical and current financial condition and operating results, as well
as the future prospects of Artecon and Box Hill.
As a part of its engagement, Tucker Anthony was requested to, and did,
solicit third party indications of interest in entering into a potential
corporate partnership arrangement, including a potential acquisition, with
Artecon. Tucker Anthony also reviewed data storage industry market research
studies and key economic and market indicators, including interest rates,
inflation rates, consumer spending levels, manufacturing productivity levels,
unemployment rates and general stock market performance. Other than as set forth
above, Tucker Anthony did not review any additional information in preparing its
opinion that, independently, was material to its analysis. Artecon and Box Hill
determined the exchange ratio in arms-length negotiations. Artecon did not place
any limitation upon Tucker Anthony with respect to the procedures followed or
factors considered by Tucker Anthony in rendering its opinion.
In arriving at its opinion, Tucker Anthony assumed and relied upon the
accuracy and completeness of all of the financial and other information that was
publicly available or provided to Tucker Anthony by or on behalf of Artecon and
Box Hill, and did not independently verify that information. Tucker Anthony
assumed, with Artecon's consent, that:
- all material assets and liabilities (contingent or otherwise, known or
unknown) of Artecon and Box Hill are as set forth in their respective
financial statements;
- obtaining all regulatory approvals and third party consents required for
consummation of the merger would not have a material effect on the
anticipated benefits of the merger;
- the merger will be accounted for under the pooling-of interests method;
and
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- the merger will be consummated in accordance with the terms set forth in
the merger agreement, without any amendment thereto and without waiver by
Artecon or Box Hill of any of the conditions to their respective
obligations thereunder.
At Artecon's direction, Tucker Anthony assumed that no cost savings or
operating efficiencies will result from the merger, and excluded transaction
costs from its financial analysis. Tucker Anthony also assumed that the
financial forecasts examined by it were reasonably prepared based upon the best
available estimates and good faith judgments of Artecon's and Box Hill's
respective senior managements as to future performance of Artecon and Box Hill.
In conducting its review, Tucker Anthony did not obtain an independent
evaluation or appraisal of any of the assets or liabilities (contingent or
otherwise) of Artecon or Box Hill. Tucker Anthony's opinion did not predict or
take into account any possible economic, monetary or other changes which may
occur, or information which may become available, after the date of the opinion.
Furthermore, Tucker Anthony expressed no opinion as to the price or trading
range at which any of Artecon's or Box Hill's securities (including Artecon
common stock and Box Hill common stock) will trade following the date of the
opinion.
The following is a summary of the material financial analyses performed by
Tucker Anthony in connection with rendering its opinion.
ANALYSIS OF ARTECON'S VALUATION PREMIUMS. Tucker Anthony calculated the
implied equity value per share reflected by the terms of the merger to be $2.40
for each share of Artecon common stock, obtained by multiplying the exchange
ratio of 0.40 by the closing price per share of Box Hill common stock of $6.00
on April 29, 1999. Tucker Anthony compared the premium to holders of Artecon
common stock represented by the implied equity value per share of $2.40 to the
closing prices for Artecon common stock on the dates four weeks prior, one week
prior and one day prior to the April 30, 1999 public announcement of the
transaction. Tucker Anthony calculated that the implied equity value per share
represented the following premiums or discounts to holders of Artecon common
stock:
- a premium of 112.4% over the closing price of $1.13 for Artecon common
stock on April 1, 1999, four weeks prior to the announcement of the
merger;
- a premium of 6.7% over the closing price of $2.25 for Artecon common
stock on April 23, 1999, one week prior to the announcement of the
merger; and
- a premium of 1.1% over the closing price of $2.38 for Artecon common
stock on April 29, 1999, one day prior to the announcement of the merger.
Tucker Anthony also performed an analysis of the implied historical
transaction premium, based upon the exchange ratio of 0.40 and the closing
market price per share of Artecon common stock and Box Hill common stock for
each trading day from January 1, 1999 to April 29, 1999. In comparison to the
premiums mentioned above, this analysis yielded an average premium of 61%, and
the single day high premium and low discount of 133% and (27%), respectively.
Tucker Anthony noted that the premiums to and discounts from Artecon's common
stock price over certain historical time periods were influenced by the
significant volatility and price declines experienced recently in the equity
capital markets in general and for technology companies in particular.
ANALYSIS OF ARTECON VALUATION MULTIPLES. Tucker Anthony calculated the
implied enterprise value of Artecon as a result of the merger to be $67.7
million. The implied
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enterprise value was obtained by multiplying the implied equity value per share
by the total number of outstanding shares of Artecon common stock, adding
Artecon's outstanding total debt and the liquidation preference of Artecon's
preferred stock and subtracting Artecon's cash and cash equivalents balances (as
of March 31, 1999 as provided to Tucker Anthony by Artecon management). In
performing its analysis, Tucker Anthony used, among other items, operating
statistics for Artecon's latest twelve months ended March 31, 1999 ("LTM"), as
provided by Artecon management. Tucker Anthony calculated multiples of Artecon's
implied enterprise value to its LTM Sales, operating income before depreciation
and amortization, interest and taxes ("EBITDA") and its operating income
("EBIT"). The calculations resulted in the following:
- the multiple of Artecon's implied enterprise value to its LTM Sales was
0.70x;
- the multiple of Artecon's implied enterprise value to its LTM EBITDA was
40.3x; and
- the multiple of Artecon's implied enterprise value to its LTM EBIT was a
negative number due to the loss realized by Artecon during the LTM
period.
IMPLIED HISTORICAL EXCHANGE RATIO ANALYSIS. Tucker Anthony performed an
analysis of the implied historical exchange ratio based on the closing market
price per share of Artecon common stock relative to the closing market price per
share of Box Hill common stock for each trading day from January 1, 1999 to
April 29, 1999. The following chart presents these historical share prices:
HISTORICAL STOCK PRICES OF ARTECON AND BOX HILL
[STOCK PRICE CHART]
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The following chart presents the historical relationship of the stock
prices of Artecon and Box Hill from January 1, 1999 to April 29, 1999. The
relationship is based on the daily closing stock price of each company. This
analysis yields daily implied historical exchange ratios during this period that
compare to the proposed exchange ratio of 0.40.
IMPLIED HISTORICAL RATIO OF DAILY SHARE PRICES
[DAILY SHARE PRICE CHART]
This analysis yielded an average implied historical exchange ratio of 0.27,
significantly below the proposed exchange ratio of 0.40. The high and low single
day implied historical exchange ratios during the period were 0.55 and 0.17,
respectively. During this period, Tucker Anthony noted two events which it
believes impacted the stock price and trading volume of Artecon common stock. On
March 9, 1999, Artecon announced that it had entered into a product supply
agreement with The Foxboro Company, a unit of Invensys plc. On April 12, 1999,
Artecon announced that it had entered into an agreement with Inktomi Corporation
to develop a storage system for Internet-related applications. No modifications
were made to the financial projections provided to Tucker Anthony by Artecon
management as a result of these agreements or their announcements.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES COMPARABLE TO
ARTECON. Tucker Anthony reviewed publicly available financial information as of
the most recently reported period and stock market information as of April 29,
1999 for seven publicly traded companies that Tucker Anthony deemed relevant.
Tucker Anthony compared Artecon to the following data storage high technology
companies:
1) Box Hill Systems Corp.
2) Ciprico, Inc.
3) EMC Corporation
4) MTI Technologies Corporation
5) Network Appliance, Inc.
6) Procom Technology, Inc.
7) Storage Computer Corporation
For each comparable company, Tucker Anthony calculated multiples of
enterprise value to LTM Sales, LTM EBITDA, LTM EBIT and book value. Tucker
Anthony then
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compared these multiples to the relevant Artecon multiples based on the implied
equity price per share and to the relevant multiples for Box Hill, as follows:
- the multiple of implied enterprise value to LTM Sales in this transaction
is 0.70x. This compares to the median multiple for the comparable public
companies of 0.71x and a multiple of 0.43x for Box Hill;
- The multiple of implied enterprise value to LTM EBITDA in this
transaction is 40.3x. This compares to the median multiple for the
comparable public companies of 3.8x and a multiple of 3.8x for Box Hill.
Tucker Anthony believes the disparity in these multiples is due primarily
to the lack of profitability of Artecon for the LTM period ending March
31, 1999;
- the multiple of implied enterprise value to LTM EBIT in this transaction
is a negative number due to Artecon's losses realized during this LTM
period. This median multiple for the comparable public companies was 4.4x
and the multiple was 4.0x for Box Hill; and
- the multiple of book value in this transaction is 6.1x. This compares to
the median multiple for the comparable public companies of 1.3x and a
multiple of 1.3x for Box Hill.
For Artecon and each comparable company, Tucker Anthony also calculated P/E
Ratios based upon the implied equity value per share for Artecon and the closing
stock prices as of April 29, 1999 for the comparable companies and net income
statistics for LTM and for calendar 1999 (as prepared by Artecon and supplied to
Tucker), as follows:
- the P/E ratio for Artecon for the LTM period was a negative number due to
Artecon's loss per share of ($1.22). The median LTM P/E ratio for the
public comparable companies was 15.1x and was 15.4x for Box Hill; and
- the P/E ratio based upon projected reported earnings per share for
calendar 1999 for Artecon was 8.6x. This calculation reflects the
anticipated utilization by Artecon of a portion of its net operating loss
carryforward during 1999. Based on fully-taxed earnings per share the P/E
ratio would be approximately 29.0x. These P/E ratios compare with the
median projected 1999 P/E ratio (based on consensus earnings-per-share
estimates reported by First Call) for the public comparable companies of
10.2x and 23.1x for Box Hill.
ANALYSIS OF SELECTED COMPARABLE ACQUISITION TRANSACTIONS. Tucker Anthony
reviewed selected acquisition transactions which Tucker Anthony deemed relevant.
The transactions were chosen based on a review of acquired companies that
possessed general business, operating and financial characteristics
representative of companies in the industry in which Artecon operates. Tucker
Anthony noted that none of the selected transactions reviewed was identical to
the merger and that, accordingly, the analysis of comparable transactions
necessarily involves complex consideration and judgments concerning differences
in financial and operating characteristics of Artecon and other factors that
would affect the acquisition value of comparable transactions including, among
others, the general market conditions prevailing in the equity capital markets
at the time of such transactions.
For each comparable transaction, Tucker Anthony calculated multiples of
enterprise value to LTM Sales, LTM EBITDA and LTM EBIT. Tucker Anthony also
calculated the premiums paid for the equity in these transactions over the
public market value of the equity at various times prior to the announcement of
such transactions. Tucker Anthony
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then compared those multiples and premiums to the relevant Artecon multiples and
premiums.
- the multiple of implied enterprise value to LTM Sales in this transaction
is 0.70x. This compares to the median multiple for the comparable merger
and acquisition transactions of 0.59x;
- the multiple of implied enterprise value to LTM EBITDA in this
transaction is 40.3x. This compares to the median multiple for the
comparable merger and acquisition transactions of 6.9x. Tucker Anthony
believes the disparity between these multiples is due primarily to the
lack of profitability of Artecon for the LTM period ending March 31,
1999;
- the multiple of implied enterprise value to LTM EBIT in this transaction
is a negative number due to Artecon's losses realized during this LTM
period. The median multiple for the comparable merger and acquisition
transactions is 9.6x;
- on April 1, 1999, Artecon's closing stock price was $1.13 per share. This
date was four weeks prior to the public announcement of the merger. The
implied equity value of $2.40 per share represents a 113% premium over
this four-week-prior stock price. This compares to the median premium
over the four-week prior stock price of 48% in the comparable merger and
acquisition transactions;
- on April 23, 1999, Artecon's closing stock price was $2.25 per share.
This date was one week prior the public announcement of the merger. The
implied equity value of this transaction represents a 6.7% premium over
the one-week-prior stock price. This compares to the median premium over
the one-week prior stock price of 32% in the comparable merger and
acquisition transactions; and
- on April 29, 1999, Artecon's closing stock price was $2.38 per share. The
date was one day prior the public announcement. The one-day-prior premium
of this transaction is 1.1%. This compares to the median premium over one
day prior stock price of 30% in the comparable merger and acquisition
transactions.
As mentioned earlier, the average premium based on the exchange ratio of
0.40 and the daily closing prices per share of Artecon common stock and Box Hill
common stock for the period from January 1 to April 29, 1999 was 61% with the
single day high premium and low discount of 133% and (27%), respectively.
CONTRIBUTION ANALYSIS. Tucker Anthony analyzed Artecon's and Box Hill's
relative contribution to the combined company with respect to certain
measurements, including net sales and pre-tax income, total assets, cash, total
debt and stockholders equity. As a result of the merger, holders of Artecon's
common stock and preferred stock will own approximately 40.1% of pro forma
outstanding Box Hill common stock on the basis of the exchange ratio of 0.40.
- Artecon would have contributed 56% of the combined sales of approximately
$163.8 million in calendar 1998 and is anticipated to contribute (based
on information provided to Tucker Anthony by Artecon and Box Hill) 55% of
the combined sales in calendar 1999. Box Hill's contribution to combined
sales in these periods would be 44% and 45%, respectively;
- Artecon would have contributed a pre-tax loss of approximately ($26.3
million) in 1998 compared to Box Hill's pre-tax income of $9.7 million
for this period. It is
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anticipated that Artecon would contribute approximately 32% of combined
pre-tax income in calendar 1999, and Box Hill would contribute
approximately 68%;
- as of December 31, 1998, the combined company would have had total assets
of approximately $128 million, of which Artecon would contribute $44.2
million, or 35%, and Box Hill would contribute $83.9 million, or 65%;
- as of December 31, 1998, the combined company would have cash and
marketable securities of approximately $59 million, of which Artecon
would contribute $1.4 million, or 2%, and Box Hill would contribute $57.7
million, or 98%;
- as of December 31, 1998, the combined company would have total debt of
approximately $14.2 million, of which Artecon would contribute 100% of
this amount. Box Hill had no debt outstanding as of this date; and
- as of December 31, 1998, the combined company would have had total
shareholders equity of approximately $78.7 million, of which Artecon
would contribute $13.5 million, or 17%, and Box Hill would contribute
$65.2 million, or 82.8%.
DISCOUNTED CASH FLOW ANALYSIS. Tucker Anthony performed a discounted cash
flow analysis of Artecon on a stand-alone basis using Artecon management's
projections for 1999 through 2003 without taking into account any potential cost
savings and efficiencies which may be realized following the merger. In such
analysis, Tucker Anthony assumed terminal value multiples of 4.0x to 6.0x EBITDA
in the year 2003 and discount rates of 30% to 35%. Selection of an appropriate
discount rate is an inherently subjective process and is affected by numerous
factors. The discount rates used by Tucker Anthony were selected based upon
Artecon's recent historical financial results, current financial condition and
the risk associated with Artecon achieving its financial projections. This range
of discount rates equals the range of return on investment required by investors
in a "turnaround" situation, which Tucker Anthony believes characterizes
Artecon's current financial situation. This range of discount rates also
reflects the cost of capital that Artecon would incur based upon the achievement
of its financial projections and the current valuation parameters for comparable
public companies. Such analysis produced present values of Artecon common stock
ranging from $1.36 to $2.63 per share. Tucker Anthony also performed a
discounted cash flow analysis taking into account the possibility that Artecon
may not be able to generate future profits necessary to realize the value of the
tax benefit of its net operating loss carryfowards. This analysis produced
implied values of Artecon common stock ranging from $1.29 to $2.56. Tucker
Anthony compared all of the above to the implied equity value per share of the
proposed merger of $2.40.
In order to assess the relative public market valuation of Box Hill common
stock to be used by Box Hill in exchange for Artecon common stock. Tucker
Anthony performed a discounted cash flow analysis of Box Hill, on a stand-alone
basis based upon Box Hill management's projections for 1999 through 2003. In
such analysis, Tucker Anthony assumed terminal value multiples of 5.0x to 7.0x
EBITDA in the year 2003 and discount rates of 20% to 25%. This analysis produced
present values per share for Box Hill common stock ranging from $5.74 to $6.70.
Tucker Anthony then multiplied these present values per share by the exchange
ratio of 0.40 which produced a range of $2.30 to $2.68, and compared these
values to the implied equity value per share of the proposed merger of $2.40.
Tucker Anthony also performed a discounted cash flow analysis of Box Hill
on a pro forma combined basis with Artecon. In this analysis, Tucker Anthony
assumed terminal
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value multiples of 5.0x to 7.0x Combined EBITDA in year 2003 and discount rates
of 18% to 22%. This analysis produced present values per share for Box Hill
common stock on a pro forma Combined basis ranging from $9.61 to $12.87. Tucker
Anthony then multiplied these per share present values by the exchange ratio of
0.40 which produced a range of $3.84 to $5.15, and compared these values to the
implied equity value of the proposed merger of $2.40 per share.
PRO FORMA MERGER ANALYSIS. Tucker Anthony prepared pro forma combined
analyses of the financial impact of the merger. In conducting its analysis,
Tucker Anthony relied upon the assumptions described above and based this
analysis on projected earnings estimates for Artecon (prepared by Artecon
management) and Box Hill (prepared by Box Hill management). Tucker Anthony
compared the earnings per share of Box Hill common stock on a stand-alone basis,
to the earnings per share of the common stock of the combined company on a pro
forma basis. The analysis (assuming no transaction-related expenses, cost
savings or efficiencies) indicated that the proposed transaction, assuming it
was consummated on June 30, 1999, would be accretive to Box Hill's stockholders
on the basis of an earnings per share in the third and fourth quarters of 1999
and the year 2000. The results of the pro forma merger analysis are not
necessarily indicative of future operating results or financial position.
As mentioned earlier, Tucker Anthony performed a discounted cash flow
analysis of Box Hill on a stand-alone basis and pro forma combined giving effect
to the proposed merger with Artecon. This analysis indicated that the present
value per share for Box Hill would increase from a range of $5.24 to $6.70 to a
range of $9.61 to $12.87 as a result of the proposed transaction.
The foregoing summary does not purport to be a complete description of the
analyses performed by Tucker. The preparation of a fairness opinion is a complex
process and is not susceptible to partial analysis or summary description.
Tucker Anthony believes that its analyses must be considered as a whole, and
that selecting portions of such analysis without considering all analyses and
factors, would create an incomplete view of the processes underlying its
opinion. Tucker Anthony did not attempt to assign specific weights to particular
analyses. However, there were no specific factors reviewed by Tucker Anthony
that did not support its opinion. Any estimates contained in Tucker Anthony's
analyses are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimates of
values of companies do not purport to be appraisals or necessarily to reflect
the prices at which companies may actually be sold. Because such estimates are
inherently subject to uncertainty, Tucker Anthony does not assume responsibility
for their accuracy.
COMPENSATION. Pursuant to an engagement letter dated March 8, 1999 between
Artecon and Tucker, Artecon agreed to pay Tucker Anthony a retainer fee of
$25,000 and, upon the closing date, a transaction fee equal to 1.5% on the
transaction amount up to $50 million, plus 2.0% on the transaction amount over
$50 million. In addition, for delivering its fairness opinion on April 30, 1999,
Tucker Anthony is entitled to receive a fee of $50,000, payable upon delivery of
its opinion, regardless of the conclusions reached by Tucker Anthony in such
opinion. Tucker Anthony's aggregate fee is estimated to be approximately
$1,222,000. Artecon has also agreed to reimburse Tucker Anthony up to $25,000
for of its out-of-pocket expenses. Artecon has also agreed to indemnify Tucker,
its affiliates and their respective directors, officers, employees and agents
and controlling persons against certain liabilities relating to or arising out
of its engagement including liabilities under the federal securities laws. In
the past, Tucker Anthony has not performed
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investment banking services for Artecon other than as provided for in the
engagement letter. During the past two years, Tucker Anthony had no prior
relationship with Artecon and has not received any compensation from Artecon.
MATERIAL FEDERAL INCOME TAX MATTERS
Holders of Box Hill common stock will not recognize any gain or loss for
federal income tax purposes as a result of the merger.
The following discussion summarizes the material federal income tax
consequences generally applicable to Artecon stockholders. The discussion is
based on the Internal Revenue Code of 1986, as amended, treasury regulations
thereunder, administrative rulings and pronouncements and judicial decisions as
of the date hereof, all of which are subject to change possibly with retroactive
effect. This discussion assumes that Artecon stockholders hold their Artecon
common stock and preferred stock as capital assets within the meaning of Section
1221 of the Internal Revenue Code. We have not sought and will not seek a ruling
from the IRS in connection with the merger. This discussion does not address the
consequences of the merger under state, local or foreign law, nor does the
discussion address all aspects of federal income taxation that may be important
to an Artecon stockholder in light of his or her particular circumstances, or
tax issues that may be significant to Artecon stockholders subject to special
rules, such as financial institutions, insurance companies, non-U.S. individuals
and entities, tax-exempt entities, dealers in securities, persons who are
subject to the alternative minimum tax provisions of the Internal Revenue Code,
persons who acquired Artecon capital stock pursuant to the exercise of an
employee option (or otherwise as compensation), or persons who hold Artecon
capital stock as part of a "hedge," "straddle" or risk reduction transaction.
Accordingly, Artecon stockholders are urged to consult their own tax
advisors as to the specific tax consequences of the merger, including the
applicable federal, state, local and foreign tax consequences to them of the
merger.
Herrick, Feinstein LLP, counsel to Box Hill, and Cooley Godward LLP,
counsel to Artecon, are of the opinion that the merger will constitute a
"reorganization" pursuant to Section 368(a) of the Internal Revenue Code. In
addition, it is a condition to the obligation of each party to consummate the
merger that it receive an opinion of its counsel to the effect that the merger
will constitute a reorganization. Such conditions will not be waived without a
resolicitation of consent by the stockholders of Artecon and the shareholders of
Box Hill. Herrick, Feinstein LLP and Cooley Godward LLP have advised Box Hill,
BH Acquisition Corp. and Artecon, respectively, that they currently expect to be
able to deliver such opinions. These opinions neither bind the IRS or the courts
nor preclude the IRS or a court from adopting a contrary position.
In addition, the tax opinions assume and are conditioned upon the
following:
- the truth and accuracy of the statements, covenants, representations and
warranties contained in the merger agreement, in the tax representations
received from Box Hill, BH Acquisition Corp. and Artecon and in all other
instruments and documents related to the formation and operation of Box
Hill, BH Acquisition Corp. and Artecon examined by and relied upon by
Herrick, Feinstein LLP and Cooley Godward LLP in connection with their
opinions;
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- that original documents submitted to counsel are authentic, documents
submitted to counsel as copies conform to the original documents, and
that those documents have been or will be by the effective time duly and
validly executed and delivered;
- that all covenants contained in the merger agreement and the tax
representations received from Box Hill, BH Acquisition Corp. and Artecon
are performed without waiver or breach of any material provision;
- that the merger will be reported by Box Hill and Artecon on their
respective federal income tax returns in a manner consistent with the tax
opinions; and
- that any representation or statement made "to the best of knowledge" or
similarly qualified is correct without being qualified.
Subject to the limitations and qualifications referred to above, the merger
will have the following federal income tax consequences:
- EXCHANGE OF ARTECON CAPITAL STOCK FOR BOX HILL COMMON STOCK. Except as
discussed below, no gain or loss will be recognized for federal income
tax purposes by Artecon stockholders who exchange their Artecon capital
stock solely for Box Hill common stock pursuant to the merger. Each
Artecon stockholders' aggregate tax basis in the Box Hill common stock he
or she receives in the merger will be the same as his or her aggregate
tax basis in the Artecon capital stock surrendered in the merger (reduced
by any tax basis allocable to fractional shares exchanged for cash). In
addition, the holding period of the Box Hill common stock received will
include the holding period of the Artecon capital stock surrendered;
- CASH RECEIVED INSTEAD OF FRACTIONAL SHARES. The payment of cash to an
Artecon stockholder instead of a fractional share in Box Hill common
stock generally should result in the recognition of capital gain or loss
measured by the difference between the amount of cash received and the
portion of the tax basis of the Artecon capital stock allocable to that
fractional share interest. In the case of an individual, capital gain is
generally subject to United States federal income tax at a maximum rate
of 20% if such individual has held his or her Artecon capital stock for
more than one year at the time of the merger, and at ordinary income
rates (as a short-term capital gain) if the individual has held his or
her Artecon capital stock for one year or less at the time of the
consummation of the merger. The deductibility of capital losses may be
limited;
- EXERCISE OF DISSENTERS' RIGHTS. A stockholder of Artecon who properly
exercises dissenters' rights under any applicable law with respect to a
share of Artecon preferred stock and receives payments for such stock in
cash should recognize capital gain or loss measured by the difference
between the amount of cash received and the shareholder's basis in such
share, provided such payment is neither essentially equivalent to a
dividend within the meaning of Section 302 of the Code nor has the effect
of a distribution of a dividend within the meaning of Section 356(a)(2)
of the Code (collectively, a "dividend equivalent transaction"). A sale
of Artecon shares incident to an exercise of dissenters' rights will
generally not be a dividend equivalent transaction if, as a result of
such exercise, the dissenting shareholder owns no shares of Box Hill
common stock (either actually or constructively within the meaning of
Section 318 of the Code) immediately after the merger; and
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- TAX CONSEQUENCES TO THE COMPANIES. Neither Box Hill nor Artecon will
recognize gain solely as a result of the merger.
There are other tax-related issues that you should be aware of such as:
- REPORTING REQUIREMENTS. Each Artecon stockholder that receives Box Hill
common stock in the merger will be required to file a statement with his
or her federal income tax return setting forth his or her basis in the
Artecon capital stock surrendered and the fair market value of the Box
Hill common stock and cash received in the merger, and to retain
permanent records of these facts relating to the merger.
- BACKUP WITHHOLDING. Unless an exemption applies under applicable law and
regulations, the exchange agent is required to withhold, and will
withhold, 31% of any cash payments to an Artecon stockholder in the
merger unless the stockholder provides the appropriate form as described
below. Each Artecon stockholder should complete and sign the Substitute
Form W-9 included as part of the letter of transmittal to be sent to each
Artecon stockholder following the closing of the merger, so as to provide
the information, including such stockholder's taxpayer identification
number, and certification necessary to avoid backup withholding, unless
an applicable exemption exists and is proved in a manner satisfactory to
Box Hill and the exchange agent.
- CONSEQUENCES OF IRS CHALLENGE. A successful IRS challenge to the
reorganization status of the merger would result in significant tax
consequences. Artecon stockholders would recognize gain or loss with
respect to each share of Artecon capital stock surrendered in the merger.
Such gain or loss would be equal to the difference between the
stockholder's basis in such shares of capital stock and the sum of the
fair market value, as of the effective time, of the Box Hill common stock
received in the merger and any cash received instead of a fractional
share of Box Hill common stock. In such event, a stockholder's aggregate
basis in the Box Hill common stock so received would equal it fair market
value as of the effective time and the stockholder's holding period for
such stock would begin the day after the merger is consummated.
Even if the merger qualifies as a reorganization, a recipient of Box Hill
common stock would recognize income to the extent that, for example, any such
shares were determined to have been received in exchange for services, to
satisfy obligations or in consideration for anything other than the Artecon
capital stock surrendered. Generally, such income is taxable as ordinary income
upon receipt. In addition, to the extent that Artecon stockholders were treated
as receiving, directly or indirectly, consideration other than Box Hill common
stock in exchange for such shareholder's Artecon capital stock, gain or loss
would have to be recognized.
The preceding discussion is not meant to be a complete analysis or
discussion of all potential tax effects relevant to the merger. Thus, Artecon
stockholders are urged to consult their own tax advisors as to the specific tax
consequences to them of the merger, including tax return reporting requirements,
federal, state, local and other applicable tax laws and the effect of any
proposed changes in the tax laws.
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RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Box Hill common stock to be received by Artecon stockholders
in connection with the merger have been registered under the Securities Act and,
except as set forth in this paragraph, may be traded without restriction. The
shares of Box Hill common stock to be issued in connection with the merger and
received by persons who may be deemed to be "affiliates" (as that term is
defined in Rule 144 under the Securities Act) of Artecon prior to the merger may
be resold by them only in transactions permitted by the resale provisions of
Rule 145 under the Securities Act or as otherwise permitted under the Securities
Act. Under guidelines published by the SEC, the sale or other disposition of Box
Hill common stock or Artecon common stock by an affiliate of either Box Hill or
Artecon within 30 days prior to the closing of the merger or the sale or other
disposition of Box Hill common stock thereafter prior to the publication of
financial results that include at least 30 days of post-merger combined
operations of Box Hill and Artecon could preclude pooling of interests
accounting treatment of the merger. Accordingly, the merger agreement provides
that each of Artecon and Box Hill will cause persons who may be deemed to be its
affiliates to execute an affiliate agreement to the effect that such persons
will not sell, transfer or otherwise dispose of any shares of Artecon common
stock or Box Hill common stock during the pooling period referred to above and,
with respect to affiliates of Artecon, that such persons will not sell, transfer
or otherwise dispose of Box Hill common stock at any time in violation of the
Securities Act or the rules and regulations promulgated thereunder, including
Rule 145. Box Hill and Artecon expect to obtain executed affiliate agreements
from all persons known to the managements of Box Hill or Artecon to be
affiliates of such corporations.
ANTICIPATED ACCOUNTING TREATMENT
The merger is expected to be accounted for under the "pooling of interests"
method of accounting pursuant to Opinion No. 16 of the Accounting Principles
Board of the American Institute of Certified Public Accountants, the Financial
Accounting Standards Board, and the rules and regulations of the SEC. The
pooling of interests method of accounting assumes that the combining companies
have been merged from inception, and the historical consolidated financial
statements for periods prior to consummation of the merger are restated as
though the companies had been combined from inception. Either Artecon or Box
Hill may terminate the merger agreement if the companies do not receive the
pooling opinion letters from the independent public accountants on the closing
date. See "Unaudited Selected Pro Forma Combined Financial Information" and
"Material Terms of the Merger Agreement -- Covenants of the Parties --
Accountants' Letters."
GOVERNMENT AND REGULATORY MATTERS
The consummation of the merger is conditioned upon the expiration or
termination of the applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976. Under the act and the regulations
thereunder, the merger may not be consummated until notifications have been
given and certain information has been furnished to the Federal Trade Commission
("FTC") and the Antitrust Division of the U.S. Department of Justice (the
"Antitrust Division") and the applicable waiting period has expired or been
terminated. Box Hill and W.R. Sauey, Chairman of Artecon and its majority
stockholders, filed notifications and report forms under the act with the FTC
and the Antitrust Division and the waiting period expired on ,
1999. Although the waiting period has expired, the FTC, the Antitrust Division
or others could, either before or after the
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consummation of the merger, take action under the antitrust laws with respect to
the merger, including seeking to enjoin the consummation of the merger or
seeking the divestiture by Box Hill of all or part of the stock or assets of
Artecon, or other businesses conducted by Box Hill. Box Hill and Artecon do not
believe that consummation of the merger will result in a violation of any
applicable antitrust laws. However, there can be no assurance that a challenge
to the merger on antitrust grounds will not be made or, if such challenge is
made, of the result.
The respective obligations of Box Hill and Artecon to consummate the merger
are subject to the condition that no court or other governmental entity having
jurisdiction over Box Hill and Artecon, or any of their respective subsidiaries,
shall have entered any injunction or other order (whether temporary, preliminary
or permanent) which is then in force and has the effect of making the merger or
any of the transactions contemplated by the merger agreement illegal. See
"Material Terms of the Merger Agreement -- Conditions to the Merger."
ABSENCE OF APPRAISAL RIGHTS OF HOLDERS OF ARTECON AND BOX HILL COMMON STOCK
Neither the holders of the common stock of Artecon nor Box Hill are
entitled to dissenters' or appraisal rights under applicable Delaware or New
York law in connection with the merger.
APPRAISAL RIGHTS OF HOLDERS OF ARTECON PREFERRED STOCK
Pursuant to Delaware law, holders of Artecon preferred stock will be
entitled to appraisal rights in connection with the merger. The following
summary of the availability of appraisal rights for holders of Artecon preferred
stock in connection with the merger does not purport to be complete and is
qualified by reference to Section 262 of the Delaware General Corporation Law, a
copy of which is attached to this prospectus/joint proxy statement as Appendix
E. Any holder of Artecon preferred stock contemplating the exercise of appraisal
rights is urged to review the full text of Section 262. The procedures set forth
in that chapter must be followed exactly or appraisal rights may be lost.
A holder of Artecon preferred stock who properly follows the procedures for
exercising appraisal rights for his or her Artecon preferred stock according to
Section 262 (as summarized below) may be entitled to receive in cash the "fair
value" of his or her Artecon preferred stock instead of the consideration
provided in the merger agreement. The "fair value" of a dissenting Artecon
stockholder's shares will be determined by the Delaware Court of Chancery. The
"fair value" could be more than, equal to or less than the value of the
consideration the stockholder would have received pursuant to the merger
agreement if the stockholder had not dissented.
To properly perfect appraisal rights with respect to the merger and to be
entitled to payment under Section 262, a holder of Artecon preferred stock must,
among other things:
- deliver to Artecon a written demand for appraisal of his or her shares
before the taking of the vote on the merger at the Artecon special
meeting;
- effect no change in his or her ownership in Artecon; and
- not vote his or her shares in favor of the merger.
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Thus, any holder of Artecon preferred stock who wishes to demand appraisal
rights in the merger and who executes and returns a proxy on the accompanying
form must specify either that his or her shares are to be voted against the
merger, or that the proxy holder should abstain from voting his or her shares in
favor of the merger. If the stockholder returns a proxy without voting
instructions, his or her shares will automatically be voted in favor of the
merger, and the stockholder will lose any appraisal rights. Similarly, if the
stockholder returns a proxy with instructions to vote in favor of the merger,
the stockholder will lose any appraisal rights.
Within 120 days after the effective time of the merger, any stockholder who
has perfected appraisal rights may file a petition in the Delaware Court of
Chancery demanding a determination of the value of the preferred stock of all
Artecon stockholders who have effectively demanded appraisal. However, at any
time within 60 days after the effective date of the merger, a stockholder may
withdraw his or her demand for appraisal and instead accept the terms offered in
the merger.
Within 120 days after the effective date of the merger, Artecon
stockholders who have demanded appraisal rights, upon written request, will be
entitled to receive from Box Hill a statement setting forth the aggregate number
of Artecon shares not voted in favor of the merger with respect to which Artecon
received demands for appraisal and the aggregate number of holders of such
shares. Box Hill must mail such statement to the requesting stockholder within
10 days after Box Hill receives the stockholder's written request for the
statement or within 10 days after expiration of the period for delivery of
demands for appraisal, whichever is later.
At the appraisal hearing of the Delaware Court of Chancery, the court will
determine the stockholders who have complied with Section 262 and who have
become entitled to appraisal rights. The court may require the stockholders who
have demanded appraisal rights and who hold stock certificates to submit their
stock certificates to the court for notation that the appraisal proceedings are
pending. If a stockholder does not comply with any such direction of the court,
the court may dismiss the proceedings as to that stockholder.
After determining the stockholders entitled to an appraisal, the court will
determine the fair value of the shares, exclusive of any element of value
arising from the accomplishment or expectation of the merger, together with a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. The court will take into account all factors it considers relevant
in determining such fair value and the rate of interest, if any. In its
discretion, the court may permit Box Hill or any stockholder entitled to
participate in the appraisal proceeding to conduct discovery or other pretrial
proceedings.
The court will direct the payment of the fair value of the shares, together
with interest, if any, by Box Hill to the stockholders entitled to such payment.
The costs of the appraisal proceeding may be determined by the court and taxed
upon the parties as the court deems equitable in the circumstances. Upon
application of a stockholder, the court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
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MATERIAL TERMS OF THE MERGER AGREEMENT
The following is a summary of the material provisions of the merger
agreement, a copy of which is attached as Appendix A to this prospectus/joint
proxy statement and is incorporated herein by reference. However, the following
is not a complete statement of all provisions of the merger agreement and
related agreements. Statements made in this prospectus/joint proxy statement
with respect to the terms of the merger agreement and such related agreements
are qualified in their respective entireties by reference to the complete text
of the merger agreement and such related agreements.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains substantially reciprocal representations and
warranties made by Artecon and Box Hill to each other. The most significant of
these relate to:
- corporate authorization to enter into the contemplated transaction;
- the shareholder votes required to approve the contemplated transaction;
- governmental approvals required in connection with the contemplated
transaction;
- absence of any breach of organizational documents, law or certain
material agreements as a result of the contemplated transaction;
- capitalization;
- ownership of subsidiaries;
- filings with the SEC;
- information provided by it for inclusion in this prospectus/joint proxy
statement;
- financial statements;
- absence of certain material changes since a specified balance sheet date;
- absence of undisclosed material liabilities;
- litigation;
- tax matters;
- employee benefits matters;
- compliance with laws;
- finders' fees;
- environmental matters;
- absence of circumstances inconsistent with the intended accounting
treatment of the merger; and
- the receipt of accountant's letters from the independent accountants of
Box Hill regarding the accounting treatment of the merger and from the
independent accountants of Artecon regarding Artecon's ability to be a
party to the merger to be accounted for as a pooling of interests.
The representations and warranties of Artecon and Box Hill in the merger
agreement do not survive the consummation of the merger or the earlier
termination of the merger agreement.
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COVENANTS OF THE PARTIES
CONDUCT OF THE BUSINESS PRIOR TO THE CLOSING OF THE MERGER
Box Hill and Artecon each have agreed that prior to the consummation of the
merger they will operate their respective businesses in the ordinary course and
consistent with past practice and will use commercially reasonable efforts to
preserve substantially intact their business organizations, including preserving
employee, supplier, customer and other business relationships. In addition, each
of Artecon and Box Hill has agreed that prior to the consummation of the merger,
it will not, without the written consent of the other party, do any of the
following:
- amend or change its charter documents;
- issue, sell, pledge, dispose of, grant or encumber (1) any shares of its
capital stock or the capital stock of any of its subsidiaries (except for
shares of capital stock issuable upon the exercise of options outstanding
as of the date of the merger agreement) or any options, warrants,
convertible securities or other rights of any kind to acquire any of the
foregoing, or (2) any of its material assets or those of its
subsidiaries;
- declare or make any dividend payments or other distributions payable in
cash, capital stock, property or otherwise, or reclassify, combine,
split, subdivide, redeem, purchase or otherwise acquire any of its
capital stock;
- acquire any corporation, partnership, limited liability company or other
business organization;
- enter into any material contract or authorize any single capital
expenditure in excess of $25,000 or $100,000 in the aggregate;
- incur any indebtedness for borrowed money, except that each party may
continue to borrow money under its respective current credit facilities;
- increase any compensation payable to its employees, except for regularly
scheduled increases in a manner consistent with past practices for
salaries of non-officer employees;
- enter into employment agreements with any employees, except as permitted
by the merger agreement;
- establish any employee benefit program;
- change any accounting policy or procedure;
- make any tax election or settle any material tax liability;
- pay, discharge or satisfy any claim, liability or obligation, except in
the ordinary course of business or as reflected on its balance sheets;
- hire any employee with an annual salary in excess of $100,000; and
- commence or settle any legal proceeding claiming or seeking in excess of
$75,000, and with respect to Box Hill, settle any pending legal
proceeding except those covered by insurance or except those requiring
Box Hill to pay not in excess of $3,000,000.
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LIMITATIONS ON DISCUSSING OTHER TRANSACTION PROPOSALS
Artecon and Box Hill each agreed to terminate all inquiries, contacts,
discussions or negotiations with any third party with respect to any acquisition
transaction and to specific limitations on their respective abilities to enter
into discussions with third parties concerning any acquisition transaction.
Generally, neither Artecon nor Box Hill is permitted, with respect to itself,
to:
- solicit, initiate or encourage the announcement of or take other action
to facilitate inquiries or the making of any proposal regarding any
acquisition transaction;
- approve, endorse or recommend any acquisition transaction;
- enter into any discussions or negotiate with any other person with
respect to an acquisition transaction or enter into any letter of intent
or similar document contemplating any acquisition transaction; or
- authorize any of such party's representatives to do any of the foregoing.
An "acquisition transaction", when used with respect either to Artecon or
Box Hill shall mean:
- any merger, consolidation, share exchange, business combination, issuance
of securities, acquisition of securities, tender offer, exchange offer,
or other similar transaction in which (1) such party is a constituent
corporation or involving the capital stock of such party, (2) a person or
"group" (as defined in the Exchange Act) acquires more than 20% of the
business, assets or voting securities of such party, or (3) such party
issues securities representing more than 20% of its outstanding voting
securities;
- any sale, lease, exchange, transfer, license, acquisition or disposition
of more than 20% of the assets of such party or any of such party's
subsidiaries; or
- any liquidation or dissolution of such party.
However, nothing prohibits the board of directors of either Artecon or Box
Hill from furnishing non-public information to, or entering into discussions or
negotiations with, a third party, in response to a superior proposal made to
that party, as long as the party receiving the superior proposal complies with
the following:
- neither such party nor its representatives shall have violated any of the
limitations discussed above;
- the board of directors of such party determines in good faith, after
consultation with such party's outside counsel, that the failure to
provide information in response to a written request and the failure to
consider the acquisition transaction would be reasonably likely to
constitute a breach of its fiduciary duties to such party's stockholders
under applicable law;
- prior to furnishing any information or entering into discussions or
negotiations with a third party, such party requires the third party to
enter into a confidentiality agreement, containing at a minimum a 24
month standstill;
- at least five business days prior to furnishing any nonpublic information
or entering into discussions or negotiations, such party provides the
other party with (1) written notice of the identity of the third person
making the superior proposal, (2) the terms and conditions of the
superior proposal and (3) such other nonpublic information; and
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- the party receiving the superior proposal allows the other party five
business days to respond with a new offer.
In addition, the board of directors of either Box Hill or Artecon may, upon
such party receiving a superior proposal, withdraw or modify its unanimous
recommendation to its stockholders to vote in favor of the merger, if after duly
considering the advice of outside counsel, the board of directors determines in
good faith that failure to do so would be reasonably likely to constitute a
breach of such board's fiduciary duties to its stockholders under applicable
law. Finally, neither party's board of directors shall be prohibited from
complying with Rule 14e-2 under the Securities Exchange Act of 1934, as amended,
with regard to an acquisition transaction.
For the purposes of the merger agreement, a superior proposal," means an
unsolicited, bona fide written offer made by a third party relating to an
acquisition transaction with respect to Artecon or Box Hill on terms that such
party's board of directors determines, in its reasonable judgement, based upon
the advice of its financial advisor, and upon consultation with its counsel, to
be more favorable to its stockholders than the merger. However, a proposal for
an acquisition transaction will not be deemed to be a "superior proposal" if (1)
any financing required to consummate the transaction contemplated by such offer
is not committed (in writing by a person who the board of directors reasonably
believes has the financial ability to meet such commitment) and it is not likely
to be obtained by such third party on a timely basis, and (2) such offer sets
forth terms which taken as a whole are less favorable to such party than the
terms of the merger.
ARTECON AND BOX HILL SHAREHOLDER MEETINGS
Under the terms of the merger agreement, each of Artecon and Box Hill is
obligated to call and duly hold a shareholders' meeting so that their respective
shareholders may vote upon and approve the merger agreement and the merger, and
with respect to Box Hill, the issuance of the Box Hill common stock in the
merger and the certificate of amendment to Box Hill's certificate of
incorporation. Both parties are obligated to hold their respective shareholders'
meeting as promptly as practicable, but in any event within 45 days of this
prospectus/joint proxy statement being declared effective. A party's obligation
to hold its shareholders' meeting will not be limited or effected by the
commencement, disclosure, announcement or submission of any superior proposal or
other acquisition transaction with respect to that party, or by any amendment,
withdrawal, or modification of such party's board of directors with respect to
the merger.
Neither the board of directors nor any committee of the board of directors
of either Artecon or Box Hill is permitted to withdraw, amend or modify or
propose to resolve to withdraw, amend or modify, in a manner adverse to the
other party, its unanimous recommendation in favor of the merger and the merger
agreement, and with respect to Box Hill, its unanimous recommendation in favor
of the issuance of the Box Hill common stock in the merger and the certificate
of amendment. However, neither party's board of directors will be prevented from
withdrawing, amending or modifying its unanimous recommendation in favor of the
merger, if:
- a superior proposal is made with respect to such party and is not
withdrawn;
- such party has not violated the covenants given by them concerning such
party's limitations on discussing other transactions; and
- such party's board of directors concludes in good faith, after
consultation with their outside counsel, that the failure to withdraw,
amend or modify their recommendation would reasonably be likely to
constitute a breach of such board's fiduciary duties to its stockholders.
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EMPLOYEE BENEFITS
Box Hill has agreed to continue to provide employee benefits to Artecon's
employees by either (1) continuing to maintain Artecon's employee benefit plans,
or (2) terminating the Artecon employee benefit plans and permitting Artecon's
employees to participate in comparable Box Hill employee benefit plans. To the
extent that Box Hill decides to terminate an Artecon group health plan and allow
Artecon employees to participate in a Box Hill group health plan, Box Hill is
obligated to give the Artecon employees who were participating in any terminated
group health plan credit for years of service and for deductibles and
co-payments already incurred by such employees.
BOX HILL EMPLOYEE STOCK PURCHASE PLAN
No later than five business days after the closing of the merger, Box Hill
is required to amend its 1997 Employee Stock Purchase Plan to provide that
Artecon employees will be eligible to participate in such plan and that the
offering period with respect to such employees will commence as close to such
day as possible.
INDEMNIFICATION AGREEMENTS
Box Hill and Artecon each entered into an indemnification agreement whereby
each company has agreed to indemnify and hold harmless the other company with
respect to losses or damages that arise from any untrue statement or alleged
untrue statement of a material fact, or the omission or alleged omission to
state a material fact which is necessary in order to make the statements made in
this prospectus/joint proxy statement not misleading. Each company is only
responsible for the information concerning itself that it provided for use in
this prospectus/joint proxy statement.
REGISTRATION OF COMMON STOCK UNDERLYING ARTECON STOCK OPTIONS
Box Hill has agreed to file a registration statement on Form S-8 within one
business day following the closing of the merger relating to the Box Hill shares
issuable with respect to the stock options of Artecon that will be assumed by
Box Hill in the merger.
ACCOUNTING TREATMENT; TAX-FREE REORGANIZATION
Box Hill and Artecon have each agreed not to take any action, whether
before or after the closing of the merger, which would disqualify the merger as
a "pooling of interests" for accounting purposes or as a "tax-free
reorganization" within the meaning of the Internal Revenue Code.
ACCOUNTANTS' LETTERS
Box Hill and Artecon are obligated to use all reasonable efforts to deliver
to the other party a letter from the independent public accountants of Box Hill
concurring with the companies' management that the merger will qualify for
pooling of interests accounting treatment and the receipt of a letter from the
independent public accountants of Artecon concurring with Artecon's management
that no conditions exist that would preclude Artecon's ability to be a party in
the merger to be accounted for as a pooling of interests.
DISCLOSURE REGARDING CLASS ACTION LITIGATION
Box Hill has agreed to keep Artecon and its counsel fully informed of all
facts, circumstances, events or matters that relate to Box Hill's pending class
action securities litigation proceeding, including the nature of any discussions
or negotiations related thereto. However, Box Hill is not required to disclose
any information to Artecon to the extent
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such information is protected by the attorney-client privilege and such
disclosure would interfere with the availability of the attorney-client
privilege.
OTHER COVENANTS
The merger agreement contains other covenants, including covenants relating
to the obligations of each party to:
- file all required reports under the Exchange Act;
- consult with the other party prior to making any press release or public
statement about the merger;
- notify the other party regarding facts or events that would render a
party's representations and warranties materially inaccurate or would
prohibit a party from complying with their obligations under the merger
agreement; and
- provide the other party with a list of persons deemed to be an affiliate
of such party.
CONDITIONS TO THE MERGER
The obligations of Artecon and Box Hill to complete the merger are subject
to the following conditions:
- the approval of the issuance of the Box Hill common stock in the merger
by the shareholders of Box Hill and the approval of the merger agreement
and the merger by the shareholders of Box Hill and the stockholders of
Artecon;
- the approval of the shares of Box Hill common stock to be issued to the
stockholders of Artecon in the merger;
- the approval of the listing on the New York Stock Exchange;
- receipt of all approvals and consents from any government entity
necessary to consummate the merger, other than those approvals and
consents which the failure to obtain would not have a material adverse
effect on the consummation of the merger;
- there being no injunction preventing the consummation of the merger and
no statute, rule or regulation enacted which would make the merger
illegal; and
- receipt from Deloitte & Touche LLP and Arthur Andersen LLP, respectively,
of letters regarding the accounting for the merger as a "pooling of
interests."
The obligation of Box Hill to consummate the merger is further conditioned
upon the following conditions:
- the representations and warranties of Artecon contained in the merger
agreement being true and correct in all respects as of the date of the
merger agreement and as of the date of the closing, except to the extent
that all inaccuracies when taken together do not constitute a "material
adverse effect";
- compliance by Artecon with its obligations under the merger agreement,
except where the failure to perform such obligations would not have a
material adverse effect on Artecon;
- receipt by Artecon of all required consents from third parties which are
required to be obtained under Artecon's material contracts;
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- delivery by Cooley Godward LLP to Box Hill of its corporate legal opinion
and delivery by Herrick, Feinstein LLP to Box Hill of its tax opinion;
and
- receipt by Carol Turchin, Dr. Benjamin Monderer, Philip Black and Mark
Mays of employment agreements from Box Hill.
The obligation of Artecon to consummate the merger is further conditioned
upon the following conditions:
- the representations and warranties of Box Hill contained in the merger
agreement being true and correct in all respects as of the date of the
merger agreement and as of the date of the closing, except to the extent
that all inaccuracies when taken together do not constitute a "material
adverse effect";
- compliance by Box Hill with its obligations under the merger agreement,
except where the failure to perform such obligations would not have a
material adverse effect on Box Hill;
- delivery by Herrick, Feinstein LLP to Artecon of its corporate legal
opinion and delivery by Cooley Godward LLP to Artecon of its tax opinion;
and
- receipt by James Lambert and Dana Kammersgard of employment agreements
from Box Hill.
For purposes of the merger agreement, any change or effect that is or could
reasonably be expected to be materially adverse to the business, operations,
properties, condition (financial or otherwise), assets or liabilities (including
contingent liabilities) of a party will be deemed to be a "material adverse
effect" with respect to such party. However, in no event will any of the
following constitute a "material adverse effect" with respect to a party:
- a change in the trading prices of either Artecon's or Box Hill's common
stock;
- conditions, events, circumstances, changes or effects generally affecting
the industry in which Artecon or Box Hill operate or arising from changes
in general business or economic conditions;
- conditions, events, circumstances, changes or effects directly
attributable to out-of-pocket fees or expenses incurred in connection
with the merger;
- any amendment or modification which is required or desirable to be made
to any of the financial statements contained in Artecon's filings with
the SEC, regardless of dollar amount or the effect such change would have
on the financial condition or position of Artecon;
- any adverse consequence arising out of or resulting from the current
class action securities litigation against Box Hill that is attributable
to a fact, condition, circumstance or event that was disclosed in writing
by Box Hill to Artecon prior to the date of the merger agreement;
- conditions, events, circumstances, changes or effects resulting from
changes in law or generally accepted accounting principles which
generally affect entities such as Artecon and Box Hill;
- conditions, events, circumstances, changes or effects resulting from the
announcement or pendency of the merger; or
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- conditions, events, circumstances, changes or effects resulting from
compliance by the parties with the terms of the merger agreement.
TERMINATION
The merger agreement may be terminated at any time prior to the
consummation of the merger (whether before or after approval of the merger
agreement and the merger by the Artecon or Box Hill shareholders):
- by mutual written consent duly authorized by the board of directors of
each of Box Hill, BH Acquisition Corp. and Artecon;
- by either Box Hill or Artecon (i) if the merger shall not have been
consummated by September 30, 1999 (unless the failure to consummate the
merger is the result of a willful breach of the merger agreement by the
party seeking termination) or (ii) there shall have occurred (1) any
general suspension of, or limitation on prices for, trading in securities
on the New York Stock Exchange or the Nasdaq Stock Market which shall
have continued for five business days and is in effect on the date of
termination, or (2) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States which
shall have continued for five business days and is in effect on the date
of termination;
- by either Box Hill or Artecon if a court of competent jurisdiction or
other governmental entity shall have issued a final and nonappealable
order, decree or ruling, or shall have taken any other action, having the
effect of permanently restraining, enjoining or otherwise prohibiting the
merger;
- by either Box Hill or Artecon if (A) the Artecon stockholders' meeting
shall have been held and (B) the merger agreement and the merger shall
not have been adopted and approved at such meeting by the necessary vote
of the Artecon stockholders; provided that the right to terminate the
merger agreement on this basis shall not be available to Artecon where
the failure to obtain stockholder approval is attributable to a failure
of Artecon to perform a material obligation required to be performed by
Artecon under the merger agreement;
- by either Box Hill or Artecon if (A) the Box Hill shareholders' meeting
shall have been held and (B) the issuance of the Box Hill common stock in
the merger, the certificate of amendment and the merger agreement and the
merger shall not have been adopted and approved at such meeting by the
necessary vote of the Box Hill shareholders; provided that the right to
terminate the merger agreement on this basis shall not be available to
Box Hill where the failure to obtain stockholder approval is attributable
to a failure of Box Hill to perform a material obligation required to be
performed by Box Hill under the merger agreement;
- at any time prior to the adoption of the merger agreement by the
shareholders of Box Hill and Artecon, (1) by Artecon if a "triggering
event" (described below) shall have occurred with respect to Box Hill,
and (2) by Box Hill if a triggering event shall have occurred with
respect to Artecon;
- by Box Hill or Artecon if any of the other party's covenants contained in
the merger agreement shall have been breached such that the breach has a
material adverse effect on the other party; provided that if a breach of
a covenant is curable by the breaching party and such party is continuing
to exercise all reasonable efforts to cure such breach, then the other
party may not terminate the merger agreement as a result of the breach;
or
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- by either party in the event that such party's board of directors
determines in good faith, after consultation with such party's outside
counsel, that failure to terminate the merger agreement may constitute a
breach of the board of directors' fiduciary duties to the shareholders of
such party; provided that neither party may terminate the agreement
solely as a result of a change in the trading prices of either party's
securities.
A "triggering event" with respect to a party shall be deemed to have occurred
if:
- the board of directors of such party shall have failed to recommend, or
shall for any reason have withdrawn or shall have amended or modified in
a manner adverse to the other party its unanimous recommendation in favor
of the adoption and approval of the merger agreement or the merger and,
with respect to Box Hill, the board's recommendation in favor of the
issuance of the Box Hill common stock in the merger;
- such party shall have failed to include in this prospectus/joint proxy
statement the unanimous recommendation of such party's board of directors
in favor of the adoption and approval of the merger agreement and the
approval of the merger and, with respect to Box Hill, the board's
recommendation in favor of the issuance of the Box Hill common stock in
the merger;
- the board of directors of a party shall have approved, endorsed or
recommended any acquisition transaction with respect to such party;
- such party shall have entered into a letter of intent or similar document
or contract regarding an acquisition transaction related to such party;
- such party shall have failed to hold the shareholders' meeting to approve
the merger agreement and the merger within the time limits specified in
the merger agreement;
EXPENSES AND TERMINATION FEES
Generally, all fees and expenses incurred in connection with the merger
agreement and the transactions contemplated by the merger agreement shall be
paid by the party incurring such expenses, whether or not the merger is
consummated.
However, if the merger agreement is terminated by Artecon or Box Hill
because the other party's shareholders failed to approve the merger or the
merger agreement, and with respect to Box Hill, its shareholders failed to
approve the issuance of the Box Hill common stock in the merger or the
certificate of amendment, then the party whose shareholders failed to approve
the transaction shall be obligated to pay the other party a cash fee equal to
120% of the other party's out-of-pocket expenses and fees incurred in connection
with negotiating, preparation, execution and performance of the merger
agreement. Notwithstanding the foregoing, no party shall be liable to the other
party for fees and expenses in excess of $2,500,000.
Furthermore, in the event Artecon terminates the merger agreement because
its board of directors believes that failure to do so may constitute a breach of
their fiduciary duty or if Box Hill terminates the merger agreement due to a
Triggering Event with respect to Artecon, then Artecon will be obligated to pay
Box Hill a cash fee of $2,500,000. Similarly, in the event Box Hill terminates
the merger agreement because its board of directors believes that failure to do
so may constitute a breach of their fiduciary duty or if Artecon terminates the
merger agreement due to a Triggering Event with respect to Box Hill, then Box
Hill will be obligated to pay Artecon a cash fee of $2,500,000.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER AND RELATED AGREEMENTS
In considering the recommendations of the Artecon and Box Hill boards of
directors with respect to the merger, you should be aware that certain members
of the boards of directors and management of each company have interests in the
merger that are different from, and in addition to, those of shareholders of
either company generally. The boards of directors of both Artecon and Box Hill
were aware of these interests and considered them in approving the merger
agreement, the merger and the other transactions contemplated thereby.
MANAGEMENT OF BOX HILL
The executive officers and directors of Box Hill after consummation of the
merger, and their ages as of April 30, 1999, are as follows:
<TABLE>
<CAPTION>
NAME: AGE: POSITION:
- ----- ---- ---------
<S> <C> <C>
W.R. Sauey(1)........................ 71 Chairman of the Board
James L. Lambert(2).................. 45 Co-Chief Executive Officer, President,
Chief Operating Officer and Director
Philip Black(3)...................... 44 Co-Chief Executive Officer, Executive Vice
President -- International Sales and
Director
Dana W. Kammersgard(4)............... 43 Chief Technical Officer
Dr. Benjamin Monderer(5)............. 40 Executive Vice President, Applications
Engineering / Professional Services
Carol Turchin(6)..................... 37 Executive Vice President, Domestic Sales
R. Robert Rebmann, Jr................ 34 Chief Financial Officer
Mark A. Mays(7)...................... 35 Secretary
Benjamin Brussell(8)................. 38 Director
Norman R. Farquhar(9)................ 53 Director
Chong Sup Park(10)................... 51 Director
</TABLE>
- -------------------------
(1) Under the terms of the merger agreement, immediately after the consummation
of the merger, Mr. Sauey, Artecon's current Chairman of the Board, will
serve as Chairman of the Board and as a Class III director of the Box Hill
board until the annual meeting of shareholders to be held in 2002.
(2) Under the terms of the merger agreement, immediately after the consummation
of the merger, Mr. Lambert, Artecon's current Chief Executive Officer and
President, will be the Co-Chief Executive Officer, President and Chief
Operating Officer, and will serve as a Class III director of the Box Hill
board until the annual meeting of shareholders to be held in 2002.
(3) Under the terms of the merger agreement, immediately after the consummation
of the merger, Mr. Black, Box Hill's current Chief Executive Officer and a
director, will be the Co-Chief Executive Officer and Executive Vice
President -- International Sales, and will serve as a Class I director of
the Box Hill board until the annual meeting of shareholders to be held in
2000.
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(4) Under the terms of the merger agreement, immediately after the consummation
of the merger, Mr. Kammersgard, Artecon's current Senior Vice President,
Sales and Marketing and Secretary, will be the Chief Technical Officer.
(5) Under the terms of the merger agreement, immediately following the
consummation of the merger, Dr. Monderer, Box Hill's current Chairman of
the Board, President and Chief Technology Officer, will be the Executive
Vice President, Applications Engineering/Professional Services and will
serve as a Class II director of the Box Hill board to serve until the
annual meeting of shareholders to be held in 2001.
(6) Under the terms of the merger agreement, immediately after the consummation
of the merger, Ms. Turchin, Box Hill's current Executive Vice President,
Strategic Planning and a director, will be the Executive Vice President,
Domestic Sales, and will serve as a Class III director of the Box Hill
board until the annual meeting of shareholders to be held in 2002.
(7) Under the terms of the merger agreement, immediately after the consummation
of the merger, Mr. Mays, Box Hill's current Vice President and Secretary
and a director, will be the Secretary.
(8) Under the terms of the merger agreement, immediately after the consummation
of the merger, Mr. Brussell, who is a current Box Hill director, or another
nominee designated by Box Hill, will serve as a Class II director until the
annual meeting of shareholders to be held in 2001.
(9) Under the terms of the merger agreement, immediately after the consummation
of the merger, Mr. Farquhar, who is a current Artecon director, or another
nominee designated by Artecon, will serve as a Class I director until the
annual meeting of shareholders to be held in 2000.
(10) Under the terms of the merger agreement, immediately after the consummation
of the merger, Dr. Park, who is a current Artecon director, or another
nominee designated by Artecon, will serve as a Class II director until the
annual meeting of shareholders to be held in 2001.
W.R. SAUEY, a founder of Artecon California, has served as Chairman of the
Board of Artecon since March 1998 and prior to such time, had served as Chairman
of the Board of Artecon California since its inception in 1984. From 1984 to
1997, Mr. Sauey also served as Treasurer of Artecon California. Mr. Sauey
founded and serves as Chairman of the Board for a number of manufacturing
companies in the Nordic Group of Companies, a group of privately-held
independent companies for which Mr. Sauey is the principal shareholder (the
"Nordic Group"). Mr. Sauey is an advisory board member of Liberty Mutual
Insurance Company, a publicly traded insurance company, and also serves as a
Trustee to the State of Wisconsin Investment Board. Mr. Sauey holds an M.B.A.
from the University of Chicago.
JAMES L. LAMBERT, a founder of Artecon California, has served as President,
Chief Executive Officer and director of Artecon since March 1998 and, prior to
such time, had served as President, Chief Executive Officer and a director of
Artecon California since its inception in 1984. Prior to co-founding Artecon,
from 1979 to 1984, Mr. Lambert served in various positions at CALMA, a division
of General Electric Company, a publicly traded company, most recently, from 1981
to 1984, as Vice President of Research and Development. Mr. Lambert currently
serves as a director of Snow Valley, Inc., a privately-held resort enterprise
affiliated with the Nordic Group. Mr. Lambert serves as a director
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with the Nordic Group. He holds a B.S. and an M.S. in Civil and Environmental
Engineering from the University of Wisconsin, Madison.
PHILIP BLACK has been Chief Executive Officer and a Director of Box Hill
since May 1995. From 1976 to 1991 Mr. Black held a number of positions,
including Vice President, President, Chief Executive Officer and Vice Chairman
of the Board at Tekelec, Inc., a publicly traded company, of which he was the
founder, engaged in the design, manufacturing and marketing of diagnostics
systems and network switching solutions. From March 1990 until August 1991, Mr.
Black served as Managing Director of Echelon Europe, of which he was a
co-founder. In September 1991 Mr. Black became the Chief Executive Officer and
Treasurer of Avalon Control Technologies, a company specializing in products and
services related to Echelon's LONWorks technology, and served in those
capacities until June 1994. In April 1994 Mr. Black became President and Chief
Executive Officer of Chevry, a backup software company, and served in those
capacities until he joined Box Hill.
DANA W. KAMMERSGARD, a founder of Artecon California, has served as
Artecon's Secretary and Senior Vice President, Engineering since March 1998. Mr.
Kammersgard served as a director of Artecon California from its inception in
1984 and as its Vice President, Sales and Marketing from March 1997 until March
1998. Between 1984 and March 1997, Mr. Kammersgard served in various positions
at Artecon California in engineering and customer support. Prior to co-founding
Artecon California, Mr. Kammersgard was the Director of Software Development at
CALMA, a division of General Electric Company, a publicly traded utility
company. Mr. Kammersgard holds a B.A. in Chemistry from the University of
California, San Diego.
DR. BENJAMIN MONDERER, ENG.SC.D., a co-founder of Box Hill, has been
President and a Director of Box Hill since its incorporation in 1988 and became
Chairman of the Board in July 1997. He is also Chief Technical Officer and has
served as Manager of Operations of Box Hill. Dr. Monderer had been a member of
the technical staff at Hewlett-Packard in 1980 and 1981 and was a Research
Scientist at Columbia University from 1986 to 1989. Dr. Monderer holds a
Bachelor of Science in Electrical Engineering degree from Princeton University
and a Master of Science degree in Electrical Engineering and a Doctor of
Engineering Science from Columbia University. Dr. Monderer is married to Carol
Turchin.
CAROL TURCHIN, a co-founder of Box Hill, has been an executive officer and
a Director of Box Hill since its incorporation in 1988 and, in July 1997, became
Executive Vice President, Strategic Planning of Box Hill. In the past, Ms.
Turchin has served as Box Hill's Vice President of Sales and Vice President of
Marketing. Ms. Turchin holds a Bachelor of Arts degree from Vassar College. Ms.
Turchin is married to Benjamin Monderer.
R. ROBERT REBMANN, JR. has been Chief Financial Officer of Box Hill since
joining the Company in January 1997 and became Treasurer in July 1997. Prior to
joining the Company, Mr. Rebmann served as Audit Manager for Perelson Weiner
(formerly Weiner Associates), a mid-sized regional public accounting firm. Mr.
Rebmann held various positions of increasing responsibility at Perelson Weiner
from 1986 until December 1996. Mr. Rebmann holds a Bachelor of Science degree in
Accounting from the State University of New York at Binghamton and is a
Certified Public Accountant.
MARK A. MAYS, a co-founder of Box Hill, has been Vice President, Technical
Consultant and a Director of Box Hill since its incorporation in 1988 and was
appointed Secretary of Box Hill in July 1997. From 1985 to 1988, Mr. Mays served
as Associate
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Research Scientist at Columbia University. Mr. Mays holds a Bachelor of Science
degree and a Master of Science degree in Electrical Engineering from Columbia
University.
BENJAMIN BRUSSELL has been a director of Box Hill since November 1998.
Throughout his career, Mr. Brussell has focused on developing and executing
acquisitions, investments and strategic alliances for technology companies.
Since March 1998, he has served as Vice President of Corporate Development for
Plantronics (NYSE: PLT), a worldwide provider of communications products. From
1990 to 1998, Mr. Brussell was responsible for corporate development at Storage
Technology Corporation, a manufacturer of storage systems, ultimately serving as
Vice President of Corporate Development. From 1985 to 1990, Mr. Brussell worked
for Salomon Brothers in various capacities, including Vice President of a
technology industry group within Salomon's Corporate Finance Department. Mr.
Brussell earned a Masters Degree in Management, with a concentration in Finance,
from the M.I.T. Sloan School of Management, and a Bachelor of Arts degree from
Wesleyan University, where he majored in Math and Economics.
NORMAN R. FARQUHAR has served as a director of Artecon since April 1998.
Mr. Farquhan has served as Executive Vice President and Chief Financial Officer
of Platinum Software Corporation, a developer of client/server enterprise
resource planning software since December 1998. Mr. Farquhar served as Executive
Vice President and Chief Financial Officer of DataWorks Corporation, a supplier
of information systems to manufacturing companies ("DataWorks"), from February
1996 to December 1998 and as a director of DataWorks from August 1995 to
December 1998. From April 1993 to December 1995, Mr. Farquhar served as Senior
Vice President, Chief Financial Officer and Secretary of Wonderware Corporation,
a manufacturer of software for the industrial automation industry. From December
1991 to April 1993, he was Vice President of Finance and Chief Financial Officer
of MTI Technology Corporation, a developer of system-managed storage solutions.
From November 1987 to December 1991, he was Senior Vice President and Chief
Financial Officer of Amperif Corporation, a manufacturer of cache-based data
storage subsystems. Mr. Farquhar is also a member of the Board of Directors of
Alteer Corporation, a medical software company. Mr. Farquhar holds a B.S. from
California State, Fullerton, and an MBA from California State, Long Beach.
CHONG SUP PARK has served as a director of Artecon since 1996. Since 1996,
Dr. Park has also served as the President of Hyundai Electronics America, an
electronics company and the Chairman of Maxtor Corporation, a disk drive
manufacturer. Dr. Park was the President of Maxtor Corporation from 1995 to
1996, the President of Axil Computer Inc., a workstation manufacturing company,
from 1993 to 1995, the Executive Vice President at Ernst & Young Consulting,
Inc., a public accounting firm, from 1992 to 1993, and the Senior Vice President
of Hyundai Electronics Company Limited from 1990 to 1992. Dr. Park holds a B.A.
in Management from Yonsei University, an M.A. in Management from Seoul National
University, an M.B.A. from the University of Chicago and a Doctorate in
Management from Nova Southeastern University.
EMPLOYMENT AGREEMENTS
In connection with the merger, Box Hill has agreed to employ certain
Artecon and Box Hill executives. See "Material Terms of the Merger
Agreement -- Conditions to the
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Merger." Each such executive will enter into an employment agreement with Box
Hill which will provide for initial annual base salaries as indicated below:
<TABLE>
<CAPTION>
NAME ANNUAL BASE SALARY
- ---- ------------------
<S> <C>
James Lambert......................................... $350,000
Carol Turchin......................................... $350,000
Dr. Benjamin Monderer................................. $300,000
Philip Black.......................................... $300,000
Dana Kammersgard...................................... $250,000
Mark Mays............................................. $230,000
</TABLE>
In addition to the annual base salaries, each of the foregoing executives
will be eligible to receive, at the discretion of Box Hill's Compensation
Committee, a cash bonus equal to 50% of such executives then annual base salary.
If an executive's employment with Box Hill is terminated under certain
circumstances, such executive will be entitled to receive a lump sum cash
severance payment equal to 125% of such executive's then annual base salary,
other than for Philip Black, whose severance compensation shall remain as
currently provided in his Compensation Plan.
INDEMNIFICATION
Pursuant to the merger agreement, Box Hill and the surviving corporation
are obligated to honor in all material respects the obligations of Artecon under
any indemnification agreement between Artecon and any person who is a director
or officer of Artecon and under any indemnification provisions currently
contained in Artecon's or Box Hill's certificate of incorporation and bylaws. In
addition, Artecon and Box Hill each have agreed to maintain in effect for a
period of six years after the closing the indemnification provisions contained
in each of such company's charter documents.
Box Hill has also agreed to maintain in effect, for a period of six years
after the closing of the merger, the current level and scope of Artecon's
directors' and officers' liability insurance; provided that Box Hill is not
required to expend in any one year an amount in excess of 150% of the annual
premiums currently paid by Artecon for such insurance. If future annual premiums
exceed 150% of the annual premiums currently paid by Artecon, then Box Hill will
be obligated to obtain a policy with the greatest coverage available for such
amount.
VOTING AGREEMENTS
ARTECON VOTING AGREEMENTS. In connection with the merger, stockholders of
Artecon who beneficially hold an aggregate of 10,157,402 shares of Artecon
common stock and 2,494,159 shares of Artecon preferred stock (representing, on
an as-converted basis, approximately 52.3% of the outstanding voting power of
Artecon as of the date of the merger agreement) have entered into voting
agreements with Box Hill. Under the terms of the voting agreements, such Artecon
stockholders have agreed that, prior to the termination of the voting agreement,
at every meeting of the stockholders of Artecon, they will vote all of the
shares of voting securities of Artecon such stockholders then own, in favor of
the approval and adoption of the merger agreement and the approval of the
merger. The Artecon stockholders have granted irrevocable proxies to Box Hill to
this effect.
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In addition, such Artecon stockholders have also agreed that, during the
effectiveness of the voting agreement, they will not:
- solicit, initiate or encourage the submission or making or announcement
of any acquisition transaction with respect to Artecon;
- take any other action to facilitate any inquiries or the making of a
proposal regarding an acquisition transaction with respect to Artecon;
- approve, endorse or recommend any acquisition transaction with respect to
Artecon;
- enter into any letter of intent or similar document or contract
contemplating or otherwise, or negotiate with any person regarding any
acquisition transaction with respect to Artecon; or
- authorize any of its affiliates to engage in any of the foregoing acts.
The voting agreements also prohibit an Artecon stockholder who is a party
thereto from transferring any interest in the securities of Artecon such
stockholder owns unless the transferee agrees to be bound by the terms of the
voting agreement and executes an irrevocable proxy in favor of Box Hill. The
holders of Artecon preferred stock have also agreed in their voting agreements
to accept in exchange for their shares of Artecon preferred stock the number of
shares of Box Hill common stock they are entitled to under the merger agreement
and have waived their right to receive any cash liquidation preference to which
they would otherwise be entitled under the certificate of incorporation of
Artecon as a result of the merger. The Artecon voting agreements terminate
either upon the consummation of the merger, the termination of the merger
agreement or written approval of Box Hill, whichever comes first.
BOX HILL VOTING AGREEMENTS. In connection with the merger, shareholders of
Box Hill who beneficially hold an aggregate of 7,705,059 shares of Box Hill
common stock (representing approximately 53.7% of the outstanding voting power
of Box Hill as of the date of the merger agreement) have entered into voting
agreements with Artecon. Under the terms of the voting agreements, such Box Hill
shareholders have agreed that, prior to the termination of the voting agreement,
at every meeting of the shareholders of Box Hill, they will vote all of the
shares of voting securities of Box Hill such shareholders then own, in favor of
the approval and adoption of the merger agreement and the approval of the
merger. The Box Hill shareholders have granted irrevocable proxies to Artecon to
this effect.
In addition, such Box Hill shareholders have also agreed that, during the
effectiveness of the voting agreement, they will not:
- solicit, initiate or encourage the submission or making or announcement
of any acquisition transaction with respect to Box Hill;
- take any other action to facilitate any inquires or the making of a
proposal regarding an acquisition transaction with respect to Box Hill;
- approve, endorse or recommend an acquisition transaction with respect to
Box Hill;
- enter into any letter of intent or similar document or contract
contemplating or otherwise, or negotiate with any person regarding any
acquisition transaction with respect to Box Hill; or
- authorize any of its affiliates to engage in any of the foregoing acts.
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The voting agreements also prohibit a Box Hill shareholder who is a party
thereto from transferring any interest in the securities of Box Hill such
shareholder owns unless the transferee agrees to be bound by the terms of the
voting agreement and executes an irrevocable proxy in favor of Artecon. The Box
Hill voting agreements terminate upon the consummation of the merger, the
termination of the merger agreement or upon written approval of Artecon,
whichever comes first.
SECURITY OWNERSHIP OF MANAGEMENT
The table below sets forth the beneficial ownership of each individual who
will serve as an executive officer or director of Box Hill upon the consummation
of the merger and all directors and executive officers as a group:
<TABLE>
<CAPTION>
NUMBER SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT(1)
- ------------------------ ------------------ ----------
<S> <C> <C>
Dr. Benjamin Monderer............................. (2)
Carol Turchin..................................... (3)
Mark A. Mays......................................
W.R. Sauey........................................ 2,941,227(4)
James Lambert..................................... 1,403,910(5)
Dana Kammersgard.................................. 555,234(6)
Philip Black......................................
Benjamin Brussell.................................
Mischa Schwartz...................................
Dr. Chong Sup Park................................ 645,000(7)
Norman R. Farquhar................................ 5,000(8)
Robert Rebmann, Jr................................
All directors and officers as a group (persons)...
</TABLE>
- -------------------------
(1) Percentage of beneficial ownership is based on shares of common
stock outstanding. This number assumes that an aggregate of shares
of Box Hill common stock will be issued to the holders of Artecon common
stock and preferred stock in the merger.
(2) Beneficial ownership includes shares held by the Monderer 1999
GRAT u/a/d March 1999 trust, as to which Dr. Monderer is the trustee and Ms.
Turchin is the sole beneficiary.
(3) Beneficial ownership includes shares owned by Dr. Benjamin
Monderer, the husband of Ms. Turchin, as to which shares Ms. Turchin
disclaims beneficial ownership, and shares held by the Monderer
1999 GRAT u/a/d March 1999 trust, as to which Ms. Turchin is the sole
beneficiary.
(4) Includes an aggregate of 823,075 shares of Box Hill common stock which were
issued in exchange for 2,494,159 shares of Artecon preferred stock at an
exchange ratio of 0.33 per share, which assumes that the closing price of
Box Hill common stock on the day prior to the consummation of the merger was
$6.00. Also, includes (i) 356,460 shares held by Flambeau Corp.
("Flambeau"), (ii) 94,202 shares held by Flambeau Products Corp. ("Flambeau
Products"), (iii) 15,333 shares held by Seats,
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Inc. ("Seats") and (iv) 415,241 shares held by the W.R. & Floy A. Sauey
Grandparents Trust established for the benefit of certain grandchildren of
W.R. Sauey. Mr. Sauey is Chairman of the Board and the principal shareholder
in each of Flambeau, Flambeau Products and Seats (collectively, the "Sauey
Affiliates"). Mr. Sauey disclaims beneficial ownership of all the
above-listed shares, except to the extent of his pecuniary or pro rata
interest in such shares. Also includes options to purchase 5,000 shares of
Box Hill common stock exercisable at or within 60 days of June 3, 1999.
(5) Includes 3,600 shares of common stock held by Pamela Lambert, the spouse of
Mr. Lambert, and 166 shares of common stock held by Mr. Lambert's daughter.
Also includes options to purchase 4,000 shares of Box Hill common stock
exercisable at or within 60 days of June 3, 1999.
(6) Includes 546 shares of common stock held by Lisa Kammersgard, the spouse of
Mr. Kammersgard. Also includes options to purchase 2,500 shares of Box Hill
common stock exercisable at or within 60 days of June 3, 1999.
(7) Represents shares held by Maxtor Corporation. Dr. Park is President of
Hyundai Electronics America, the parent of Maxtor Corporation, and Chairman
of the Board of Maxtor Corporation. Also includes options to purchase 5,000
shares of Box Hill common stock exercisable at or within 60 days of June 3,
1999.
(8) Includes options to purchase 5,000 shares of Box Hill common stock
exercisable at or within 60 days of June 3, 1999.
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INFORMATION RELATING TO BOX HILL
BUSINESS
Box Hill Systems Corp. is an independent provider of high-performance data
storage and storage area network, or SAN, solutions. Box Hill designs,
manufactures, markets and supports data storage systems, and markets and
supports data storage back-up systems, for the open systems computing
environment. Box Hill's storage solutions encompass a broad range of scalable
products and services targeting high-end customers. With data becoming an
increasingly critical business tool, these customers are demanding certain
characteristics in their storage systems, particularly high availability, high
performance and fault tolerance, as well as the highest level of customer and
technical support. Box Hill has a history of providing high-end storage
solutions that meet these requirements by combining extensive design and
implementation experience with leading edge technologies. Box Hill was among the
first to develop and successfully commercialize a hot-swappable SCSI disk array
storage system and a redundant array of independent disks, or RAID, storage
system for UNIX, a popular multi-user computer operating system commonly used in
open systems. In 1997, Box Hill introduced the Fibre Box(R), one of the first
Fibre Channel storage systems. In the United States, Box Hill employs a direct
marketing strategy targeted at data-intensive industries, which to date
primarily include financial services, telecommunications, health care,
government/defense and academia. Abroad, Box Hill teams up with local resellers
to provide storage solutions to customers. Box Hill was incorporated in New York
in April 1988 and completed its initial public offering in September 1997. Box
Hill is listed on the New York Stock Exchange, or "NYSE," under the symbol BXH.
INDUSTRY OVERVIEW
The demand for open systems data storage is fueled by the rapid
proliferation of new data-intensive applications, such as:
- high-definition television and digital broadcasting;
- the Internet;
- intranets;
- data warehousing;
- data mining; and
- the migration of mission-critical applications off mainframe computers.
Disk storage systems, tape backup systems and software-based management
tools designed to operate on multiple platforms are becoming a strategic part of
the computer environment. Computer purchase decisions are becoming "storage
centric" and, in many instances, capital expenditures on storage systems are
equal to or greater than those made on computer processing hardware.
The high end of the open systems market is characterized by large capacity
UNIX and Windows NT servers operating in multi-platform environments, generally
running mission-critical applications. Windows NT is a Microsoft computer
operating system commonly used in open systems.
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Box Hill believes that storage purchase decisions at the high end of the
open systems computing environment are based on a variety of factors, including:
- response time, capacity and minimization of downtime;
- data protection;
- all-encompassing solutions,
- multi-platform compatibility, and
- scalability.
CURRENT AND EMERGING TECHNOLOGIES
The open system's current storage options include disk arrays, RAID storage
systems and tape backup systems, each of which are generally attached to hosts
using the computer systems interface ("SCSI") and more recently the ultra SCSI
interface and Fibre Channel. Fibre Channel is an emerging high-speed serial
interface that became commercially available in 1997. Fibre Channel enables
faster data transfer to Disk Arrays and RAID storage systems. Fibre Channel also
enables storage area networks or SANs. A SAN is a Fibre Channel-based network
that sits between servers and storage devices. SANs provide considerable
networking capabilities, allowing multiple hosts to have high-speed access to
multiple storage and backup devices. SAN technology, which is in its infancy,
addresses the growing demand for higher availability and increased connectivity
in open systems storage environments.
THE BOX HILL SOLUTION
Box Hill develops and markets a comprehensive range of storage systems
designed to meet the requirements of the high-end open systems market. Box
Hill's family of products and services is intended to provide users with the
following benefits:
HIGH PERFORMANCE, HIGH AVAILABILITY AND FAULT TOLERANCE. Recognizing the
increased demand for faster response times, greater capacities, higher
availability of data and minimum system downtime, Box Hill has focused on
developing high-performance, high-availability, fault-tolerant storage products
for high end customers using SCSI, Ultra SCSI and Fibre Channel interfaces. The
term "high availability" means the capability of a system to perform its
functions with minimum downtime. The term "fault tolerance" means the capability
of a system to withstand a degree of failure and continue to perform its
functions. Box Hill was among the first to develop and successfully
commercialize a hot swappable SCSI disk array and a RAID storage system for the
UNIX environment. The term "hot swappable" means the ability of a component
(such as a disk) to be exchanged while the system remains powered on. In 1997,
Box Hill was one of the first to introduce a Fibre Channel storage system.
This past year, Box Hill was among the first storage vendors to provide
SANs to its customers. SAN technology is in its infancy and has not yet
generated significant revenue for Box Hill. Further, Box Hill cannot predict the
timing and magnitude of customer demand for SANs. However, Box Hill believes it
is in a strong position to deliver SANs to customers; Box Hill has been
developing Fibre Channel technology for over four years and has a history of
providing integrated storage solutions. In the United States, Box Hill sells
directly to customers with sophisticated storage needs and the sales force and
engineers work closely with those customers to design innovative solutions.
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HIGH-PERFORMANCE BACKUP. To satisfy market demand for reliable,
high-quality backup products and systems, Box Hill offers a broad variety of
backup products and services, including tape library systems, backup software,
training and documentation. Box Hill also designs and implements the effective
integration of backup solutions into a customer's system, whether the system be
a departmental server or enterprise-wide network.
ALL-ENCOMPASSING SOLUTIONS. Box Hill delivers all-encompassing solutions,
including design consulting, installation, integration, training, and
comprehensive, 24-hour, post-sales service and technical support, as well as
software-based management tools. Box Hill employs a full staff of direct sales
personnel and applications engineers to assist customers in making appropriate
and effective storage system purchases and in addressing, analyzing and solving
complex, pre-deployment storage problems. BoxHill believes that this value-
added capability fosters customer loyalty and allows Box Hill to identify
emerging customer requirements for future data storage products.
MULTI-PLATFORM SUPPORT. As an independent provider of storage products,
Box Hill is well positioned to provide storage systems specifically designed to
be compatible with a variety of UNIX and Windows NT platforms. This
cross-platform capability allows end users to standardize on a single storage
system that can readily be reconfigured and re-deployed at minimal cost as
operating systems or other open system components change.
SCALABILITY. Box Hill's products are designed using a flexible, modular
architecture allowing Box Hill to size and configure storage systems to the
application-specific requirements of individual customers. In addition, this
architecture allows Box Hill to resize and reconfigure these systems to adapt to
the changing needs of customers, while allowing them to retain capital value in
their underlying systems.
PRODUCTS AND SYSTEMS
Box Hill's family of products is a flexible, highly scalable set of
hardware and software storage solutions for open systems applications. Box Hill
sells storage in two fundamental ways: as solution packages or, for those
customers who prefer to buy particular products, as modular building blocks.
Either way, Box Hill's storage solutions range from SCSI Disk Array
configurations to multi-terabyte Ultra SCSI RAID storage systems to Fibre
Channel-based storage area networks. Box Hill's backup solutions incorporate
"best of breed" tape library products and backup management software, the vast
majority of which are manufactured by other parties.
DISK STORAGE PRODUCTS. Box Hill's principal disk storage products include
the Mod Box 5000(TM), the Jewel Box 8000(TM), the RAID Box 5300 Turbo(TM), and
the Fibre Box(R).
MOD BOX 5000. The Mod Box 5000 is a modular, scalable, hot-swappable, SCSI
and Ultra SCSI capable disk array system that can be configured with a wide
range of storage devices, including the RAID Box 5300 Turbo. The Mod Box 5000
architecture supports both 3 1/2" and 5 1/4" device form factors, enabling Box
Hill to support the highest capacity drives, and is compatible with both UNIX
and Windows NT platforms.
JEWEL BOX 8000. The Jewel Box 8000 is another modular, scalable,
hot-swappable storage system that can be configured with the RAID Box 5300 Turbo
for added reliability and fault-tolerance. Up to eight 4-gigabyte ("GB") 36 GB,
10,000 rpm, SCSI- and Ultra SCSI-capable disk drives can be accommodated within
the system.
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RAID BOX 5300 TURBO. Box Hill integrates hardware RAID controllers with
the Mod Box 5000 or the Jewel Box 8000 disk array to create the RAID Box 5300
Turbo product line. Box Hill also supplies remote monitoring and configuration
software as a key part of the RAID Box 5300 Turbo system. This high-end,
high-speed, hot-swappable, SCSI and Ultra SCSI capable RAID storage system
supports redundant "failover" controllers and capacities up to 2.7 TB terbytes,
or "TB." The term "failover" refers to a high-availability and data protection
feature that automatically transfers functions from a failed device to a
redundant, functioning device. Box Hill believes that its RAID Box 5300 Turbo is
one of the fastest Ultra SCSI RAID storage systems available for both UNIX and
Windows NT platforms.
FIBRE BOX. The Fibre Box is based on Fibre Channel technology, Fibre
Channel enables data transfer rates of up to 200 megabytes or "MB" per second,
transmission distances of up to 10 kilometers, and connectivity of up to 126
host-to-device connections. In addition, the Fibre Box contains up to eight 36
GB Fibre Channel disk drives in an intelligent enclosure and features
hot-swappability, redundancy of key components, and automatic environmental
monitoring to enable failure prediction. Included with the Fibre Box is Box
Hill's Fibre Box Array Explorer(TM) , or "FBAE," software program, which
supports the management and configuration of the Fibre Box on Windows NT and
provides users with the benefits of system monitoring and configuration, event
reporting and remote disk maintenance and administration. FBAE allows the Fibre
Box to take full advantage of SANs. Versions of FBAE released during 1998 have
included features such as SAN Spanning(TM), global hot spares, auto rebuild and
background initialization.
BACKUP PRODUCTS. Box Hill's backup solutions consist of a variety of "best
of breed" tape libraries and enterprise-wide backup software from industry
leaders (including Storage Technology Company (StorageTek), Legato Systems Inc.
and Veritas Software Corporation), proprietary Box Hill software and
comprehensive integration and customization services that produce turnkey
solutions. Box Hill believes it has unique abilities to custom design
system-wide and enterprise-wide backup systems and effectively integrate "best
of breed" hardware and software backup products. The principal tape backup
products offered by Box Hill include the Magna Box, an enterprise-wide automated
Digital Linear Tape, or "DLT," library with capacities ranging from 800 GB to 41
TB, and the Echo Box, which, together with Box Hill's proprietary Tape Mirroring
Software, allows for the simultaneous real-time creation of two sets of backup
tapes, one for fast, local retrieval of data and the other for remote, off-site
storage. "DLT" is a proprietary tape drive product line designed and built by
Quantum.
CUSTOMERS
Box Hill markets its products principally to high-end users in the open
systems market. Box Hill has installed storage systems principally in
data-intensive industries in which customers require high-performance,
high-availability, fault-tolerant storage solutions, such as financial services,
telecommunications, health care, government/defense and academia. Box Hill
intends to expand its focus to include other data-intensive vertical markets,
such as video, multimedia and imaging. Box Hill enjoys strong relationships with
its customers, which are reflected in high levels of repeat business over many
years.
Box Hill historically has targeted industries requiring high-end storage
products, and a material portion of Box Hill's net revenues to date has been
derived from sales to customers in the financial services industry and the
telecommunications industry. For the quarter ended March 31, 1999, direct sales
to customers in the financial services industry
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and the telecommunications industry were approximately 33% and 20% of Box Hill's
net revenue respectively for such quarter. In 1998, direct sales to customers in
the financial services and telecommunications industries were approximately 47%
and 15%, respectively, of Box Hill's net revenue, and in 1997 were approximately
40% and 14%, respectively, of Box Hill's net revenue.
Historically, a material percentage of Box Hill's net revenue in each year
have been derived from a limited number of customers. For the quarter ended
March 31, 1999, Box Hill's top five customers, including distributors, accounted
for approximately 33% of Box Hill's net revenue, and no single customer
accounted for 10% or more of its revenues of such quarter. For the year ended
December 31, 1998, Box Hill's top five customers, including distributors,
accounted for approximately 36% of Box Hill's net revenue. For the year ended
December 31, 1997, Box Hill's top five customers, including distributors,
accounted for approximately 30% of Box Hill's net revenue. In 1997, no single
customer accounted for 10% or more of Box Hill's net revenue. In 1998, one
customer, Salomon Smith Barney Inc., accounted for approximately 18% of Box
Hill's net revenue. Salomon Smith Barney Inc., who performs investment banking
services for Box Hill from time to time, was the lead underwriter of Box Hill's
initial public offering and is Box Hill's financial advisor for the merger. Box
Hill generally does not enter into long-term contracts with its customers, and
customers generally have certain rights to extend or delay the shipment of their
orders or cancel orders without penalty.
A very significant amount of Box Hill's revenues to date have been
concentrated in the UNIX marketplace, and within the UNIX marketplace, a
significant portion of Box Hill's revenues are associated with versions of UNIX
manufactured by Sun Microsystems, Inc.
SALES AND MARKETING
In the United States, Box Hill's marketing strategy emphasizes direct sales
to high-end users of its storage and backup products. Prior to 1995, Box Hill
conducted its sales exclusively from its facility in New York City, which office
still generates the vast majority of Box Hill's revenue. In recent years, Box
Hill has engaged in an expansion program to penetrate new markets outside the
northeastern region of the United States. In 1996, Box Hill established a sales
location in the greater Washington, D.C. metropolitan area and, in 1997,
commenced hiring personnel in other parts of North America. In 1998, Box Hill
opened a sales office in Newport Beach, California and added a number of sales
people in the Western and Southern Regions of the country. As of May 1, 1999,
Box Hill no longer employs sales people in the Southern Region of the country.
Box Hill also hired a Director of Western Region sales to oversee the efforts of
the Western Region sales team. Box Hill plans to continue its expansion efforts
in the future. Box Hill's team of application engineers, generally highly
qualified storage experts, complements the sales force by providing pre-sales
and pre-deployment consulting, installation services and support.
Box Hill's international marketing strategy has been to use distributors
located outside of the United States. Box Hill's foreign activities have
principally been conducted through distributors in the United Kingdom, Japan and
Hong Kong. Since 1996, Box Hill has embarked on a program of international
expansion. As of December 31, 1998, Box Hill had reseller agreements with
distributors in Korea, Singapore, Italy, Ireland, Spain, Taiwan, Thailand,
Australia, Brazil, China, India and Venezuela. Box Hill provides marketing and
technical support services in connection with international sales. Sales to
international distributors located outside the United States represented
approximately 11%
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of Box Hill's net revenue for the quarter ended March 31, 1999 and 12%, 17%, and
18% of Box Hill's net revenue for the fiscal year ended December 31, 1998, 1997,
and 1996, respectively.
ENGINEERING AND PRODUCT DEVELOPMENT
Box Hill's research, engineering and development efforts are focused on
developing innovative storage and SAN solutions for the high-end of the open
systems market. Box Hill has expertise in UNIX and Windows NT driver and system
software design, data storage system design and integration, high-speed
interface design for SCSI, Ultra SCSI and Fibre Channel and design,
qualification and integration of disk drives, tape drives, robotics and other
storage components. For example, Box Hill was among the first to develop and
successfully commercialize a hot-swappable SCSI disk array and a RAID storage
system for the UNIX environment. More recently, Box Hill was one of the first to
introduce a Fibre Channel storage system to provide turnkey SAN solutions to the
open systems market.
Box Hill generally designs its products to have a modular architecture that
can be readily modified to respond to technological developments and paradigm
shifts in the open systems computing environment. This flexibility allows Box
Hill to focus research and development resources on specific product innovations
and advancements. The modular architecture of the products meets customer needs
with solutions tailored to their applications and products that can be adapted
to changes in technology and in their computing environments.
Box Hill is currently focusing development efforts on SANs, which are based
on the Fibre Channel(R) protocol. Projects include improvements to the features,
functions and performance of the Fibre Box and the Fibre Box Array Explorer(TM),
which form the basis of Box Hill's SANs. Box Hill is also focusing on new SAN
applications.
Box Hill's engineering design teams work with marketing managers,
application, technical and production engineers and customers to develop
products and product enhancements. Box Hill employs a staff of applications
engineers to assist customers in making appropriate and effective storage system
purchases and in addressing, analyzing and solving complex pre-deployment
storage problems. Box Hill's technical support engineering team and production
engineering team also contribute to the quality, manufacturability and usability
of products from design to deployment. This value-added capability fosters
customer loyalty and allows Box Hill to identify emerging customer requirements
for future data storage products.
Engineering and product development expense (which does not include
compensation for application and technical support engineers -- such
compensation is recorded as sales and marketing expenses) for fiscal years 1998,
1997 and 1996 was $2.6 million, $2.3 million and $2.1 million, respectively and
$0.7 million and $0.6 million for the three months ended March 31, 1999 and
1998, respectively. As of March 31, 1999, Box Hill had 25 full-time employees
engaged in research and development activities and had 17 full-time application
and technical support engineers.
CUSTOMER SERVICE AND SUPPORT
Box Hill believes that the provision of comprehensive, proactive and
responsive support is an essential element in establishing new customer accounts
and securing repeat business from existing customers. Box Hill is committed to
providing the highest levels of
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customer service and support aimed at simplifying installation, reducing field
failures, minimizing system downtime and streamlining administration.
In certain geographical regions, and for an annual or quarterly fee, Box
Hill maintains a staff of on-call technical personnel who are available to visit
customer sites within a few hours. In other geographical regions, Box Hill
indirectly provides the same level of support by using third-party service
companies. In all cases, Box Hill technical support engineers are available by
phone on a seven day, 24 hour basis.
Box Hill provides standard warranties with all products sold which are set
forth in various documents and agreements. These documents and agreements are
delivered to customers with each product. As a general policy, Box Hill ships
replacement hardware components to customers in advance of receiving returns of
defective components under a standard warranty, which runs from one to five
years. Box Hill occasionally issues credit in lieu of replacing a piece of
equipment. A customer may also contract for an extended warranty or on site
maintenance support from Box Hill on all products.
MANUFACTURING
Box Hill's manufacturing operations consist of assembling and integrating
components and subassemblies into Box Hill's products. Certain of those
subassemblies are manufactured by independent contractors. The units are
assembled to order. Prior to shipping, the units are subjected to a
systems-level test and to firmware revision controls to ensure performance to
specification in the anticipated end-user computing environment. Test results
are identified by individual product serial numbers and are logged to aid in
technical support. Box Hill strives to develop close relationships with its
suppliers, exchanging critical information and implementing joint corrective
action programs to maximize the quality of its components, reduce costs and
reduce inventory investments.
Box Hill 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 Box Hill. Box Hill
purchases substantially all of its disk drives and all of its Fibre Channel
drives from Seagate Technology Inc., all of its DLT tape drives from Quantum
Corporation and all of its hardware SCSI RAID controllers from CMD Technology.
For the quarter ended March 31, 1999 and for the years ended December 31, 1998,
1997 and 1996, approximately 21%, 24.9%, 32.7%, and 52.7%, respectively, of Box
Hill's total raw material purchases were from Seagate. Approximately 2.9%,
10.5%, and 16.5%, of Box Hill's total raw material purchases were from Quantum
for the years ended December 31, 1998, 1997, and 1996, respectively. In
addition, Box Hill purchases substantially all of its raw materials pursuant to
purchase orders, rather than pursuant to long term purchase agreements. Box Hill
attempts to maintain minimum inventory levels.
To date, Quantum is the only supplier of DLT tape drives. If Box Hill faced
a shortage of DLT tape drives, manufacture and shipment of certain of Box Hill's
products could be delayed indefinitely, as long as there continue to be no
alternative sources of supply. Box Hill relies on other supplies of components,
such as CMD Technology for RAID controllers and Seagate for disk drives. If Box
Hill faced a shortage of Seagate disk drives, CMD controllers or various other
components, the incorporation of components from alternative suppliers into Box
Hill's products could delay the manufacture and shipment of such products while
modifications to such products and accompanying software were made to
accommodate the introduction of alternative suppliers' components. Box Hill has
experienced a shortage of DLT tape drives in the past, and there can be no
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assurance that Box Hill will not experience shortages of these or other
components in the future. Box Hill estimates that replacing CMD's hardware RAID
controllers with those of another supplier would involve several months of
hardware and software modification.
Box Hill resells the products of Storage Technology Corporation
(StorageTek), including StorageTek tape libraries, as well as the products of
Legato Systems, Veritas Software and other companies. During the first quarter
of 1999 and the 1998 fiscal year, approximately 45% and 34%, respectively, of
Box Hill's total purchases were for StorageTek products, which products were
then resold to customers. If Box Hill were to face a shortage of StorageTek,
Legato or Veritas products in the future, Box Hill could, after some
modification, integrate the products of other manufacturers into its storage
solutions. However, due to the market acceptance of StorageTek, Legato and
Veritas products Box Hill believes that a substantial number of customers would
not be satisfied with the products of an alternate manufacturer.
COMPETITION
The market for open systems storage is growing and it is intensely
competitive. Box Hill competes primarily with traditional suppliers of computer
systems such as Compaq Computer Corporation, Hewlett-Packard, Sun Microsystems,
IBM, Hitachi, Data General Corporation, and Dell Computer Corp., which market
storage systems as well as other computer products and which seem to have become
more focused on storage during 1998. For example, the storage division of Data
General, Clariion, recently announced that it plans to dramatically increase the
size of its direct sales force, and has been aggressively targeting customers
and employees of competitors. Box Hill also competes against independent storage
system suppliers to the high-end open systems market, including, but not limited
to, EMC Corporation, Network Appliance, Inc., Ciprico Inc., MTI Technologies,
Inc., Artecon Inc., Andataco, Inc., nStor Technologies, Inc. LSI Logic Corp.,
Procom Technology Inc. and Storage Computer Corp. In providing tape backup, Box
Hill competes with suppliers of tape-based storage systems such as Datalink
Corporation, MTI Technologies, Inc., Dallas Digital, Cranel, Inc. and numerous
resellers.
Competitive pricing pressures exist in the data storage market, and have
had and may in the future continue to have an adverse effect on Box Hill's
revenues and earnings. There also has been and may continue to be a willingness
on the part of certain large competitors to reduce prices in order to preserve
or gain market share. Box Hill believes that pricing pressures are likely to
continue as competitors develop more competitive product offerings, and saw some
of these pressures occurring in the recent past.
Many of Box Hill's current and potential competitors are significantly
larger than Box Hill and have significantly greater financial, technical,
marketing, purchasing and other resources than Box Hill, and as a result, may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or devote greater resources to the development, promotion
and sale of products than Box Hill, or to deliver competitive products at a
lower end-user price. Box Hill 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
Box Hill's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market
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share, any of which could have a material adverse effect on Box Hill's business,
operating results or financial condition.
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
Box Hill's success depends significantly upon its proprietary technology.
Box Hill has no patent protection for its products and has attempted to protect
its intellectual property rights through copyrights, trade secrets and other
measures. Box Hill seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. Box Hill has registered its Box Hill(R) and Fibre Box(R)
trademarks and has applied for registered trademark protection for the marks
X/ORRAID(TM) and SANman(TM). Box Hill is claiming common law protection for and
may seek to register its RAID Box 5300 Turbo(TM), Mod Box 5000(TM), Fibre Box
Array Explorer(TM), RAID Turbo HS(TM), ONS(TM), San Spanning(TM), Redundant
Path(TM) software, Jewel Box 8000(TM), Shadow Box(TM), Echo Box(TM), Borg
Box(TM), Bread Box(TM), Magna Box(TM) and Light Box(TM) trademarks and other
trademarks and logos as it deems appropriate. Box Hill generally enters into
confidentiality agreements with its employees and with key vendors and
suppliers.
Box Hill licenses certain Fibre Channel driver software under royalty-free
licenses for use in connection with host bus adapters purchased by Box Hill from
the licensors. The licenses are irrevocable, non-transferable and non-exclusive,
and continue as long as Box Hill continues to use the licensors' drivers or
unless Box Hill terminates it or either party materially breaches its
obligations.
EMPLOYEES
As of March 31, 1999, Box Hill had a total of 162 employees (substantially
all of whom are full-time), of whom 25 were engaged in engineering, research and
development; 24 in applications and technical support engineering and customer
support; 50 in marketing, sales; 36 in manufacturing; 24 in general management
and administration; and three shareholder officers.
Box Hill has experienced no work stoppages and believes that its employee
relations are good. Box Hill's future performance depends in significant part
upon the continued service of its key technical and senior management personnel.
Box Hill provides incentives such as salary and benefits, and will make stock
option grants to attract and retain qualified employees. Most members of the
sales force are compensated in a manner that includes a commission-based
component.
PROPERTIES
Box Hill's executive offices, principal sales office, marketing operations,
administrative staff, manufacturing operations and research and development
operations are all located in New York City at a 52,000 square-foot leased
facility. In 1998, approximately 8,500 square feet of space was added to the New
York City facility. This New York facility is occupied under a long-term lease,
as amended, expiring in 2007. In addition, Box Hill leases an office in Vienna,
Virginia, under a lease that expires in July 1999, to facilitate sales efforts
in the greater Washington, D.C. metropolitan area. In 1998, Box Hill began
leasing an office in Newport Beach, California, and an office in Hazlet, New
Jersey. The aggregate rent for the year ended December 31, 1998 for the four
facilities was approximately $685,000. Box Hill believes that its existing
facilities are adequate for its current needs.
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LEGAL PROCEEDINGS
Four putative shareholder class action lawsuits were filed, and have since
been consolidated into a single action, against Box Hill Systems Corp., Philip
Black, Carol Turchin, Dr. Benjamin Monderer, Mark Mays, and the underwriters of
Box Hill's September 16, 1997 initial public 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 Box Hill during the period
from September 16, 1997 through 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 Box Hill's
registration statement and prospectus issued in connection with the initial
public offering and in statements allegedly made by Box Hill and certain of its
officers and directors subsequent to the initial public offering.
Box Hill believes that it has meritorious defenses to plaintiffs' claims
and intends to vigorously defend against those claims. However, Box Hill expects
to incur significant legal expense defending this litigation. Such defense
costs, and other amounts incurred in connection with this litigation, will be
expensed as incurred and will reduce Box Hill's results of operations.
In addition to the complaints discussed above, Box Hill is subject to
various other legal proceedings and claims against Box Hill, asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
the claims against Box Hill cannot be predicted with certainty, management
believes that such litigation and claims will not have a material adverse effect
on Box Hill's financial position or results of operations.
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BOX HILL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Box Hill designs, manufactures, markets and supports high performance data
storage systems for the open systems computing environment and operates in one
business segment. In the United States, Box Hill employs a direct marketing
strategy aimed at data-intensive industries which, to date, include financial
services, telecommunications, health care, government/defense and academia. Box
Hill's international strategy is to use distributors located outside of the
United States. Since its inception, Box Hill has focused exclusively on
providing storage solutions to high-end customers, primarily in the UNIX
environment. Box Hill 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's strategy is 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 been profitable since inception and has financed its
growth primarily with cash generated from operations.
Box Hill's manufacturing operations consist primarily of the assembly and
integration of components and subassemblies into Box Hill's products, with
certain of those subassemblies manufactured by independent contractors.
Generally Box Hill extends to its customers the warranties provided to Box Hill
by its suppliers. To date, Box Hill's suppliers have covered the majority of Box
Hill's warranty costs. On a quarterly and annual basis Box Hill'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.
Competitive pricing pressures exist in the data storage market, and have
had and may in the future continue to have an adverse effect on Box Hill's
revenues and earnings. Box Hill believes that pricing pressures are likely to
continue as competitors of Box Hill develop more competitive product offerings.
Box Hill completed an initial public offering of its common stock on
September 16, 1997. The offering consisted of the sale of 5,500,000 shares of
common stock at $15.00 per share, of which 3,300,000 were issued and sold by Box
Hill and 2,200,000 shares were sold by individuals who were the founders and
sole shareholders of Box Hill prior to the initial public offering.
Additionally, 825,000 shares of common stock were purchased from Box Hill at
$15.00 per share by the underwriters upon the exercise of an over-allotment
option. The net proceeds to Box Hill, after deducting estimated underwriting
discounts and offering expenses, were approximately $56.6 million.
Box Hill was subject to taxation under Subchapter S of the Internal Revenue
Code and the New York State Tax Code from 1990 until the termination of its S
Corporation status concurrent with the Offering. Accordingly, prior to the
initial public offering, no provision was made for federal or state income taxes
and Box Hill's shareholders were taxed directly on their proportionate share of
Box Hill's taxable income. In connection with the initial public offering, Box
Hill terminated its status as an S Corporation and is subject to federal and
state taxes for the C Corporation's pro rata share of Box Hill's 1997 taxable
income.
In September 1997, Box Hill made $10.5 million of distributions to the S
Corporation shareholders, representing the estimated taxed but undistributed S
Corporation earnings as of June 30, 1997. In December 1997, Box Hill made
distributions of $1.2 million to its
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S Corporation shareholders, representing the estimated taxed, but undistributed
S Corporation earnings of Box Hill as of December 31, 1997 and at December 31,
1997, Box Hill recorded a distribution payable to its S Corporation shareholders
of $227,000, representing the estimated final distribution for taxed, but
undistributed, S Corporation earnings.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------- -----------------------
1999 1998 1996 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenue........................... 100.0% 100.0 100.0% 100.0% 100.0%
Cost of goods sold.................... 65.8 65.6 65.4 64.7 66.0
----- ----- ----- ----- -----
Gross profit..................... 34.2 34.4 34.6 35.3 34.0
----- ----- ----- ----- -----
Operating expenses:
Shareholder officers'
compensation..................... 2.2 2.0 1.8 10.7 12.7
Engineering and product
development...................... 4.7 4.0 3.6 3.3 4.1
Sales and marketing................. 14.8 12.5 12.0 9.5 10.6
General and administrative.......... 9.2 5.9 6.4 5.0 4.8
----- ----- ----- ----- -----
Total operating expenses.............. 30.9 24.4 23.8 28.5 32.2
----- ----- ----- ----- -----
Operating income...................... 3.3% 10.0% 10.8% 6.8% 1.8%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
NET REVENUE. Net revenue were approximately $14.3 million for the three
months ended March 31, 1999, representing a decrease of 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 SANs and growing market acceptance of the new technology,
partially offset by price reductions. Net revenues 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
revenues 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 revenues 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 revenues, 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 revenues, 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 revenues, 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 revenues.
GENERAL AND ADMINISTRATIVE INCLUDING SHAREHOLDER OFFICERS'
COMPENSATION. General and administrative expenses consist primarily of
compensation to the officers and employees performing Box Hill's administrative
functions and expenditures for Box Hill'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 revenues, 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 Box Hill'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. Box Hill'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 offset by research and development credits and a tax
benefit from Box Hill's foreign sales corporation.
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YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Net revenues increased 3.1% to $72.5 million for the year
ended December 31, 1998, compared to $70.3 million for the year ended December
31, 1997. The revenue growth resulted from an increase in volume, which was
partially offset by price reductions. Increases in sales of back-up products,
Fibre Channel and RAID were offset by a decrease in net revenues from sales of
legacy (SCSI-JBOD) storage products. Net revenues from sales of back-up products
increased $3.5 million, or 21.3%, to $19.9 million for the year ended December
31, 1998, compared to $16.4 million for the year ended December 31, 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 Box Hill's traditional
customer base, and the successful sales efforts in obtaining new customers
requiring Box Hill's knowledge and experience in back-up integration. Net
revenues from sales of Fibre Channel products increased $2.2 million, or 244%,
to $3.1 million for the year ended December 31, 1998, compared to $.9 million
for the year ended December 31, 1997. The increase is due to growing market
acceptance of the new technology. Net revenues from sales of RAID products
increased $1.6 million, or 9.7%, to $18.1 million for the year ended December
31, 1998, compared to $16.5 million for the year ended December 31, 1997. The
increase is the result of the successful expansion of Box Hill's direct sales
force and the growth of the storage market. Net revenues from sales of legacy
storage products and services decreased $5.1 million, or 14.0% to $31.4 million
for the year ended December 31, 1998 compared to $36.5 million for the year
ended December 31, 1997 primarily as a result of price reductions for SCSI-JBOD
disk storage systems.
GROSS PROFIT. Gross profit increased 1.2% to $25.1 million from $24.8
million for the comparable period of 1997. As a percentage of net revenues,
gross profit decreased slightly from 35.3% to 34.6%, principally as a result of
a different product mix.
SHAREHOLDER OFFICERS' COMPENSATION. Shareholder officers' compensation
consists of salaries and bonuses paid to Box Hill's three shareholder officers.
Shareholders officers' compensation decreased 82.7% to $1.3 million for the year
ended December 31, 1998, compared to $7.5 million for the year ended December
31, 1997. The decrease in shareholder officers' compensation is attributable to
new employment agreements entered into with the shareholder officers in
connection with Box Hill's initial public offering. See Notes 2 and 10 of Notes
to Box Hill's Financial Statements.
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
engineering and 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 capitalization
have been insignificant. Engineering and product development increased 13.0% to
$2.6 million for the year ended December 31, 1998 from $2.3 million for the
comparable period of 1997. As a percentage of net revenues, engineering and
product development increased to 3.6% in 1998 from 3.3% in 1997. The increase is
due to an increase in the number of employees engaged in research and
development activities.
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 29.9% to $8.7 million for the year ended
December 31, 1998 from $6.7 million for the year ended December 31, 1997. As a
percentage of net revenues, sales and marketing expenses increased to 12.0% in
1998 from 9.5% in 1997. The increase was
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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 Box Hill's administrative
functions and expenditures for Box Hill's administrative facilities. General and
administrative expenses increased 31.4% to $4.6 million for the year ended
December 31, 1998 from $3.5 million for the year ended December 31, 1997. As a
percentage of net revenues, general and administrative expenses increased to
6.4% in 1998 from 5.0% in 1997. The increase is primarily due to the costs
associated with being a public company, increased receivable allowances and
additional rent expense resulting from an expanded facility.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES. Net revenues increased 40.6% to $70.3 million for the year
ended December 31, 1997, compared to $50.0 million for the year ended December
31, 1996. The increase resulted from an increase in volume, which was partially
offset by price reductions. Net revenues from sales of backup products increased
$7.7 million, or 88.5%, to $16.4 million for the year ended December 31, 1997,
compared to $8.7 million for the year ended December 31, 1996. Net revenues from
sales of RAID products increased $5.6 million, or 51.4%, to $16.5 million for
the year ended December 31, 1997, compared to $10.9 million for the year ended
December 31, 1996. Net revenues from Box Hill's other products increased 23.0%
to $37.4 million for the year ended December 31, 1997, due to increased demand
for Box Hill's products.
GROSS PROFIT. Gross profit increased 45.9% to $24.8 million from $17.0
million for the comparable period of 1996. As a percentage of net revenues,
gross profit increased from 34.0% to 35.3%, principally as a result of more
favorable product mix.
SHAREHOLDER OFFICERS' COMPENSATION. Shareholders officers' compensation
increased 19.0% to $7.5 million for the year ended December 31, 1997 as compared
to $6.3 million for the year ended December 31, 1996. The increase in
shareholder officers' compensation is attributable to higher bonuses for the
period from January 1, 1997 to September 16, 1997. In connection with the
Offering, Box Hill entered into new employment agreements with the shareholder
officers. See Notes 2 and 10 of Notes to Box Hill's Financial Statements.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering and product development
increased to $2.3 million for the year ended December 31, 1997 from $2.1 million
for the comparable period of 1996. As a percentage of net revenues, engineering
and product development decreased to 3.3% in 1997 from 4.1% in 1996.
SALES AND MARKETING. Sales and marketing expenses increased 24.6% to $6.7
million for the year ended December 31, 1997 from $5.3 million for the year
ended December 31, 1996. The increase was primarily due to an increase in the
direct sales forces and field service staff and increased commissions based on
the increase in sales. As a percentage of net revenues, sales and marketing
expenses decreased to 9.5% in 1997 from 10.6% in 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
52.2% to $3.5 million for the year ended December 31, 1997 from $2.3 million for
the year ended December 31, 1996. The increase was due to an increase in support
staff to support Box Hill's growth. As a percentage of net revenues, general and
administrative expenses increased slightly to 5.0% in 1997 from 4.8% in 1996.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, Box Hill had $62.6 million of cash, cash equivalents
and short-term investments and no bank indebtedness. As of March 31, 1999,
working capital was $64.6 million. In September 1997, Box Hill completed an
initial public offering of its common stock. Proceeds of the initial public
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 for the three months
ended March 31, 1999 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 1995 Stock Incentive
Plan and from the 1997 Employee Stock Purchase Plan were $44,000 for the three
months ended March 31, 1999.
In October 1997, Box Hill obtained a $10 million revolving line of credit
facility from a commercial bank. Box Hill has not made any borrowings under this
facility. Borrowings under the facility will be collateralized by a pledge of
substantially all of its assets and borrowings greater than $5 million will also
be required to be secured by short-term investments. Additionally, Box Hill is
required to comply with certain financial covenants. The line of credit was
renewed May 1998.
Box Hill currently expects that cash, 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, Box Hill may need additional
capital to pursue acquisitions, other than the merger, or significant capital
improvements, neither of which is currently contemplated.
Many of Box Hill's current and potential competitors are significantly
larger than Box Hill and have significantly greater financial, technical,
marketing, purchasing, and other resources than Box Hill, and, as a result, may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or devote greater resources to the development, promotion
and sale of products than Box Hill, or to deliver competitive products at a
lower end-user price. Box Hill 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
Box Hill'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 Box Hill's business, operating
results or financial condition.
YEAR 2000 COMPLIANCE
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 Box Hill.
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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 supercedes those prior statements. 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
Box Hill 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 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 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, Box Hill has not evaluated all such products. Box Hill 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 the Year 2000 compliance of 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 compliance and Box Hill
makes no warranties or representations to its customers and suppliers by virtue
of this disclosure or otherwise regarding Year 2000 compliance.
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.
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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 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 Year 2000 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 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 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, Box Hill 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, Box Hill 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 Box Hill. However, some risks that Box Hill 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 its 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. 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.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Box Hill does not use derivative financial instruments in its investment
portfolio. Box Hill places its investments in instruments that meet high quality
standards, as specified in its investment policy guidelines. The policy also
limits the amount of credit exposure to any one issue, issuance and type of
instrument. Box Hill does not expect any material loss with respect to its
investment portfolio.
The following table provides information about Box Hill's investment
portfolio as of March 31, 1999. For investment securities, the table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. All investment securities are expected to mature within one
year:
<TABLE>
<S> <C> <C>
Cash equivalents........................... $56,603
Average interest rate.................... 2.47%
Short-term investments..................... $ 6,000
Average interest rate.................... 3.8%
Total Portfolio............................ $62,603
Average interest rate.................... 2.54%
</TABLE>
BOX HILL MANAGEMENT
BOX HILL BOARD COMPOSITION AND RESPONSIBILITIES
Box Hill currently has six directors. Pursuant to the merger agreement,
upon consummation of the merger, Box Hill will have eight authorized directors
who, will be divided into three classes: Class I, whose term will expire at the
annual meeting of shareholders to be held in 2000; Class II, whose term will
expire at the annual meeting of shareholders to be held in 2001; and Class III,
whose term will expire at the annual meeting of shareholders to be held in 2002.
At each annual meeting of shareholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, the Box Hill certificate of incorporation
provides that the authorized number of directors may be changed only by
resolution of the Box Hill board. Any additional directorships resulting from an
increase in the number of directors will be distributed among the three classes
so that, as nearly as possible, each class will consist of one-third of the
directors. This classification of the Box Hill board may have the effect of
delaying or preventing changes in control or management of Box Hill.
The Box Hill board of directors is responsible for supervision of the
overall affairs of Box Hill. To assist it in carrying out its duties, the Box
Hill board has delegated certain authority to two committees -- the Audit
Committee and the Compensation Committee. The committees of the Box Hill board,
as well as the full Box Hill board, have access to outside consultants and
experts as needed in connection with their deliberations. Two of the six current
directors are outside directors who are neither officers nor employees of Box
Hill or its subsidiaries. In the opinion of the Box Hill board, each of the
outside directors is independent of management and free of any relationship with
Box Hill that would interfere with his or her exercise of independent judgment
in enforcing the duties of a director.
The Box Hill board of directors held five meetings in 1998. At the
quarterly meetings of the Box Hill board, all members were either present or
participating by means of a conference telephone allowing all persons to hear
each other at the same time. At a meeting held on October 26, 1998, Dr. Mischa
Schwartz was not present, but participated in a vote taken on that day by a
previously signed and submitted absentee ballot. Between
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annual meetings, the Box Hill board has the authority under the Box Hill by-laws
to increase or decrease the size of the Box Hill board and fill vacancies.
COMMITTEES OF THE BOX HILL BOARD
The Audit Committee and the Compensation Committee are the standing
committees of the Box Hill board of directors. The Box Hill Audit Committee is
currently comprised of Benjamin Brussell and Mischa Schwartz, Ph.D. The Box Hill
Compensation Committee is currently comprised of Messrs. Brussell, Schwartz and
Mays.
AUDIT COMMITTEE
The Audit Committee is responsible for reviewing reports of Box Hill's
financial results and internal controls. The committee recommended to the Box
Hill board of directors the selection of Box Hill's outside auditors and reviews
their procedures for ensuring their independence with respect to the services
performed for Box Hill.
The Audit Committee is composed entirely of outside directors who are not
officers or employees of Box Hill or its subsidiaries. In the opinion of the Box
Hill board, these directors are independent of management and free of any
relationship that would interfere with their exercise of independent judgment as
members of this committee. The committee held three meetings in 1998 at which
all members either were present or participating by means of a conference
telephone allowing all persons to hear each other at the same time.
COMPENSATION COMMITTEE
The Compensation Committee is responsible for administering and approving
all elements of compensation for elected corporate officers and certain other
senior management positions. It also approves, by direct action or through
delegation, participation in, and all awards, grants, and related actions under
the provisions of, the 1995 Incentive Program and the Employee Stock Purchase
Plan. The committee reports to shareholders on executive compensation items as
required by the Securities and Exchange Commission. The committee is responsible
for reviewing Box Hill's management resources programs and for recommending
qualified candidates to the Box Hill board for election as officers.
The Compensation Committee is currently comprised of the Box Hill board's
outside directors, who are not officers or employees of Box Hill or its
subsidiaries, and Mark A. Mays. While Mr. Mays is a Vice President and Secretary
of Box Hill, he is not part of the management team. In the opinion of the Box
Hill board, these directors are independent of management and will exercise
independent judgment as members of this committee. The committee held four
meetings in 1998 at which all members either were present or participating by
means of a conference telephone allowing all persons to hear each other at the
same time.
DIRECTORS' COMPENSATION
In July 1997, Box Hill adopted a compensation policy for its non-employee
directors. The policy provides that such directors shall receive an annual fee
of $25,000 payable in quarterly installments, and shall be reimbursed for
out-of-pocket expenses incurred in connection with attending meetings of the Box
Hill board of directors or committees thereof. Directors who are employees of
Box Hill do not receive additional compensation for serving as directors.
Box Hill granted options to certain directors of Box Hill, pursuant to Box
Hill's 1995 Incentive Program, in connection with their election to the Box Hill
board. In
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November 1998, Mr. Brussell was granted an option to purchase 10,000 shares of
Box Hill common stock at an exercise price of $6.625 per share and Ms. Strong
was granted an option to purchase 150,000 shares of Box Hill common stock at an
exercise price of $9.9375 per share. The options have a five-year term and vest
ratably over sixteen quarters, commencing on January 1, 1999.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Box Hill believes that during 1998 all reports for Box Hill's executive
officers and directors that were required to be filed under Section 16 of the
Securities Exchange Act of 1934 were timely filed.
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation
during fiscal 1998, 1997 and 1996 of Box Hill's Chief Executive Officer, each of
the four most highly compensated executive officers of Box Hill whose salary and
bonus for such year exceeded $100,000 on an annualized basis for the fiscal year
ended December 31, 1998 and one former executive officer who departed from Box
Hill during fiscal year 1998 (collectively, the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION (1) AWARDS
-------------------------------------------- ------------
SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND COMPENSATION OPTIONS COMPENSATION
PRINCIPAL POSITION* YEAR SALARY($) BONUS($) ($) (#) ($)
- ------------------- ---- --------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Philip Black.............. 1998 316,664 194,531 -- -- 210,390(5)
Chief Executive Officer 1997 290,975 149,065 -- -- --
1996 282,289 72,630 -- -- --
Dr. Benjamin Monderer..... 1998 500,000 -- -- -- --
Chairman of the Board, 1997 354,932 3,063,179(7) -- -- 39,803(4)
President and Chief 1996 281,910 2,603,375(7) -- -- --
Technical Officer
Carol Turchin............. 1998 425,000 -- -- -- --
Executive Vice President,
Strategic Planning 1997 340,297 3,063,179(7) -- -- --
1996 278,489 2,603,375(7) -- -- --
Mark Mays................. 1998 350,000 -- -- -- --
Vice President and
Secretary 1997 308,668 449,642 -- -- --
1996 278,489 295,250 -- -- --
Elizabeth Strong.......... 1998 175,321 -- 133,670(2) 150,000 23,240(3)
Executive Vice President
of Sales
Warren Fisher............. 1998(6) 90,104 -- 117,023 -- --
Former Vice President 1997 108,692 -- 191,460 -- --
of Sales 1996 101,392 -- 135,415 13,530 50,000(3)
</TABLE>
- -------------------------
* But for Warren Fisher, table reflects the position or positions of such
officers as of December 31, 1998.
(1) Represents amounts paid in 1998, 1997 and 1996.
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(2) Represents sales commissions paid.
(3) Represents moving expenses paid.
(4) Represents amounts paid in 1997 prior to the initial public offering of Box
Hill's common stock in September, 1997 to two Box Hill employees who provide
housekeeping and domestic services for Dr. Monderer which are not Box
Hill-related. Following the initial public offering, Box Hill continues to
employ these individuals and Dr. Monderer reimburses Box Hill for the full
amount of their salary, benefits and related expenses.
(5) Disposition of non-qualified stock options.
(6) Represents amounts paid to Warren Fisher from January 1, 1998 until the
effective date of his termination, which was November 6, 1998.
(7) 1997 and 1996 bonuses paid to Dr. Monderer, Ms. Turchin and Mr. Mays were
calculated in accordance with their compensation schemes that existed prior
to their employment contracts dated September 22, 1997.
During 1998, and until May 31, 1999, none of the Box Hill named executive
officers received any stock options, other than 150,000 options granted to Ms.
Strong at an exercise price of $9.9375 per share which vests quarterly in equal
amounts over five years pursuant to Box Hill's Stock Incentive Program.
EMPLOYMENT AND COMPENSATION AGREEMENTS
Box Hill has entered into employment agreements with Dr. Monderer, Ms.
Turchin and Mr. Mays. The effective term of each agreement is September 22, 1997
through December 31, 2000. For the period ending December 31, 1998, the
agreements provide for annual base compensation of $500,000 for Dr. Monderer,
$425,000 for Ms. Turchin, and $350,000 for Mr. Mays with the compensation for
the remaining two years to be not less than the prior year's base compensation,
adjusted for increases in the Consumer Price Index. The agreements also provide
for an annual bonus of 0.5% of the net revenues in excess of $100,000,000 for
each of Dr. Monderer and Ms. Turchin and 4.0%, 2.5% and 1.5% of the net pre-tax
income above $20,000,000 for Dr. Monderer, Ms. Turchin and Mr. Mays,
respectively, for any year ending during the term of the agreements. The
employment agreements with Dr. Monderer and Ms. Turchin provide that Box Hill is
to secure term life insurance for each of them in the amount of at least
$1,000,000 for the benefit of his or her spouse. Each of their employment
agreements also provides that in the event of the employee's death, Box Hill
will pay the employee's spouse the employee's base compensation for twelve
months following such death at the rate payable immediately prior to such death,
plus the amount of any bonus which would have been earned during the following
12 months. The agreements also provide that in event of termination due to
disability, Box Hill will pay base compensation for the twelve-month period
following termination at the rate payable immediately prior to termination.
In May 1995, Box Hill entered into a Compensation Plan and Agreement (the
"1995 Compensation Plan") with Mr. Philip Black. The 1995 Compensation Plan
provides that Mr. Black's employment with Box Hill is at will. During 1996, 1997
and until July 1998, Mr. Black received an annual base salary of $275,000, plus
a bonus, based on Box Hill's net revenues and pre-tax income for the immediately
prior calendar year, of: 0.05% of the net revenues up to $100,000,000 plus 0.5%
of the net revenues in excess of $100,000,000 for the period and (ii) 1.12% of
Box Hill's pre-tax income, up to $20,000,000, plus 4.0% of the pre-tax income
above $20,000,000 for the period pursuant to the 1995 Compensation
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Plan. In July 1998, Mr. Black began to receive an annual base salary of
$350,000, with the same bonus structure set forth above, pursuant to the 1995
Compensation Plan. The 1995 Compensation Plan may be terminated at the option of
either Box Hill or Mr. Black for convenience and without cause at any time upon
30 days prior written notice. If so terminated by Box Hill, Mr. Black is
entitled to a severance payment equal to his annual salary and aggregate bonus
for the calendar year prior to the termination, but not more than $600,000 in
the aggregate. The employment agreements described above and the 1995
Compensation Plan contain a non-competition covenant for a one-year period
following termination of employment.
In March 1999, Box Hill entered into a new Compensation Plan and Agreement
(the "1999 Plan") with Mr. Black. The 1999 Compensation Plan provides that Mr.
Black's employment with Box Hill is at will. The 1999 Plan provides for an
annual base salary of $350,000, plus commissions at the rate of 0.20% of
revenues for calendar year 1999 and for a quarterly bonus paid at the rate of
1.12% of each quarter's pre-tax income. For each year subsequent to 1999 that
Mr. Black remains employed under the 1999 Compensation Plan, Box Hill shall
offer Mr. Black a package with potential, "on plan" compensation equal to or
greater than that offered pursuant to the package for 1999. The 1999
Compensation Plan may be terminated at the option of either Box Hill or Mr.
Black for cause or, upon 30 days written notice, without cause. In the event
that Box Hill terminates Mr. Black without cause, Mr. Black is entitled to a
severance payment equal to his annual compensation for the calendar year prior
to the termination. In the event of termination due to disability, Mr. Black is
entitled to a one-time payment of 60% of his annual compensation for the
calendar year prior to termination. The 1999 Plan contains certain restrictions
on competition for an eighteen-month period following termination of employment
and non-disclosure restrictions.
In April 1998, Box Hill hired Elizabeth Strong as Executive Vice President
of Sales pursuant to terms contained in an unexecuted letter of agreement.
During 1998, Ms. Strong's annual base salary was set at $250,000.
In addition, Ms. Strong was entitled to receive base commissions at the
rate of 0.40% of the net sales on the first $90,000,000 in the 1998 calendar
year and a bonus of 1.0% of the net sales greater than $90,000,000 for the 1998
calendar year. If the total amount of net sales for the 1998 calendar year is
collected by Box Hill, Ms. Strong will be entitled to $214,844 in sales
commission. Ms. Strong also received a one-time option to purchase 150,000
shares of Box Hill's common stock at an exercise price of $9.9375 per share
which vests quarterly in equal amounts over five years, pursuant to Box Hill's
Stock Incentive Program. Ms. Strong is also entitled to relocation expenses up
to $165,000. As of June 1, 1999, Box Hill paid such expenses in the amount of
$23,240.
CERTAIN TRANSACTIONS OF BOX HILL
OTHER RELATIONSHIPS
Box Hill and its subsidiaries purchase services, supplies and equipment in
the normal course of business from many suppliers and similarly sell and lease
Box Hill products and services to many customers. In some instances, these
transactions occur between Box Hill and other companies for whom members of Box
Hill's board serve as executive officers. In 1998, none of these transactions
was individually significant or reportable.
Box Hill has purchased directors' and officers' indemnification insurance
coverage. This insurance covers directors and officers individually where
exposure exists. These policies run from either September 16, 1998 through
September 16, 1999, or May 20, 1998
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through September 16, 1999, at a total cost of $351,551. The primary carrier is
CHUBB Group of Insurance Companies.
Effective as of December 31, 1997, Box Hill acquired Box Hill Systems
Europe, Ltd. ("Box Hill Europe") by purchasing all of the outstanding common
stock of Box Hill Europe from Dr. Monderer, Ms. Turchin and Mr. Mays. The
purchase gave Box Hill direct control of Box Hill Europe and rendered it a
wholly-owned subsidiary. In exchange, Box Hill issued 4,959 shares of common
stock, valued at $51,750, which is equal to the value of the net assets of Box
Hill Europe as of December 31, 1997.
Box Hill Europe was formed to provide marketing and technical support
services to Box Hill in connection with European sales. Mr. Mays, Dr. Monderer,
Ms. Turchin and Mr. Black, are Box Hill Europe's current directors. Box Hill has
always paid the operating expenses of Box Hill Europe's operations, which
consist solely of salaries for its employees and related expenses, plus a fee of
10% of total operating expenses, which fee is principally used to pay applicable
United Kingdom taxes. No sales of Box Hill's products or services are effected
through Box Hill Europe. None of Box Hill Europe's employees are, or ever were,
an officer or director or an affiliate of an officer or director of Box Hill.
Box Hill has also entered into certain transactions with its executive
officers, as described under the caption "-- Employment and Compensation
Agreements."
In addition, Box Hill has agreed to indemnify its directors and executive
officers as described under the captions "Comparison of Capital
Stock -- Description of Box Hill Capital Stock."
On July 31, 1997, Dr. Monderer, Ms. Turchin and Mr. Mays entered into a
voting agreement with respect to the shares each owns, which became effective
with the consummation of Box Hill's initial public offering. The shares held by
Ms. Turchin were subsequently transferred to the Monderer 1999 GRAT u/a/d March
1999 Trust, which is currently a party to the agreement. Pursuant to the
agreement, the three shareholders have agreed to vote their respective shares
for the election of each other as a director of Box Hill and will vote their
shares in accordance with the determination of the holders of a majority of
their shares as to any proposal to merge, consolidate, liquidate or sell
substantially all the assets of Box Hill. The agreement, which is to terminate
on December 31, 2009, or upon the deaths of Dr. Monderer and Ms. Turchin,
prohibits the transfer of their shares other than:
- to a member of the transferor's family who agrees to be bound by the
agreement;
- pursuant to a sale exempt from registration pursuant to Rule 144 under
the Securities Act; or
- in a merger, consolidation or sale of substantially all the assets of Box
Hill.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF BOX HILL
The following table sets forth certain information regarding the beneficial
ownership of Box Hill common stock as of April 30, 1999:
- each shareholder who is known by Box Hill to own beneficially more than
5% of Box Hill common stock;
- each named executive officer of Box Hill;
- each director of Box Hill; and
- all directors and executive officers of Box Hill as a group.
As of April 30, 1999 there were 14,361,328 shares of Box Hill issued and
outstanding. Unless otherwise indicated, to the knowledge of Box Hill, all
persons listed below have sole voting and investment power with respect to their
shares of Box Hill common stock, except to the extent authority is shared by
spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ --------- -------
<S> <C> <C>
Dr. Benjamin Monderer............................ 7,705,059(1)(2)(3) 53.7%
Carol Turchin.................................... 7,705,059(1)(2)(3) 53.7%
Mark A. Mays..................................... 7,705,059(1)(2)(3) 53.7%
Philip Black..................................... 391,842(4) 2.7%
R. Robert Rebmann, Jr............................ 7,578(4)
Benjamin Brussell................................ 1,250(4) *
Mischa Schwartz.................................. 4,375(4) *
Elizabeth Strong................................. 29,999(4) *
Adam Temple...................................... 17,898(4) *
Kenneth Pitz..................................... 25,341(3)(4) *
All directors and executive officers as a group
(10)........................................... 8,183,342(3)(4) 56.9%
</TABLE>
- -------------------------
* Less than 1%
(1) Dr. Benjamin Monderer, Carol Turchin and Mark Mays' shares are subject to
the voting agreement described above. Therefore, ownership for each
individual represents those shares beneficially owned by all three.
(2) Beneficial ownership includes shares held by the Monderer 1999
GRAT u/a/d March 1999 trust, as to which Dr. Monderer is the trustee and
Carol Turchin his wife is the sole beneficiary.
(3) Beneficial ownership includes shares owned by the spouse of each named
director and/or officer.
(4) Beneficial ownership represents shares issuable upon exercise of options
exercisable within 60 days of April 30, 1999.
See "Interest of Certain Persons in the Merger and Related
Agreements -- Security Ownership of Management."
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INFORMATION RELATING TO ARTECON
BUSINESS
Artecon, founded in 1984, designs, manufactures, markets and supports a
broad range of data storage products used in Internet and enterprise storage
networks and for the open-systems computing environment. Artecon has established
itself as a leader in the design, manufacture and sale of third-party mass
storage solutions for a broad range of customers. Artecon's enterprise storage
product line includes scalable RAID systems which allow users to grow modularly
from a single mass storage device to over 30 TB, of fault-tolerant mass storage,
thereby meeting the capacity and performance needs of a wide range of customers
while protecting and maintaining the customer's investment. Telecommunication
companies often require certification of compliance with Bellcore's Network
Equipment-Building System, or NEBS. Artecon's telecommunications infrastructure
and Internet storage EXTREME product line represent what Artecon believes was
the first fully NEBS-certified, multi-terabyte solution for high-end,
application-specific needs of telecommunications and government customers using
commercially available workstation technology. Artecon also provides systems
integration and a variety of other service and support programs for its
customers.
In August 1997, Artecon, Inc., a California corporation, formerly a
subsidiary of Artecon, or Artecon California, acquired substantially all of the
assets and liabilities of Falcon Systems, Inc. or Falcon, a network-attached
storage server integrator and storage peripherals reseller, in a transaction
accounted for as a purchase of Falcon by Artecon California, or the Falcon
acquisition. The Falcon acquisition has enabled Artecon to achieve several
important strategic objectives, including the acquisition of the AerREAL(TM)
real-time specialized file server software and other complementary products to
better serve Artecon's existing customers, the expansion of Artecon's customer
base in the UNIX market and a significant expansion of Artecon's revenue base.
On March 31, 1998, Artecon, Inc. and Storage Dimensions, Inc., or SDI
completed a reverse merger whereby SDI acquired Artecon in a stock-for-stock
transaction. Immediately after the merger, SDI changed its name to Artecon, Inc.
In the merger, shareholders of the former Artecon, Inc. received approximately
62% of the common stock, and 100% of the preferred stock of the new Artecon.
Since the former Artecon's shareholders received a substantial majority of the
common stock of the new Artecon, the transaction was accounted for as a purchase
of SDI by Artecon. As a result, the historical financial results included in
this prospectus/joint proxy statement are those of Artecon and include the
results of operations of business of Falcon following the Falcon acquisition in
August 1997 and the results of operations and business of SDI following the
reverse merger on March 31, 1998. Subsequent to the SDI merger the new Artecon
wrote off substantial research and development costs that were in process at SDI
prior to the merger.
In June 1998, Artecon California was merged with and into Artecon.
INDUSTRY BACKGROUND
The rapid proliferation of new data-intensive applications, such as video,
the Internet, intranets, multimedia, data warehousing and data mining, and the
migration of mission-critical applications away from mainframe computers have
fueled the demand for open-systems data storage. Disk storage systems, tape
backup systems and software-based management tools designed to operate on
multiple platforms are becoming a strategic part
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of network computing. System purchase decisions are becoming increasingly
focused on data storage and, increasingly, capital expenditures for storage
systems are equal to or greater than those made on computer processing hardware.
Storage architectures based on protocols such as UltraSCSI and Fibre Channel and
topologies such as the SAN are driving a much greater focus on data center
purchasing towards storage. Currently, the industry is split into solutions
based on host-attached storage and solutions based on network-attached storage.
UNIX AND WINDOWS NT. Open-systems platforms today employ either UNIX
variants, such as Solaris (Sun), HPUX (HP), AIX (IBM) and IRIX (SGI), or Windows
NT from Microsoft. Together, these operating systems are installed on the vast
majority of computers used in the enterprise. UNIX platforms currently have the
largest installed user base in terms of numbers of units, with the Windows NT
user base expanding.
Many companies use a combination of both types of systems, often employing
Windows NT-based Intel machines for front office work (e.g., accounting, office
support, administration) and UNIX-based RISC workstations and servers for back
office functions such as engineering and manufacturing. More recently, Windows
NT workstations have been developed by companies such as Compaq and Hewlett
Packard, or "HP," among others, to challenge the dominance of UNIX workstations
in the engineering, scientific and other technical arenas. This has resulted in
a gradual but steady transition from the UNIX-installed base towards Windows NT,
further stimulating the demand for open-systems storage solutions that support
multiple operating systems on platforms from a variety of vendors.
HOST-ATTACHED STORAGE. The open-systems market's current host-attached
storage options include disk arrays, RAID storage systems and tape backup
systems. Each of these is generally attached to the host by a SCSI bus. SCSI,
including UltraSCSI, Ultra2 and Ultra3, was designed to transfer data at higher
rates with enhanced reliability and lower error rates, has been the dominant
commercially available interface currently used in most disk array and RAID
storage systems. Fibre Channel, an emerging high-speed serial interface that has
recently become commercially available, is regarded by many industry
participants as the storage industry's next-generation interface. Fibre Channel
enables the transfer of data between computers and peripherals at substantially
increased rates, over greatly increased cabling lengths and among a greater
number of host/device connections. A number of industry leaders, including
Microsoft Corporation, Seagate, Quantum, IBM, Sun, and Emulex, have indicated
support for Fibre Channel technology and have announced that they are producing
or plan to produce products that incorporate it.
SAN BASED ON FIBRE CHANNEL. The requirements of the data intensive network
environment have contributed to the growing importance of SANs, based on Fibre
Channel. SANs represent localized networks of storage pools that can
collectively be accessed by many (and disparate) servers. Centralized management
is a key benefit of SANs, which in their most basic form, could be physically
distributed over the 10km distance limits of fibre channel. Artecon's
LynxArrayII and future hardware and software products form the nucleus of
storage area network product suites.
The SAN architecture enhances the potential of open systems storage vendors
as it tends to separate the storage purchasing decision. As a result, the SAN
storage decision becomes one of "best-fit" or "best of breed" as opposed to
simply foregoing the storage as an after thought to the server.
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THE INTERNET AND THE WORLD WIDE WEB (WWW). The virtual explosion of the
Internet and subsequently corporate-wide intranets has had a profound impact on
the computer industry in general and on the demand for storage solutions in
particular. The Internet and intranet environments involve intensive processing
or computation of, and frequent user access to, large volumes of data and
consequently require a mission critical level of high-availability mass storage.
Moreover, the data intensity of these environments is expected to continue to
increase substantially due to the development of new applications and services
and the more prevalent use of stored digital graphics, voice and video,
requiring dramatically more data capacity and performance than equivalent
alphanumeric information.
TELECOMMUNICATIONS INDUSTRY. The enactment by Congress of the
Telecommunications Deregulation Act in 1996, the opening up of additional radio
frequency spectrum for wireless communications by the Federal Communications
Commission and other significant recent developments have spurred dramatic
changes in the worldwide telecommunications industry. The development and
build-out of expanded markets and new modes of communication that have been
enabled by these changes, including digital cellular systems, personal
communications systems, or "PCS," satellite-based communications systems,
Internet and cable systems, will require enormous capital expenditures for new
infrastructure. Artecon believes that a significant element of the required
infrastructure will consist of high performance mass storage systems that must
be specially adapted and certified for use in the telecommunications industry.
Telecommunications companies are seeking commercial off-the-shelf, or
"COTS,"-based solutions that can be adapted and deployed in their embedded
architectures due to ever-increasing cost pressures and time-to-market
constraints. These solutions are typically based on UNIX and/or Windows NT
systems and employ highly redundant RAID storage systems.
THE ARTECON SOLUTION
Artecon develops and markets a comprehensive range of scalable, fully
integrated data storage products and services for the open-systems computing
environment. Artecon's products are both host-attached and network-attached, are
based on a common architecture allowing scalability from the first desktop mass
storage unit purchased to multi-terabyte data center installations and are
compatible with a variety of UNIX and Window NT operating systems. Artecon's
family of products and services is intended to provide users with the following
benefits:
- HIGH PERFORMANCE WITH MISSION-CRITICAL HIGH AVAILABILITY. Recognizing
the increased demand for faster response times, greater capacities,
higher availability of data and minimum system downtime, Artecon has
focused on developing high-end, high-performance storage products using
Ultra SCSI, LVD and Fibre Channel interfaces. Redundant system components
such as dual power inlets and multiple fans are intended to eliminate any
single point of failure to ensure maximum system uptime.
- SCALABILITY. Artecon's products are designed using a flexible, modular
architecture allowing Artecon to size and configure storage systems to
the application-specific requirements of individual customers. In
addition, this architecture allows Artecon to resize and reconfigure
these systems to adapt to the changing needs of customers, while allowing
them to retain capital value in their underlying systems. This
scalability preserves the customer's initial and subsequent storage
investments by
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allowing users to grow modularly from a single mass storage device to
over 30 terabytes of mass storage.
- MULTI-PLATFORM SUPPORT. As an independent provider of storage products,
Artecon is well positioned to provide storage systems specifically
designed to be compatible with a variety of UNIX and Windows NT
platforms. This multi-operating system capability allows end users to
standardize on a single storage system that can readily be reconfigured
and reused at minimal cost even if the user decides to change operating
systems or other components of the network.
- HIGH-PERFORMANCE BACKUP. To satisfy market demand for reliable,
high-quality backup products and systems, Artecon offers a broad variety
of backup products, including tape library systems, backup software,
training and documentation. Artecon has specialized expertise in the
design and implementation of effective, well-integrated backup solutions
designed to satisfy customers' individual needs, from departmental server
systems to enterprise network systems.
- CARRIER CLASS RELIABILITY. Artecon's products are believed to be the
first open-systems storage RAID products that are fully certified to the
telecommunications industry's demanding NEBS standards. NEBS
certification assures customers that Artecon's telecommunications
products deliver true carrier-class reliability.
- ALL-ENCOMPASSING SOLUTIONS. Artecon delivers all-encompassing solutions
including design consulting, systems integration, installation, training,
comprehensive service and technical support and software-based management
tools. Artecon employs a full staff of direct sales personnel and
applications engineers to assist customers in making appropriate and
effective storage system purchases and in addressing, analyzing and
solving complex storage problems. This value-added approach is designed
to foster customer loyalty and allow Artecon to identify emerging
customer requirements for future data storage products.
ARTECON'S STRATEGY
Artecon's objective is to continue its growth and enhance its position as a
leading independent provider of host-attached and network-attached storage
solutions to the open-systems marketplace. To achieve this objective, Artecon
plans to build upon its record of successfully introducing and commercializing
new products and technologies that address the evolving data storage needs of
its broad customer base. Key elements of this strategy are:
- PROVIDE COMPLETE SOLUTIONS AND PRODUCT MIGRATION PATH. Artecon's
products are designed to address a wide range of customer needs. By
utilizing common core technology throughout its product line, Artecon
enables customers to migrate from product to product across multiple
platforms to address the changing needs of growing companies. By
providing comprehensive solutions, Artecon is able to work more closely
with customers, offer additional modules or products and provide
additional services.
- EXPAND MARKET PENETRATION. While maintaining its status as a leading
provider for the Sun market, Artecon intends to continue to provide
industry-leading mass storage and enhancement products for use in the
Windows NT market and other UNIX markets. Artecon has a number of
products designed for use on Windows NT platforms. In addition, Artecon
recently introduced its Redundant Data Path, or
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"RDP," software for Windows NT platforms which provides the capability to
support two independent data paths with failover capability.
- FOCUS ON SPECIALIZED STORAGE NEEDS OF DATA-INTENSIVE MARKETS. Artecon
intends to continue to target users of UNIX and Windows NT computing
environments who require high-performance, high-availability and
fault-tolerant storage solutions, such as end users in data-intensive
industries, particularly the telecommunications and Internet/intranet,
financial services and multimedia markets. Artecon, as an independent
provider of storage systems, believes that it is well positioned to
address the multi-platform, multi-protocol computing requirements of
these targeted high-end users.
- INTERNET AND TELECOMMUNICATIONS STRATEGY. Artecon intends to continue to
aggressively pursue Internet and telecommunications companies by
realigning its internal resources and continuing to develop a series of
new products that satisfy their rapidly expanding storage needs. In the
implementation of its strategy Artecon will focus its resources to
enhance existing products and develop new products and services
specifically targeted to the Internet and telecommunications segment of
the storage market and increase sales and marketing efforts to key
telecommunications, Internet, and other storage-intensive companies.
- REALIGN AND EXPAND DIRECT SALES FORCE WHILE LEVERAGING RESELLER CHANNELS.
Artecon believes that a properly managed direct sales force should result
in the greatest penetration of Artecon's markets. Direct customer contact
provides Artecon with valuable market feedback and the ability to provide
high-quality technical support and enhance customer loyalty. In certain
markets, however, Artecon uses strong vertical market oriented resale
partners and believes that leveraging these reseller channels will
provide Artecon with a significant competitive advantage.
PRODUCTS AND SERVICES
Artecon's products and services are offered through two distinct sales
groups: the Enterprise Storage Division and the TeleCom Division. In order to
address the unique and highly specialized needs of the telecommunications and
Internet/intranet marketplace, Artecon formed its TeleCom Division in June 1996.
Artecon's Enterprise Storage Division is responsible for the other markets
targeted by Artecon, including finance (for example, commodities brokers and
trading analysts), multimedia (such as entertainment providers, cable companies,
news services and the companies building infrastructure to serve them),
government, advanced-technology and industrial markets. Within these two
divisions of Artecon, Artecon's data storage solutions fall into three general
categories: enterprise storage, telecommunications storage and systems
integration capability.
ENTERPRISE STORAGE DIVISION
Artecon provides enterprise storage solutions to its customers through its
Lynx product line. By allowing users to grow modularly from a single mass
storage device to over 30 TB of rack-mounted, fault-tolerant RAID mass storage,
Artecon's Lynx hot-swap removable mass storage subsystems address the capacity
and performance needs of customers while maintaining and protecting customer
investment. The Lynx unit is the fundamental building block of all Artecon
storage solutions and has several unique and differentiating features, including
interlocking stackability, cableless design, ruggedized hot-swap drive sleds,
front-removable power supplies and auto termination. To date, over 70,000 Lynx
storage units have been installed.
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The Lynx line of storage solutions includes LynxArray and LynxStak RAID
systems which offer host-attached RAID protection and performance enhancement
for creating highly available, mission-critical storage systems. Artecon
believes that the performance, flexibility, true scalability, hot-swap removable
components and compact form factor provide significant benefits to its
customers.
Artecon's LynxStak(TM) product is an interlocking modular desktop storage
product that scales from 4 GB to 126 GB as required. The LynxStak system uses
the same disk drives and controllers as Artecon's LynxArray preserving the
customer's initial and subsequent storage investment. Artecon believes that the
performance, flexibility, scalability, hot-swap removable components and compact
form factor provide significant benefits to its customers. LynxStak won Windows
NT Magazine's "Favorite Storage Product" in 1999.
Artecon's LynxArray II is a tower or rackmount product for larger storage
requirements. The LynxArray II uses the same architecture as capacity scales
from 27 GB to more than 30 TB. LynxArray II uses an Intel-based RAID controller
that operates at speeds up to 5000 input/outputs per second. LVD SCSI channels
from host computer through controllers to disk drives allow 80 MB per second
burst and 36 MB per second sustained transfer rates. Each LynxArray II can
support up to 252 GB of hot-swappable disk capacity and two hot-swap failover
RAID controllers. Inline support for tape drives makes backup possible within
the RAID subsystem. Hot-swap removable failover controllers, redundant power
supplies and fans are all available for more fail-safe, potentially nonstop
operation.
To complement its disk products, Artecon engineered a family of high-speed,
high-reliability MEGAFLEX tape backup systems that are designed to address the
challenges of backing up increasing amounts of data in ever-shortening time
periods. These tape products are easily integrated and fully compatible with
Artecon's disk storage systems. In addition, tape backup products are offered as
stand-alone products to back up data maintained on other manufacturers' disk
storage systems. Artecon believes that its disk and tape storage products are
differentiated from competitive products based on functionality, performance,
ease of use and lower life-cycle cost of ownership.
Artecon's disk and tape storage products utilize proprietary software to
incorporate leading edge hardware features and capabilities relative to the
storage products offered by computer and server manufacturers, with design
features specifically engineered to minimize system downtime and to support easy
integration and administration.
RAIDScape is a Java-based enterprise storage management software package
that combines configuration, maintenance, and monitoring tools into a single,
easy-to-use application. RAIDScape enables remote administration of Artecon disk
arrays attached to Windows NT, Solaris and Netware servers located anywhere on a
local or wide area network, greatly simplifying storage management and reducing
costs. It is ideally suited for centralized information technology departments
managing large, distributed networks.
Redundant Data Path, or "RDP," software provides the new level of
resiliency and performance, as well as multiple server connectivity for
Artecon's LynxArray II dual active controller RAID storage systems on NT and
Linux operating system. The software's host-based driver supports dual active
input/output paths from the server to the storage systems. This enhances
resiliency by providing failover protection should a host bus adapter, cable,
hub or controller on either data path fail. It also enhances performance by
doubling the system's throughput potential.
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Artecon will continue to enhance its existing extensive proprietary
software library. This library is designed to enable Artecon to quickly
integrate new hardware technologies to bring new products to market in a rapid
and cost-effective manner.
WORKSTATION AND SERVER RACK SOLUTIONS. Artecon's Sphinx(TM) workstation
and server rack solutions enable users to rackmount COTS desktop workstations
from Sun into powerful, application-specific servers. Sphinx products protect
against shock and vibration events, maintain the thermal integrity of the
workstation/server, enhance system physical security while providing a very
compact expansion capability. Artecon believes it offers a superior solution
than the typical rack shelf used for rackmounting workstations and servers.
Sphinx also allows hot swap removable devices to be added so that a variety of
powerful and expandable configurations can be constructed, including high-end
clustered compute servers, high availability failover servers, network servers
and database servers.
Artecon's Sphinx customers range from manufacturing floor and computer
center applications, to government agencies with requirements for shipboard,
aircraft and ground vehicle deployment of desktop workstations.
TELECOM DIVISION
Artecon's TeleCom Division designs, manufactures, markets and supports
fully integrated, industry-compliant storage products, services and solutions
for the telecommunications and Internet/intranet markets by utilizing
commercially available workstation, server and other application-specific
products for enhanced price/performance characteristics and reduced time to
market. Most of the products and services manufactured and marketed by Artecon's
Enterprise Storage Division can be utilized by telecommunications and Internet
service providers. Requirements unique to the telecommunications industry
include -48VDC power (native to the Central Office environment) and compliance
with Bellcore's NEBS areas of standardization, which include electromagnetic
compatibility, thermal robustness, fire resistance, earthquake and office
vibration resistance, transportation and handling, acoustics and illumination
and airborne contaminants. Telco embedded infrastructure projects are
exceptionally demanding in terms of high availability and redundancy due to the
uptime requirements of the world's telephone and communications support
equipment. NEBS testing requires a certified unit to be able to withstand an
earthquake, a lightning strike, a fire, severe airborne particulate
contamination, extreme temperature ranges and other catastrophic events. Artecon
believes it was the first open-systems storage company whose RAID products are
fully certified to Bellcore NEBS standards. In addition, Artecon's commercial
enterprise storage products are built to the same demanding standards, yielding
very reliable systems for the commercial market.
TELCO STORAGE SOLUTIONS. Most of Artecon's enterprise storage products,
including LynxArray II, can be utilized by telecommunications and Internet
service providers. Artecon's LynxArray EXTREME products are already in use by
telecommunications and Internet service providers.
WORKSTATION AND SERVER RACK SOLUTIONS. Artecon's Sphinx EXTREME product
line is fully NEBS-certified and has been instrumental in bringing Sun
workstation products into the telecommunications and typical Internet service
provider environment. Artecon's TeleCom Division Sphinx customers include a wide
range of telecommunications infrastructure and Internet/intranet service
providers building new Internet, wireless and PCS services based on COTS
workstations.
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POWER PRODUCTS. Artecon believes that its PowerSphinx(TM) EXTREME is the
industry's first 1.75" DC/DC power converter which allows unmodified
workstation, network and storage products to run in the 48VDC environment of the
telecommunications Central Office. PowerSphinx EXTREME enables workstation and
networking products typically used in 110-240VAC environments to run unmodified
in the -48VDC context. Artecon believes this feature may significantly
accelerate its customers' time to market for new infrastructure while reducing
costs due to the ability to employ standard (as opposed to custom) workstation,
networking and other products.
PowerSphinx EXTREME is designed for use with 110-240VAC devices such as
workstations, switches, routers and hubs so that they may operate in the -48VDC
telecommunications environment, thereby expanding the limits of available
product choices to engineers and integrators building telecommunications
systems. Artecon believes that the compact 1.75" EIA rack height is an improved
and preferable alternative to typically large (often as much as 21" or 12u EIA)
power inverters. PowerSphinx EXTREME has two hot-swappable, load-sharing power
modules to assure uninterrupted operation, combined with dual -48VDC inlet power
connections to help virtually eliminate any single point of failure. Other
features include 1600 watts of total power output, hot-plug removable power
trays and fans, alarm system and dual LED displays. The PowerSphinx EXTREME is
fully certified to Bellcore NEBS standards.
TELECOMMUNICATIONS SERVICES. Most of the regional Bell phone companies,
long-distance service companies and Internet service providers often lack the
resources, time, expertise and inclination to install and integrate storage
solutions and therefore they look to a single source supplier who can provide a
complete storage solution. As a consequence, Artecon believes that its systems
integration services are well suited to the telecommunications market. Artecon
has established a product and integration contract with Motorola.
Artecon has extensive experience as a systems integrator producing
expandable systems to suit each client's unique situation. Artecon utilizes
commercially available workstation, server, networking and other
application-specific products along with its own EXTREME product line. Utilizing
commercially available equipment and an open-systems approach can accelerate
customers' time to market and provide customers with superior price/performance.
PRODUCTS IN DEVELOPMENT
Artecon has several products under development including a full Fibre
Channel RAID storage system and RAID systems that will support Ultra3 SCSI.
In the area of software development for its server-attached disk storage
products, Artecon has recently completed development of its RDP software for
Windows NT, that provides the capability to support two or more independent data
paths with failover capability. This same software is being developed for
Solaris and Linux. There is no guarantee that Artecon will complete these
projects.
The recently introduced CacheBack products will combine Artecon's rugged
carrier-class storage devices with performance enhancement storage and network
capability. These products will utilize the highly regarded Inktomi traffic
server, to provide the first in a series of scalable, carrier-class, high
performance network cache solutions designed for Internet service providers and
large enterprise intranets. This initial product is expected to become the
foundation for an evolving product line of superior storage solutions.
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In the rapidly expanding and evolving world of communications, developing
the right technology is only part of the role of the equipment provider.
Operators in today's markets are looking for total support from their suppliers,
for service packages that are unique and tailored to meet their individual needs
and requirements. Artecon will carry the service concept far beyond the
traditional vendor approach of simply providing equipment and systems support.
Instead it will be based on the development of a long-term partnership between
the operator and Artecon, combining consulting on a strategic business level
with implementation and operational support.
CUSTOMERS
Artecon targets both the horizontal markets defined by the primary
workstation vendors, such as Sun, SGI, HP and IBM, and the vertical markets of
the data-intensive Internet, telecommunications, finance and multimedia
industries. Artecon's customers include OEMs, systems integrators, value added
resellers, or "VARs," and end users and span market segments ranging from
computer manufacturers to government agencies. The following customers of
Artecon accounted for approximately that percentage of Artecon's total revenues
set forth below during the periods indicated: Sales to one customer did not
exceed 10% of total net revenue for the fiscal years ended March 31, 1998 and
1999; Tracor Enterprise Solution (25.4%) for the fiscal year ended March 31,
1997. No other customer accounted for more than 10% of Artecon's total revenues
during the fiscal years ended March 31, 1999, 1998 and 1997. Sun Financial Group
accounted for approximately 10% of Storage Dimensions' total revenue for the
fiscal year ended December 31, 1997.
SALES AND MARKETING
Artecon utilizes both a direct sales force and selected reseller channels
for certain products and markets in the U.S. and overseas to provide broad
market coverage for its products. As of March 31, 1999, Artecon's U.S. and
foreign sales, marketing, service and support organization consisted of 112
personnel located in 16 offices around the world. In the U.S., 83 sales,
marketing, service and support people are located in 11 geographical markets,
including, San Jose, Los Angeles, and San Diego, California; Denver, Colorado;
Atlanta, Georgia; Chicago, Illinois; Boston, Massachusetts; New York City, New
York; Bridewater, New Jersey; Cleveland, Ohio; and Washington, D.C. Artecon's
international marketing group includes 30 sales, service and support personnel
who work for a Japan-based subsidiary and a Europe-based subsidiary with offices
in England, France and the Netherlands. Artecon's sales to customers located in
the United States represented approximately 86.3% and 90% for the fiscal years
ended March 31, 1998 and 1999, respectively. Artecon's sales to customers
located outside the United States represented approximately 12% and 10% of
Artecon net revenues for the fiscal years ended March 31, 1998 and 1999,
respectively. For fiscal year ended March 31, 1997, Artecon California's sales
to customers located in the United States represented approximately 83.8% of
Artecon California's net revenues and sales to customers located outside the
United States represented approximately 16.2% of Artecon California's net
revenues. Direct sales organizations of Artecon's subsidiaries in Japan (Tokyo,
Nagoya), the Netherlands (Encschede), France (Paris) and the United Kingdom
(London) consisted of 10 sales professionals.
Artecon also employs a leveraged sales model that utilizes resellers
focused on the needs of specific end users. Artecon has developed pricing
structures and field sales commission plans that are designed to minimize sales
channel conflicts. Artecon believes
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that this two-pronged sales strategy provides a meaningful competitive advantage
over competitors who only provide products directly to end-user customers.
Artecon will continue to focus much of its sales and marketing efforts on
Internet service providers and telecommunications companies with rapidly
increasing storage requirements. Their storage requirements are driven by their
customers' demand for information that resides in heterogeneous UNIX and Windows
NT operating environments.
CUSTOMER SERVICE AND SUPPORT
Artecon believes that its ability to provide comprehensive and responsive
support is an important element in penetrating new customer accounts and in
securing repeat business from existing customers. Artecon is committed to
providing superior customer service and support aimed at simplifying
installation, reducing field failures, minimizing system downtime and
streamlining administration.
In certain geographical regions, Artecon maintains a staff of on-call
technical personnel who are available to visit the customer's site within a few
hours of receiving a request for service. In other geographical regions, Artecon
indirectly provides the same level of support by using third-party service
companies. In all cases, Artecon's technical support engineers are available by
phone on a seven-day-per-week, 24-hour-per-day basis. Artecon plans to
increasingly utilize the Internet and other on-line services in the support and
distribution of its products.
Artecon provides standard warranties with all products sold which are set
forth in various documents and agreements, which are delivered to customers with
each product. As a general policy, Artecon ships replacement hardware components
to customers in advance of receiving returns of defective components under a
standard warranty, which generally runs three years. Artecon occasionally issues
credit in lieu of replacing a piece of equipment. A customer may also contract
for an extended warranty or maintenance support from Artecon on all products.
RESEARCH AND DEVELOPMENT
To date, Artecon has made substantial investments in research and
development, particularly in the areas of RAID, SANs, backup, FC-AL, GUI
software development, and specialized file server software. Artecon's
engineering design team employs electrical engineering, mechanical engineering,
systems engineers and computer science professionals and places great importance
on the exchange of information with Artecon's sales and marketing and customer
support departments and with its resellers to develop new products and product
enhancements that anticipate and address technological changes and evolving
industry standards and customer needs.
Artecon generally designs its products to have a modular architecture that
can be readily modified to respond to technological developments and paradigm
shifts in the open systems computing environment. This flexibility allows
Artecon to focus research and development resources on specific product
innovations and advancements. The modular architecture of the products meets
customer needs with solutions tailored to their applications and products that
can be adapted to changes in technology and in their computing environments.
Artecon's engineering design teams work cross-functionally with marketing
managers, applications, technical and production engineers and customers to
develop products and
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product enhancements. Artecon employs a full staff of applications engineers to
assist customers in making appropriate and effective storage system purchases
and in addressing, analyzing and solving complex pre-deployment storage
problems. Artecon's technical support engineering team and production
engineering team also contribute to the quality, manufacturability and usability
of products from design to deployment. This value-added capability fosters
customer loyalty and allows Artecon to identify emerging customer requirements
for future data storage products.
Artecon's expenses for research and development for fiscal years 1997,
1998, and 1999 were $2.4 million, $3.2 million, and $7.3 million, respectively.
As of March 31, 1999, Artecon had 32 regular full-time and three contract
employees engaged in research and development activities, of which four were
specifically focused on research and development of products and services
directed at the telecommunications and Internet/intranet markets. Additionally,
Storage Dimensions' expenses for research and development for calendar year 1997
was $6.3 million.
The data storage system market is characterized by rapid technological
change, changing customer needs, frequent new product introductions and evolving
industry standards. The introduction of products embodying new technologies and
increased storage capacities and the emergence of new industry standards could
render Artecon's existing products obsolete and unmarketable. Artecon's future
success will depend upon its ability to develop and introduce new products with
increasing storage capabilities on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that Artecon will be successful in developing and marketing any new products
that respond to technological changes or evolving industry standards, that
Artecon will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products, or that its
new products will adequately meet the requirements of the marketplace and
achieve market acceptance. In addition, storage system products like those
offered by Artecon may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by Artecon and by current and potential customers, errors will
not be found in new products after commencement of commercial shipments,
resulting in a loss or delay in market acceptance, which could have a material
adverse effect on Artecon's business, operating results or financial condition.
MANUFACTURING
Artecon operates 43,000 square feet of manufacturing space at its Carlsbad,
California facilities. Artecon's products are manufactured in a work cell
production process. State-of-the-art equipment and software include
manufacturing resource planning, just-in-time order processing and
total-quality-management. Artecon strives to develop close relationships with
its suppliers, exchanging critical information and implementing joint corrective
action programs to maximize the quality of its components, to reduce costs and
inventory investments and to create flexibility for rapid capacity expansion
when required. Artecon believes that its current facilities and capital
equipment will be adequate to meet its manufacturing needs in the foreseeable
future.
In July 1998, Artecon earned the ISO 9002 certification from the
International Organization for Standardization. ISO 9002 certification covers
the manufacture, distribution and support of Artecon's high-performing storage
systems. Attaining the certification entailed meticulous examination of
Artecon's manufacturing standards and processes.
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Artecon must undergo periodic assessment by independent auditors in order to
retain the ISO 9002 certification.
Artecon subcontracts some of its manufacturing, such as plastic molding,
metal bending, PCB fabrication and assembly, to qualified partners in the U.S.
and Asia. Artecon owns the design and tools/molds associated with the
manufacture of these parts. Artecon has designed and owns over 50 tools used to
produce various components of its Lynx, LynxStak, and LynxArrayII products. In
addition, Artecon relies upon a limited number of suppliers of several key
components utilized in the assembly of Artecon's products, including Seagate,
IBM, Quantum, Merisel, Infortrend, ATL, Flextronics, Exabyte and Mylex.
Artecon's reliance on its manufacturing subcontractors and suppliers involves
several risks, including: an inadequate supply of required components; price
increases; late deliveries; and poor component quality. Although to date Artecon
has been able to obtain its requirements of components, there can be no
assurance that Artecon will be able to obtain its full requirements of such
components in the future or that prices of such components will not increase. In
addition, there can be no assurance that problems with respect to yield and
quality of such components and timeliness of deliveries will not occur.
Disruption or termination of the supply of these components could delay
shipments of Artecon's products and could have a material adverse effect on
Artecon's business, operating results or financial condition. Such delays could
also damage relationships with current and prospective customers. Artecon has
experienced delays in the shipments of its products in the past, principally due
to an inability of vendors to deliver an adequate supply of components,
resulting in delay or loss of product sales. Although these delays in the past
have not had a material adverse effect upon Artecon's business, operating
results or financial condition, there can be no assurance that in the future any
such delays would not have such a material adverse effect.
COMPETITION
The storage market is extremely competitive and is characterized by rapidly
changing technology. Artecon has a number of competitors in various markets,
including Hewlett Packard, Sun Microsystems, IBM, Hitachi, Data General
Corporation, Compaq Corporation, Network Appliance, nStor Technologies, LSI
Logic, Ciprico, Andataco, StorageTek, Dell Computer Corp, SGI, DEC, Storage
Works, MTI Technology and EMC Corporation, many of which have substantially
greater name recognition, engineering, manufacturing and marketing capabilities,
and greater financial and personnel resources than Artecon. In particular, a
number of Artecon's customers are also competitors, including Sun and SGI.
Artecon expects to experience increased competition from established and
emerging computer storage hardware and management software companies,
particularly HP, Sun, IBM, Dell, Compaq and EMC Corporation.
In addition, increased competitive pressure could lead to intensified
price-based competition, which could have a material adverse effect on Artecon's
results of operations. There also has been, and may continue to be, a
willingness on the part of certain large competitors to reduce prices in order
to preserve or gain market share. Artecon believes that pricing pressures are
likely to continue as competitors develop more competitive product offerings.
The principal factors of competition in Artecon's markets include rapid
introduction of new technology, product quality and reliability, price and
performance characteristics, service and support and responsiveness to
customers. Artecon believes that, in general, it competes favorably with respect
to these factors. Artecon intends to maintain its
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competitive position by continuing to build a defensible niche in the Internet
and telecommunications markets, while at the same time serving other industries
and customers. Its strengths in product reliability and quality,
price/performance characteristics and new technology are being supplemented by
enhanced service and support. With Inktomi as a strategic partner in developing
traffic-server software, Artecon believes it can provide a superior network
storage solution. However, there can be no assurance that Artecon will be able
to compete successfully or that competition will not have a material adverse
effect on Artecon's business, results of operations or financial condition.
INTELLECTUAL PROPERTY
Artecon's success depends significantly upon its proprietary technology.
Artecon relies on a combination of patent, copyright, trademark and trade secret
laws, employee and third-party nondisclosure agreements and technical measures
to protect its proprietary rights in its products.
As of March 31, 1999, Artecon had been awarded a total of seven U.S.
patents covering certain elements of its products. There can be no assurance
that any additional patents will be issued, that Artecon will develop
proprietary products or technologies that are patentable, that any patent issued
in the future will provide Artecon with any competitive advantages or will not
be challenged by third parties, or that the patents of others will not have a
material adverse effect on Artecon's ability to do business. Artecon seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Artecon has
registered numerous trademarks and will continue to evaluate the registration of
additional trademarks as appropriate. Artecon generally enters into
confidentiality agreements with its employees and consultants and with key
vendors and suppliers. All released documentation of products, including
drawings, requirements specifications, source code, BOMs, costs and other
materials, are kept in a secure, centralized document control area.
Artecon expects that companies in the storage system market will
increasingly be subject to infringement claims as the number of products and
competitors in Artecon's target markets grows. Although Artecon believes that
its products and trade designations do not infringe on the proprietary rights of
third parties, there can be no assurance that third parties will not assert
infringement claims against Artecon in the future. If such a claim is made,
Artecon will evaluate the claim as it relates to its products and, if
appropriate, may seek a license to use the protected technology. There can be no
assurance that Artecon would be able to obtain a license to use such technology
or that such a license could be obtained on terms that would not have a material
adverse effect on Artecon. If Artecon or its suppliers are unable to license
protected technology, Artecon could be prohibited from incorporating or
marketing products incorporating that technology. Artecon could also incur
substantial costs to redesign its products or to defend any legal action taken
against it. Should Artecon's products be found to infringe protected technology,
Artecon could be required to pay damages to the infringed party or be enjoined
from manufacturing and selling such products.
Despite Artecon's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of Artecon's products or to obtain and use
information that Artecon regards as proprietary. In addition, the laws of some
foreign countries do not protect proprietary rights to as great an extent as do
the laws of the United States. There can be no assurance that Artecon's means of
protecting its proprietary rights will be adequate or that Artecon's competitors
will not independently develop similar technology,
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duplicate Artecon's products or design around patents issued to Artecon or other
intellectual property rights of Artecon.
EMPLOYEES
As of March 31, 1999, Artecon had approximately 234 full-time employees
worldwide, including 112 in marketing, sales and service support, 67 in
manufacturing and quality assurance, 29 in engineering and research and
development and 26 in general administration and finance.
None of Artecon's employees is represented by a labor union. Artecon has
experienced no work stoppages and considers its relations with its employees to
be good.
Artecon's future performance depends in significant part upon the continued
service of its key technical and senior management personnel. Artecon provides
incentives such as salary and benefits to attract and retain qualified
employees. The loss of the services of one or more of Artecon's officers or
other key employees could have a material adverse effect on Artecon's business,
operating results or financial condition. Artecon's future success also depends
on its continuing ability to attract and retain highly qualified technical and
management personnel. Competition for such personnel is intense, and there can
be no assurance that Artecon can retain its key technical and management
employees or that it can attract, assimilate or retain other highly qualified
technical and management personnel in the future.
PROPERTIES
Artecon's principal administrative, sales, marketing, manufacturing and
research and development facility is located in approximately 70,000 square feet
of space in Carlsbad, California, including approximately 43,000 square feet of
manufacturing space. This facility is leased through December 1999 with a
two-year option to extend. Artecon leases other sales offices throughout the
U.S., as well as operations sites in Japan, France, England and the Netherlands.
Artecon believes that its existing facilities have the capacity to double its
current production and therefore are adequate to achieve the levels of sales in
the projections.
LEGAL PROCEEDINGS
Artecon is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to the business.
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ARTECON MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Artecon designs, manufactures, markets and supports a broad range of
scalable, fully integrated data storage products for the open-systems computing
environment. Artecon has established itself as a leader in the design,
manufacture and sale of third-party mass storage and enhancement products in the
Sun, UNIX and PC-LAN markets, offering both host-attached and network-attached
storage solutions for a broad range of customers. Artecon offers a wide range of
products and services in four principal areas: enterprise storage,
telecommunications and Internet infrastructure and tape backup solutions.
On March 31, 1998, Artecon (then known as Storage Dimensions, Inc.) entered
into a merger transaction with Artecon California, in a stock-for-stock
transaction that was accounted for as a purchase (the "Storage Dimensions
merger"). The Storage Dimensions merger created a leading third-party storage
company serving the combined PC-LAN and UNIX open systems network computing
market. For financial reporting purposes, the Storage Dimensions merger was
accounted for as an acquisition of Storage Dimensions by Artecon California,
and, as such, the historical financial results of Artecon for all years ended
prior to and including March 31, 1998 included in this prospectus/joint proxy
statement are those of Artecon California. The historical financial results of
Artecon subsequent to March 31, 1998 that are included in this prospectus/joint
proxy statement include the results of the combined company.
In August 1997, Artecon California acquired substantially all of the assets
and liabilities of Falcon. The Falcon acquisition has enabled Artecon to achieve
several important strategic objectives, including the acquisition of Falcon's
AerREAL(TM) real-time specialized file server software and other complementary
products to better serve Artecon's existing customers, the expansion of
Artecon's customer base in the UNIX market and an expansion of Artecon's revenue
base. The acquisition was accounted for as a purchase.
In June 1998, Artecon California was merged with and into Artecon.
Except where otherwise noted, the financial and other matters in this
section relate solely to Artecon California (including the results of operations
for the Falcon business following the closing of the Falcon acquisition in
August 1997). See Note 1 to Artecon's consolidated financial statements for
certain additional pro forma combined financial information relating to Artecon
California, Storage Dimensions, Inc. and Falcon.
Artecon markets and distributes its products and services through its
direct sales force employed in 11 domestic sales and support offices and 5
overseas sales offices located in Japan, France, England and the Netherlands. In
addition, Artecon utilizes domestic and foreign reseller distribution channels
to market and distribute its products and services. Artecon believes that such a
diverse channel strategy results in the greatest penetration of the market and
enables it to effectively and efficiently penetrate major accounts while at the
same time leveraging its distribution network into vertical markets. Artecon
believes that the direct customer contact resulting from the use of its own
internal sales force provides it with invaluable market feedback and the ability
to tailor its products and high-quality technical support services to enhance
customer satisfaction and loyalty. Artecon generates revenue from the sales of
products and services. Revenue from product sales is recognized upon shipment.
Revenue generated from service contracts is recognized ratably over the term of
the contract. Operating expenses consist primarily of rent, payroll,
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commissions, other selling and administrative expenses and research and
development costs and are recognized in the period incurred.
The following table sets forth certain items from Artecon California's
consolidated statement of operations as a percentage of net revenues for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
MARCH 31 MARCH 31 MARCH 29
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Revenues........................... 100.0% 100.0% 100.0%
Gross Margin........................... 35.0 23.2 23.4
Operating expenses
Selling and service.................. 27.2 17.2 13.8
General and administrative........... 5.6 5.4 3.0
Research and development............. 7.6 4.8 4.3
Restructuring........................ 1.5 -- --
Impairment of intangible assets...... 0.9 -- --
Acquired in-process research and
development....................... -- 27.4 --
Operating income (loss)................ (7.9) (31.7) 2.2
Net income (loss)...................... (5.6)% (29.1)% 1.2%
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1999 COMPARED TO YEAR ENDED MARCH 31, 1998
NET REVENUES. Net revenues reflect the invoiced amounts for products
shipped less reserves for estimated returns. Net revenues for the year ended
March 31, 1999 ("FY 1999") were $95.9 million compared to $66.3 million for the
year ended March 31, 1998 ("FY 1998"), an increase of approximately 44.5%. The
increase in net revenues is primarily attributable to sales generated from the
Enterprise Storage Division. Net revenues for this division, which includes
sales to the finance, multimedia, government, advanced-technology, and
industrial markets, were $63.0 million for FY 1999 compared to $33.7 million for
FY 1998, an increase of approximately 86.6%. This increase in net revenues from
the Enterprise Storage Division is primarily attributable to revenue from the
Storage Dimensions products.
GROSS MARGIN. Gross margin for FY 1999 was $33.5 million, or 35.0% of net
revenues, compared to a gross margin of $15.4 million, or 23.2% of net revenues,
for FY 1998. The increase in gross margin as a percentage of net revenues from
FY 1998 to FY 1999 was primarily attributable to sales of higher margin
products.
SELLING AND SERVICE EXPENSES. Selling and service expenses are comprised
primarily of salaries, commissions, and marketing costs. Selling and service
expenses increased to $26.1 million, or 27.2% of net revenues for FY 1999, from
$11.4 million, or 17.2% of net revenues, for FY 1998. The increase in selling
and service expenses as a percentage of net revenues is attributable to two
factors: lower than expected revenues, and increased sales management overhead
related to the Storage Dimensions merger.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G & A")
expenses are comprised primarily of overhead costs associated with Artecon's
finance and administrative staff. G & A expenses for FY 1999 were $5.3 million
or 5.6% of net revenues compared to $3.6 million, or 5.4% of net revenues for FY
1998. The increase in G & A expenses is primarily attributable to the following:
- additional amortization expense of $1.7 million for goodwill and other
intangible assets associated with the Falcon acquisition and Storage
Dimensions merger as a result of a full year of amortization in the
current year
- additional depreciation expense of $1.5 million associated with property
and equipment acquired in the Storage Dimensions merger on March 31, 1998
- a decrease in compensation expense of $700,000 for stock participation
rights granted, and common stock issued, below fair market value to
certain employees in FY 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses are
comprised primarily of prototype expenses, salaries for employees directly
engaged in research and other costs associated with product development.
Research and development expenses increased to $7.3 million, or 7.6% of net
revenues, for FY 1999 compared to $3.2 million, or 4.8% of net revenues for FY
1998. The increase in research and development expenses is attributable to
management's decision to initially maintain the combined Storage Dimensions and
Artecon engineering staff and a separate engineering facility located in
Milpitas, California which was acquired in connection with the Storage
Dimensions merger. The engineering staff was reduced and the engineering
facility located in Milpitas, California was closed in connection with the
December 1998 restructuring discussed below. The increase in research and
development expenses as a percentage of revenues compared to the prior year is
attributable to the items discussed above and lower than expected revenues.
RESTRUCTURING EXPENSES AND IMPAIRMENT OF INTANGIBLE ASSETS. In December
1998, the Board of Directors approved a plan to consolidate one of Artecon's
engineering facilities from Milpitas, California, to Carlsbad, California, to
consolidate certain domestic sales and service locations, and to eliminate
certain product lines and development activities. Artecon recorded pre-tax
restructuring charges of $1.8 million to cover the costs associated with these
actions. The major components of the fiscal year 1999 charges and the remaining
accrual balance as of March 31, 1999 were as follows:
<TABLE>
<CAPTION>
INITIAL ACCRUED
RESTRUCTURING AMOUNTS RESTRUCTURING
CHARGE UTILIZED COSTS
------------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Employee termination costs........ $ 254 $ (200) $ 54
Inventory write-downs............. 415 (115) 300
Facility closures and related
expenses........................ 716 (476) 239
Tooling write-off................. 123 (123) --
Intangible asset impairment....... 300 (300) --
------ ------- ----
Total................... $1,807 $(1,214) $593
====== ======= ====
</TABLE>
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Employee termination costs consist primarily of severance payments for 43
employees, all of which were terminated as of March 31, 1999. The majority of
the employees terminated were employed at the engineering facility in Milpitas,
California and at the various domestic sales and service locations. Remaining
costs associated with bi-weekly payroll payments are expected to be paid in the
first quarter of fiscal year 2000. Inventory write-downs and the tooling
write-off primarily relate to the discontinuance of certain low-volume and
low-profit product lines. Of the total restructuring charge associated with the
inventory write-downs, $403,000 has been included as a separate component of
cost of sales in the accompanying financial statements. Facility closures and
related expenses consist of lease termination costs and the write-off of certain
property and equipment disposed of associated with the closures. The majority of
the remaining accrued costs are expected to be paid in fiscal year 2000.
In connection with the acquisitions of Falcon and SDI, the company
allocated $420,000 and $1,600,000, respectively, to an assembled workforce
intangible asset. The company recorded an impairment of these intangible assets
of $300,000 during the year ended March 31, 1999 which has been included as a
component of the restructuring charge, as the impairment was a direct result of
employee terminations associated with restructuring activities. Furthermore, as
a result of significant attrition and terminations of employees which had been
utilized as the basis for the assembled workforce valuation, the company
recognized additional amortization of $867,000 based on a change in estimate of
the remaining useful life of the assembled workforce.
In connection with the merger with SDI, Artecon recorded a reserve for
acquisition related costs of $6.6 million, of which $5.8 million was outstanding
at March 31, 1998. All of the acquisition related costs were included in the
purchase price allocation performed at March 31, 1998. The following is a
summary related to the accrued merger costs at March 31, 1998, amounts utilized
during fiscal year 1999 and remaining reserve balance at March 31, 1999:
<TABLE>
<CAPTION>
ACCRUED MERGER ACCRUED MERGER
COSTS AMOUNTS COSTS
(MARCH 31, 1998) UTILIZED (MARCH 31, 1999)
---------------- -------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Employee termination
costs.................... $2,858 $(2,691) $167
Professional service
fees..................... 1,726 (1,410) 316
Other costs................ 1,181 (998) 183
------ ------- ----
Total............ $5,765 $(5,099) $666
====== ======= ====
</TABLE>
The majority of the accrued merger costs at March 31, 1999 relate to
remaining severance and benefit payments pursuant to the related agreements,
lease and contract termination costs, and miscellaneous professional service fee
obligations. Artecon anticipates that the remaining merger costs will be paid in
fiscal year 2000 and believes that there are no unresolved issues or additional
liabilities that may result in an adjustment to the purchase price allocation
for the Storage Dimensions merger.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. During fiscal 1998,
Artecon California determined that certain hardware and software products in
development that were acquired in the Falcon acquisition had not established
technological feasibility. Accordingly, in fiscal 1998, Artecon California
recognized a $3.7 million charge to earnings
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for write-=off of these in-process research and development costs. In fiscal
1998 Artecon recognized an additional charge against earnings of $14.5 million
for in-process research and development costs relating to the Storage Dimensions
merger.
TOTAL OTHER EXPENSE. Total other expense is comprised of interest, taxes
and other expenses, if any, relating to such periods presented. Total other
expense for FY 1999 was $0.6 million compared to total other expense of $1.1
million for FY 1998. The decrease in total other expense was primarily
attributable to legal settlement income received in FY 1999.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 29, 1997
NET REVENUES. Artecon's net revenues for FY 1998 were $66.3 million
compared to $55.3 million for the year ended March 29, 1997 ("FY 1997"), an
increase of approximately 19.9%. Such increase in net revenues was primarily
attributable to the Falcon acquisition. Net revenues attributable to sales of
Falcon products by Artecon from August 21, 1997, the date of the Falcon
Acquisition, to March 31, 1998, were approximately $12.6 million. Net revenues
for FY 1998 attributable to sales of Artecon products (excluding Falcon
products) were $53.7 million, compared to $55.3 million for FY 1997. The decline
in Artecon-only sales was primarily attributable to a decline in orders from a
significant customer from $14.1 million in FY 1997 to $0.3 million in FY 1998.
Future sales to this customer are not expected to be significant.
GROSS MARGIN. Gross margin for FY 1998 was $15.4 million, or 23.2% of net
revenues, compared to a gross margin of $12.9 million, or 23.4% of net revenues,
for FY 1997. The decrease in gross margin as a percentage of net revenues from
FY 1997 to FY 1998 was due primarily to sales of higher margin products which
favorably effected gross margin by approximately 6%, offset by a $5.0 million
write off of inventory in FY 1998. The gross margin derived from sales of Falcon
products during FY 1998 was approximately $3.3 million, or 26.2% of Falcon net
revenues.
SELLING AND SERVICE EXPENSES. Selling and service expenses increased to
$11.4 million, or 17.2% of net revenues for FY 1998, from $7.6 million, or 13.8%
of net revenues, for FY 1997. The increase in selling and service expenses for
FY 1998 was attributable primarily to the increase in Artecon's sales and
marketing force resulting from the Falcon acquisition.
GENERAL AND ADMINISTRATIVE EXPENSES. G & A expenses for FY 1998 were $3.6
million or 5.4% of net revenues compared to $1.7 million, or 3.0% of net
revenues for FY 1997. The increase in G & A expenses is primarily attributable
to professional services and amortization expenses associated with the Falcon
acquisition. In addition, $628,000 of compensation expense was recorded for
issuance of common stock to certain employees in FY 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $3.2 million, or 4.8% of net revenues, for FY 1998 compared to $2.4
million, or 4.3% of net revenues for FY 1997. The increase in research and
development expenses is attributable to Artecon's continued development of new
products.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. During FY 1998,
Artecon California determined that certain hardware and software products
acquired from Falcon had not established technological feasibility and had no
future alternative use. Accordingly, in fiscal 1998, Artecon California
recognized a $3.7 million charge to earnings for write-off
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of these in-process research and development costs. In FY 1998 Artecon
California recognized an additional charge against earnings of $14.5 million for
in-process research and development costs relating to the Storage Dimensions
merger.
TOTAL OTHER EXPENSE. Total other expense is comprised of interest, taxes
and other expenses, if any, relating to such periods presented. Total other
expense for FY 1998 was $1.1 million compared to total other expense of $0.2
million for FY 1997. The increase in total other expense was attributable
primarily to interest payments made on the promissory note issued in connection
with the Falcon acquisition and increased borrowings under Artecon's credit
line.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Artecon has financed its operations primarily through a
combination of cash generated from operations, bank borrowings, and through
sales of its capital stock. At March 31, 1999, Artecon had $2.1 million in cash
and cash equivalents compared to $8.0 million at March 31, 1998, a decrease of
$5.9 million. This decrease was primarily attributable to net cash used in
operating activities of $6.7 million which included the current year loss of
$5.4 million. Financing activities and proceeds from Artecon's Stock Option
Plans and Stock Purchase Plan provided $1.1 million and $313,000, respectively.
In May 1998, Artecon entered into a revolving credit facility with LaSalle
National Bank (the "line of credit") which permits borrowings of up to
$15,000,000. Under the terms of the line of credit, borrowings are
collateralized by substantially all of Artecon's assets and mature in May 2001
unless otherwise renewed. Borrowings under the line of credit bear interest at
the bank's prime rate. Monthly payments consist of interest only, with the
principal due at maturity. As of March 31, 1999, the total outstanding balance
under the line of credit was approximately $10.6 million. The line of credit
agreement requires that Artecon comply with certain covenants, including minimum
net income and tangible net worth. Artecon is currently not in compliance with
the minimum net income covenant and has obtained a waiver regarding its
non-compliance with this covenant.
Artecon's Japanese subsidiary has two lines of credit with a Japanese bank
for borrowings of up to an aggregate of 35 million Yen (approximately US
$295,000 at March 31, 1999) at interest rates ranging from 1.8% to 2.5%.
Interest is due monthly, with principal due and payable on various dates through
August 2005. Borrowings are secured by the inventories of the Japanese
subsidiary. As of March 31, 1999, the total amount outstanding under the three
credit lines was 33 million Yen (approximately US $275,000 at March 31, 1999).
The Falcon acquisition purchase price of $3,500,000 included $1,000,000 in
cash and a promissory note in the original principal amount of $1,250,000 (the
"Artecon Note"). Subsequent to the issuance of the Artecon Note, Artecon
California and Falcon amended the Artecon Note to decrease the principal amount
due thereunder to $750,000. Concurrently with the Falcon acquisition, Falcon
transferred certain technology assets (the "Falcon Technology") to Founding
Partners, a California general partnership ("Founding Partners"), in exchange
for a promissory note in the principal amount of $1,750,000 (the "Founding
Partners Note"). Dana Kammersgard, James Lambert and W.R. Sauey, each of whom is
an executive officer and/or director of Artecon, are the general partners of
Founding Partners. Founding Partners is considered to be a "special purpose
entity" and, accordingly, has been consolidated with Artecon for financial
reporting purposes. The purchase price was allocated among the acquired assets
to $10,232,000 for other assets
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acquired, $638,000 to goodwill and other intangible assets, $14,138,000 for
liabilities assumed and to in-process research and development expenses of
$3,700,000. Under the terms of the Artecon Note, as adjusted, and the Founding
Partners Note (collectively, the "Notes"), Artecon and Founding Partners,
respectively, are required to make monthly payments to Falcon of $15,935 and
$37,182, respectively, through August 2002. Each of the Notes bears interest at
the rate of 10% per annum. As of March 31, 1999, the approximate total amount of
principal and interest outstanding under the Artecon Note was $556,000, and the
total approximate amount of principal and interest outstanding under the
Founding Partners Note was $1,298,000.
In connection with the Falcon acquisition and the transfer of the Falcon
Technology, Artecon California and Founding Partners entered into a Technology
License Agreement, dated August 21, 1997, pursuant to which Founding Partners
granted to Artecon an exclusive, perpetual license of the Falcon Technology in
exchange for monthly payments of $39,000 payable through August 2002.
As of March 31, 1999, Artecon's future commitments under its operating
leases totaled approximately $3.1 million.
Capital spending for FY 1999, FY 1998 and FY 1997 was $638,000, $668,000,
and $260,000 respectively.
Artecon's sales and operating results have in the past fluctuated from
quarter to quarter and may vary in the future depending on a number of factors,
including:
- the size and timing of significant purchase orders;
- the timing of hardware shipments by third-party vendors necessary to
recognize revenues;
- Artecon's ability to continue to design, develop and market new products
and services;
- Market acceptance of new products;
- Artecon's success in increasing its domestic and foreign sales force;
- the size and number of new accounts;
- technological changes in the storage systems market;
- the growth of the telecommunications and Internet/intranet industry;
- reduction in demand for Artecon's products as a result of new product
introductions by competitors;
- levels of expenditure on research and development;
- the amount of additional capital needed by Artecon and the timing of such
need;
- product quality problems;
- fluctuations in foreign currency exchange rates; and
- general economic trends and other factors.
Sales and operating results for past periods are not necessarily indicative
of future periods and a period-to-period comparison of its sales or results of
operations are not necessarily meaningful and should not be relied upon as an
indicator of future performance.
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Artecon's management believes that its expected cash resources from
operations and amounts available under the line of credit are sufficient to meet
its current capital commitments and the operating requirements of its existing
business for at least the next twelve months. However, there can be no assurance
that Artecon will not need to obtain additional capital before such time. The
actual amount and timing of working capital and capital expenditures that
Artecon may incur in future periods may vary significantly and will depend upon
numerous factors, including the amount and timing of the receipt of revenues
from continued operations, the increase in manufacturing capabilities, the
timing and extent of the introduction of new products and services, and growth
in personnel and operations.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000 ("Y2K"), these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than one year, computer systems and/or software used by many companies may need
to be upgraded to comply with such Y2K requirements.
STATE OF READINESS
Artecon has defined Y2K compliance in accordance with the British Standards
Institute (BSI). According to the BSI DISC PD2000, Y2K conformity shall mean
that neither performance nor functionality is affected by dates prior to, during
and after Y2K. Y2K compliance is based on the following factors: 1) during the
normal operation, the value for the current date will not cause any interruption
in operation; 2) date-based functionality must behave consistently for dates
prior to, during and after Y2K; 3) in all interfaces and data storage, the
century in any date must be specified either explicitly or by unambiguous
algorithms or inferencing rules; and 4) Y2K must be recognized as a leap year.
In 1996, Artecon started a comprehensive Y2K program for its data storage
products. This program includes verification testing of existing products,
implementation of date code programming policies, and the integration of
compliance tests for all enhancements and future products. Artecon established
certain criteria to obtain Y2K compliance, expanding year fields to four digits,
windowing, date encoding techniques, and absence of date code dependency.
Artecon's technology generally lends itself to being Y2K compliant based on the
absence of date dependencies in the hardware, software, and firmware code.
Artecon certifies to its customers that the hardware, software, and firmware
developed, manufactured and distributed by Artecon is Y2K compliant. In
addition, Artecon's products also recognize Y2K as a leap year. Management
believes that all of Artecon's data storage products are Y2K compliant.
In 1997, Artecon implemented a Y2K assessment program for its internal
processing systems. The program currently includes an inventory and assessment
of information systems, testing and implementation. Artecon has identified the
major systems that will require modification to make them Y2K compliant and
anticipates completion of the process by the end of March 1999. To date,
approximately 80% of these internal processing systems are Y2K compliant, and
Artecon anticipates having the remaining internal
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processing systems Y2K compliant by the second quarter of calendar 1999 with any
additional testing of such systems to be completed by the third quarter of
calendar 1999.
Artecon may include software from third party vendors as a part of its data
storage products. Artecon has received compliance statements from such software
vendors and has conducted internal testing to verify their Y2K compliance
statements. Artecon has initiated communications with its significant supplier
to determine the extent to which Artecon may be impacted by those third party
suppliers who fail to remedy their own Year 2000 issues. To date Artecon has
contacted 55% of its significant suppliers and has received assurance of Year
2000 compliance from a number of those contacted. Most suppliers under existing
contracts with Artecon are under no contractual obligation to provide such
information to Artecon. Artecon is taking steps with respect to new supplier
agreements to assure that the suppliers' products and internal systems are Year
2000 compliant.
COSTS TO ADDRESS ARTECON'S Y2K ISSUES.
While it is difficult to quantify the total cost to Artecon of Y2K
compliance activities, Artecon's best estimate of resources that are allocated
to this program is approximately $500,000. However, there can be no assurance
that Y2K issues will not have a material adverse impact on Artecon's business,
results of operations or financial condition.
RISKS OF ARTECON'S Y2K ISSUES
Artecon believes that the Y2K issue may affect the purchasing patterns of
customers and potential customers in a variety of ways. Many companies are
expending significant resources to correct or patch their current software
systems for Y2K compliance. These expenditures may result in reduced funds
available to purchase products such as those offered by Artecon. Conversely, Y2K
issues may cause other companies to accelerate purchases, thereby causing an
increase in short-term demand and consequent decrease in long-term demand for
products. Additionally, Y2K issues could cause a significant number of
companies, including current customers, to reevaluate their current information
system needs, and as result consider switching to other systems or suppliers.
Any of the foregoing could result in a material adverse effect on Artecon's
business, operating results and financial condition.
ARTECON'S CONTINGENCY PLAN
Artecon currently does not have a contingency plan in place if any of the
systems, processes or third party suppliers mentioned is not Y2K compliant.
Currently, Artecon is in the process of preparing a contingency plan for Y2K
compliance issues, and anticipates having such a contingency plan in place by
the end of the third quarter of calendar 1999.
THE EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. These countries have agreed to adopt the euro as their
common legal currency on that date. The euro will then trade on currency
exchanges and be available for non-cash transactions. These countries will issue
sovereign debt exclusively in euro and will re-denominate outstanding sovereign
debt. Effective on this date, these countries will no longer control their own
monetary policies by directing independent interest rates for the
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legacy currencies. Instead, the authority to direct monetary policy, including
money supply and official interest rates for the euro, will be exercised by the
new European Central Bank.
Following introduction of the euro, the legacy currencies are scheduled to
remain legal tender in these countries as a denominations of the euro between
January 1, 1999 and January 1, 2002 (the "transition period"). During the
transition period, public and private parties may pay for goods and services
using either the euro or the country's legacy currency on a "no compulsion, no
prohibition" basis. However, conversion rates no longer will be computed
directly from one legacy currency to another. Instead a "triangulation" process
will be applied whereby an amount denominated in one legacy currency first will
be converted into an amount denominated in euro, and the resultant
euro-denominated amount is converted into the second legacy currency.
Two countries that will convert to the euro, the Netherlands and France,
generated revenue of approximately $894,000 and $763,000, respectively, or 1.7%
of Artecon's total revenue for FY 1999. Based on this percentage of revenue
generated from these two countries, Artecon does not anticipate that this
conversion of the euro will have a significant impact on its financial
statements. Artecon is continuing to evaluate the impact this conversion will
have on its financial condition and results of operations.
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<PAGE> 155
ARTECON MANAGEMENT
The executive officers of Artecon who will serve as a director or executive
officer of Box Hill are James L. Lambert and Dana W. Kammersgard. Their ages and
current positions with Artecon as of June 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James L. Lambert................... 46 Chief Executive Officer and
President
Dana W. Kammersgard................ 43 Vice President, Engineering and
Secretary
</TABLE>
For biographical information regarding Messrs. Lambert and Kammersgard, see
"Interest of Certain Persons in the Merger and Related Agreements -- Management
of Box Hill."
The following table shows for the fiscal years ended March 29, 1997, March
31, 1998 and March 31, 1999, certain compensation awarded or paid to, or earned
by, Messrs. Lambert and Kammersgard.
<TABLE>
<CAPTION>
COMPENSATION
ANNUAL COMPENSATION OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL ---------------------- COMPENSATION UNDERLYING COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) ($) OPTION (#) ($)(1)
- ------------------ ---- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James L. Lambert..... 1999 227,702 96,808(2) -- 40,000 906
President and 1998 138,462 14,938(2) 291,250(4) -- 906
Chief Executive 1997 103,708 6,959 -- -- 906
Officer
Dana W.
Kammersgard........ 1999 172,614 48,870(3) -- 25,000
Vice President, 1998 124,139 27,782(3) 145,625(5) --
Engineering and 1997 102,307 10,315 -- --
Secretary
</TABLE>
- -------------------------
(1) Includes term life insurance premium paid on behalf of Mr. Lambert.
(2) Includes tax gross-ups paid to Mr. Lambert of $44,808 in 1999 and $14,938 in
1998.
(3) Includes tax gross-ups paid to Mr. Kammersgard of $44,808 in 1999 and
$14,938 in 1998.
(4) Represents the dollar value of shares of Artecon California common stock
purchased pursuant to an option exercise, calculated by multiplying the
difference between the fair market value of such stock on the date of grant
($1.20 per share) and the exercise price ($0.035 per share) by the number of
shares of Artecon California common stock purchased (250,000 shares).
(5) Represents the dollar value of shares of Artecon California common stock
purchased pursuant to an option exercise, calculated by multiplying the
difference between the fair market value of such stock on the date of grant
($1.20 per share) and the exercise price ($0.035 per share) by the number of
shares of Artecon California common stock purchased (125,000 shares).
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<PAGE> 156
STOCK OPTION GRANTS AND EXERCISES
Artecon grants options to its executive officers under its 1996 Stock
Option Plan (the "1996 Plan"). The following table sets forth for each of
Messrs. Lambert and Kammersgard information concerning stock options granted
during the year ended March 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
PERCENT OF OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED(1) 1999(2) SHARE DATE 5% 10%
- ---- ---------- --------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
James L. Lambert..... 40,000 1.9% $3.75 4/1/08 $94,500 $238,500
Dana W.
Kammersgard........ 25,000 1.2 3.75 4/1/08 59,062 149,062
</TABLE>
- -------------------------
(1) Options granted have a ten year term, and vest at the rate of 1/4
(one-fourth) of the shares subject to the Option shall vest on the first one
(1) year anniversary of the vesting commencement date, and an additional
1/4th (one-fourth) of the shares shall vest on each one (1) year anniversary
thereafter.
(2) Based on options to purchase 2,085,000 shares of Artecon common stock
granted to employees, including Messrs. Lambert and Kammersgard, under the
1996 Plan during the fiscal year ended March 31, 1999.
(3) Calculated on the assumption that the market value of the underlying stock
increases at the stated values, compounded annually. The total appreciation
of the options over their ten-year terms at 5% and 10% is 63% and 159%,
respectively.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
As of March 31, 1999, none of Artecon named executive officers exercised
any stock options, nor were any stock options exercisable during the fiscal year
ended March 31, 1999.
EMPLOYEE BENEFIT PLANS
1996 STOCK OPTION PLAN
The 1996 Plan provides for granting to employees, including officers,
directors, and consultants, of non-statutory stock options. A total of 3,000,000
shares of Artecon common stock are currently reserved for issuance pursuant to
the 1996 Plan. As of March 31, 1999, options to purchase 1,280,497 shares of
Artecon common stock were outstanding under the 1996 Plan and 1,719,503 shares
of Artecon common stock remained available for issuance under the 1996 Plan. In
April 1998, Artecon granted options to purchase 1,471,500 shares at exercise
prices ranging from $3.38 to $3.75. Additionally, 217,500 options with exercise
prices ranging from $5.13 to $7.00 were cancelled and re-granted at $3.375 per
share.
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<PAGE> 157
1996 EMPLOYEE STOCK PURCHASE PLAN
The 1996 Employee Stock Purchase Plan (the "Purchase Plan") provides for
the opportunity to purchase Artecon common stock through accumulated payroll
deductions. A total of 400,000 shares of Artecon common stock are currently
reserved for issuance under the Purchase Plan. As of March 31, 1999, 298,401
shares of Artecon common stock had been purchased under the Purchase Plan and
101,599 shares remained available for purchase under the Purchase Plan.
401(K) PLAN
Artecon has a savings plan under Section 401(k) of the Internal Revenue
Code (the "401(k) Plan"). The 401(k) Plan allows eligible employees to
contribute up to 15 percent of their compensation on a pre-tax basis up to the
statutorily prescribed annual limit ($10,000 in 1998). Artecon matches 50
percent of the employee's contribution up to a specified limit. Such matching
contributions vest incrementally over 5 years.
DIRECTOR COMPENSATION
For services as directors, effective April 1998, each non-employee member
of the Artecon board of directors receives an annual fee of $10,000, plus $2,000
for each board meeting attended in person, $1,000 for each board meeting
attended via telephone conference, $1,000 for each committee meeting attended in
person and $500 for each committee meeting attended via telephone conference,
provided that the committee meeting is not on the same date as the board meeting
and reimbursement for reasonable expenses. The 1996 Plan provides that options
may be granted to non-employee directors. See "-- Employee Benefit Plans -- 1996
Stock Option Plan. " In April 1998, each non-employee director received an
initial grant of options to purchase 50,000 shares of Common Stock at an
exercise price of $3.75 per share. Concurrently with such grant, Mr. Fitzgerald
and Dr. Park, two current Artecon directors, surrendered for cancellation
certain non-employee director stock options granted to them prior to the Storage
Dimensions merger.
OPTION REPRICING INFORMATION
In April 1998, following the Storage Dimensions merger, Artecon implemented
an employee option exchange program (the "1998 Repricing") applicable to Artecon
employees (other than executive officers). Under the program, outstanding
options held by qualifying employees with an exercise price greater than $3.38
per share, the closing price of the Artecon common stock on the date of the
exchange (the "1998 Exchange Price"), were exchanged for new options to purchase
the same number of shares at an exercise price equal to the 1998 Exchange Price.
Subject to certain exceptions, the new options are not exercisable until one
year after the date of issuance, at which time they will continue to vest to the
same extent as the old options surrendered therefor. During the past ten years,
no options held by executive officers of Artecon have been repriced
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<PAGE> 158
CERTAIN TRANSACTIONS OF ARTECON
The Falcon acquisition purchase price of $3,500,000 included $1,000,000 in
cash and a promissory note in the original principal amount of $1,250,000 (the
"Artecon Note"). Subsequent to the issuance of the Artecon Note, Artecon
California and Falcon amended the Artecon Note to decrease the principal amount
due thereunder to $750,000. Concurrently with the Falcon Acquisition, Falcon
transferred the Falcon Technology to Founding Partners, a California general
partnership ("Founding Partners"), in exchange for a promissory note in the
principal amount of $1,750,000 (the "Founding Partners Note"). Dana Kammersgard,
James Lambert and W.R. Sauey, each of whom is an executive officer and/or
director of Artecon, are the general partners of Founding Partners. Founding
Partners is considered to be a "special purpose entity" and, accordingly, has
been consolidated with Artecon for financial reporting purposes. The purchase
price was allocated among the acquired assets to $10,232,000 for other assets
acquired, $638,000 to goodwill and other intangible assets, $14,138,000 for
liabilities assumed and to in-process research and development expenses of
$3,700,000, which had no future alternative use, based on management
assumptions. Under the terms of the Artecon Note, as adjusted, and the Founding
Partners Note (collectively, the "Notes"), Artecon and Founding Partners are
required to make monthly payments to Falcon of $15,935 and $37,182,
respectively, through August 2002. Each of the Notes bears interest at the rate
of 10% per annum. As of March 31, 1999, the approximate amount of principal
outstanding under the Artecon Note was $552,000, and the approximate amount of
principal outstanding under the Founding Partners Note was $1,287,000.
In connection with the Falcon acquisition and the transfer of the Falcon
Technology, Artecon California and Founding Partners entered into a Technology
License Agreement, dated August 21, 1997, pursuant to which Founding Partners
granted to Artecon California an exclusive, perpetual license of the Falcon
Technology in exchange for monthly payments of $39,000 payable through August
2002.
On December 27, 1997, Founding Partners and Artecon California amended the
Technology License Agreement to provide for, among other things, the transfer of
the Falcon Technology from Founding Partners to Artecon California upon the
satisfaction in full of Founding Partners' obligations under the Founding
Partners Note.
Pursuant to certain commitments between Artecon and the Nordic Group, in
which W.R. Sauey holds a controlling interest, Artecon was obligated to pay fees
to the Nordic Group for certain software maintenance services provided by and
overhead costs incurred by the Nordic Group. Such fees totaled approximately
$9,000 to $11,000 per month and represented Artecon's portion of overhead costs
paid by the Nordic Group on its behalf. Such payments terminated effective upon
the closing of the Merger. In addition, Artecon leases certain real property
from W.R. Sauey at a monthly rental fee of approximately $1,125 under a
month-to-month lease between the parties.
Since January 1997, Artecon California made a series of short-term loans to
Flambeau Corp., a company in which W.R. Sauey is the principal shareholder, in
the aggregate principal amount of $6,145,000. Such loans were made pursuant to
the terms of a promissory note dated January 16, 1997 which bore interest at a
rate of 7.25% per annum and which was due and payable on demand. The aggregate
principal amount (including $14,506 in total interest payments) was paid in full
by Flambeau Corp. in August 1997.
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<PAGE> 159
During the fiscal years ended March 29, 1997, March 31, 1998, and March 31,
1999, Artecon California made payments to certain entities affiliated with W.R.
Sauey (the "Nordic Group Companies") of approximately $85,000, $130,000 and
$80,000, respectively, for the purchase of certain products and services from
the Nordic Group Companies. In addition, during the fiscal years ended March 29,
1997, March 31, 1998 and March 31, 1999, the company received payments for the
sale of certain products and services from certain of the Nordic Group Companies
of approximately $74,000, $125,000 and $48,000, respectively. As of March 31,
1999, Artecon had accounts receivable from certain Nordic Group Companies of
approximately $13,000 and accounts payable of zero.
In February 1999, Artecon issued a promissory note to Flambeau Corporation,
a company affiliated with Mr. W.R. Sauey, for the principal amount of $500,000
at an interest rate of prime minus one-half of one percent. Such note was paid
in full by Artecon on March 30, 1999.
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<PAGE> 160
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF ARTECON
The following table sets forth certain information with respect to
beneficial ownership of Artecon's common stock and preferred stock as of June 3,
1999, by:
- each shareholder who is known by Artecon to own beneficially more than 5%
of Artecon capital stock;
- each named executive officer of Artecon;
- each director of Artecon; and
- all directors and executive officers of Artecon as a group.
Unless otherwise indicated, to the knowledge of Artecon, all persons listed
below have sole voting and investment power with respect to their shares of
Artecon common stock and preferred stock, except to the extent authority is
shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
STOCK COMMON PREFERRED STOCK PERCENT OF
BENEFICIALLY STOCK BENEFICIALLY PREFERRED STOCK
NAME AND ADDRESS OWNED(1) OWNED(2) OWNED(1) OWNED(2)
---------------- ------------ ---------- --------------- ---------------
<S> <C> <C> <C> <C>
5% Stockholders -- --
Capital Partners
Group................ 2,900,623(3) 13.3%
Maxtor Corporation..... 1,600,000 7.3% -- --
Officers & Directors
W.R. Sauey............. 5,295,384(4) 24.3% 2,494,159(5) 100%
James L. Lambert....... 3,509,777(6) 16.1% -- --
Dana W. Kammersgard.... 1,388,087(7) 6.4% -- --
Jason C. Sauey......... 373,104(8) 1.7% -- --
Dr. Chong Sup Park..... 1,612,500(9) 7.4% -- --
Brian D. Fitzgerald.... 2,913,123(3)(10) 13.4% -- --
Norman R. Farquhar..... 12,500(11) * -- --
William J. Filip....... 27,500(12) * -- --
All executive officers
and directors as a
Group (9
persons)(13)......... 15,131,975 69.2% 2,494,159 100%
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1%.
(1) This table is based upon information supplied by executive officers,
directors, principal stockholders and the company's transfer agent.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes generally sole voting and
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
Company believes that the persons named in the table above have sole voting
and investment power with respect to all shares of common stock and
preferred stock shown as beneficially owned by them.
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<PAGE> 161
(2) Percentage of beneficial ownership is based on 21,772,227 shares of common
stock outstanding as of June 3, 1999. Preferred stock is based on 2,494,159
shares of Series A Preferred Stock outstanding as of June 3, 1999.
(3) Represents 1,676,440 shares held by CP Acquisition, L.P. No. 4A, 926,790
shares held by CP Acquisition, L.P. No. 4B, 3,612 shares held by Capital
Partners, Inc., and 293,781 shares held by FGS, Inc. The following
affiliated entities are included in "Capital Partners Group"; (a) CP
Acquisition, L.P. No. 4A, a Delaware limited partnership; (b) CP
Acquisition, L.P. No. 4B, a Delaware limited partnership; (c) Capital
Partners, Inc., a Connecticut corporation, of which Brian D. Fitzgerald is
the sole stockholder, an officer and a director, and (d) FGS, Inc., a
Delaware corporation, of which Mr. Fitzgerald is the controlling
stockholder, an officer and a director. Mr. Fitzgerald may be deemed to
beneficially own the shares held by the entities comprising the Capital
Partners Group.
(4) Includes (i) 891,151 shares of common stock held by Flambeau Corp., (ii)
235,507 shares of common stock held by Flambeau Products Corp., (iii)
38,333 shares of common stock held by Seats, Inc. and (iv) 1,038,103 shares
of common stock held by the W.R. & Floy A. Sauey Grandparents Trust
established for the benefit of certain grandchildren of W.R. Sauey. Mr.
Sauey is Chairman of the Board and the principal shareholder in each of
Flambeau Corp., Flambeau Products Corp. and Seats, Inc. (collectively, the
"Sauey Affiliates"). Mr. Sauey disclaims beneficial ownership of all the
above-listed shares, except to the extent of his pecuniary or pro rata
interest in such shares. Also, includes options to purchase 12,500 shares
of common stock exercisable at or within 60 days of June 3, 1999.
(5) Includes (i) 1,038,604 shares of preferred stock held by Flambeau Corp.,
(ii) 1,038,604 shares of preferred stock held by Flambeau Products Corp.
and (iii) 169,074 shares of preferred stock held by Seats, Inc. Mr. Sauey
disclaims beneficial ownership of all the above-listed shares, except to
the extent of his pecuniary or pro rata interest in such shares.
(6) Includes (i) 3,492,681 shares held jointly with Pamela Lambert, the spouse
of Mr. Lambert, (ii) 3,600 shares of common stock held by Pamela Lambert,
and 166 shares of common stock held by Mr. Lambert's daughter and (iii)
options to purchase 10,000 shares of common stock exercisable at or within
60 days of June 3, 1999.
(7) Includes (i) 546 shares of common stock held by Lisa Kammersgard, the
spouse of Mr. Kammersgard and (ii) options to purchase 6,250 shares of
common stock exercisable at or within 60 days of June 3,1999.
(8) Includes options to purchase 12,500 shares of common stock exercisable at
or within 60 days of June 3, 1999.
(9) Includes 1,600,000 shares held by Maxtor Corporation. Dr. Park is President
and Chief Executive Officer of Hyundai Electronics America, the parent of
Maxtor Corporation, and Chairman of the Board of Maxtor Corporation. Also,
includes options to purchase 12,500 shares of common stock exercisable at
or within 60 days of June 3, 1999.
(10) Includes options to purchase 12,500 shares of common stock exercisable at
or within 60 days of June 3, 1999.
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<PAGE> 162
(11) Includes options to purchase 12,500 shares of common stock exercisable at
or within 60 days of June 3, 1999.
(12) Includes options to purchase 12,500 shares of common stock exercisable at
or within 60 days of June 3, 1999.
(13) Includes 2,203,094 shares of common stock held by the Sauey Affiliates.
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<PAGE> 163
COMPARISON OF CAPITAL STOCK
DESCRIPTION OF BOX HILL CAPITAL STOCK
Box Hill's authorized capital stock consists of 40,000,000 shares of common
stock, par value $.01 per share, and 5,000,000 shares of preferred stock, par
value $.01 per share. As of the record date, there were shares of
Box Hill common stock issued and outstanding, and no shares of Box Hill
preferred stock issued or outstanding. The following summary of the terms and
provisions of Box Hill's capital stock does not purport to be complete and is
qualified in its entirety by reference to Box Hill's certificate of
incorporation and bylaws and applicable law.
BOX HILL COMMON STOCK. Holders of common stock are entitled to one vote
per share on all matters submitted to a vote of shareholders and do not have
cumulative voting rights. Holders of common stock are entitled to receive
ratably such dividends as may be declared by the Box Hill board of directors out
of funds legally available therefor, subject to preferences that may be
applicable to any outstanding preferred stock. In the event of a dissolution of
Box Hill, after distribution to the holders of preferred stock, if any, of
amounts to which they may be preferentially entitled, the holders of common
stock are entitled to share ratably in the assets of Box Hill legally available
for distribution to its shareholders. None of the holders of common stock has
any preemptive, subscription, liquidation, conversion or redemption rights, and
no holders of common stock are subject to further calls or assessments or rights
of redemption by Box Hill. All outstanding shares of common stock are, and all
shares of common stock to be outstanding upon consummation of the merger will
be, validly issued, fully paid and nonassessable.
BOX HILL PREFERRED STOCK. Box Hill's board of directors has the authority
to issue 5,000,000 shares of preferred stock in one or more series and to fix
the powers, designations, rights, preferences and restrictions thereof,
including dividend rights, conversion rights, voting rights, redemption terms,
liquidation preferences and the number of shares constituting each such series,
without any further vote or action by Box Hill's shareholders. Box Hill
currently has no plans to issue any preferred stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS. Box Hill's bylaws
provide that Box Hill will indemnify its directors and executive officers for
their reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him or her in connection with his or her defense of any action to
which he or she becomes a party by reason of the fact that such individual
served as an officer or director of Box Hill or of any corporation in which he
or she served at the request of Box Hill. Box Hill's employment agreements with
Dr. Monderer, Ms. Turchin and Mr. Mays, its Compensation Agreement with Mr.
Black and its agreement with Mr. Conner, a prior director of Box Hill contain
indemnification provisions consistent with the foregoing.
No indemnification is available to an officer or director if a judgment or
other final adjudication adverse to such officer or director establishes that
his or her acts were committed in bad faith or were the result of active and
deliberate dishonesty, and were material to the adjudicated action that he or
she personally gained in fact a financial profit or other advantage to which he
or she was not legally entitled. The limit to the indemnification provisions in
this paragraph prohibit indemnification only to the extent provided by Section
721 of the New York Business Corporation Law; they do not eliminate a director's
duty of care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief may be available. Such
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<PAGE> 164
limitations also do not affect a director's responsibilities under any other
laws, such as federal securities laws or state or federal environmental laws.
NEW YORK BUSINESS CORPORATION LAW. Section 912 of the New York law
regulates certain business combinations, including transactions between domestic
corporations (which term includes Box Hill) and an interested shareholder, which
is any person beneficially owning 20% or more of the outstanding voting stock of
the domestic corporation or any affiliate or associate of such corporation and
has owned 20% or more of the outstanding voting stock of the corporation within
the previous five years. Under the statute, a domestic corporation may not
engage in any business combination with any interested shareholder, unless:
- if the business combination is to occur within five years of the date the
shareholder acquired 20% or more ownership, either the business
combination or the stock acquisition was approved by the board of
directors prior to the date such shareholder became a 20% shareholder; or
- the business combination is approved by a majority of outstanding voting
stock not beneficially owned by the interested shareholder or his or her
associates or affiliates, the stock acquisition date; or
- the business combination occurs after five years or more after the
relevant stock acquisition date and the consideration paid to the
non-interested shareholders meets certain additional conditions.
The restrictions imposed by Section 912 will not apply to a corporation
that amends its bylaws by the affirmative vote of a majority of its outstanding
voting stock (not including shares owned by the interested shareholder) to "opt
out" of Section 912. However, an amendment will not be effective for 18 months
after such vote and will not apply to any business combination where the stock
acquisition date precedes the amendment.
Box Hill has not sought to "opt out" of Section 912, but believes the
Section 912 provisions do not apply to the merger.
Section 912 of the New York law may discourage other persons from making a
tender offer for, or acquisitions of, a number of shares of the common stock.
This could have the incidental effect of inhibiting changes in management and
also may prevent temporary fluctuations in the market price of the common stock
that often result from actual or rumored takeover attempts. In addition, the
limited liability provisions in Box Hill's certificate of incorporation and the
indemnification provisions in Box Hill's bylaws, each with respect to officers
and directors, may discourage shareholders from bringing a lawsuit against
directors for breach of their fiduciary duty and may also reduce the likelihood
of derivative litigation against directors and officers, even though such an
action, if successful, might otherwise have benefited Box Hill and its
shareholders. Furthermore, a shareholder's investment in Box Hill may be
adversely affected to the extent Box Hill pays the costs of settlement and
damage awards against Box Hill's directors and officers pursuant to the
indemnification provisions of Box Hill's bylaws.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the Box
Hill common stock is American Stock Transfer & Trust Company.
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DESCRIPTION OF ARTECON CAPITAL STOCK
The authorized capital stock of Artecon consists of 40,000,000 shares of
Artecon common stock, par value $0.005 per share, and 10,000,000 shares of
Artecon preferred stock, par value $0.005 per share. As of the record date,
there were 21,772,227 shares of Artecon common stock issued and outstanding, and
2,494,159 shares of Artecon Series A Preferred Stock issued and outstanding.
ARTECON COMMON STOCK. The holders of Artecon common stock are entitled to
one vote for each share held of record on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Except as otherwise
required by law, all matters submitted for stockholder vote are determined by a
majority of the votes cast. Holders of Artecon common stock are entitled to
receive ratably such dividends, if any, as may be declared by the Artecon board
out of funds legally available therefor, subject to any preferential dividend
rights of outstanding Artecon preferred stock. Subject to the rights of holders
of Artecon preferred stock, upon the liquidation (which includes a merger and a
sale of all or substantially all of the assets of Artecon), dissolution or
winding up of Artecon, the holders of Artecon common stock are entitled to
receive ratably the net assets of Artecon available after the payment of all
debts and other liabilities. Holders of the Artecon common stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of Artecon common stock are fully paid and nonasessable.
ARTECON PREFERRED STOCK. The board of directors of Artecon, without any
further vote or action by the stockholders, subject to certain limitations
prescribed by law, has the authority to issue from time to time up to an
aggregate of 10,000,000 shares of Artecon preferred stock in one or more classes
or series and to determine the designation and the number of shares of any class
or series as well as the voting rights, preferences, limitations and special
rights, if any, of the shares of any such class or series, including the
dividend rights, dividend rates, conversion rights and terms, voting rights,
redemption rights and terms, and liquidation preferences. Artecon's certificate
designates 2,494,159 of the shares of Artecon preferred stock as Series A
Preferred Stock, all of which are outstanding and held of record by four
stockholders. Upon any liquidation (which includes a merger and a sale of all or
substantially all of the assets of Artecon), dissolution or winding up of
Artecon, the holders of Series A are entitled to receive an amount equal to
$2.00 per share prior and in preference to any distribution of any of the assets
or surplus of funds of Artecon to the Artecon common stockholders. The shares of
the Series A vote together with the common stock as a single class. The holder
of each share of Series A is entitled to the number of votes equal to the number
of shares of common stock into which such share of Series A could be converted
on the record date for such vote. At the option of the holder, each share of
Series A is convertible into such number of shares of common stock as is
determined by dividing two dollars ($2.00) by the greater of (i) $6.00 and (ii)
the average of the closing sales prices of Artecon common stock as traded on the
Nasdaq National Market during the 20-trading-day period ending on the day that
is two days prior to the date on which conversion is requested. Each share of
Series A automatically converts on the earlier of (i) the day the Artecon board
unanimously adopts a resolution requesting such conversion, in which case the
conversion rate is determined by dividing two dollars ($2.00) by the conversion
price, and (ii) the day following the date on which the average of the closing
per share sales price of the Artecon common stock for 20 consecutive days equals
or exceeds $9.00 per share, as reported on the Nasdaq National Market in which
case the conversion rate is determined by dividing two dollars ($2.00) by such
average price.
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The authorization of additional Artecon preferred stock having equivalent
rights to the Series A Preferred Stock may have an adverse effect upon the
rights of holders of the Artecon common stock. Such effects might include:
- restrictions on dividends on the Artecon common stock if dividends on
preferred stock have not been paid;
- dilution of the voting power of the Artecon common stock to the extent
that the Artecon preferred stock and Series A Preferred Stock have voting
rights;
- dilution of the equity interest of the Artecon common stock to the extent
that the Artecon preferred stock or Series A Preferred Stock is converted
into Artecon common stock; or
- the Artecon common stock not being entitled to share in Artecon's assets
upon liquidation until satisfaction of any liquidation preference granted
to holders of the Artecon preferred stock or Artecon Series A Preferred
Stock.
Additionally, the issuance of Artecon preferred stock, while providing
desired flexibility in connection with possible acquisitions and other corporate
purposes, may be used to deter, discourage or make more difficult the assumption
of control of Artecon by another corporation or person through a tender offer,
merger, proxy contest or similar transaction or series of transactions.
The Artecon certificate of incorporation and Artecon bylaws require that
any action required or permitted to be taken by stockholders of Artecon must be
effected at a duly called annual or special meeting of the stockholders and may
not be effected by a consent in writing. In addition, special meetings of the
stockholders of Artecon may be called only by the Artecon board, the Chairman or
Vice Chairman of the Board, the President of Artecon, or by any person or
persons holding shares entitled to cast at least 10% of the votes at the
meeting. The Artecon certificate of incorporation also provides for a classified
board and specifies that the authorized number of directors may be changed only
by resolution of the Artecon board. These provisions may have the effect of
deterring hostile takeovers or delaying changes in control or management of
Artecon.
DELAWARE GENERAL CORPORATION LAW. Artecon is subject to the provisions of
Section 203 of Delaware law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the time that
such stockholder became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
employees, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
Such effect of this provision may deter hostile takeovers at a price higher
than the prevailing market price for the Artecon common stock. In some
circumstances, certain stockholders may consider this antitakeover provision to
have a disadvantageous effect. Tender offers or other non-open market
acquisitions of shares are frequently made at prices above the prevailing market
price of a company's shares. In addition, acquisitions of shares by persons
attempting to acquire control through market purchases may cause the market
price of the Artecon common stock to reach levels that are higher than would
otherwise be the case. This antitakeover provision may discourage any or all of
such acquisitions, particularly those of less than all of the Artecon common
stock, and may thereby prevent
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certain holders of Artecon common stock from having an opportunity to sell their
shares at a temporarily higher market price.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the
Artecon common stock is Boston EquiServe.
COMPARISON OF SHAREHOLDERS' RIGHTS
In connection with the merger, the Artecon stockholders will be converting
their shares of Artecon common stock and Artecon preferred stock into shares of
Box Hill common stock. Box Hill is a New York corporation and Artecon is a
Delaware corporation, and the Box Hill certificate of incorporation and bylaws
differ from the Artecon certificate of incorporation and bylaws in several
significant respects. Because of the differences between the Delaware law and
the New York law and the differences in the charter documents of Box Hill and
Artecon, the rights of a holder of Box Hill common stock differ from the rights
of a holder of Artecon common stock.
Copies of the Box Hill charter, the Box Hill bylaws, the Artecon charter,
and the Artecon bylaws are incorporated herein by reference and will be sent to
holders of Box Hill and Artecon shares upon request. See Additional Information
"Where You Can Find More Information" on page . The summary contained below is
not intended to be complete and is qualified by reference to Delaware law, New
York law, the Box Hill charter and bylaws and the Artecon charter and bylaws.
Below is a summary of some of the material differences between the Delaware
law and the New York law and the charter documents of Box Hill and Artecon. It
is not practical to summarize all of such differences in this prospectus/joint
proxy statement, but some of the principal differences which could materially
affect the rights of Artecon stockholders include the following:
SIZE OF THE BOARD OF DIRECTORS
The Artecon certificate of incorporation states that the number of
directors will be set exclusively by the Artecon board and authorizes the
Artecon board to change the number by resolution. The number of directors of
Artecon is currently fixed at seven. The Artecon board, acting without
shareholder approval, may change such number.
The Box Hill bylaws authorize the Box Hill board to fix the number of
directors by resolution adopted by the majority of the entire Box Hill board.
The number of directors is currently fixed at six directors. Upon the closing of
the merger, the number of directors will be fixed at eight directors.
CLASSIFIED BOARD OF DIRECTORS
A classified board is one in which a certain number, but not all, of the
directors are elected on a rotating basis each year. Delaware law permits a
classified board of directors to be divided into as many as three classes with
staggered terms of office, with only one class of directors standing for
election each year. The Artecon certificate of incorporation provides for a
classified board of directors with three classes of directors.
The New York law permits the certificate of incorporation or the specific
provisions of a bylaw adopted by the shareholders to divide the directors into
either two, three or four classes. In contrast to the Artecon certificate of
incorporation, the Box Hill certificate of incorporation does not currently
provide for a classified board, but will be amended to
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provide for a classified board of directors divided into three classes. For a
more complete description of the proposal to amend Box Hill's certificate of
incorporation, by-laws and the composition of the Box Hill board after the
merger, you should read "Interest of Certain Persons in the Transaction Merger
Related Agreements Management of Box Hill" and "Amendment of Box Hill
Certificate of Incorporation for a Classified Board of Directors."
REMOVAL OF DIRECTORS
Under Delaware law, if a corporation has a classified board, the
stockholders may remove a director only for cause, unless the certificate of
incorporation provides otherwise. The Artecon certificate of incorporation and
the Artecon bylaws provide that any and all directors may be removed with cause
by a vote of the holders of a majority of shares entitled to vote at an election
of directors, and without cause by:
- until the 2001 annual meeting of stockholders of Artecon, the affirmative
vote of the holders of at least eighty percent (80%) of the voting power
of all the outstanding shares entitled to vote at an election of
directors; and
- after the 2001 annual meeting, the vote of at least sixty-six and
two-thirds percent (66 2/3%) of the voting power of all the outstanding
shares entitled to vote at an election of directors.
Under New York law:
- shareholders may remove any director for cause, and the certificate of
incorporation or provision of a bylaw adopted by the shareholders may
give the board such right;
- if the certificate of incorporation or the bylaws so provide,
shareholders may remove directors without cause; and
- an action to remove a director for cause may be brought by the
attorney-general or by the holders of 10% of the outstanding shares,
whether or not such shares are entitled to vote.
The Box Hill bylaws permit the removal of any director by a vote of the
shareholders cast at a special meeting of shareholders called for such purpose.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under Delaware law, vacancies and newly created directorships may be filled
by a majority of the directors then in office (even though less than a quorum)
unless otherwise provided in the certificate of incorporation or bylaws (and
unless the certificate of incorporation directs that a particular class of stock
is to elect such director, in which case any other directors elected by such
class, or a sole remaining director so elected, may fill such vacancy). Under
the Artecon certificate of incorporation and Artecon bylaws, the shareholders
may, at a special meeting called for such purpose, fill a vacancy created by the
removal of a director at such meeting. Any such vacancy not filled by the
shareholders, or any vacancy caused by the death or resignation of any director,
and any newly created directorship resulting from any increase in the authorized
number of directors, may be filled by the affirmative vote of a majority of the
directors then in office, although less than a quorum. Any director so elected
to fill any such vacancy or newly created directorship shall hold office until
his successor is elected and qualified or until his earlier resignation or
removal.
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Pursuant to the New York law and the Box Hill bylaws, newly created
directorships resulting from an increase in the number of directors and
vacancies arising therefrom may be filled by vote of the board of directors. The
Box Hill bylaws provide that the shareholders may, at a special meeting called
for such purpose, fill a vacancy at such meeting. Any such vacancy not filled by
the shareholders, and any newly created directorship resulting from any increase
in the authorized number of directors, may be filled by the vote of a majority
of the directors then in office, although less than a quorum. Any director so
elected to fill any such vacancy or newly created directorship will hold office
until the next annual meeting of shareholders at which such directorship is up
for election and until his successor is elected and qualified.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Delaware law, other than an action brought by or in the right of the
corporation, indemnification is available to a director, officer, employee or
agent of a corporation who is a party or threatened to be made a party to any
action, suit or proceeding by reason of such office, employment, directorship or
agency if it is determined that the proposed indemnitee acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceedings, had no reasonable cause to believe his or her conduct was unlawful.
In actions brought by or in the right of the corporation, such indemnification
is limited to expenses actually and reasonably incurred and permitted only if
the indemnitee acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the company, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person is adjudged to be liable to the corporation, unless and only to the
extent that the court in which the action was brought determines that, despite
the adjudication of liability but in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for such expenses
which the court deems proper. To the extent that the proposed indemnitee has
been successful in defense of any action, suit or proceeding, he must be
indemnified against expenses actually and reasonably incurred by him in
connection with the action.
The Artecon bylaws provide that Artecon shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, (including action by or in the rights of Artecon) by reason of
the fact that he is or was or has agreed to become a director or officer of
Artecon, or is or was serving or has agreed to serve at the request of Artecon
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or by reason of any action alleged to have been taken
or omitted in such capacity, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him or on his behalf in connection with such action, suit or proceeding and
any appeal therefrom, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of Artecon, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful; except that in the case of an action or suit by or in
the right of Artecon to procure a judgment in its favor (i) such indemnification
shall be limited to expenses (including attorneys' fees) actually and reasonably
incurred by such person in the defense or settlement of such action or suit, and
(ii) no indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to Artecon unless
and only to the extent that the Delaware Court of Chancery or the court in which
such action or suit was
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brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Delaware
Court of Chancery or such other court shall deem proper.
The New York law permits a corporation to indemnify any person made, or
threatened to be made, a party to any action or proceeding other than one by or
in the right of the corporation to procure a judgment in its favor by reason of
the fact that he or she was a director or officer of the corporation, provided
such director or officer acted in good faith for a purpose which he or she
reasonably believed to be in the best interests of the corporation and, in
criminal proceedings, had no reasonable cause to believe his or her conduct was
unlawful. In the case of shareholder derivative suits, the corporation may
indemnify any person by reason of the fact that he or she was a director or
officer of the corporation if he or she acted in good faith for a purpose which
he or she reasonably believed to be in the best interests of the corporation,
except that no indemnification may be made in respect of (i) a threatened
action, or a pending action which is settled or otherwise disposed of, or (ii)
any claim, issue or matter as to which such person has been adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action was brought, or, if no action was brought, any court of competent
jurisdiction determines upon application that, in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for such
portion of the settlement amount and expenses as the court deems proper.
The indemnification rights described above are not exclusive of other
indemnification rights to which a director or officer may be entitled, if
contained in the certificate of incorporation or bylaws, or, when authorized, by
a resolution of shareholders, a resolution of directors or an agreement
providing for such indemnification.
However, no indemnification may be made to or on behalf of any director or
officer if a judgment or other final adjudication adverse to the director or
officer establishes that his or her acts were committed in bad faith or were the
result of active and deliberate dishonesty and were material to the cause of
action so adjudicated, or that he or she personally gained in fact a financial
profit or other advantage to which he or she was not legally entitled.
Any person who has been successful on the merits or otherwise in the
defense of a civil or criminal action or proceeding shall be entitled to
indemnification. Except as provided in the preceding sentence, or ordered by a
court pursuant to New York law, any indemnification provided under New York law
described in the above paragraphs shall be made by the corporation only if
authorized in the specific case, and after a finding that the director or
officer met the requisite standard of conduct by the disinterested directors if
a quorum is available, or in the event a quorum of disinterested directors is
not available or an available quorum so directs, by either the board of
directors upon the written opinion of independent legal counsel, or by the
shareholders.
The Box Hill bylaws provide that Box Hill will, to the fullest extent
permitted by law, indemnify any person made, or threatened to be made, a party
to any action or proceeding, whether civil or criminal, including an action by
or in the right of Box Hill to procure a judgment in its favor and an action by
or in the right of any other corporation of any type or kind, domestic or
foreign, or any partnership, joint venture, trust, employee benefit plan or
other enterprise, which any director or officer of Box Hill served in any
capacity at the request of Box Hill, by reason of the fact that he or she, his
or her testator or intestate, was a director or officer of Box Hill, or served
such other corporation, partnership, joint
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venture, trust, employee benefit plan or other enterprise in any capacity,
against judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees, actually necessarily incurred as a result of such
action or proceeding or any appeal therein. However, no indemnification will be
provided to any such person if a judgment or other final adjudication adverse to
the director or officer establishes that (i) his acts were committed in bad
faith or were the result of active and deliberate dishonesty and were material
to the cause of action so adjudicated, or (ii) he personally gained in fact a
financial profit or other advantage to which he was not legally entitled.
Expenses incurred by an officer or director pursuant to the Box Hill bylaws
in defending a civil or criminal action or proceeding may be paid by the
corporation in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of such person to repay such
amount if it is ultimately found that he is not entitled to be indemnified by
the corporation. The indemnification and advancement of expenses provided for in
the Box Hill bylaws continues as to a person who has ceased to be a director or
officer of Box Hill and will inure to the benefit of the heirs, executors and
administrators of such person.
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
Under Delaware law, a corporation's certificate of incorporation can be
amended by the affirmative vote of the board of directors and approved by the
affirmative vote of the holders of a majority of the outstanding shares entitled
to vote thereon, unless the certificate of incorporation requires the vote of a
larger portion of the shares. The Artecon certificate of incorporation requires
approval by 66 2/3% of the outstanding shares entitled to vote thereon in order
to amend certain provisions relating to the composition of the Artecon board,
the removal of directors, amendment of the bylaws and certificate of
incorporation, actions by stockholders and approval of mergers or combination
with an interested purchaser.
Under the New York law, an amendment or change of the certificate of
incorporation may be authorized by vote of the board of directors, followed by
vote of the holders of a majority of all outstanding shares entitled to vote
thereon. Certain categories of amendments which adversely affect the rights of
any holders of shares of a class of stock must be authorized by a majority of
the votes of all outstanding shares of the class.
AMENDMENT OF BYLAWS
Under Delaware law, the stockholders may adopt, amend or repeal the bylaws.
The certificate of incorporation may confer the power to adopt, amend or repeal
bylaws upon the board of directors. Under the Artecon certificate of
incorporation and Artecon bylaws, the stockholders of Artecon may alter or amend
the Artecon bylaws by a vote of at least 66 2/3% of the outstanding shares
entitled to vote thereon. Under the Artecon certificate of incorporation and
Artecon bylaws, the Artecon board may adopt, amend or repeal the Artecon bylaws.
Under New York law, except as otherwise provided in the certificate of
incorporation, bylaws may be amended, repealed or adopted by a majority of the
votes cast by the shares at the time entitled to vote in the election of any
directors. When so provided in the certificate of incorporation or a bylaw
adopted by the shareholders, bylaws may also be amended, repealed or adopted by
the board of directors by such vote as may be therein specified, which may be
greater than the vote otherwise prescribed by law, but any bylaw adopted by the
board of directors may be amended or repealed by the shareholders entitled
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to vote thereon. Under the terms of the Box Hill bylaws, such bylaws may be
amended by the board of directors at any regular meeting or any special meeting
which is held for that purpose or at a meeting of the shareholders, provided
that notice of such action is contained in the notice or waiver of notice should
the action take place at a special meeting.
POWER TO CALL SPECIAL SHAREHOLDERS MEETINGS
Under Delaware law, a special meeting of stockholders may be called by the
board of directors or by any other person authorized to do so in the certificate
of incorporation or the bylaws. In addition, if the annual meeting of
stockholders has not been held for a certain period of time or action by written
consent to elect directors has not been taken, the Court of Chancery may
summarily order a meeting to be held upon the application of any stockholder or
director. The Artecon certificate of incorporation and the Artecon bylaws
provide that special meetings of stockholders may be called only by the Artecon
board, the Chairman or Vice-Chairman of the Artecon board, the President of
Artecon, or by any person or persons holding shares representing at least ten
percent (10%) of the outstanding capital stock of Artecon.
Under New York law, a special meeting of shareholders may be called by the
board of directors and by such person or persons as may be authorized to do so
in the certificate of incorporation or bylaws. In addition, if an annual
shareholder meeting has not been held for a certain period of time and a
sufficient number of directors were not elected to conduct the business of the
corporation, the board shall call a special meeting for the election of
directors. If the board fails to do so, or sufficient directors are not elected
within a certain period of time, holders of ten percent (10%) of the votes of
the shares entitled to vote in an election of directors may call a special
meeting for such an election. The Box Hill bylaws provide that (i) a special
meeting of shareholders may be called by the President, the Chairman of the
board of directors or by written instrument signed by a majority of the board of
directors and that (ii) a special meeting shall be called by the Chief Executive
Officer, the President, the Chairman of the board of directors or Secretary upon
written request therefor by shareholders holding at least thirty percent (30%)
of the outstanding shares at the time entitled to vote at any meeting of the
shareholders.
ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS
As permitted by law, the Artecon certificate of incorporation provides that
any action taken by shareholders must be effected at an annual or special
meeting and may not be effected by written consent. The Box Hill certificate
does not provide such a limitation; and therefore, except as limited by law,
actions may be taken by the shareholders by written consent.
INSPECTION OF SHAREHOLDERS' LIST
Delaware law allows any stockholder to inspect the stockholders' list for a
purpose reasonably related to such person's interest as a stockholder. The New
York law provides that any shareholder of record has the right to examine in
person or by agent the record of shareholders for any purpose reasonably related
to such person's interest as a shareholder.
DIVIDENDS AND REPURCHASES OF SHARES
Delaware law permits a corporation, unless otherwise restricted by its
certificate of incorporation, to declare and pay dividends out of its surplus
or, if there is no surplus, out
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of net profits for the fiscal year in which the dividend is declared or for the
preceding fiscal year as long as the amount of capital of the corporation is not
less than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets. The Artecon certificate of incorporation does not contain any such
restrictions on Artecon's ability to declare and pay dividends. In addition,
Delaware law generally provides that a corporation may redeem or repurchase its
shares only if such redemption or repurchase would not impair the capital of the
corporation. The ability of a Delaware corporation to pay dividends on, or to
make repurchases or redemptions of, its shares is dependent on the financial
status of the corporation standing alone and not on a consolidated basis. In
determining the amount of surplus of a Delaware corporation, the assets of the
corporation, including stock of subsidiaries owned by the corporation, must be
valued at their fair market value as determined by the board of directors,
regardless of their historical book value.
Under New York law, dividends may be declared or paid and other
distributions may be made out of surplus only, so that the net assets of the
corporation remaining after such declaration, payment or distribution must at
least equal the amount of its stated capital. A corporation may declare and pay
dividends or make other distributions except when the corporation is currently
insolvent or would thereby be made insolvent, or when the declaration, payment
or distribution would be contrary to any restrictions contained in the
corporation's certificate of incorporation. The Box Hill bylaws provide that the
Box Hill board in its discretion may declare and pay dividends upon the
outstanding shares of Box Hill out of surplus only, so that the net assets of
Box Hill remaining after such payment will at least equal the amount of its
stated capital.
APPROVAL OF CERTAIN CORPORATE TRANSACTIONS
Under Delaware law, with certain exceptions, any merger, consolidation or
sale, lease or exchange of all or substantially all of the assets must be
approved by the board of directors and by the affirmative vote of a majority of
the outstanding shares entitled to vote thereon. Pursuant to the New York law,
two-thirds of the votes of all outstanding shares of stock of a New York
corporation entitled to vote thereon is required to approve sales, leases, share
exchanges, or other dispositions of all or substantially all the assets of a
corporation if not made in the usual or regular course of the business actually
conducted by such corporation.
BUSINESS COMBINATION FOLLOWING A CHANGE IN CONTROL
Delaware law prohibits certain business combinations between a Delaware
corporation, the shares of which are listed on a national securities exchange,
and an "interested stockholder" for a period of three years following the time
that such person became an "interested stockholder," without board approval,
unless certain conditions are met and unless the certificate of incorporation of
the corporation contains a provision expressly electing not to be governed by
such provisions. The Artecon certificate of incorporation does not contain such
an election.
New York law prohibits any business combination (defined to include a
variety of transactions, including mergers, consolidations, sales or
dispositions of assets, issuances of stock, liquidations, reclassifications and
the receipt of certain benefits from the corporation, including loans or
guarantees) with, involving or proposed by any interested shareholder (defined
generally as any person who beneficially owns, directly or indirectly, 20% or
more of the outstanding voting stock of a resident domestic New York law
corporation or is an
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affiliate or associate of such resident domestic corporation and at any time
within the past five years was a beneficial owner of 20% or more of such stock)
for a period of five years after the date on which the interested shareholder
became such unless such business combination or the interested shareholder's
purchase of stock is approved by the board of directors prior to such interested
shareholder's stock acquisition date. After such five-year period a business
combination between a resident domestic New York corporation and such interested
shareholder is prohibited unless either certain "fair price" provisions are
complied with or the business combination is approved by a majority of the
outstanding voting stock not beneficially owned by such interested shareholder,
its affiliates or associates. New York law exempts from its prohibitions any
business combination with an interested shareholder if such business
combination, or the purchase of stock by the interested shareholder that caused
such shareholder to become such, is approved by the board of directors of the
resident domestic New York corporation prior to the date on which the interested
shareholder becomes such. Under New York law, corporations may opt to not be
governed by the statute described above. The Box Hill certificate of
incorporation does not contain such an election.
APPRAISAL RIGHTS
Under Delaware law, a stockholder of a corporation participating in certain
major corporate transactions may, under varying circumstances, be entitled to
appraisal rights pursuant to which such stockholder may receive cash in the
amount of the fair market value of the shares held by such stockholder (as
determined by a court or by agreement of the corporation and the stockholder) in
lieu of the consideration such stockholder may otherwise receive in the
transaction. Under Delaware law, appraisal rights are not available to:
- stockholders holding a class or series of shares that are either listed
on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or are held of record by more
than 2,000 holders if such shareholders receive only shares of the
surviving corporation or shares of any other corporation which are either
listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or are held of record by more
than 2,000 holders; or
- stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the
merger because, among other things, the number of shares to be issued in
the merger does not exceed 20% of the shares of the surviving corporation
outstanding immediately prior to the merger, and if certain other
conditions are met.
Delaware law also does not provide stockholders of a corporation with
appraisal rights when the corporation acquires another business through the
issuance of its capital stock:
- in exchange for all or substantially all of the assets of the business to
be acquired;
- in exchange for more than fifty percent of the outstanding shares of the
corporation to be acquired; or
- in a merger of the corporation to be acquired with a subsidiary of the
acquiring corporation.
APPRAISAL RIGHTS ARE AVAILABLE TO HOLDERS OF ARTECON PREFERRED STOCK WITH
RESPECT TO THE MERGER. FOR MORE INFORMATION REGARDING APPRAISAL RIGHTS OF
HOLDERS OF ARTECON
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PREFERRED STOCK, YOU SHOULD READ "THE MERGER -- APPRAISAL RIGHTS OF HOLDERS OF
ARTECON PREFERRED STOCK."
Under the New York law, shareholders have the right under certain
circumstances to receive payment of the fair value of their shares if certain
proposed corporate actions (including a merger, consolidation, certain
amendments or changes to the certificate of incorporation adversely affecting
their shares, certain sales, exchanges or other dispositions of all or
substantially all of the corporation's assets and certain share exchanges) are
taken. However, the right of a shareholder, who does not assent to any plan of
merger or consolidation to which the corporation is a party, to receive payment
of the fair market value of his shares is not available to a shareholder for
shares which were listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. A shareholder intending to
enforce his or her rights of dissent must file a written notice of election to
dissent to the proposed action with the corporation before the meeting of
shareholders at which the action is submitted to a vote, or at such meeting but
before the vote.
AMENDMENT TO BOX HILL'S
CERTIFICATE OF INCORPORATION
CHANGE IN BOX HILL'S NAME
Box Hill shareholders are requested to specifically approve the amendment
to the Box Hill certificate of incorporation to change the name of the company
from Box Hill Systems Corp. to " ".
The board of directors of Box Hill believes that the proposed new name of
the company will better reflect the combined capabilities of Box Hill and
Artecon, and will be an easily recognizable name in the data storage systems
marketplace.
Approval of this proposal will require the affirmative vote of the holders
of a majority of the outstanding voting stock of Box Hill. Accordingly,
abstentions and broker non-votes are equivalent to negative votes for purposes
of approving the proposal.
The Box Hill board believes that approval of this proposal is in the best
interests of Box Hill and its shareholders and unanimously recommends that the
Box Hill shareholders vote in favor of this amendment to the Box Hill
certificate of incorporation.
CHANGE TO PROVIDE FOR CLASSIFIED BOARD OF DIRECTORS
Box Hill shareholders are requested to specifically approve the amendment
to the Box Hill certificate of incorporation to add Article VII of Box Hill's
certificate of incorporation, which amendment provides for a classified board of
directors whereby the directors will be separated into three classes with
members of each class serving for a three-year term. A copy of the proposed
amendment is attached to this prospectus/joint proxy statement as Appendix B.
Currently, each elected director of Box Hill holds office until the next
annual meeting of shareholders and until his or her successor is duly elected
and qualified. The proposed amendment provides for a classified board of
directors with staggered three-year terms. Directors will be assigned to one or
three classes designated as Class I, Class II and Class III, respectively, by
resolution of the board of directors. The board of directors will have the
authority to reallocate directors among classes from time to time, and to
appoint new directors to any class, so long as the total number of directors in
each class remains
167
<PAGE> 176
equal as nearly as practicable. The term of office of Class I directors will
expire on the first annual meeting of stockholders of Box Hill following the
adoption of the certificate of amendment, while the terms of Class II and Class
III directors expire on the second and third annual meetings, respectively,
following adoption of the certificate of amendment. If adopted, the provision
would be applicable to every subsequent election of directors and have the
effect of requiring at least two annual meetings to gain control of the board of
directors versus only one annual meeting under the current system.
Approval of this proposal will require the affirmative vote of the holders
of a majority of the outstanding voting stock of Box Hill. Accordingly,
abstentions and broker non-votes are equivalent to negative votes for purposes
of approving the proposal. A vote against this proposal will constitute a vote
against the merger and the issuance of Box Hill shares pursuant to the terms of
the merger agreement.
The Box Hill board believes that approval of this proposal is in the best
interest of Box Hill and its shareholders and unanimously recommends that the
Box Hill shareholders vote in favor of this amendment to the Box Hill
certificate of incorporation.
AMENDMENT TO INCREASE THE NUMBER OF SHARES AUTHORIZED
UNDER BOX HILL'S 1997 EMPLOYEE STOCK PURCHASE PLAN AND
1995 INCENTIVE STOCK OPTION PLAN
In August 1997, Box Hill adopted the 1997 Employee Stock Purchase Plan,
which provides employees of Box Hill and its designated subsidiaries with an
opportunity to purchase Box Hill common stock through accumulated payroll
deductions. In 1995, Box Hill adopted the 1995 Incentive Program, which provides
for grants to officers, directors and employees and certain consultants of Box
Hill of certain rights to acquire shares of Box Hill common stock.
GENERAL DESCRIPTION
1997 PLAN
The 1997 Plan may be administered by the board or a designated committee
thereof. The 1997 Plan currently authorizes, and has reserved for issuance,
250,000 shares of Box Hill common stock, of which approximately 232,000 remain
available for issuance.
The 1997 Plan provides for a series of six-month periods, at the conclusion
of each of which an option granted pursuant to the plan may be exercised. The
enrollment date, which is the first day of each offering period, is the date by
which each employee may elect to have up to 10% of his or her regular
compensation during the offering period deducted from their respective payroll
account. The exercise date under the purchase plan is the last day of any
offering period. The purchase price of any option granted under the purchase
plan is an amount equal to 85% of the fair market value of a share of common
stock on the enrollment date or exercise date, whichever is lower. Subject to
certain volume limitations, the purchase option may be exercised on the exercise
date for a number of shares equal to the accumulated deductions for the offering
period divided by the purchase price.
168
<PAGE> 177
1995 PLAN
The 1995 Plan may be administered by the board or a designated committee
thereof. The 1995 Plan currently authorizes, and reserves for issuance,
2,392,500 shares of Box Hill common stock, of which approximately 850,000 remain
available for issuance.
The board may grant to employees, officers, key executives, directors,
professionals, administrators or consultants non-transferable incentive stock
options or non-qualified stock options under the 1995 Plan. Options granted
thereunder are evidenced by an option agreement between Box Hill and the
grantee, which option agreement specifies the exercise price per share, term and
other provisions thereof, all as determined by the board in its sole discretion,
subject to its fiduciary duties. Grants of options under the 1995 Plan need not
be uniform. To exercise an option, an employee may pay the price of the option
in cash, or deliver other shares of Box Hill common stock owned by the grantee
for at least six-months, as permitted by law.
NEED FOR ADDITIONAL SHARES
As of May 31, 1999, options to purchase approximately 44,600 shares of
Artecon common stock were outstanding under the Artecon 1996 Employee Stock
Purchase Plan and approximately 1,132,500 shares of Artecon common stock were
outstanding under Artecon's 1993 Stock Option Plan and 1996 Stock Option Plan.
At the exchange ratio of .40, such number shares of Artecon common stock and
options may be exchanged for shares and options to purchase an aggregate of
470,840 shares of Box Hill common stock, which exceeds the number of shares
available for issuance under the Box Hill plans. Therefore, the number of shares
of Box Hill common stock available for issuance under the Box Hill plans must be
increased to enable Box Hill to satisfy its obligations under the merger
agreement.
Consequently, the Box Hill board has authorized, subject to Box Hill
shareholder approval, an amendment to the 1997 Plan authorizing an additional
500,000 shares of Box Hill common stock to be reserved for issuance under such
plan, and an amendment to the 1995 Plan authorizing an additional 2,000,000
shares of Box Hill common stock to be reserved for issuance under such plan.
Such increase would provide an adequate number of shares of Box Hill common
stock to allow Box Hill to exchange options granted under the Artecon option
plans for options to purchase Box Hill common stock. Box Hill also believes the
amendment will provide sufficient shares for future grants under the Box Hill
plans to employees of the combined company.
Approval of the amendment to increase the number of shares of Box Hill
common stock issuable under the 1997 Plan and 1995 Plan requires the affirmative
vote of a majority of shares of Box Hill common stock cast on the proposal,
provided that the total votes cast on the proposal represents more than 50% of
all shares of Box Hill common stock that are entitled to vote thereon.
Approval of the amendment to increase the number of shares of Box Hill
common stock issuable under the 1997 Plan and 1995 Plan is conditioned upon
shareholder approval of the other Box Hill proposals. If the merger proposal or
the proposals to amend the certificate of incorporation are not approved, the
amendment to increase the number of shares of Box Hill common stock issuable
under the 1997 Plan and 1995 Plan will not become effective.
169
<PAGE> 178
The board recommends that the holders of Box Hill common stock vote for the
approval of the amendment of the 1997 employee stock purchase plan and the 1995
incentive program.
EXPERTS
The consolidated audited financial statements of Box Hill Systems Corp.
included in this prospectus/joint proxy statement and elsewhere in this
registration statement of which this prospectus/joint proxy statement is a part,
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of Artecon at March 31, 1999 and
1998, and for each of the three years in the period ended March 31, 1999,
included in this prospectus/ joint proxy statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report thereon appearing
elsewhere herein. The consolidated financial statements referred to above are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of Storage Dimensions, Inc. as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997 included in this prospectus/joint proxy statement have been so
included in reliance on the part of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the shares of Box Hill common stock offered hereby, certain
legal matters in connection with the merger and the federal income tax
consequences of the merger will be passed upon for Box Hill by Herrick,
Feinstein LLP, New York, New York. Certain legal matters in connection with the
merger agreement and the federal income tax consequences of the merger will be
passed upon for Artecon by Cooley Godward LLP, San Diego, California.
170
<PAGE> 179
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
BOX HILL SYSTEMS CORP.
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Shareholders' Equity for 1998,
1997 and 1996............................................. F-5
Consolidated Statements of Cash Flows for 1998, 1997 and
1996...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Balance Sheet as of March 31, 1999
and December 31, 1998 (unaudited)......................... F-19
Condensed Consolidated Statement of Income for the three
months ended March 31, 1999 and 1998 (unaudited).......... F-20
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 (unaudited).... F-21
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-22
ARTECON, INC.
Independent Auditors' Report................................ F-24
Consolidated Balance Sheets as of March 31, 1999 and March
31, 1998.................................................. F-25
Consolidated Statement of Operations and Comprehensive
Operations for the years ended March 31, 1999, March 31,
1998 and March 29, 1997................................... F-27
Consolidated Statement of Shareholders' Equity for the years
ended March 31, 1999, March 31, 1998 and March 29, 1997... F-28
Consolidated Statement of Cash Flows for the years ended
March 31, 1999, March 31, 1998 and March 29, 1997......... F-29
Notes to Consolidated Financial Statements.................. F-32
STORAGE DIMENSIONS, INC.
Report of Independent Accountants........................... F-50
Consolidated Balance Sheet as of December 31, 1997 and
1996...................................................... F-51
Consolidated Statement of Operations for the three years
ended December 31, 1997................................... F-52
Consolidated Statement of Stockholders' Equity for the three
years ended December 31, 1997............................. F-53
Consolidated Statement of Cash Flows for the three years
ended December 31, 1997................................... F-54
Notes to Consolidated Financial Statements.................. F-55
</TABLE>
F-1
<PAGE> 180
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Box Hill Systems Corp.:
We have audited the accompanying consolidated balance sheets of Box Hill
Systems Corp. (a New York Corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Box Hill Systems Corp. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
January 29, 1999 (except with respect
to the matter discussed in Note 11 as to
which the date is April 29, 1999)
F-2
<PAGE> 181
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---- ----
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $54,214 $40,897
Short-term investments................................... 3,500 9,305
Accounts receivable, net of allowance of $640 and $267... 13,601 13,866
Inventories.............................................. 8,091 7,351
Prepaid expenses and other............................... 1,220 344
Prepaid income taxes..................................... 737 --
Deferred income taxes.................................... 984 721
------- -------
Total current assets.................................. 82,347 72,484
Property and equipment, net................................ 1,331 1,199
Deferred income taxes...................................... 191 134
------- -------
$83,869 $73,817
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 9,796 $ 8,088
Accrued expenses......................................... 4,008 2,000
Customer deposits........................................ 2,173 2,143
Deferred revenue......................................... 2,455 1,829
Income taxes payable..................................... -- 757
Distribution payable..................................... -- 227
------- -------
Total current liabilities............................. 18,432 15,044
------- -------
Deferred rent.............................................. 287 225
------- -------
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued............................... -- --
Common stock, $.01 par value, 40,000,000 shares
authorized, 14,327,081 and 14,138,871 shares issued
and outstanding....................................... 143 141
Additional paid-in capital............................ 57,157 56,491
Retained earnings........................................ 7,850 1,916
------- -------
Total shareholders' equity............................ 65,150 58,548
------- -------
$83,869 $73,817
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 182
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
--------------------------------
<S> <C> <C> <C>
Net revenues..................................... $72,476 $70,344 $50,027
Cost of goods sold............................... 47,403 45,528 33,028
------- ------- -------
Gross profit................................ 25,073 24,816 16,999
------- ------- -------
Operating expenses:
Shareholder officers' compensation............. 1,275 7,538 6,347
Engineering and product development............ 2,617 2,324 2,071
Sales and marketing............................ 8,731 6,699 5,325
General and administrative..................... 4,634 3,465 2,348
------- ------- -------
17,257 20,026 16,091
------- ------- -------
Operating income................................. 7,816 4,790 908
Interest income.................................. 1,924 681 144
------- ------- -------
Income before income taxes.................. 9,740 5,471 1,052
Income taxes..................................... 3,806 413 226
------- ------- -------
Net income....................................... $ 5,934 $ 5,058 $ 826
======= ======= =======
Basic net income per share....................... $ .42 $ .45 $ .08
======= ======= =======
Diluted net income per share..................... $ .39 $ .42 $ .08
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 183
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------ ------------------ -------- -------------
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............ 9,900,000 $ 99 -- $ 7,844 $ 7,943
Net income.......................... -- -- -- 826 826
---------- ---- ------- -------- --------
Balance, December 31, 1996............ 9,900,000 99 -- 8,670 8,769
Sale of Common stock, net of
offering costs................... 4,125,000 41 56,514 -- 56,555
Distributions to S Corporation
shareholders..................... -- -- -- (11,927) (11,927)
Termination of S Corporation
status........................... -- -- (115) 115 --
Exercise of stock options........... 113,871 1 92 -- 93
Net income.......................... -- -- -- 5,058 5,058
---------- ---- ------- -------- --------
Balance, December 31, 1997............ 14,138,871 141 56,491 1,916 58,548
Exercise of stock options........... 170,870 2 120 -- 122
Sale of Common stock under Employee
Stock Purchase Plan.............. 12,381 -- 108 -- 108
Acquisition of Box Hill Europe...... 4,959 -- 52 -- 52
Issuance of Common stock warrants... -- -- 213 -- 213
Tax benefit of option exercises..... -- -- 173 -- 173
Net income.......................... -- -- -- 5,934 5,934
---------- ---- ------- -------- --------
Balance, December 31, 1998............ 14,327,081 $143 $57,157 $ 7,850 $ 65,150
========== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 184
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities:
Net income.................................... $ 5,934 $ 5,058 $ 826
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities --
Depreciation and amortization.............. 389 279 257
Deferred income taxes........................... (320) (855) --
Non-cash compensation expense................... 213 -- --
Other........................................... 63 70 45
Changes in operating assets and liabilities--
Accounts receivable............................. 265 (4,628) (3,989)
Inventories..................................... (740) (1,237) (1,890)
Prepaid expenses and other...................... (876) (129) (94)
Prepaid income taxes............................ (565) -- --
Accounts payable................................ 1,760 2,936 1,090
Accrued expenses................................ 2,008 889 545
Customer deposits............................... 30 797 551
Deferred revenue................................ 626 946 459
Income taxes payable............................ (757) 757 --
------- -------- -------
Net cash provided by (used in) operating
activities.................................... 8,030 4,883 (2,200)
------- -------- -------
Investing Activities:
Purchases of property and equipment............. (521) (623) (284)
Sales (purchases) of short-term investments..... 5,805 (9,305) --
------- -------- -------
Net cash provided by (used in) investing
activities.................................... 5,284 (9,928) (284)
------- -------- -------
Financing Activities:
Distributions to S Corporation shareholders..... (227) (11,700) --
Net proceeds from initial public offering....... -- 56,555 --
Proceeds from exercise of stock options......... 122 93 --
Proceeds from sale of stock to employees........ 108 -- --
------- -------- -------
Net cash provided by financing activities....... 3 44,948 --
------- -------- -------
Net increase (decrease) in cash and cash
equivalents................................... 13,317 39,903 (2,484)
Cash and cash equivalents, beginning of year.... 40,897 994 3,478
------- -------- -------
Cash and cash equivalents, end of year.......... $54,214 $ 40,897 $ 994
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 185
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Box Hill Systems Corp. (the "Company"), designs, manufactures, markets and
supports high performance data storage systems for the open systems computing
environment. In the United States, the Company employs a direct marketing
strategy aimed at data-intensive industries which, to date, include financial
services, telecommunications, healthcare, government/defense and academia. The
Company's international strategy has been to use distributors located outside of
the United States. The Company's manufacturing operations consist primarily of
assembly and integration of components and subassemblies into the Company's
products. The Company's manufacturing, principal research and development and
principal sales and marketing operations are conducted from a single, leased
facility in New York City.
INITIAL PUBLIC OFFERING
The Company completed an initial public offering (the "Offering") of its
Common Stock effective September 16, 1997. The offering consisted of the sale of
5.5 million shares of Common Stock at an initial public offering price of
$15.00, of which 3.3 million shares were issued and sold by the Company and 2.2
million 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 estimated underwriting discounts and offering expenses, were
approximately $56.6 million.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Box Hill
Systems Corp. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION AND PRODUCT WARRANTY
The Company recognizes revenue on product sales when products are shipped.
Revenues from maintenance contracts are deferred and recognized on a
straight-line basis over the contract term, generally twelve months. The cost of
purchase maintenance contracts is deferred and recognized as expense over the
contract term, consistent with the associated revenue. At December 31, 1998, the
balance of deferred costs of purchase maintenance contracts was $711 and is
included in prepaid expenses and other assets.
F-7
<PAGE> 186
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company generally extends to its customers the warranties provided to
the Company by its suppliers. The Company provides for the estimated cost that
may be incurred for product warranties in the period the related revenue is
recognized. To date, the Company's suppliers have covered the majority of the
Company's warranty costs. There can be no assurance that such suppliers will
continue to cover such costs in the future, which could have a material adverse
effect on the Company's financial position and results of operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments purchased with
an original maturity of three months or less. Cash equivalents consist
principally of money market mutual funds.
SHORT-TERM INVESTMENTS
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Short-term investments have been
categorized as available for sale and, as a result, are stated at fair value.
Unrealized holding gains and losses are included as a separate component of
shareholders' equity until realized. At December 31, 1998 and 1997, unrealized
holding gains and losses were not material. Short-term investments are generally
comprised of variable rate securities that provide for early redemption within
twelve months.
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.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Equipment and furniture are
depreciated using straight-line and accelerated methods over their estimated
useful lives (two to seven years). Leasehold improvements are amortized on a
straight-line basis over the life of the lease. Significant improvements are
capitalized and expenditures for maintenance and repairs are charged to expense
as incurred. Upon the sale or retirement of these assets, the applicable cost
and related accumulated depreciation are removed from the accounts and any gain
or loss is included in the statements of income.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. For the years ended
December 31, 1998, 1997 and 1996, advertising expense was $499, $444, and $520,
respectively.
PRODUCT DEVELOPMENT
Research and development costs are expensed as incurred. In conjunction
with the development of its products, the Company incurs certain software
development costs. No
F-8
<PAGE> 187
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs have been capitalized pursuant to SFAS No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed," since the
period between achieving technological feasibility and completion of such
software is relatively short and software development costs qualifying for
capitalization have been insignificant.
INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates.
The Company was subject to taxation under Subchapter "S" of 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, prior to the offering, no provision was made for federal or state
income taxes and the Company's shareholders' were taxed directly on their
proportionate share of the Company's taxable income. In connection with the
offering, the Company terminated its S Corporation status and is subject to
federal and state income taxes for the C Corporation's pro rata share of the
Company's 1997 taxable income. Upon terminating its S Corporation status, the
Company recorded a $855 tax benefit for the recognition of a net deferred tax
asset (see Note 6).
NET INCOME PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". This
statement requires that the Company report basic and diluted earnings per share
for all periods reported. Basic and diluted earnings per share are calculated by
dividing net income by the weighted average and diluted weighted average number
of shares outstanding, respectively.
The table below sets forth the reconciliation of the numerators and
denominators of the earnings per share calculation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income............................... $ 5,934 $ 5,058 $ 826
======= ======= =======
Shares used in computing basic net income
per share.............................. 14,283 11,120 9,900
Dilutive effect of options............... 770 1,047 791
Shares used in computing diluted net
income per share....................... 15,053 12,167 10,691
======= ======= =======
</TABLE>
For the year ended December 31, 1998, options to purchase 547,531 shares of
common stock with exercise prices ranging from $6.60 to $15.00 per share were
outstanding, but were not included in the computation of diluted net income per
share for the entire year because the exercise price of the options was greater
than the average market price of the common shares. These options expire at
various times through November 2008.
F-9
<PAGE> 188
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for income taxes for the years ended December 31, 1998, 1997, and
1996 was $5,459, $448 and $256, respectively.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management believes that the
Company operates in a single line of business and, therefore, no additional
disclosure is required.
2. RISKS AND UNCERTAINTIES
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but are
not limited to, dependence on new products, dependence on a limited number of
suppliers of high quality components, reliance on a limited number of principal
customers, concentration of customers in targeted industries, difficulties in
managing growth, difficulties in attracting and retaining qualified personnel,
competition, competitive pricing, dependence on key personnel, enforcement of
the Company's intellectual property rights, dependence on a single production
facility, and an uneven pattern of quarterly results.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The Company does not require collateral or other securities to support customer
receivables. The majority of the Company's net revenues are derived from sales
to customers in the financial services and telecommunications industries and a
significant amount of the Company's net revenues are derived from sales to
customers located in the New York City area. For the years ended December 31,
1998, direct sales to customers in the financial services and telecommunications
industry constituted 47% and 15%, respectively, of the Company's net revenues
and for the year ended December 31, 1997 were approximately 40% and 14%,
respectively, of the Company's net revenues. For the year ended December 31,
1998, one customer accounted for 17.9% of the Company's net revenues. For the
years ended December 31, 1997 and 1996, no single customer accounted for greater
than 10% of the Company's net revenues.
F-10
<PAGE> 189
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXPORT SALES
The following table summarizes export sales by graphical region:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Asia............................................ 4.2% 5.8% 9.1%
Europe.......................................... 6.3% 10.2% 8.3%
Other........................................... 1.6% 1.2% 0.6%
---- ---- ----
12.1% 17.2% 18.0%
==== ==== ====
</TABLE>
DEPENDENCE ON SUPPLIERS
The Company purchases substantially all of its disk drives, a critical
component of its storage products, from one supplier. Approximately 24.9%,
32.7%, and 52.7% of the Company's total component purchases were made from this
supplier for the years ended December 31, 1998, 1997 and 1996, respectively. The
Company resells the products of various third parties including one supplier of
tape libraries and other products. During 1998 and 1997, approximately 34% and
10% respectively, of total purchases were from this supplier. Additionally, the
Company purchases all of its DLT tape drives from another supplier, which is the
only source for such tape drives. Approximately 2.9%, 10.5% and 16.5% of the
Company's total component purchases were from this supplier for the years ended
December 31, 1998, 1997 and 1996. There are a limited number of suppliers for
certain of the Company's other components and management believes that other
suppliers could provide certain similar products on comparable terms. Any
shortage of key components and any delay or other difficulty in obtaining such
components from other suppliers and integrating them into the Company's products
or lack of supply from sole source suppliers could have a material adverse
effect on the Company's financial position and results of operations.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Equipment and furniture.............................. $1,948 $1,514
Leasehold improvements............................... 949 862
------ ------
2,897 2,376
Less - Accumulated depreciation...................... (1,566) (1,177)
------ ------
$1,331 $1,199
====== ======
</TABLE>
Depreciation expense was $389, $279 and $257 for the years ended December
31, 1998, 1997 and 1996, respectively.
F-11
<PAGE> 190
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. CREDIT FACILITY
In October 1997, the Company entered into an agreement with a commercial
bank which provides for a $10 million revolving line of credit. The Company did
not have any borrowings under this facility in 1998 or 1997. 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, as defined. The revolver expires in May
1999.
5. INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ----
<S> <C> <C> <C>
Current:
Federal.................................... $2,729 $ 867 $ --
State and local............................ 1,397 401 226
------ ------ ----
4,126 1,268 226
------ ------ ----
Deferred:
Federal.................................... (216) -- --
State and local............................ (104) -- --
Recognition of deferred tax asset.......... -- (855) --
------ ------ ----
(320) (855) --
------ ------ ----
$3,806 $ 413 $226
====== ====== ====
</TABLE>
The provision for income taxes for the year ended December 31, 1998,
consists of federal and state income taxes. The provision for income taxes for
the year ended December 31, 1997, consists of federal and state income taxes on
the C Corporation's pro rata portion of the Company's 1997 taxable income, New
York City taxes, state franchise taxes and a one-time tax benefit of $855
related to the recognition of the net deferred tax asset recorded by the Company
upon terminating its S Corporation status. For the year ended December 31, 1996,
the provision for income taxes consists of New York City taxes and state
franchise taxes.
The reconciliation of the federal statutory income tax rate and the actual
and pro forma effective income tax rate is as follows for the year ended
December 31, 1998:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Federal statutory rate...................................... 34.0%
State and local income taxes, net of federal benefit........ 10.9
Permanent differences and other............................. (5.8)
----
39.1%
====
</TABLE>
F-12
<PAGE> 191
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences that give rise to the gross
deferred income tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1997
------ ----
<S> <C> <C>
Warranty accrual....................................... $ 372 $228
Inventory reserve...................................... 205 238
Vacation accrual....................................... 113 86
Allowance for bad debts................................ 233 114
Depreciation........................................... 69 37
Deferred rent.......................................... 123 97
Other accruals and reserves............................ 60 55
------ ----
$1,175 $855
====== ====
</TABLE>
6. STOCK INCENTIVE PLAN
EMPLOYEE STOCK OPTIONS
The Company's stock incentive plan (the "Plan"), adopted in May 1995 and
amended in July 1997, provides for the granting of incentive and nonqualified
stock options to employees, non-employee directors, and consultants. The Company
has currently reserved 2,392,500 shares of Common Stock for issuance pursuant to
the Plan. The terms and conditions of grants of stock options are determined by
the Board of Directors in accordance with the terms of the Plan.
Information with respect to options under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF RANGE OF AVERAGE
SHARES EXERCISE PRICE EXERCISE PRICE
--------- -------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1995................ 1,043,833 $ .64 - .75 $0.69
Grants.................................. 68,947 .83 - 5.02 1.93
--------- ------------- -----
Balance, December 31, 1996................ 1,112,780 .64 - 5.02 0.77
Grants.................................. 577,850 5.03 - 15.00 13.13
Forfeitures............................. (19,832) .75 - 5.02 1.66
Exercises............................... (113,871) .75 - 5.02 0.82
--------- ------------- -----
Balance, December 31, 1997................ 1,556,927 .64 - 15.00 5.34
Grants.................................. 265,500 5.50 - 10.50 9.15
Forfeitures............................. (313,447) .75 - 12.73 10.94
Exercises............................... (170,870) .64 - 2.23 0.71
--------- ------------- -----
Balance, December 31, 1998................ 1,338,110 $ .64 - 15.00 $5.38
========= ============= =====
</TABLE>
F-13
<PAGE> 192
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, 649,779 options were exercisable and 619,650 options
were available for future grants. The options generally vest ratably over a
five-year period and are exercisable over a period of ten years, with the
exception of 291,531 options issued to outside directors which vest ratably over
a four-year period.
Information with respect to options issued under the Plan at December 31,
1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- -------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .64 - $ .75 732,115 6.7 years $ .68 490,351 $ .68
$ .83 - $ 5.02 36,564 7.3 years 1.84 19,725 1.65
$ 5.03 - $15 569,431 8.9 years 11.64 139,703 12.78
</TABLE>
The Company applies Accounting Principal Board Opinion No. 25," Accounting
for Stock Issued to Employee," and the related interpretations in accounting for
its stock option plan.
Had compensation cost for the Plan been determined upon the fair value of
the options issued to employees at the date of grant, as prescribed by SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
basic and diluted net income per share would have been reduced to the following
amounts:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Net Income:
As reported...................................... $5,934 $7,216
As adjusted...................................... 5,363 6,566
Basic net income per share:
As reported...................................... $ .42 $ .62
As adjusted...................................... .38 .56
Diluted net income per share:
As reported...................................... $ .39 $ .57
As adjusted...................................... .36 .52
</TABLE>
The weighted average fair value of each stock option granted during the
years ended December 31, 1998, 1997 and 1996 was $5.98, $8.67 and $1.86,
respectively.
F-14
<PAGE> 193
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.5% 6.4% 6.0%
Expected dividend yield........................... -- -- --
Expected life..................................... 7 years 7 years 7 years
Expected volatility............................... 60% 60% --
</TABLE>
Because additional option grants are expected to be made each year, the
above pro forma disclosures are not representative of pro form effects of
reported net income for future years.
STOCK OPTIONS ISSUED TO CONSULTANT
In October 1998, the Company issued an option to a sales consultant to
purchase 150,000 shares of Common Stock at an exercise price of $5.00, which was
equal to the fair value of the Company's stock on the date of grant. The option
was exercisable immediately and expires in January 2000. The Company recorded a
charge of $213 for the year ended December 31, 1998 for the fair value of option
on the date of grant, which was calculated using the Black-Scholes option
pricing model.
7. RELATED PARTY TRANSACTIONS
DISTRIBUTIONS TO S CORPORATION SHAREHOLDERS
In September 1997, the Company made distributions of $10,500 to its S
Corporation shareholders, representing the estimated taxed, but undistributed S
Corporation earnings of the Company as of June 30, 1997. In December 1997, the
Company made distributions of $1,200 to its S Corporation shareholders,
representing the estimated taxed, but undistributed, S Corporation earnings of
the Company as of December 31, 1997. In March 1998, the Company made
distributions of $227 to its S Corporation shareholders, representing the final
distribution for taxed, but undistributed, S Corporation earnings.
BOX HILL EUROPE
Box Hill Systems Europe Limited ("Box Hill Europe") 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 "Box Hill Europe
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 Box Hill Europe Merger, Box Hill Europe became a wholly owned
subsidiary of the Company. On January 1, 1998, the fair value of the 4,959
shares of Box Hill common stock issued to the founding shareholders was $52;
which was equal to the net book value of Box Hill Europe on that date. No
restatement of the Company's
F-15
<PAGE> 194
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the Company's statements of operations for all periods
prior to the Box Hill Europe Merger.
8. EMPLOYEE BENEFIT PLANS
RETIREMENT SAVINGS PLAN
Effective August 1, 1995, the Company established a retirement savings plan
under the provisions of Section 401(k) of the Internal Revenue Code. The plan
covers all employees who were employed on the effective date of the plan or upon
the attainment of age 21. The Company can make discretionary contributions to
the plan. No contributions were made to the plan for the years ended December
31, 1998, 1997 and 1996.
EMPLOYEE STOCK PURCHASE PLAN
In August 1997, the Company adopted an employee stock purchase plan under
the provisions of Section 423 of the Internal Revenue Code. The plan provides
eligible employees of the Company with an opportunity to purchase shares of the
Company's Common Stock at 85% of fair market value, as defined. The Company has
reserved 250,000 shares of Common Stock for issuance pursuant to this plan. For
the year ended December 31, 1998, 12,381 shares were issued under the plan.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its primary operating facility under a noncancelable
operating lease which expires in September 2007. The lease provides for a rent
abatement which is being amortized over the life of the lease. Rent expense for
the years ended December 31, 1998, 1997 and 1996, was $685, $472 and $369,
respectively.
Future minimum lease payments, on a cash basis, under all noncancelable
operating leases at December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999........................................... $ 621
2000........................................... 637
2001........................................... 652
2002........................................... 628
2003........................................... 671
Thereafter..................................... 2,595
------
$5,804
======
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has an employment contract with its Chief Executive Officer
("CEO") which provides for base annual compensation, incentive bonus, benefits
and termination. Either the Company or the CEO may terminate the agreement at
any time with or without cause. However, if the Company terminates the agreement
without cause, the
F-16
<PAGE> 195
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company must continue to pay the CEO for a one year period subsequent to the
termination. The agreement contains a non-competition covenant for an eighteen
month period following termination of employment.
During 1998, the Company hired and employed its Executive Vice President of
Sales pursuant to terms which provide for base annual compensation, commissions,
benefits and termination. The Company is in the process of negotiating an
employment contract and compensation plan with this officer. The proposed
agreement is expected to contain severance, disability and non-competition
provisions following the termination of employment.
On July 15, 1997, the Company entered into employment agreements with its
three shareholder officers, which commenced on September 22, 1997. The
agreements provide for combined minimum annual base compensation of $1,275,
benefits, termination, non-competition and death benefits. The agreements extend
through December 31, 2000. In addition, the shareholder officers are eligible
for combined annual bonus equal to (i) 1.0% of the consolidated net revenues of
the Company in excess of $100 million, plus (ii) 8.0% of the income before
income taxes in excess of $20 million, for any fiscal year during the agreement
term.
CLASS ACTION LAWSUITS
In December 1998, four shareholder class action lawsuits were filed against
the Company, certain of its officers and directors, and the underwriters of the
Company's September 16, 1997 initial public offering (the "Offering"). The
actions were filed on behalf of purchasers of the Common Stock of the Company
during the period from September 16, 1997 to April 14, 1998 and allege that the
Company 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.
The Company believes that it has meritorious defenses to plaintiffs' claims and
intends to vigorously defend against those claims. Legal costs to defend the
claims are expected to be material and will be charged to expense as incurred.
OTHER LITIGATION
The Company is involved in certain other legal actions and claims arising
in the ordinary course of business. Management believes that the outcome of such
other litigation and claims will not have a material adverse effect on the
Company's financial position or results of operations.
10. RECAPITALIZATION
On July 3, 1997, the Company's Board of Directors and Shareholders approved
an amendment to the Company's Certificate of Incorporation authorizing 5,000,000
shares of $.01 par value Preferred Stock and authorized a 3.3-for 1 split of its
Common Stock. The authorized Preferred Stock and the stock split have been
retroactively reflected in the accompanying financial statements.
F-17
<PAGE> 196
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ARTECON ACQUISITION SUBSEQUENT TO DECEMBER 31, 1998.
Effective April 29, 1999, the Company and Artecon, Inc. ("Artecon") signed
an agreement and plan of merger (the "Merger Agreement"), in which the two
companies would be merged in a tax-free, stock-for-stock transaction intended to
be accounted for as a pooling of interests. Under the terms of the Merger
Agreement, the Company will issue 0.4 shares of its common stock in exchange for
each share of Artecon common stock. Additionally, Artecon's convertible
preferred A stock will be converted into the Company's Common stock based on the
terms defined in the Merger Agreement.
F-18
<PAGE> 197
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
INFORMATION)
<S> <C> <C>
ASSETS
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
------- -------
Total current assets............................ 84,259 82,347
Property and equipment, net.......................... 1,275 1,331
Deferred income taxes................................ 191 191
------- -------
$85,725 $83,869
======= =======
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
------- -------
Total current liabilities....................... 19,677 18,432
------- -------
Deferred rent........................................ 292 287
------- -------
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
------- -------
Total shareholders' equity...................... 65,756 65,150
------- -------
$85,725 $83,869
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE> 198
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
(UNAUDITED)
<S> <C> <C>
Net revenue................................................ $14,285 $16,045
Cost of goods sold......................................... 9,393 10,519
------- -------
Gross profit.......................................... 4,892 5,526
------- -------
Operating expenses:
Engineering and product development...................... 673 646
Sales and marketing...................................... 2,118 1,999
General and administrative............................... 1,626 1,282
------- -------
4,417 3,927
------- -------
Operating income...................................... 475 1,599
Interest income............................................ 442 506
------- -------
Income before income taxes............................... 917 2,105
Income tax provision....................................... 353 810
------- -------
Net income................................................. $ 564 $ 1,295
======= =======
Basic net income per share................................. $ .04 $ .09
======= =======
Diluted net income per share............................... $ .04 $ .09
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE> 199
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
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
------- -------
Net cash provided by operating activities......... 4,879 1,381
------- -------
Investing activities:
(Purchase) sale of short-term investments................. (2,500) 4,405
Purchases of property and equipment....................... (34) (172)
------- -------
Net cash (used in) provided by investing
activities..................................... (2,534) 4,233
------- -------
Financing activities:
Proceeds from exercise of stock options................... 19 57
Proceeds from Employee Stock Purchase Plan................ 25 75
Distributions to S Corporation shareholders............... -- (227)
------- -------
Net cash provided by (used in) financing
activities..................................... 44 (95)
------- -------
Net increase in cash and cash equivalents................... 2,389 5,519
------- -------
Cash and cash equivalents, beginning of period.............. 54,214 40,897
------- -------
Cash and cash equivalents, end of period.................... $56,603 $46,416
======= =======
Supplemental cash flow disclosure:
Cash paid for income taxes................................ $ -- $ 751
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE> 200
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 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
MARCH 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Shares used in computing basic net income per share........ 14,341 14,221
Dilutive effect of options................................. 657 844
------ ------
Shares used in computing diluted net income per share...... 14,998 15,065
====== ======
</TABLE>
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
F-22
<PAGE> 201
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:
Effective April 29, 1999, the Company and Artecon, Inc. ("Artecon") signed
an agreement and plan of merger (the "Merger Agreement"), in which the two
companies would be merged in a tax-free, stock-for-stock transaction intended to
be accounted for as a pooling of interests. Under the terms of the Merger
Agreement, the Company will issue 0.4 shares of its common stock in exchange for
each share of Artecon common stock. Additionally, Artecon's convertible
preferred A stock will be converted into the Company's Common Stock based on the
terms defined in the Merger Agreement.
F-23
<PAGE> 202
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Artecon, Inc.
We have audited the accompanying consolidated balance sheets of Artecon,
Inc. and its subsidiaries (the Company) as of March 31, 1999 and 1998, and the
related consolidated statements of operations, comprehensive operations,
shareholders' equity and cash flows for each of the three years in the period
ended March 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of Artecon, Inc. and its
subsidiaries at March 31, 1999 and 1998 and the results of their operations and
their cash flows for each of the three years in the period ended March 31, 1999,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
May 6, 1999
F-24
<PAGE> 203
ARTECON, INC.
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 2,093 $ 7,992
Accounts receivable, less allowance for doubtful
accounts and sales returns of $1,010 at March 31,
1999 and $887 at March 31, 1998..................... 12,231 18,415
Inventories, net....................................... 11,673 12,354
Deferred income taxes.................................. 3,239 3,510
Prepaid expenses and other............................. 1,970 1,654
-------- --------
Total current assets................................ 31,206 43,925
Property and Equipment:
Machinery and equipment................................ 3,811 4,474
Tooling molds.......................................... 932 1,158
Furniture and fixtures................................. 136 105
Computer software...................................... 183 347
-------- --------
5,062 6,084
Less accumulated depreciation.......................... (3,426) (2,358)
-------- --------
Property and equipment, net......................... 1,636 3,726
Other assets............................................. 114 133
Goodwill, net............................................ 1,252 4,668
Other intangible assets, net............................. 1,059 3,291
Deferred income taxes.................................... 7,894 1,602
-------- --------
$ 43,161 $ 57,345
======== ========
</TABLE>
F-25
<PAGE> 204
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 9,663 $ 14,253
Accrued compensation................................... 1,446 2,431
Accrued merger and restructuring liabilities........... 1,259 5,765
Other accrued liabilities.............................. 2,016 3,684
Unearned maintenance revenue........................... 1,387 182
Current portion of long-term debt...................... 483 756
Short-term borrowings.................................. 35
-------- --------
Total current liabilities........................... 16,254 27,106
Long-term liabilities.................................... 133 13
Borrowings under lines of credit......................... 10,552 7,899
Long-term debt........................................... 1,356 2,585
Minority interest........................................ 52 63
Commitments (Note 14)....................................
Shareholders' equity:
Convertible preferred A shares, $.005 par value, 10,000
shares authorized, 2,494............................ 12 12
Shares issued and outstanding at March 31, 1999 and
March 31, 1998; liquidation preference of $4,988....
Common shares, $.005 par value ; 40,000 shares
authorized; 21,707 and 21,387 shares issued and
outstanding at March 31, 1999 and March 31, 1998,
respectively........................................ 109 107
Additional paid-in capital............................. 39,596 39,148
Accumulated other comprehensive operations............. (62) (97)
Accumulated deficit.................................... (24,841) (19,491)
-------- --------
Total shareholders' equity.......................... 14,814 19,679
-------- --------
$ 43,161 $ 57,345
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 205
ARTECON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1999, MARCH 31, 1998
AND MARCH 29, 1997
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 29,
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues................................. $95,879 $ 66,340 $55,317
Cost of sales................................ 61,958 50,945 42,391
Restructure expenses......................... 403 -- --
------- -------- -------
Gross margin................................. 33,518 15,395 12,926
Operating expenses:
Selling & service.......................... 26,108 11,422 7,643
General & administrative................... 5,347 3,584 1,663
Research and development................... 7,329 3,199 2,392
Restructure expenses....................... 1,404 -- --
Additional amortization of intangible
assets.................................. 867 -- --
Acquired in-process research and
development costs....................... -- 18,200 --
------- -------- -------
Total operating expenses................ 41,055 36,405 11,698
------- -------- -------
Operating (loss) income...................... (7,537) (21,010) 1,228
Other expense:
Other income (expense), net................ 395 (124) (10)
(Loss) gain on foreign currency
transactions, net....................... (14) (141) 45
Interest expense, net...................... (1,018) (820) (282)
------- -------- -------
Total other expense..................... (637) (1,085) (247)
------- -------- -------
(Loss) income before income tax benefit
(provision)................................ (8,174) (22,095) 981
Income tax benefit (provision)............... 2,824 2,807 (340)
------- -------- -------
Net (loss) income............................ $(5,350) $(19,288) $ 641
======= ======== =======
Basic net (loss) income per share............ $ (0.25) $ (3.30) $ 0.12
======= ======== =======
Weighted average shares used to calculate
basic net income (loss) per share.......... 21,549 5,841 5,202
======= ======== =======
Diluted net (loss) income per share.......... $ (0.25) $ (3.30) $ 0.08
======= ======== =======
Weighted average shares used to calculate
diluted net income (loss) per share........ 21,549 5,841 8,410
======= ======== =======
COMPREHENSIVE OPERATIONS:
Net (loss) income............................ $(5,350) $(19,288) $ 641
Foreign currency translation adjustments, net
of tax..................................... 35 233 (18)
------- -------- -------
Comprehensive (loss) income.................. $(5,315) $(19,055) $ 623
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 206
ARTECON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, MARCH 31, 1998
AND MARCH 29, 1997
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
CONVERTIBLE PREFERRED B PREFERRED A
PREFERRED SHARES SHARES SHARES COMMON SHARES
---------------- ---------------- --------------- ----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ------- ------ ------ ------ -------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 1, 1996.......... 1,212 $2,419 1,405 $2,810 -- $-- 5,210 $ 601
Repurchase of common and
preferred shares............... (100) (200) (17)
Foreign currency translation
adjustment.....................
Net income......................
------ ------- ------ ------- ----- --- ------ -------
BALANCE, March 29, 1997......... 1,112 2,219 1,405 2,810 5,193 601
Issuance of common shares....... (57) (68) 851 817
Conversion of preferred shares
to common shares............... (23) (46) 29 46
Conversion of convertible
preferred and preferred B
shares to convertible preferred
A shares....................... (1,089) (2,116) (1,405) (2,742) 2,494 12
Assumed issuance of common stock
in connection with
acquisition.................... 15,314 (1,357)
Foreign currency translation
adjustment.....................
Net loss........................
------ ------- ------ ------- ----- --- ------ -------
BALANCE, March 31, 1998......... 2,494 12 21,387 107
Common stock issued under
employee stock purchase plan... 167 1
Common stock issued under
employee stock option plan..... 153 1
Stock options income tax
benefits.......................
Foreign currency translation
adjustment.....................
Net loss........................
------ ------- ------ ------- ----- --- ------ -------
BALANCE, March 31, 1999......... -- $ -- $ -- 2,494 $12 21,707 $ 109
====== ======= ====== ======= ===== === ====== =======
<CAPTION>
OTHER
COMPREHEN- ACCUM-
PAID-IN SIVE ULATED TOTAL
CAPITAL OPERATIONS DEFICIT EQUITY
------- ---------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
BALANCE, April 1, 1996.......... $(312) $ (798) $ 4,720
Repurchase of common and
preferred shares............... (46) (246)
Foreign currency translation
adjustment..................... (18) (18)
Net income...................... 641 641
------- ----- -------- --------
BALANCE, March 29, 1997......... (330) (203) 5,097
Issuance of common shares....... 692
Conversion of preferred shares
to common shares...............
Conversion of convertible
preferred and preferred B
shares to convertible preferred
A shares....................... 4,846
Assumed issuance of common stock
in connection with
acquisition.................... 34,302 32,945
Foreign currency translation
adjustment..................... 233 233
Net loss........................ (19,288) (19,288)
------- ----- -------- --------
BALANCE, March 31, 1998......... 39,148 (97) (19,491) 19,679
Common stock issued under
employee stock purchase plan... 236 237
Common stock issued under
employee stock option plan..... 75 76
Stock options income tax
benefits....................... 137 137
Foreign currency translation
adjustment..................... 35 35
Net loss........................ (5,350) (5,350)
------- ----- -------- --------
BALANCE, March 31, 1999......... $39,596 $ (62) $(24,841) $ 14,814
======= ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE> 207
ARTECON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1999, MARCH 31, 1998
AND MARCH 29, 1997
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 29,
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income.......................... $(5,350) $(19,288) $ 641
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities, net of effects of
acquisition:
Depreciation and amortization........... 5,152 1,001 664
Write-off of property and equipment..... 323 -- --
Compensation expense related to stock
issuances............................. -- 699 --
Acquired in-process research and
development costs..................... -- 18,200 --
Provision for doubtful accounts and
sales returns......................... 123 271 10
Deferred income taxes................... (3,307) (2,868) (18)
Impairment of intangible assets......... 300 -- --
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable................... 6,061 258 226
Inventories........................... 682 3,276 (980)
Prepaid expenses and other assets..... (308) (580) (175)
Accounts payable...................... (4,498) 96 240
Accrued compensation.................. (985) 406 (327)
Accrued merger and restructuring
liabilities........................ (4,261) (816) --
Other accrued liabilities............. (2,005) (506) 518
Unearned maintenance revenue.......... 1,205 49 (39)
Long-term liabilities................. 120 (91) (13)
Other................................. 36 20 (5)
------- -------- --------
Net cash (used in) provided by
operating activities............ (6,712) 127 742
Cash flows from investing activities:
Purchases of property and equipment........ (638) (668) (260)
Cash received from acquisitions, net of
cash paid............................... -- 7,351 --
------- -------- --------
Net cash (used in) provided by investing
activities............................ (638) 6,683 (260)
</TABLE>
F-29
<PAGE> 208
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 29,
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from bank and other borrowings.... 48,292 24,988 23,116
Payments on bank and other borrowings...... (47,210) (24,802) (23,381)
Issuance of common shares.................. 313 17 --
Repurchase of preferred shares............. -- -- (230)
Repurchase of common shares................ -- -- (16)
------- -------- --------
Net cash provided by (used in) financing
activities............................ 1,395 203 (511)
Effect of exchange rate changes on cash...... 56 233 (18)
------- -------- --------
Net (decrease) increase in cash.............. (5,899) 7,246 (47)
Cash and cash equivalents, beginning of
year....................................... 7,992 746 793
------- -------- --------
Cash and cash equivalents, end of year....... $ 2,093 $ 7,992 $ 746
======= ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest................................... $ 817 $ 663 $ 307
======= ======== ========
Income taxes (refunded) paid............... $ (961) $ 880 $ 289
======= ======== ========
Supplemental schedule of noncash investing
and financing activities:
Acquisitions of property and equipment for
note payable............................ $ 360
========
Adjustment of deferred income taxes and
goodwill (Notes 1 and 14)............... $ 2,576
=======
Stock Option income tax benefits........... $ 137
=======
Detail of businesses acquired in purchase
business combinations:
On August 21, 1997, the Company acquired
certain net assets of Falcon Systems,
Inc.
A summary of the transaction is as follows:
Fair value of other assets acquired..... $ 10,232
Acquired in-process research and
development costs..................... 3,700
Other intangible assets................. 420
Goodwill................................ 127
Acquired developed technology........... 91
Note to Falcon shareholder.............. (2,500)
</TABLE>
F-30
<PAGE> 209
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 29,
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for acquisition, net of cash
acquired.............................. (432)
--------
Liabilities assumed.......................... $ 11,638
========
On March 31, 1998, the Company acquired the
net assets of Storage Dimensions, Inc.
(SDI)
A summary of the transactions is as
follows:
Fair value of other assets acquired..... $ 17,281
Acquired in-process research and
development........................... 14,500
Other intangible assets................. 2,400
Goodwill................................ 4,538
Acquired developed technology........... 500
Cash acquired........................... 7,783
Fair market value of stock.............. (32,945)
--------
Liabilities assumed.......................... $ 14,057
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 210
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 1999, MARCH 31, 1998, AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS ACTIVITIES
DESCRIPTION OF BUSINESS -- Artecon, Inc. and its wholly- and majority-owned
subsidiaries, (collectively, the Company or Artecon), are manufacturers and
suppliers of value-added computer products and services in the open systems
workstation and server markets. The Company's principal markets include the
United States, Europe, Canada, and Japan. The Company sells its products through
a direct sales force, reseller distribution channels, worldwide government
agencies and Fortune 1000 companies.
On August 21, 1997, the Company acquired certain net assets of Falcon
Systems, Inc. (Falcon), a manufacturer and distributor of computer peripheral
equipment. The purchase price of $3,500 included $1,000 in cash and $2,500 of
promissory notes (Note 9). The acquisition was recorded as a purchase and the
results of operations for the period from August 21, 1997 to March 31, 1998 are
included in the accompanying consolidated financial statements. The purchase
price was allocated $10,232 to assets acquired (consisting primarily of
inventories, accounts receivable, property and equipment and other current
assets), $638 to goodwill and other intangible assets, $14,138 to liabilities
assumed, and $3,700 to in-process research and development expenses, which had
no future alternative use, based on management assumptions. In connection with
the acquisition, a partnership was created to purchase certain assets from
Falcon. The partners are majority shareholders of the Company. The partnership
is considered to be a Special Purpose Entity and, accordingly, the accompanying
consolidated financial statements include the accounts of the partnership and
all intercompany transactions have been eliminated.
On March 31, 1998, Artecon, Inc. and Storage Dimensions, Inc. (SDI)
completed a reverse merger whereby SDI acquired Artecon, Inc. Immediately after
the merger, SDI changed its name to Artecon, Inc. In the merger, shareholders of
the former Artecon, Inc. received approximately 62% of the total issued and
outstanding common stock, and 100% of the total issued and outstanding Preferred
Stock of the new Artecon, Inc. Since the former Artecon shareholders received a
substantial majority of the shares of common stock of the newly named Artecon,
the transaction was treated as a purchase of SDI by Artecon for accounting
purposes. As a result, the historical financial statements of Artecon, Inc. for
the periods prior to the merger are those of Artecon, Inc., rather than those of
SDI. The fair market value of stock was contractually determined based on the
average bid and ask price of Storage Dimensions common stock of 3.96875 on
December 18, 1997. The purchase price was allocated $25,064 to assets acquired
(consisting primarily of cash and cash equivalents, accounts receivable,
inventories, property and equipment, deferred tax assets, and other assets),
$7,438 to goodwill and other intangible assets, $14,057 to liabilities assumed
and $14,500 to in-process research and development expenses, which had no future
alternative use, based on management assumptions.
During the year ended March 31, 1999, the Company recorded adjustments
associated with certain tax-related matters that existed at the time of the
merger with SDI. The amount of the purchase price allocated to goodwill was
decreased by approximately $581 as a result of these adjustments.
F-32
<PAGE> 211
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma results of operations of the Company for the years
ended March 31, 1998 and March 29, 1997 are included below. Such pro forma
presentation has been prepared assuming that the acquisitions had occurred as of
April 1, 1996 for the Company.
<TABLE>
<CAPTION>
MARCH 31, MARCH 29,
1998 1997
--------- ---------
<S> <C> <C>
Net revenues..................................... $144,595 $183,298
Net loss......................................... (10,942) (18,183)
Pro forma basic and diluted net loss per share... $ (0.53) $ (1.39)
Weighted average shares used to calculate pro
forma basic and diluted net loss per share..... 20,667 13,074
</TABLE>
The pro forma results include the historical accounts of the Company,
Falcon and SDI and pro forma adjustments, as may be required, including the
in-process research and development expense, the amortization of goodwill and
other intangible assets, and the interest expense related to the promissory
notes issued to Falcon's previous shareholder. The in-process research and
development expense has been included as if recorded on April 1, 1996 and has
been excluded from the year ended March 31, 1998. The pro forma results of
operations are not necessarily indicative of actual results that may have
occurred had the operations of Falcon and SDI been combined in prior years.
Effective December 31, 1997, the Company changed its fiscal year as ending
on March 31 and its fiscal quarters as ending on June 30, September 30 and
December 31, respectively. Prior to this change, the Company's fiscal year was
previously on a 52- to 53-week basis that ended on the Saturday nearest to March
31. The fiscal year ended March 29, 1997 contained 52 weeks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of Artecon, Inc. and its subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
CREDIT RISK -- The Company performs ongoing credit evaluations of its
customers and requires no collateral. The Company maintains reserves for
potential credit losses.
INVENTORIES -- Inventories are comprised of purchased parts and assemblies,
which include direct labor and overhead, and are valued at the lower of cost
(first-in, first-out) or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets (ranging from three to five years).
Depreciation expense was $2,371, $859, and $664 for the years ended March 31,
1999, March 31, 1998 and March 29, 1997 respectively.
FOREIGN CURRENCY -- The accounts of foreign subsidiaries consolidated
herein have been translated from their respective functional currencies at
appropriate exchange rates in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial
F-33
<PAGE> 212
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting Standards (SFAS) No. 52. Cumulative translation adjustments are
included as a separate component of shareholders' equity. Gains and losses on
short-term intercompany foreign currency transactions are recognized as
incurred.
LONG-LIVED ASSETS -- The Company accounts for the impairment and
disposition of long-lived assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 121, long-lived assets to be held are reviewed
whenever events or changes in circumstances indicate that their carrying value
may not be recoverable. The Company periodically reviews the carrying value of
long-lived assets to determine whether or not an impairment to such value has
occurred. Based on its most recent analysis, the Company believes that no
impairment exists at March 31, 1999. During the years ended March 31, 1999 and
1998, the Company recognized an impairment of certain long-lived assets in
connection with the merger and restructuring activities (Note 4).
SOFTWARE LICENSE COSTS -- Software license costs are amortized as the
related products which include the software are shipped. Included in other
current assets in the accompanying consolidated financial statements at March
31, 1999 is $1,000 in unamortized software license costs that are expected to be
utilized in fiscal year 2000.
GOODWILL AND OTHER INTANGIBLE ASSETS -- Goodwill related to acquisitions is
being amortized on a straight-line basis over a period of seven years.
Accumulated amortization was $679 and $12 at March 31, 1999 and March 31, 1998,
respectively. Other intangible assets related to acquisitions are being
amortized on a straight-line basis over two to four years. Goodwill and other
intangible assets are periodically reviewed for events or changes whenever
circumstances which indicate that their carrying value may not be recoverable.
The Company periodically reviews the carrying value of goodwill and other
intangible assets to determine whether or not an impairment to such values has
occurred. During the year ended March 31, 1999, the Company recorded an
impairment associated with certain other intangible assets of $300 and
additional amortization of $867 associated with a change in estimate of the
remaining useful lives of such assets (Note 4).
REVENUE RECOGNITION -- The Company recognizes revenue from product sales
upon shipment, including products sold under a stock rotation program that
entitles the buyer to the right to return products under certain conditions. The
Company provides allowance for estimated returns. Revenue from service contracts
is recognized ratably over the term of the contract.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INCOME TAXES -- The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes, which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this statement, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax
F-34
<PAGE> 213
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
bases of assets and liabilities using the enacted tax rates in effect for the
year in which the differences are expected to reverse.
CONCENTRATIONS -- The Company currently utilizes a limited number of
suppliers for certain devices used in its products but has no long-term supply
contracts with them. Due to the cyclical nature of the industry and competitive
conditions, there can be no assurance that the Company will not experience
difficulties in meeting its supply requirement in the future.
Approximately 26%, 27% and 35% of revenues for the years ended March 31,
1999, March 31, 1998 and March 29, 1997, were to four, four and two customers,
respectively. For the years ended March 31, 1999 and 1998, no customer accounted
for 10% or more of total revenues. For the year ended March 29, 1997, one
customer accounted for 25% of total net revenues. The loss of, or a reduction in
sales to, any such customers would have a material adverse effect on the
Company's business, operating results and financial condition.
Revenues derived from various U.S. government agencies were approximately
$1,440, $1,861 and $1,400 for the years ended March 31, 1999, March 31, 1998 and
March 29, 1997, respectively. Export sales to international customers amounted
to approximately $8,064, $7,737 and $7,675 for the years ended March 31, 1999,
March 31, 1998 and March 29, 1997, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION -- The Company accounts for
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees.
EARNINGS (LOSS) PER SHARE -- Basic earnings (loss) per share is computed
using the weighted average number of common shares outstanding during the
reporting period. Diluted earnings (loss) per share is computed using the
weighted average number of common shares outstanding and the potential dilutive
effect of the convertible Preferred A shares and options to purchase common
stock (see Note 10).
RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1997, the FASB issued SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information. This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosure about products and services, geographic areas and major
customers (see Note 16).
In February 1998, the FASB issued SFAS No. 132, Disclosures about Pensions
and Other Post-Retirement Benefits. This statement revises and standardizes
employers' disclosure requirements about pension and other post-retirement
benefit plans, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer useful. The
Company does not maintain an employee pension plan or any other post-retirement
benefit plans.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The Company
does not invest in derivative
F-35
<PAGE> 214
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investments and engaged in limited hedging activity in the prior year (Note 15).
The Company does not presently engage, nor does it intend to engage in future
hedging activities.
RECLASSIFICATIONS -- Certain prior year balances have been reclassified to
conform with the current year presentation.
3. OTHER COMPREHENSIVE OPERATIONS
Accumulated other comprehensive operations for each of the three years in
the period ended March 31, 1999 is comprised of the following:
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
OPERATIONS
-------------
<S> <C>
Balance, April 1, 1996................................. $(312)
Foreign currency translation adjustment................ (18)
-----
Balance, March 29, 1997................................ (330)
Foreign currency translation adjustment................ 233
-----
Balance, March 31, 1998................................ (97)
Foreign currency translation adjustment................ 35
-----
Balance, March 31,1999................................. $ (62)
=====
</TABLE>
4. ACCRUED MERGER AND RESTRUCTURING LIABILITIES AND IMPAIRMENT OF INTANGIBLE
ASSETS
In December 1998, the Board of Directors approved a plan to consolidate one
of the Company's engineering facilities from Milpitas, California, to Carlsbad,
California, to consolidate certain domestic sales and service locations, and to
eliminate certain product lines and development activities. The Company recorded
pre-tax restructuring charges of $1,807 to cover the costs associated with these
actions. The major components of the fiscal year 1999 charges and the remaining
accrual balance as of March 31, 1999 were as follows:
<TABLE>
<CAPTION>
INITIAL ACCRUED
RESTRUCTURING AMOUNTS RESTRUCTURING
CHARGE UTILIZED COSTS
------------- -------- -------------
<S> <C> <C> <C>
Employee termination costs................ $ 254 $ (200) $ 54
Inventory write-downs..................... 415 (115) 300
Facility closures and related expenses.... 715 (476) 239
Tooling write-off......................... 123 (123) --
Intangible asset impairment............... 300 (300) --
------ ------- ----
Total................................ $1,807 $(1,214) $593
====== ======= ====
</TABLE>
F-36
<PAGE> 215
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee termination costs consist primarily of severance payments for 43
employees, all of which were terminated as of March 31, 1999. The majority of
the employees terminated were employed at the engineering facility in Milpitas,
California and at the various domestic sales and service locations. Remaining
costs associated with bi-weekly payroll payments are expected to be paid in the
first quarter of fiscal year 2000. Inventory write-downs and the tooling
write-off primarily relate to the discontinuance of certain low-volume and
low-profit product lines. Of the total restructuring charge associated with the
inventory write-downs, $403 has been included as a separate component of cost of
sales in the accompanying financial statements. Facility closures and related
expenses consist of lease termination costs and the write-off of certain
property and equipment which was disposed of associated with the closures. The
majority of the remaining costs are expected to be paid in fiscal year 2000.
In connection with the acquisitions of Falcon and SDI, the Company
allocated $420 and $1,600, respectively, to an assembled workforce intangible
asset. The Company recorded an impairment of these intangible assets of $300
during the year ended March 31, 1999, which has been included as a component of
the restructuring charge, as the impairment was a direct result of employee
terminations associated with restructuring activities. Furthermore, as a result
of significant attrition and terminations of employees, which had been utilized
as the basis for the assembled workforce valuation, the Company recognized
additional amortization of $867 based on a change in estimate of the remaining
useful life of the assembled workforce.
In connection with the merger with SDI, the Company recorded a reserve for
acquisition related costs of $6,581, of which $5,765 was outstanding at March
31, 1998. All of the acquisition related costs were included in the purchase
price allocation performed at March 31, 1998. The following is a summary related
to the accrued merger costs at March 31, 1998, amounts utilized during fiscal
year 1999 and remaining reserve balance at March 31, 1999:
<TABLE>
<CAPTION>
ACCRUED ACCRUED
MERGER MERGER
COSTS COSTS
(MARCH 31, AMOUNTS (MARCH 31,
1998) UTILIZED 1999)
---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Employee termination costs................... $2,858 $(2,691) $167
Professional service fees.................... 1,726 (1,410) 316
Other costs.................................. 1,181 (998) 183
------ ------- ----
Total................................... $5,765 $(5,099) $666
====== ======= ====
</TABLE>
The majority of the accrued merger costs at March 31, 1999 relate to
remaining severance and benefit payments pursuant to the related agreements,
lease and contract termination costs, and miscellaneous professional service fee
obligations. The Company anticipates that the remaining merger costs will be
paid in fiscal year 2000 and believes that there are no unresolved issues or
additional liabilities that may result in an adjustment to the purchase price
allocation for the SDI merger.
F-37
<PAGE> 216
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
Purchased parts and materials.................... $ 8,385 $ 6,972
Work-in-process.................................. 163 1,599
Finished goods................................... 3,125 3,783
------- -------
$11,673 $12,354
======= =======
</TABLE>
6. ACCOUNTS AND TRANSACTIONS WITH RELATED PARTIES
Revenues from sales to affiliated companies for the years ended March 31,
1999, March 31, 1998, and March 29, 1997 were approximately $48, $125, and $74,
respectively. Accounts receivable from affiliated companies were approximately
$13 and $3 at March 31, 1999 and March 31, 1998, respectively, and are included
in accounts receivable in the accompanying consolidated balance sheets.
The Company purchases certain goods from affiliates and was subject to a
management fee of approximately $4 per month from an affiliate which was
terminated upon completion of the merger with SDI. Purchases from affiliated
companies for the years ended March 31, 1999, March 31, 1998, and March 29, 1997
were approximately $80, $130, and $85, respectively.
7. SHORT-TERM BORROWINGS
As a result of the merger with SDI (Note 1), the Company assumed a Loan and
Security Agreement with a financial institution. Borrowings outstanding under
the line at March 31, 1998 included $35 representing borrowings under the loan
provisions. Amounts outstanding under this agreement were repaid during the year
ended March 31, 1999 and this agreement was not renewed upon expiration in May
1998.
8. BORROWINGS UNDER LINE OF CREDIT
The Company has a $15,000 revolving credit facility with a United States
bank (the Agreement). The Agreement provides for financing collateralized by all
assets of the Company, as defined by the Agreement, and matures May 14, 2001,
unless otherwise renewed. The line of credit bears interest, at the bank's prime
rate. Monthly payments consist of interest only, with the principal due at
maturity. The Agreement requires that the Company comply with certain covenants
including quarterly and annual profitability covenants. The Company was not in
compliance with the net income covenants at March 31, 1999 and obtained a waiver
from the bank which included a modification of the future net income
requirements.
The Japanese subsidiary has two lines of credit with a Japanese bank for
borrowings up to an aggregate 35 million Yen (US$295 at March 31, 1999) at rates
ranging from 1.8% to 2.5%. At March 31, 1999, 33 million Yen (approximately
US$275) were
F-38
<PAGE> 217
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding. Interest is due monthly with the principal due on various dates
through August 2005. Borrowings are collateralized by inventories of the
Japanese subsidiary.
At March 31, 1999, the Company's borrowings under lines of credit were as
follows:
<TABLE>
<S> <C>
U.S. bank line, variable interest at prime (7.75% at March
31, 1999)................................................. $10,277
Japan bank lines, interest ranging from 1.8% to 2.5%........ 275
-------
$10,552
=======
</TABLE>
During the year ended March 31, 1999, the Company received a short-term
loan totaling $500 from an affiliate. The loan bore interest at 7.25% and
interest expense related to the loan was immaterial. During the year ended March
31, 1998, the Company made a short-term loan totaling $754 to an affiliate. The
loan bore interest at 7.25% per annum and interest income related to the loan
was immaterial.. No amounts related to the loans were outstanding at March 31,
1999 and March 31, 1998.
9. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
Promissory notes payable to former shareholder of Falcon
(Note 1), bearing interest at 10% per annum, monthly
installments of principal and interest of $53 through
August 2002............................................ $1,839 $2,268
Term loan payable to bank, bearing interest at 7.72% per
annum, collateralized by property and equipment and
monies in possession of the bank, paid in full in May
1998................................................... 190
Term loan payable to bank, bearing interest at 8.5% per
annum, collateralized by substantially all of the
assets of the Company, paid in full in May 1998........ 883
------ ------
1,839 3,341
Less current portion..................................... (483) (756)
------ ------
$1,356 $2,585
====== ======
</TABLE>
Long-term debt at March 31, 1999 matures as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING:
- -------------------
<S> <C>
2000......................................... $ 483
2001......................................... 525
2002......................................... 580
2003......................................... 251
------
$1,839
======
</TABLE>
F-39
<PAGE> 218
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense related to long-term debt was $207, $160 and $13 for the
years ended March 31, 1999, March 31, 1998, and March 29, 1997, respectively.
10. SHAREHOLDERS' EQUITY
Immediately prior to the merger with SDI, there were two classes of
preferred shares: the "Preferred" shares and the "Preferred B" shares. There
were 10,000 shares of each preferred class authorized. All Preferred shares were
nonvoting, did not provide for dividends, and had a liquidation preference over
common shares. The shares were convertible into common shares, at the option of
the holder, at the earlier of three years after issuance or upon the occurrence
of certain other events, at the conversion rate of one common share for each 0.8
Preferred share. The liquidation preference for the Preferred was $.01 per share
and for the Preferred B was $2.00 per share.
In December 1994, the Company entered into a repurchase agreement with
certain shareholders who were holders of the Company's outstanding Preferred
shares. The agreement required the Company to redeem 100 shares of the
outstanding Preferred shares and grants the Company the option to repurchase the
remaining shares at any time during the five-year period ending December 22,
1999 at prices ranging from $2.00 to $2.50 per share. During the year ended
March 29, 1997, the Company repurchased 100 Preferred shares under the agreement
at $2.30 per share.
As consideration for the option to repurchase the Preferred shares, in the
period ended March 29, 1997, the Company issued 276 common shares to the holders
of Preferred shares at the ratio of approximately one share of common stock for
each ten shares of Preferred stock that were valued at $0.50 per common share.
The value ascribed to the common stock outstanding at the date of issuance has
been shown as a reduction in the carrying value of the Preferred stock.
In June and October 1997, the Company issued a total of 95 shares of common
stock to certain employees in exchange for stock participation rights previously
granted. The common stock was issued at prices of $1.20 and $2.00 per share. No
stock participation rights or other options to purchase common stock were
outstanding at March 31, 1998. Management has recorded $73 in compensation
expense for the period ended March 31, 1998 as a result of these issuances.
In July 1997, the Company issued 475 shares of common stock to certain
officers of the Company at a price of $0.035 per share. Management has recorded
$553 in compensation expense for the period ended March 31, 1998 as a result of
these issuances.
As a result of, and immediately following the merger with SDI, each share
of common stock of the former Artecon, Inc. was converted into 2.19 shares of
common stock of the new Artecon, Inc., and each share of convertible Preferred
stock and convertible Preferred B stock of the former Artecon, Inc. was
converted into one share of Series A convertible Preferred stock of the new
Artecon, Inc.
The convertible Preferred A shares have voting rights, provide for
dividends when and if declared by the Board of Directors and have liquidation
preference over common shares. The convertible Preferred A shares are
convertible into common shares, at the option of the holder, any time after
January 1, 1999 at the conversion rate, as defined in the amended Articles of
Incorporation.
F-40
<PAGE> 219
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The convertible Preferred A shares are automatically converted into common
shares upon a unanimous resolution by the Board of Directors or upon the close
of business on the first day following the date on which the average of the
closing per share sales price of the common stock as reported on the NASDAQ
National Market for 20 consecutive trading days equals or exceeds $9.00 per
share, at the conversion rate defined in the amended Articles of Incorporation.
11. EARNINGS PER SHARE
Basic net (loss) income per share is computed using the weighted average
number of common shares outstanding during the periods presented.
Diluted net (loss) income per share is computed using the weighted average
number of common and common stock equivalent shares outstanding during the
periods presented assuming the conversion of all shares of the Company's
Convertible preferred stock into common stock. Common stock equivalent shares
have not been included where inclusion would be antidilutive.
The following is a reconciliation between the components of the basic and
diluted net income per share calculations (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 1998 MARCH 29, 1997
--------------------------- ---------------------------- --------------------------
PER PER PER
NET WEIGHTED SHARE NET WEIGHTED SHARE NET WEIGHTED SHARE
LOSS SHARES AMOUNT LOSS SHARES AMOUNT INCOME SHARES AMOUNT
------- -------- ------ -------- -------- ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net (loss) income per
share......................... $(5,350) 21,549 $(0.25) $(19,288) 5,841 $(3.30) $641 5,202 $0.12
Effect of dilutive securities --
preferred stock............... 3,208
------- ------ ------ -------- ----- ------ ---- ----- -----
Diluted net (loss) income per
share plus assumed
conversions................... $(5,350) 21,549 $(0.25) $(19,288) 5,841 $(3.30) $641 8,410 $0.08
======= ====== ====== ======== ===== ====== ==== ===== =====
</TABLE>
12. EMPLOYEE STOCK AND SAVINGS PLANS
SAVINGS PLAN -- The Company has a savings plan, which qualifies under
Section 401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 15% of their pretax salary, but not more than
statutory limits. The Company matches 50% of eligible employees' contributions
up to a specified limit ($500). The Company's matching contributions to the
savings plan were $67, $38 and $23 for the years ended March 31, 1999, March 31,
1998, and March 29, 1997, respectively.
STOCK PLANS -- In connection with the merger with SDI, the Company adopted,
and the Board of Directors approved, the following employee stock plans:
1996 EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1996 Employee Stock Purchase Plan (the Purchase Plan),
a total of 200 shares of SDI's common stock was originally reserved for issuance
under the Purchase Plan. The Purchase Plan was amended in January 1998 and a
total of 400 shares of Artecon common stock has been reserved for issuance under
the amended purchase plan. As of March 31, 1999, 298 shares of common stock had
been purchased under the Purchase Plan and 102 shares of common stock remained
available for purchase under the Purchase Plan.
F-41
<PAGE> 220
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1993 STOCK OPTION PLAN
The 1993 Stock Option Plan (the 1993 Plan) provides for the granting of
non-statutory stock options for the purchase of up to an aggregate of 556 shares
of the Company's common stock by officers, employees, consultants and directors
of the Company. The Board of Directors is responsible for administration of the
1993 Stock Option Plan. The Board of Directors determines the term of each
option, option exercise price, number of shares for which each option is granted
and the rate at which each option is exercisable. Options granted under the 1993
Stock Option Plan generally vest over a four-year period.
1996 STOCK OPTION PLAN
The 1996 Stock Option Plan (the 1996 Plan) provides for the granting to
employees and consultants of non-statutory stock options. A total of 3,000
shares of common stock are currently reserved for issuance pursuant to the 1996
Plan. As of March 31, 1999, 3,074 options have been granted under the 1996 Plan.
As of March 31, 1999, options to purchase 1,280 shares of common stock were
outstanding under the 1996 plan and 1,720 shares of common stock remain for
issuance under the 1996 plan.
In April 1998, the Company approved the cancellation of 218 previously
outstanding SDI options with exercise prices ranging from $5.13 to $7.00 per
share, and regranted the stock options at an exercise price of $3.38 per share,
the fair market value on the date of the regrant. The options were considered
granted on April 3, 1998 and are exercisable prospectively in accordance with
the agreements evidencing those grants.
Non-statutory stock options may be granted at an exercise price per share
of not less than 100% of the fair value per common share on the date of the
grant (not less than 110% of the fair value in the case of holders of more than
10% of the Company's voting stock). Options granted under the 1993 and 1996
Stock Option Plans generally expire ten years from the date of the grant.
Transactions under the 1993 and 1996 Stock Option Plans are summarized as
follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
OUTSTANDING, March 30, 1996.............................. 458 $0.20
Granted (weighted average fair value of $5.11)......... 718 $5.11
Exercised.............................................. (70) $0.20
Canceled............................................... (116) $0.37
------ -----
OUTSTANDING, March 29, 1997.............................. 990 $3.99
Granted (weighted average fair value of $5.94)......... 492 $5.77
Exercised.............................................. (146) $0.40
Canceled............................................... (277) $5.47
------ -----
OUTSTANDING, March 31, 1998.............................. 1,059 $5.06
Granted (weighted average fair value of $3.27)......... 2,085 $3.27
Exercised.............................................. (154) $0.49
Canceled............................................... (1,614) $4.38
------ -----
OUTSTANDING, March 31, 1999.............................. 1,376 $3.64
====== =====
</TABLE>
F-42
<PAGE> 221
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
AVERAGE --------------------------
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
RANGE OF MARCH 31, LIFE EXERCISE MARCH 31, EXERCISE
EXERCISE PRICES 1999 (YEARS) PRICE 1999 PRICE
- --------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.20 - $3.00........ 237...... 7.67 $1.37 91 $0.28
$3.38 - $3.38........ 560 8.98 3.38 0 0
$3.75 - $3.75........ 365 9.00 3.75 0 0
$4.06 - $7.25........ 214 8.01 6.70 214 6.70
----- ---- ----- --- -----
1,376 8.61 3.64 305 4.77
===== ==== ===== === =====
</TABLE>
FAIR VALUE DISCLOSURES
Had compensation cost for options granted in fiscal years 1999, 1998 and
1997 under the Company's option plan been determined based on the fair value at
the grant dates, as prescribed in SFAS No. 123, the Company's net (loss) income
and pro forma net (loss) income per share would have been as follows (in
thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
MARCH 31, MARCH 31, MARCH 29,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net (loss) income:
As reported................................ $(5,350) $(19,288) $ 641
Pro forma.................................. $(6,098) $(19,923) $ 640
Basic net (loss) income per share:
As reported................................ $ (0.25) $ (3.30) $0.12
Pro forma.................................. $ (0.28) $ (3.41) $0.12
Diluted net (loss) income per share:
As reported................................ $ (0.25) $ (3.30) $0.08
Pro forma.................................. $ (0.28) $ (3.41) $0.08
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants during
the applicable periods: dividend yield of 0.0% for all periods, risk-free
interest rates of 4.54% to 5.63% for options granted during the year ended March
31, 1999, risk-free interest rates of 5.49% to 6.57% for options granted during
the year ended March 31, 1998, and risk-free interest rates of 5.97% to 6.48%
for options granted during the year ended March 29, 1997. An 80% volatility
factor was used for the years ended March 31, 1998 and March 27, 1997, and a
137% volatility factor was used for the year ended March 31, 1999. A weighted
average expected option term of five years was used for all periods.
F-43
<PAGE> 222
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because the determination of the fair value of all options granted after
the Company became a public entity includes an expected volatility factor and
because additional option grants are expected to be made each year, the above
pro forma disclosures are not representative of pro forma effects of reported
net income for future years.
13. INCOME TAXES
Significant components of the (benefit) provision for income taxes are as
follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 29,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................... $ 352 $ 17 $245
State...................................... 105 (11) 145
Foreign.................................... 27 20 9
------- ------- ----
484 26 399
Deferred:
Federal.................................... (2,838) (2,150) 53
State...................................... (402) (602) (66)
Foreign.................................... (68) (81) (46)
------- ------- ----
(3,308) (2,833) (59)
------- ------- ----
$(2,824) $(2,807) $340
======= ======= ====
</TABLE>
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 29,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal rate............... (35)% (35)% 35%
State taxes, net of federal
benefit............................ (2) (2) 5
In-process research and
development........................ 23
Foreign tax (benefit) provision...... (6)
Goodwill............................. 3
Other................................ (1) 1 1
--- --- --
(35)% (13)% 35%
=== === ==
</TABLE>
F-44
<PAGE> 223
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets
Uniform capitalization................................. $ 129 $ 100
Tax credit carryforwards............................... 1,566 713
Inventory reserve...................................... 1,556 2,117
Other reserves and accruals............................ 1,504 1,258
Book over tax depreciation............................. 160 501
In-process research and development.................... 1,418 1,523
Acquisition costs...................................... 64 1,002
Net operating losses................................... 5,972 2,125
Restructuring reserve.................................. 231
------- -------
Total deferred tax assets........................... 12,600 9,339
Deferred tax liabilities:
Import reserve......................................... $ 277 $ 346
Amortization........................................... 152 160
State taxes............................................ 784 537
Acquired intangibles................................... 254 1,189
------- -------
Total deferred tax liabilities...................... 1,467 2,232
Valuation allowance.................................... (1,995)
------- -------
Net deferred tax assets................................ $11,133 $ 5,112
======= =======
</TABLE>
A valuation allowance of $1,995 was established at the date of the
Company's merger with SDI in order to reflect limitations on the company's usage
of SDI's net operating loss carryforwards associated with, among other factors,
SDI continuing to be a separate subsidiary of Artecon. The valuation allowance
has been reduced to zero in the fourth quarter of fiscal year 1999 as a result
of the Company dissolving the subsidiary structure of SDI and making the
determination that it is now more likely than not that these losses will be
utilized. The reduction in the valuation allowance of $1,995 has reduced
goodwill related to the SDI acquisition.
As of March 31, 1999, the Company has federal and state net operating
losses of $15,612 and $7,512, which begin to expire in the tax years ending 2009
and 2010, respectively. In addition, the Company has federal and state tax
credit carryforwards of $875 and $691, respectively.
F-45
<PAGE> 224
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS
The Company leases office and equipment under non-cancelable operating
leases. Lease terms range from three to five years. The Company's United States
headquarters is leased under an operating lease that has been extended to
December 1999.
Future minimum lease commitments for all operating leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING:
<S> <C> <C>
2000....................................................................... $1,610
2001....................................................................... 1,002
2002....................................................................... 366
2003....................................................................... 91
2004....................................................................... 55
------
$3,124
======
</TABLE>
Total rent expense for the years ended March 31, 1999, March 31, 1998, and
March 29, 1997 was approximately $1,951, $1,027, and $698, respectively.
15. HEDGING ACTIVITIES
The company engaged in limited hedging activity in the prior year and the
Company does not presently engage, nor does it intend to engage in future
hedging activities.
In the prior year, the Company's Japanese subsidiary entered into
derivative financial instruments, primarily foreign currency forward exchange
contracts, to manage foreign exchange risk on foreign currency transactions and
did not use the contracts for trading purposes. These financial instruments were
used to protect the Company from the risk that the eventual net cash inflows
from the foreign currency transactions would be adversely affected by changes in
exchange rates. Gains and losses related to hedges of firmly committed
transactions were deferred and recognized when the hedged transaction occurred.
The following table summarizes the notional amount, which approximates fair
market value, of the Company's outstanding foreign exchange contracts at March
31, 1998 (none outstanding at March 31, 1999):
<TABLE>
<CAPTION>
U.S.
DOLLAR
EQUIVALENT MATURITY
---------- ----------
<S> <C> <C>
U.S. Dollars.................................... $100 April 1998
U.S. Dollars.................................... 100 May 1998
U.S. Dollars.................................... 100 June 1998
----
$300
====
</TABLE>
F-46
<PAGE> 225
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The counterparties to these instruments were major financial institutions.
The Company was exposed to credit losses in the event of nonperformance by
counterparties to its forward exchange contracts but had no off-balance sheet
credit risk of accounting loss. The Company anticipated, however, that the
counterparties would be able to fully satisfy their obligations under the
contracts. The Company did not obtain collateral or other security to support
the forward exchange contracts subject to credit risk but monitored the credit
standing of the counterparties.
16. GEOGRAPHICAL AND SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The Company's chief
operating decision-maker is its Chief Executive Officer. The operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.
The Company's reportable operating segments include the Enterprise Storage
Division (ESD), the Telecommunications (Telco) Division and the International
Division. The ESD Division provides enterprise storage solutions to the
following markets: finance, multimedia, government, advanced-technology and
industrial. The Telco Division designs, manufactures, markets, and supports
fully integrated, industry-compliant storage products, services and solutions
for the telecommunications and Internet/intranet markets by utilizing
commercially available workstation, server and other application-specific
products for enhanced price/performance characteristics and reduced time to
market. The International Division provides storage solutions in various
international markets.
The accounting policies of the Company's operating segments are the same as
those described in Note 2, Summary of Significant Accounting Policies. The
Company evaluates performance based on stand-alone segment gross margin. Because
the Company does not evaluate performance based on segment operating income or
return on assets at the operating segment level, Company operating expenses and
total assets are not tracked internally by segment. Therefore, such information
is not presented.
F-47
<PAGE> 226
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating segment data for the years ended March 31, 1999, March 31, 1998,
and March 29, 1997 are as follows:
<TABLE>
<CAPTION>
ESD TELCO INTERNATIONAL CONSOLIDATED
------- ------- ------------- ------------
<S> <C> <C> <C> <C>
Year ended March 31, 1999
Net Revenues.................. $62,967 $23,306 $9,606 $95,879
Gross Margin.................. 21,786 8,063 3,669 33,518
Year ended March 31, 1998
Net Revenues.................. $33,746 $23,531 $9,063 $66,340
Gross Margin.................. 7,983 4,601 2,811 15,395
Year ended March 29, 1997
Net Revenues.................. $44,982 $ 1,392 $8,943 $55,317
Gross Margin.................. 10,080 248 2,598 12,926
</TABLE>
Information concerning principal geographic areas in which the Company
operates was as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
-----------------------------------
MARCH 31, MARCH 31, MARCH 29,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUE:
North America.............................. $87,638 $ 58,557 $48,169
Europe..................................... 5,781 4,271 3,176
Japan...................................... 2,460 3,512 3,972
------- -------- -------
$95,879 $ 66,340 $55,317
======= ======== =======
INCOME (LOSS) BEFORE TAXES:
North America.............................. $(8,189) $(21,873) $ 996
Europe..................................... 140 (74) 59
Japan...................................... (125) (148) (74)
------- -------- -------
$(8,174) $(22,095) $ 981
======= ======== =======
ASSETS:
North America.............................. $42,292 $ 56,187 $14,057
Europe..................................... 416 232 579
Japan...................................... 902 1,539 1,967
Eliminations............................... (449) (613) (1,409)
------- -------- -------
$43,161 $ 57,345 $15,194
======= ======== =======
</TABLE>
F-48
<PAGE> 227
ARTECON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999
Revenues................ $26,945 $30,968 $19,639 $ 18,327 $ 95,879
Income (loss) before
income taxes......... 125 527 (7,079)(a) (1,747)(a) (8,174)
Net income (loss)....... 69 282 (6,795) 1,094(C) (5,350)
Basic earnings (loss)
per share............ 0.00 0.01 (0.32) (0.05) (0.25)
Diluted earnings (loss)
per share............ 0.00 0.01 (0.32) (0.04) (0.25)
Year ended March 31, 1998
Revenues................ $12,158 $18,042 $22,401 $ 13,739 $ 66,340
Income (loss) before
income taxes......... 275 (2,607)(b) 145 (19,908)(b) (22,095)
Net income (loss)....... 104 (1,565) (153) (17,674)(c) (19,288)
Basic earnings (loss)
per share............ 0.02 (0.26) (0.03) (2.84) (3.30)
Diluted earnings (loss)
per share............ 0.01 (0.26) (0.03) (2.84) (3.30)
</TABLE>
- -------------------------
(a) Includes pre-tax charges of $2,387 in the third quarter of 1999 and $287 in
the fourth quarter of 1999 for restructuring and impairment of certain
intangible assets.
(b) Includes pre-tax in-process research and development costs relating to the
acquisition of Falcon of $3,700 in the second quarter of fiscal year 1998
and $14,500 in the fourth quarter of fiscal year 1998 relating to the
acquisition of SDI.
(c) Includes the recognition of an income tax benefit of $2,841 and $2,234
during the fourth quarter of fiscal year 1999 and 1998, respectively.
18. SUBSEQUENT EVENT
On April 29, 1999, the Company and Box Hill Systems Corporation (Box Hill)
signed an agreement and plan of merger (the Merger Agreement), whereby the two
companies would be merged in a tax-free, stock-for-stock transaction intended to
be accounted for as a pooling of interests. Under the terms of the Merger
Agreement, each share of the Company's common stock will be converted into 0.40
of a share of Box Hill's common stock. Additionally, the Company's convertible
Preferred A shares will be converted into Box Hill common stock based on the
terms defined in the Merger Agreement.
F-49
<PAGE> 228
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Storage Dimensions, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Storage
Dimensions, Inc. and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Storage Dimensions, Inc. for any period
subsequent to December 31, 1997.
PricewaterhouseCoopers LLP
San Jose, California
January 16, 1998
F-50
<PAGE> 229
STORAGE DIMENSIONS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
--------- ---------
(IN THOUSANDS, EXCEPT
FOR PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 1,682 $ 7,094
Accounts receivable, net................................ 11,939 12,178
Inventories............................................. 6,304 5,606
Prepaid expenses and other assets....................... 858 732
------- -------
Total current assets................................. 20,783 25,610
Property and equipment, net............................... 2,115 1,822
------- -------
Total assets......................................... $22,898 $27,432
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 5,061 $ 4,016
Accrued liabilities..................................... 3,580 4,211
Short-term borrowings................................... 6,029 86
Short-term debt from stockholder........................ 3,600 --
------- -------
Total current liabilities....................... 18,270 8,313
------- -------
Commitments (Note 10)
Stockholders' equity:
Series A Convertible Preferred Stock, $0.005 par value,
13,850 and 10,000 shares authorized; 13,850 and no
shares issued and outstanding........................ 69 --
Common Stock, $0.005 par value, 40,000 shares
authorized; 1,674 and 7,933 shares issued and
outstanding.......................................... 8 40
Additional paid-in capital.............................. 10,442 27,396
Deferred stock compensation............................. (486) (351)
Accumulated deficit..................................... (5,405) (7,966)
------- -------
Total stockholders' equity........................... 4,628 19,119
------- -------
Total liabilities and stockholders' equity........... $22,898 $27,432
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE> 230
STORAGE DIMENSIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales:
Enterprise and OEM............................. $52,475 $69,873 $70,966
Desktop........................................ 7,683 2,437 366
------- ------- -------
60,158 72,310 71,332
Cost of goods sold............................... 37,170 45,327 45,723
------- ------- -------
Gross profit..................................... 22,988 26,983 25,609
------- ------- -------
Operating expenses:
Sales and marketing............................ 13,344 14,081 17,491
Research and development....................... 5,377 5,872 6,250
General and administrative..................... 3,390 3,819 4,231
Advisory fee payable to related party.......... 360 729 --
------- ------- -------
22,471 24,501 27,972
------- ------- -------
Income (loss) from operations.................... 517 2,482 (2,363)
Interest expense................................. (641) (686) (255)
Related party interest expense................... (482) (469) (90)
Interest income.................................. -- -- 277
Income (loss) before provision for income
taxes.......................................... (606) 1,327 (2,431)
Provision for income taxes....................... 30 132 130
------- ------- -------
Net income (loss)................................ $ (636) $ 1,195 $(2,561)
======= ======= =======
Basic net income (loss) per share................ $ (0.40) $ 0.73 $ (0.39)
======= ======= =======
Weighted average shares used to calculate basic
net income (loss) per share.................... 1,604 1,641 6,651
======= ======= =======
Diluted net income (loss) per share.............. $ (0.40) $ 0.22 $ (0.39)
======= ======= =======
Weighted average shares used to calculate diluted
net income (loss) per share.................... 1,604 5,529 6,651
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
<PAGE> 231
STORAGE DIMENSIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED TOTAL
----------------- ---------------- PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNTS SHARES AMOUNTS CAPITAL COMPENSATION DEFICIT EQUITY
------- ------- ------ ------- ---------- ------------ ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994..... 13,453 $67 1,600 $ 8 $ 9,220 $ -- $(5,964) $ 3,331
Issuance of Series A Convertible
Preferred Stock to employees... 341 2 -- -- 199 -- -- 201
Redemption of Series A
Convertible Preferred.......... (60) -- -- -- (35) -- -- (35)
Stock Common Stock options
exercised...................... -- -- 8 -- 1 -- -- 1
Net loss......................... -- -- -- -- -- -- (636) (636)
------- --- ----- --- ------- ----- ------- -------
Balance at December 31, 1995..... 13,734 69 1,608 8 9,385 -- (6,600) 2,862
Issuance of Series A Convertible
Preferred Stock to employees... 383 2 -- -- 490 -- -- 492
Redemption of Series A
Convertible Preferred Stock.... (267) (2) -- -- (155) -- -- (157)
Common Stock options exercised,
net............................ -- -- 66 -- 7 -- -- 7
Equity related to issuance of
Common Stock options........... -- -- -- -- 715 (540) -- 175
Amortization of deferred stock
compensation................... -- -- -- -- -- 54 -- 54
Net income....................... -- -- -- -- -- -- 1,195 1,195
------- --- ----- --- ------- ----- ------- -------
Balance at December 31, 1996..... 13,850 69 1,674 8 10,442 (486) (5,405) 4,628
Preferred Stock converted into
common shares.................. (13,850) (69) 3,462 18 51 -- -- --
Common Stock issued pursuant to
initial public offering, net of
expenses....................... -- -- 2,700 14 16,615 -- -- 16,629
Common Stock issued under
employee stock purchase plan... -- -- 47 -- 260 -- -- 260
Common Stock options exercised,
net............................ -- -- 50 -- 28 -- -- 28
Amortization of deferred stock
compensation................... -- -- -- -- -- 135 -- 135
Net loss......................... -- -- -- -- -- -- (2,561) (2,561)
------- --- ----- --- ------- ----- ------- -------
Balance at December 31, 1997..... -- $-- 7,933 $40 $27,396 $(351) $$(7,966) $19,119
======= === ===== === ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-53
<PAGE> 232
STORAGE DIMENSIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ (636) $1,195 $(2,561)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization................ 2,495 1,147 1,238
Compensation expense from stock and stock
options.................................... -- 434 135
Changes in assets and liabilities:
Accounts receivable........................ (1,141) (2,293) (239)
Inventory.................................. (2,106) 611 698
Prepaid expenses and other assets.......... 258 (350) 126
Accounts payable........................... 2,158 (1,180) (1,045)
Accrued liabilities........................ (118) 769 631
------- ------ -------
Net cash provided by (used in) operating
activities........................... 910 333 (1,017)
------- ------ -------
Cash flows from investing activities:
Acquisition of property and equipment........... (1,363) (943) (945)
------- ------ -------
Cash flows from financing activities:
Proceeds from initial public offering, net...... -- -- 16,629
Proceeds from sale of Series A Convertible
Preferred Stock to employees................. 201 287 --
Payments to repurchase Series A Convertible
Preferred Stock.............................. (35) (157) --
Proceeds from exercise of Common Stock options,
net.......................................... 1 7 28
Proceeds from employee stock purchase plan...... -- -- 260
Proceeds from (repayments of) from short-term
borrowings................................... 179 1,792 (9,543)
------- ------ -------
Net cash provided by financing activities.... 346 1,929 7,374
------- ------ -------
Net increase (decrease) in cash and cash
equivalents..................................... (107) 1,319 5,412
Cash and cash equivalents at beginning of year.... 470 363 1,682
------- ------ -------
Cash and cash equivalents at end of year.......... $ 363 $1,682 $ 7,094
======= ====== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.......... $ 929 $1,066 $ 104
======= ====== =======
Cash paid during the year for income taxes...... $ 14 $ 25 $ 451
======= ====== =======
Supplemental schedule of noncash financing
activities:
Refinancing of short-term borrowings............ $ -- $5,289 $ --
======= ====== =======
Issuance of Common Stock upon conversion of
Preferred Stock.............................. $ -- $ -- $ 69
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-54
<PAGE> 233
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
Storage Dimensions, Inc. (the "Company") was incorporated in Delaware in
November 1992. The Company designs, manufactures, markets and supports high
performance data storage systems for open systems network applications.
The Company was formed in order to effect a majority interest
management-led buy-out (the "MBO") of Storage Dimensions, Inc. (a wholly owned
subsidiary of Maxtor Corporation ("Maxtor") on December 26, 1992 by an investor
group comprised of members of management and Capital Partners, Inc.
On December 22, 1997 the Company entered into an agreement and Plan of
Merger and Reorganization with Artecon, Inc. ("Artecon") setting forth the terms
of a merger between the Company and Artecon (the "Merger"). Under the terms of
the Merger, each share of Artecon Common Stock would be converted into the right
to receive approximately 2.16 shares of Storage Dimensions Common Stock and each
share of Artecon Preferred Stock would be converted into the right to receive
one share of Storage Dimensions Preferred Stock, and Artecon would become a
wholly owned subsidiary of Storage Dimensions. For accounting purposes, the
Merger would be treated as a purchase of Storage Dimensions by Artecon since
former holders of Artecon equity securities would hold and have voting power
with respect to approximately 62.5% of the total issued and outstanding voting
capital stock of the combined company, giving effect to the conversion of the
Storage Dimensions Preferred Stock to be issued in the Merger and the exercise
of outstanding Storage Dimensions stock with an exercise price of less than
$3.9375 per share.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all significant intercompany accounts
and transactions.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investment instruments
with original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market.
F-55
<PAGE> 234
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, which range from three to five years. Amortization
of leasehold improvements is computed using the straight-line method over the
shorter of the estimated useful lives of the assets or the remaining lease term.
REVENUE RECOGNITION AND PRODUCT WARRANTY
Revenue from product sales is recognized upon shipment.
Certain sales are made to distributors who have limited rights to return
products or obtain credits for pricing changes. The Company accrues for the
estimated costs of sales returns and allowances in the period the related
revenue is recognized.
Also, the Company provides product warranties, generally for periods of
either three or five years from the date of product sale. The Company provides
for the estimated cost to repair or replace products under warranty arrangements
in the period the related revenue is recognized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
SOFTWARE DEVELOPMENT COSTS
To date, the period between achieving technological feasibility and
completion of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.
ADVERTISING COSTS
Advertising costs are charged to operations as incurred in accordance with
AICPA Statement of Position 93-7, "Reporting on Advertising Costs."
FISCAL YEAR
The Company operates and reports financial results on a
fifty-two/fifty-three week fiscal year cycle ending on the Saturday nearest
December 31. The Company also follows a five-four-four week quarterly cycle. For
convenience, the Company presents its fiscal year as ending on December 31.
Fiscal 1995, 1996 and 1997 each contained 52 weeks.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation" (see Note 7).
F-56
<PAGE> 235
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME (LOSS) PER SHARE
In December 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("FAS 128"), "Earnings per Share." All historical earnings per
share information has been restated as required by FAS 128.
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the periods presented and also gives
retroactive effect to the one-for-four reverse split of all shares of Common
Stock as described in Note 6.
Diluted net income (loss) per share is computed using the weighted average
number of common and common equivalent shares outstanding during the periods
presented assuming the conversion of all shares of the Company's Series A
Convertible Preferred Stock into Common Stock. Per share amounts also give
retroactive effect to the one-for-four reverse split of all shares of Common
Stock (and an adjustment to the conversion price of the Series A Convertible
Preferred Stock) as described in Note 6.
The following is a reconciliation between the components of the basic and
diluted net income (loss) per share calculations (in thousands except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1995 1996 1997
------------------------ ------------------------ -------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC INCOME (LOSS) PER SHARE
Income available to Common
stockholder.................. $(636) 1,604 (0.40) 1,195 1,641 $0.73 $(2,561) 6,651 $(0.39)
Effect of dilutive securities
Options...................... -- -- -- 464 -- --
Preferred stock................ -- -- -- 3,424 -- --
----- ----- ------ ----- ------- -----
Diluted net income (loss) per
share........................
Income available to common
stockholders
====== ===== =======
plus assumed conversions....... $(636) 1,604 $(0.40) $1,195 5,529 $0.22 $(2,561) 6,651 $(0.39)
===== ===== ====== ===== ======= =====
</TABLE>
2. RELATED PARTY TRANSACTIONS:
PURCHASES AND SALES
During 1995, the Company purchased goods (principally rigid magnetic and
optical disk drives) from Maxtor Corporation and its affiliates totaling
$69,000. The Company did not purchase any goods from Maxtor during 1996 or 1997.
SUBORDINATED NOTE PAYABLE
In December 1992, in conjunction with the MBO, the Company issued a
subordinated promissory note of $4 million to Maxtor (the "Maxtor Note").
Interest at 12% per annum was paid quarterly. During 1996, in accordance with
the terms of the Maxtor Note and in addition to interest payments, the Company
repaid $400,000 in principal. In 1997, the
F-57
<PAGE> 236
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remaining principal balance of $3,600,000 was repaid in March 1997 after the
Company effected its initial public offering.
ADVISORY FEE
During 1995 and 1996, the Company paid advisory fees of $360,000 and
$729,000, respectively, to one of its investors in accordance with an Investment
Advisory Services Agreement (the "Advisory Agreement"). The Advisory Agreement
was terminated in December 1996.
3. BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Accounts receivable:
Gross receivables................................ $12,478 $12,861
Less allowance for doubtful accounts............. (539) (683)
------- -------
$11,939 $12,178
======= =======
Inventory:
Raw material and purchased components............ $ 3,140 $ 3,145
Work in progress................................. 1,639 1,683
Finished goods................................... 2,156 1,763
------- -------
$ 6,935 $ 6,591
------- -------
(631) (985)
------- -------
$ 6,304 $ 5,606
======= =======
Property and equipment:
Machinery and equipment.......................... $ 6,992 $ 6,773
Furniture and fixtures........................... 620 656
Leasehold improvements........................... 539 548
------- -------
8,151 7,977
Less accumulated depreciation and amortization... (6,036) (6,155)
------- -------
$ 2,115 $ 1,822
======= =======
</TABLE>
F-58
<PAGE> 237
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Accrued liabilities:
Accrued employee compensation.................... $ 1,865 $ 2,078
Accrued warranty expense......................... 404 652
Deferred revenue................................. 252 617
Accrued sales tax................................ 431 356
Other............................................ 628 508
------- -------
$ 3,580 $ 4,211
======= =======
</TABLE>
4. SHORT-TERM BORROWINGS:
On May 17, 1996, the Company entered into a Loan and Security Agreement
(the "Agreement") with Congress Financial Corporation, which expires May 16,
1998. Under the revolving line of credit provisions of the Agreement, the
Company may borrow up to $11 million based upon eligible accounts receivable and
inventory. Under the terms of the Agreement, deposits from collections of
accounts receivable are restricted. The Agreement also allows the Company to
borrow up to $1 million for purchases of property and equipment under its
capital expenditure facility and up to $400,000 under its term loan provisions.
Such borrowings reduce the available borrowings under the revolving line of
credit. Borrowings bear interest at the rate of prime plus .75% (9.25% as of
December 31, 1997) and are secured by all of the Company's assets. Borrowings
outstanding under the line at December 31, 1996 and 1997 include $267,000 and
$67,000, respectively, representing borrowings under the term loan provisions.
5. INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Current:
Federal........................................ $-- $ 34 $ --
State.......................................... 6 40 66
Foreign........................................ 24 58 64
--- ---- ----
$30 $132 $130
=== ==== ====
</TABLE>
F-59
<PAGE> 238
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Depreciation and amortization...................... $ 358 $ 324
Reserves and accruals.............................. 889 1121
Net operating loss carryforward.................... 50 479
Research and development credits................... 233 344
Other.............................................. 165 269
------- -------
Gross deferred tax assets.......................... 1,695 2,537
Deferred tax asset valuation allowance............. (1,695) (2,537)
------- -------
Net deferred tax assets............................ $ -- $ --
======= =======
</TABLE>
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based on available evidence including the prior history
of losses, that some or all of the deferred tax assets will not be realized.
At December 31, 1997 the Company had federal net operating loss
carryforwards of approximately $1,410,000 available to reduce future federal and
state taxable income. Its net operating loss carryforwards expire from 2009 to
2012. The tax benefit of the net operating loss and credit carryforwards may be
limited due to the impact of the Tax Reform Act of 1986. Events which may cause
the tax benefit to be limited include, but are not limited to, a cumulative
stock ownership change of more than 50%, as defined, over a three-year period
and the timing of utilization of various tax benefits carried forward. The
Company's net operating loss and credit carryforwards may be subject to such
limitations.
A reconciliation of the provision for income taxes to the amount computed
by applying the statutory federal income tax rate to income (loss) before income
taxes is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996 1997
----- ---- -----
<S> <C> <C> <C>
Tax provision (benefit) at the U.S. federal statutory
rate of 34%......................................... $(206) $451 $(827)
State income taxes, net of federal tax benefit........ 6 40 66
Change in valuation allowance......................... 184 (564) 842
Other, net............................................ 46 205 49
----- ---- -----
$ 30 $132 $ 130
===== ==== =====
Effective tax rate.................................... (5)% 10% (5)%
===== ==== =====
</TABLE>
F-60
<PAGE> 239
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY:
On March 11, 1997 the Company effected its initial public offering of
2,700,000 shares of Common Stock at an offering price of $7.00 per share (the
"Offering"). The net proceeds from the Offering were $16,629,000 after payment
of underwriting discounts and Offering expenses. Net proceeds were used to pay
down the Company's short-term line of credit and pay off the Company's
subordinated promissory note to Maxtor Corporation, a stockholder.
In conjunction with the Offering, the Company effected a one-for-four
reverse stock split of all outstanding Common Stock and increased the authorized
Common Stock to 40,000,000 shares, par value $0.005. In addition, all
outstanding Preferred Stock were converted to Common Stock, and the Company
increased the authorized Preferred Stock to 10,000,000 shares of undesignated
Preferred Stock, par value $0.005. As of December 31, 1997, the Company had
7,933,451 shares of Common Stock outstanding and no shares of Preferred Stock
outstanding .
7. EMPLOYEE STOCK PLANS:
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in December 1996 and by the stockholders in
January 1997. A total of 200,000 shares of Storage Dimensions Common Stock was
originally reserved for issuance under the Purchase Plan. As of December 31,
1997, 47,253 shares of Common Stock had been purchased under the Purchase Plan
and 152,747 shares of Common Stock remained available for purchase under the
Purchase Plan.
1993 STOCK OPTION PLAN
The 1993 Stock Option Plan (the "1993 Plan") provides for the granting of
nonstatutory stock options for the purchase of up to an aggregate of 555,555
shares of the Company's common stock by officers, employees, consultants and
directors of the Company. The Board of Directors is responsible for
administration of the 1993 Stock Option Plan. The Board of Directors determines
the term of each option, option exercise price, number of shares for which each
option is granted and the rate at which each option is exercisable. Options
granted under the 1993 Stock Option Plan generally vest over a four-year period.
1996 STOCK OPTION PLAN
The 1996 Stock Option Plan (the "1996 Plan") provides for the granting to
employees and consultants of nonstatutory stock options. The 1996 Plan was
approved by the Board of Directors in December 1996 and was effective March 11,
1997, the date the initial public offering (see Note 6) of the Company's Common
stock was consummated. A total of 1,000,000 shares of Common Stock are currently
reserved for issuance pursuant to the 1996 Plan. As of December 31, 1996 and
1997, no and 978,016 options, respectively, have been granted under the 1996
Plan.
Nonstatutory stock options may be granted at an exercise price per share of
not less than 100% of the fair value per common share on the date of the grant
(not less than
F-61
<PAGE> 240
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
110% of the fair value in the case of holders of more than 10% of the Company's
voting stock). Options granted under the 1993 and 1996 Stock Option Plans
generally expire ten years from the date of the grant.
Transactions under the 1993 and 1996 Stock Option Plans are summarized as
follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period....................... 451 $0.20 457 $0.20 457 $0.57
Granted...................... 167 0.20 185 1.12 1,038 6.41
Exercised.................... (8) 0.20 (70) 0.20 (50) 0.57
Canceled..................... (153) 0.20 (115) 0.21 (254) 5.09
---- ----- -----
Outstanding at period end...... 457 0.20 457 0.57 1,191 4.70
==== ===== =====
Options exercisable at period
end.......................... 233 0.20 224 0.21 475 3.07
==== ===== =====
Weighted average grant date
fair value of options granted
during the year.............. $3.48 $6.51
===== =====
Weighted average grant date
fair value of options granted
during the year at exercise
prices below market prices... $3.48 $7.00
===== =====
</TABLE>
During the year ended December 31, 1996, the Company granted options to
purchase 185,125 shares of Common Stock to employees at exercise prices ranging
from $0.20 to $3.00 per share. Management is amortizing $540,000 of compensation
expense over the vesting period relating to these options, of which $54,000 and
$135,000 have been recorded during the years ended December 31, 1996 and 1997,
respectively.
Upon consummation of the IPO, in accordance with a previous commitment, the
Company granted a nonqualified option to purchase 25,000 shares of Common Stock
at an exercise price of $0.20 per share in exchange for financial planning and
management services. The option became exercisable upon consummation of the
initial public offering of the Company's Stock (see Note 6). The Company
recorded $175,000 in estimated compensation expense in 1996 in connection with
this option.
F-62
<PAGE> 241
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
AT CONTRACTUAL AVERAGE AT AVERAGE
DECEMBER 31, LIFE EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1997 (YEARS) PRICE 1997 PRICE
- ------------------------ ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.20 - $0.20........... 279 6.4 $0.20 246 $0.20
1.00 - 5.88............. 206 9.3 3.58 31 1.54
6.00 - 6.75............. 219 9.4 6.35 40 6.38
7.00 - 7.69............. 487 9.2 7.01 158 7.00
1,191 8.6 4.70 475 3.07
===== ===
</TABLE>
FAIR VALUE DISCLOSURES
Had compensation cost for options granted in 1996 and 1997 under the
Company's option plan been determined based on the fair value at the grant
dates, as prescribed in FAS 123, the Company's net income (loss) and pro forma
net income (loss) per share would have been as follows (in thousands except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1997
------ -------
<S> <C> <C>
Net income (loss):
As reported....................................... $1,195 $(2,561)
Pro forma......................................... 1,186 (3,300)
Basic net income (loss) per share:
As reported....................................... $ 0.73 $ (.39)
Pro forma......................................... 0.72 (.50)
Diluted net income (loss) per share:
As reported....................................... $ 0.22 $ (.39)
Pro forma......................................... 0.21 (.50)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants during
the applicable period: dividend yield of 0.0% for both periods; risk-free
interest rates of 5.36% to 6.60% for options granted during the year ended
December 31, 1996 and 5.80% to 6.76% for options granted during the year ended
December 31, 1997; no volatility factor was used due to the nonpublic entity
status for the year ended December 31, 1996 and an 0.80 volatility factor was
used for the year ended December 31, 1997; and a weighted average expected
option term of 5 years for both periods.
F-63
<PAGE> 242
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because the determination of the fair value of all options granted after
the Company became a public entity includes an expected volatility factor and
because additional option grants are expected to be made each year, the above
pro forma disclosures are not representative of pro forma effects of reported
net income for future years.
8. EMPLOYEE BENEFIT PLANS:
PROFIT SHARING
Employees of the Company are entitled to receive compensation under a
profit sharing agreement that is based upon attaining specific profit goals.
Profit sharing expense totaled $20,000, $231,000 and $0 in 1995, 1996 and 1997,
respectively.
401(K) PLAN
The Company maintains a 401(k) Tax Deferred Savings Plan (the Plan) which
covers all full-time employees of the Company who are at least 21 years of age.
Under the Plan, employees may elect to contribute up to 15% of their pre-tax
compensation to the Plan. The Company matches contributions under the Plan at
the rate of 50% of the employee's contributions up to a specified maximum. The
Company's contributions to the Plan were $75,000, $94,000 and $82,000 for 1995,
1996 and 1997, respectively.
9. EXPORT SALES AND CONCENTRATIONS OF CREDIT RISK:
The Company markets its products both domestically and internationally.
Export sales are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Europe...................................... $4,597 $4,676 $3,322
Other....................................... 1,010 543 478
------ ------ ------
$5,607 $5,219 $3,800
====== ====== ======
</TABLE>
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and accounts
receivable. Substantially all of the Company's cash is invested in high credit
quality financial institutions. The Company performs ongoing credit evaluations
of its customers' financial conditions and maintains an allowance for
uncollectible accounts receivable based upon expected write-offs. At December
31, 1997, one customer accounted for 11% gross accounts receivable. Revenues
from significant customers which represented 10% or more of total revenues for
the respective periods were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Customer A........................................ 11% 13% 6%
Customer B........................................ 15% 8% 5%
</TABLE>
F-64
<PAGE> 243
STORAGE DIMENSIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS:
The Company leases its offices and operating facilities under various
noncancelable renewable operating leases. The Company's future minimum
commitments at December 31, 1997 under all operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
1998......................................... $1,049
1999......................................... 178
2000......................................... 14
------
$1,241
======
</TABLE>
Rental expense under noncancelable operating leases totaled $862,000,
$904,000, and $1,190,000 in 1995, 1996 and 1997, respectively.
F-65
<PAGE> 244
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF
APRIL 29, 1999
AMONG
BOX HILL SYSTEMS CORP.,
BH ACQUISITION CORP.
AND
ARTECON, INC.
A-1
<PAGE> 245
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I DEFINITIONS................................................... A-6
SECTION 1.1 Certain Defined Terms................................... A-6
ARTICLE II THE MERGER................................................... A-12
SECTION 2.1 The Merger.............................................. A-12
SECTION 2.2 Closing; Effective Time................................. A-12
SECTION 2.3 Effect of the Merger.................................... A-13
SECTION 2.4 Certificate of Incorporation and By-laws; Directors and
Officers................................................ A-13
SECTION 2.5 Conversion of Securities................................ A-14
SECTION 2.6 Exchange of Certificates................................ A-15
SECTION 2.7 Tax Consequences........................................ A-16
SECTION 2.8 Accounting Consequences................................. A-17
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-17
SECTION 3.1 Organization and Qualification; Subsidiaries............ A-17
SECTION 3.2 Certificate of Incorporation and By-laws................ A-17
SECTION 3.3 Capitalization.......................................... A-17
SECTION 3.4 Authority Relative to this Agreement.................... A-18
SECTION 3.5 No Conflict; Required Filings and Consents.............. A-18
SECTION 3.6 Compliance.............................................. A-19
SECTION 3.7 SEC Filings; Financial Statements....................... A-19
SECTION 3.8 Absence of Certain Changes or Events.................... A-20
SECTION 3.9 Absence of Litigation................................... A-20
SECTION 3.10 Company Plans........................................... A-21
SECTION 3.11 Labor Matters........................................... A-21
SECTION 3.12 Real Property and Leases................................ A-21
SECTION 3.13 Intellectual Property Rights............................ A-22
SECTION 3.14 Taxes................................................... A-22
SECTION 3.15 Environmental Matters................................... A-23
SECTION 3.16 Material Agreements..................................... A-24
SECTION 3.17 Accounting Matters...................................... A-24
SECTION 3.18 Section 203 of the DGCL Not Applicable.................. A-24
SECTION 3.19 Ownership of Parent Common Stock........................ A-24
SECTION 3.20 Information Supplied.................................... A-25
SECTION 3.21 Brokers................................................. A-25
SECTION 3.22 Fairness Opinion........................................ A-25
SECTION 3.23 Assets.................................................. A-25
</TABLE>
A-2
<PAGE> 246
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT
AND PURCHASER............................................................ A-26
SECTION 4.1 Organization and Qualification; Subsidiaries............ A-26
SECTION 4.2 Certificate of Incorporation and By-laws................ A-26
SECTION 4.3 Capitalization.......................................... A-26
SECTION 4.4 Authority Relative to this Agreement.................... A-27
SECTION 4.5 No Conflict; Required Filings and Consents.............. A-27
SECTION 4.6 Compliance.............................................. A-28
SECTION 4.7 SEC Filings; Financial Statements....................... A-28
SECTION 4.8 Absence of Certain Changes or Events.................... A-29
SECTION 4.9 Absence of Litigation................................... A-29
SECTION 4.10 Parent Plans............................................ A-29
SECTION 4.11 Labor Matters........................................... A-30
SECTION 4.12 Real Property and Leases................................ A-30
SECTION 4.13 Intellectual Property Rights............................ A-31
SECTION 4.14 Taxes................................................... A-31
SECTION 4.15 Environmental Matters................................... A-31
SECTION 4.16 Material Agreements..................................... A-32
SECTION 4.17 Accounting Matters...................................... A-32
SECTION 4.18 Section 912 Not Applicable.............................. A-33
SECTION 4.19 Ownership of Company Common Stock....................... A-33
SECTION 4.20 Information Supplied.................................... A-33
SECTION 4.21 Brokers................................................. A-33
SECTION 4.22 Fairness Opinion........................................ A-33
SECTION 4.23 Class Action Proceeding................................. A-33
SECTION 4.24 Purchaser Organization.................................. A-34
ARTICLE V COVENANTS..................................................... A-34
SECTION 5.1 Conduct of Business by the Company Pending the Merger... A-34
SECTION 5.2 Conduct of Business by Parent Pending the Merger........ A-36
SECTION 5.3 No Solicitation of Transactions by the Company.......... A-37
SECTION 5.4 No Solicitation of Transactions by Parent............... A-39
SECTION 5.5 Company Stockholders' Meeting........................... A-41
SECTION 5.6 Parent Shareholders' Meeting............................ A-42
SECTION 5.7 Proxy Statement/Form S-4................................ A-43
SECTION 5.8 Accounting Methods...................................... A-44
SECTION 5.9 Indemnification Agreement............................... A-44
SECTION 5.10 Letters of the Company's Accountants.................... A-44
SECTION 5.11 Letters of Parent's Accountants......................... A-44
SECTION 5.12 Access to Information; Confidentiality.................. A-45
</TABLE>
A-3
<PAGE> 247
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 5.13 Employee Benefit Plans.................................. A-45
SECTION 5.14 Stock Exchange Listing.................................. A-46
SECTION 5.15 Notification of Certain Matters......................... A-46
SECTION 5.16 Subsequently Filed SEC Documents........................ A-46
SECTION 5.17 Further Action; Reasonable Best Efforts................. A-46
SECTION 5.18 Public Announcements.................................... A-46
SECTION 5.19 Indemnification of Directors and Officers............... A-47
SECTION 5.20 Affiliates.............................................. A-47
SECTION 5.21 Reasonable Efforts...................................... A-48
SECTION 5.22 Tax Representation Letters.............................. A-48
SECTION 5.23 Disclosure Regarding Class Action Proceeding............ A-48
ARTICLE VI CONDITIONS TO THE MERGER..................................... A-48
SECTION 6.1 Conditions to Each Party's Obligation To Effect the
Merger.................................................. A-48
SECTION 6.2 Conditions to Obligations of Parent and Purchaser....... A-49
SECTION 6.3 Conditions to Obligations of the Company................ A-50
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER........................... A-51
SECTION 7.1 Termination............................................. A-51
SECTION 7.2 Effect of Termination................................... A-52
SECTION 7.3 Fees and Expenses....................................... A-52
SECTION 7.4 Amendment............................................... A-53
SECTION 7.5 Waiver.................................................. A-53
ARTICLE VIII GENERAL PROVISIONS......................................... A-54
SECTION 8.1 Non-Survival of Representations, Warranties and
Agreements.............................................. A-54
SECTION 8.2 Notices................................................. A-54
SECTION 8.3 Severability............................................ A-54
SECTION 8.4 Entire Agreement; Assignment............................ A-55
SECTION 8.5 Parties in Interest..................................... A-55
SECTION 8.6 Governing Law........................................... A-55
SECTION 8.7 Headings................................................ A-55
SECTION 8.8 Interpretation.......................................... A-55
SECTION 8.9 Counterparts............................................ A-55
</TABLE>
EXHIBITS
Exhibit A -- Certificate of Amendment of Certificate of Incorporation of Parent
Exhibit B -- Amended and Restated By-laws of Parent
Exhibit C -- Certificate of Incorporation and By-laws of Surviving Corporation
Exhibit D -- Directors and Officers of Parent
Exhibit E -- Directors and Officers of Surviving Corporation
Exhibit F -- Tucker Anthony Fairness Opinion
Exhibit G -- Salomon Smith Barney Inc. Fairness Opinion
A-4
<PAGE> 248
<TABLE>
<S> <C>
Exhibit H -- Form of Indemnification Agreements
Exhibit I -- Affiliate Letters
Exhibit J -- Form of Opinion of Cooley Godward LLP
Exhibit K -- Summary of Terms of Artecon Executive Summary
Exhibit L -- Form of Opinion of Herrick, Feinstein LLP
Exhibit M -- Summary of Terms of Box Hill Executive Summay
Exhibit N -- Tax representation Letter of Parent
Exhibit O -- Tax Representation Letter of Surviving Corporation
Exhibit P -- Form of Tax Opinion of Cooley Godward LLP
Exhibit Q -- Form of Tax Opinion of Herrick, Feinstein LLP
</TABLE>
COMPANY DISCLOSURE SCHEDULE
<TABLE>
<S> <C>
Schedule 3.1 -- Subsidiaries
Schedule 3.3 -- Options and Warrants
Schedule 3.5(a) -- Exceptions to No Conflicts
Schedule 3.5(b) -- Company Consents
Schedule 3.7(c) -- Company Current Balance Sheet
Schedule 3.10 -- Company Plans
Schedule 3.11 -- Labor Matters
Schedule 3.16 -- Company Material Agreements
Schedule 3.23 -- Assets
Schedule 5.1(f) -- Company Severance Payments
</TABLE>
PARENT DISCLOSURE SCHEDULE
<TABLE>
<S> <C>
Schedule 4.1 -- Parent Subsidiaries
Schedule 4.3 -- Options and Warrants
Schedule 4.5(a) -- Exceptions to No Conflicts
Schedule 4.5(b) -- Parent Consents
Schedule 4.7(c) -- Parent Current Balance Sheet
Schedule 4.10 -- Parent Plans
Schedule 4.11 -- Labor Matters
Schedule 4.16 -- Parent Material Agreements
Schedule 5.2(f) -- Parent Severance Payments
</TABLE>
A-5
<PAGE> 249
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER dated as of April 29, 1999 (this "Agreement")
by and among BOX HILL SYSTEMS CORP., a New York corporation ("Parent"), BH
ACQUISITION CORP., a Delaware corporation and a wholly owned subsidiary of
Parent ("Purchaser"), and ARTECON, INC., a Delaware corporation (the "Company").
WITNESSETH:
WHEREAS, the Boards of Directors of each of Parent, Purchaser and the
Company have approved, and deem it advisable and in the best interests of their
respective stockholders to consummate, the business combination transaction
provided for in this Agreement in which Purchaser would merge with and into the
Company (the "Merger");
WHEREAS, Parent, Purchaser and the Company desire to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions to the Merger;
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests";
WHEREAS, certain stockholders of the Company and of Parent are concurrently
herewith executing irrevocable voting agreements (the "Voting Agreements")
providing for, inter alia, the vote of all of their respective shares of capital
stock of the Company or Parent, as the case may be, in favor of the Merger and
the transactions contemplated by this Agreement;
WHEREAS, certain members of senior management of the Company and certain
members of senior management of Parent will be entering into employment
agreements with Parent, which employment agreements will become effective upon
the consummation of the Merger; and
WHEREAS, certain affiliates of the Company and certain affiliates of Parent
are concurrently herewith delivering executed affiliate letters providing for
certain restrictions on the ability of such affiliates to sell their shares of
Company Common Stock and Parent Common Stock, respectively.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Purchaser and the Company hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings:
"1995 Stock Incentive Plan" means the 1995 Stock Incentive Program of
Parent, as amended, as governed by the operative documents with respect thereto,
which have been filed as exhibits to the Parent SEC Reports.
A-6
<PAGE> 250
"1996 Employee Stock Purchase Plan" means the 1996 Employee Stock Purchase
Plan of the Company, as governed by the operative documents with respect
thereto, which have been filed as exhibits to the Company SEC Reports.
"1996 Stock Option Plan" means the 1996 Stock Option Plan of the Company,
as governed by the operative documents with respect thereto, which have been
filed as exhibits to the Company SEC Reports.
"Accounting Pronouncements" has the meaning ascribed to it in Section 3.17.
"Affiliate" of a specified Person means a Person who directly or indirectly
through one or more intermediaries controls, is controlled by, or is under
common control with, such specified Person.
"Affiliate Letters" has the meaning ascribed to it in Section 5.20.
"Agreement" has the meaning ascribed to it in the Recitals.
"APB 16" has the meaning ascribed to it in Section 5.11(b).
"Blue Sky Laws" means any and all state securities laws and regulations
thereunder.
"Business Day" means any day on which the principal offices of the SEC in
Washington, D.C. are open to accept filings, or, in the case of determining a
date when any payment is due, any day on which banks are not required or
authorized to close in New York, New York.
"Certificates" has the meaning ascribed to it in Section 2.6(b).
"Certificate of Amendment" has the meaning ascribed to it in Section
2.4(a).
"Certificate of Merger" has the meaning ascribed to it in Section 2.2.
"Charter Document" has the meaning ascribed to it in Section 3.2.
"Class Action Proceeding" has the meaning ascribed to it in Section 4.23.
"Closing" has the meaning ascribed to it in Section 2.2.
"Closing Date" has the meaning ascribed to it in Section 2.2.
"Code" has the meaning ascribed to it in the Recitals.
"Comfort Letter" has the meaning ascribed to it in Section 5.10.
"Company" has the meaning ascribed to it in the Recitals.
"Company Acquisition Transaction" has the meaning ascribed to it in Section
5.3.
"Company Assets" has the meaning ascribed to it in Section 3.23.
"Company Common Stock" means the common stock of the Company, par value
$.005 per share.
"Company Required Consents" has the meaning ascribed to it in Section 3.16.
"Company Current Balance Sheet" means the consolidated balance sheet of the
Company and Subsidiaries as at March 31, 1999, including the notes thereto.
"Company Disclosure Schedule" means the disclosure schedule listing certain
information referred to in this Agreement and delivered to Parent and Purchaser
contemporaneously with the execution and delivery of this Agreement.
A-7
<PAGE> 251
"Company Employees" has the meaning ascribed to it in Section 5.13.
"Company Material Agreements" has the meaning ascribed to it in Section
3.16.
"Company Options" shall mean all outstanding options to purchase Company
Common Stock pursuant to the 1996 Stock Option Plan and 1996 Employee Stock
Purchase Plan.
"Company Plans" means employee benefit plans, programs and arrangements
maintained for the benefit of any current or former employee, officer or
director of the Company or any Subsidiary.
"Company Preferred Stock" means the Series A Preferred Stock, par value
$.005 per share, of the Company.
"Company's Stockholders' Meeting" has the meaning ascribed to it in Section
5.5.
"Company Triggering Event" A "Company Triggering Event" shall be deemed to
have occurred if: (i) the board of directors of the Company shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to Parent, its unanimous recommendation in favor
of, the Merger or approval or adoption of this Agreement; (ii) the Company shall
have failed to include in the Proxy Statement the unanimous recommendation of
the board of directors of the Company in favor of approval and adoption and
declaring the advisability of this Agreement and the Merger; (iii) the board of
directors of the Company shall have approved, endorsed or recommended any
Company Acquisition Transaction; (iv) the Company shall have entered into any
letter of intent or similar document or any contract or other agreement relating
to any Company Acquisition Transaction; (v) the Company shall have failed to
hold the Company Stockholders' Meeting as promptly as practicable and in any
event within forty-five (45) days after the definitive Proxy Statement was filed
with the SEC (which 45-day period shall be extended on a day-for-day basis if
and for so long as any stop order or other similar action is in place, pending
or threatened by the SEC); (vi) a tender or exchange offer relating to
securities of the Company shall have been commenced and the Company shall not
have sent to its securityholders, within ten (10) Business Days after the
commencement of such tender or exchange offer, a statement disclosing that the
Company recommends rejection of such tender or exchange offer; (vii) a Company
Acquisition Transaction is publicly announced, and the Company (A) fails to
issue a press release announcing its opposition to such Company Acquisition
Transaction within ten (10) Business Days after such Company Acquisition
Transaction is announced or (B) otherwise fails to actively oppose such Company
Acquisition Transaction; or (viii) a Person or group (as defined in the Exchange
Act and the rules promulgated thereunder) shall have acquired more than fifty
percent (50%) of the Company's voting securities (excluding persons and groups
that, as of the date of this Agreement, hold more than fifty percent (50%) of
the Company's voting securities or that may be deemed to have acquired such
percentage upon execution of the Voting Agreements).
"Company SEC Reports" has the meaning ascribed to it in Section 3.7(a).
"Company Unaudited Financial Statements" shall have the meaning ascribed to
it in Section 3.7(b).
"Consents" has the meaning ascribed to it in Section 6.1(d).
A-8
<PAGE> 252
"Damages" shall include any loss, damage, injury, liability, claim, demand,
settlement, judgment, award, fine, penalty, tax, fee (including reasonable
attorneys' fees), charge, cost (including costs of investigation) or expense of
any nature.
"DGCL" means the Delaware General Corporation Law.
"Effective Time" has the meaning ascribed to it in Section 2.2.
"Environmental Law" has the meaning ascribed to it in Section 3.15(a).
"ERISA" has the meaning ascribed to it in Section 3.10.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Act Filings" shall have the meaning ascribed to it in Section
5.16.
"Exchange Agent" means the bank or trust company designated by Parent to
exchange Company Common Stock and Company Preferred Stock for Parent Common
Stock in accordance with the terms of this Agreement.
"Exchange Rate" has the meaning ascribed to it in Section 2.5(a).
"Form S-4" means a registration statement on Form S-4 to be filed with the
SEC by Parent in connection with the issuance of Parent Common Stock in the
Merger.
"GAAP" means United States generally accepted accounting principles,
consistently applied.
"Governmental Entity" means any court, alternative dispute resolution body,
government, administrative agency, commission or other governmental authority or
instrumentality, domestic or foreign.
"Hazardous Substances" means (i) hazardous substances as defined in the
Comprehensive Environmental Response Compensation and Liability Act, as amended,
42 U.S.C. Section 9601 et seq., and regulations thereunder; and (ii) any
substance regulated by or pursuant to state or local laws because of a potential
or real harmful effect on public safety or health and/or the environment.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Indemnified Party" has the meaning ascribed to it in Section 5.19(a).
"Injunction" means a temporary restructuring order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition.
"Intellectual Property Rights" means any of the following rights of the
specified Person to own, use and exploit all or any of the following which is
material to the business of such Person: (i) statutory invention registrations,
patents, patent registrations and patent applications (including all reissues,
divisions, continuations and continuations-in-part) and all improvements to the
inventions covered in each such registration, patent or application; (ii)
trademarks, service marks, trade dress, logos, trade names and corporate names
and registrations and applications for registration thereof, including, but not
limited to, all marks registered in any trademark offices throughout the world;
(iii) copyrights (registered or otherwise) and registrations and applications
for registration thereof; (iv) computer software, data and documentation; (v)
trade secrets and confidential business information (including ideas, formulas,
compositions, inventions, and conceptions of inventions whether patentable or
unpatentable and whether or not reduced to practice), technology (including
A-9
<PAGE> 253
know-how and show-how), manufacturing and production processes and techniques,
research and development information, drawings, specifications, designs, plans,
proposals, technical data, copyrightable works, financial, marketing and
business data, pricing and cost information, business and marketing plans and
customer and supplier lists and information; (vi) copies and tangible
embodiments of all of the foregoing, in whatever form or medium; (vii) all
rights to obtain and rights to apply for patents, and to register trademarks and
copyrights; and (viii) all rights to sue for present and past infringement of
any of the rights hereinabove set out.
"Legal Proceeding" shall mean any action, suit, litigation, arbitration,
proceeding (including any civil, criminal, administrative, investigative or
appellate proceeding), hearing, inquiry, audit, examination or investigation
commenced, brought, conducted or heard by or before, or otherwise involving, any
court or other Governmental Entity or any arbitrator or arbitration panel.
"Legal Requirement" shall mean any federal, state, local, municipal,
foreign or other law, statute, constitution, principal of common law,
resolution, ordinance, code, edict, decree, rule, regulation, ruling or
requirement issued, enacted, adopted, promulgated, implemented or otherwise put
into effect by or under the authority of any Governmental Entity.
"Liens" means all mortgages, pledges, security interests, conditional and
installment sale agreements, encumbrances, charges, options, rights of first
refusal, limitations on voting rights, and other encumbrances of any kind,
nature or character.
"Material Adverse Effect" means, with respect to any Person, any change or
effect that is or could reasonably be expected to be materially adverse to the
business, operations, properties, condition (financial or otherwise), assets or
liabilities (including, without limitation, contingent liabilities) of such
Person and its subsidiaries taken as a whole. In no event shall any of the
following constitute a Material Adverse Effect: (i) a change in the trading
prices of either the Company's or Parent's equity securities between the date
hereof and the Effective Time, in and of itself; (ii) conditions, events,
circumstances, changes or effects generally affecting the industry in which
either the Company or Parent operates or arising from changes in general
business or economic conditions; (iii) conditions, events, circumstances,
changes or effects directly attributable to out-of-pocket fees and expenses
(including without limitation legal, accounting and financial consulting fees
and expenses) incurred in connection with the transactions contemplated by this
Agreement; (iv) any modification or amendment which is required or desirable to
be made to any of the financial statements contained in or required to be
contained in the Company SEC Reports, regardless of the dollar amount of such
change or the effect such change would have on the financial position or
condition of the Company; (v) any conditions, events, circumstances, changes or
effects resulting from any change in law or generally accepted accounting
principles, which effect generally entities such as Parent or the Company; (vi)
any conditions, events, circumstances, changes or effects (including without
limitation, delays in customer orders, a reduction in sales, a disruption in
supplier, distributor or similar relationships or a loss of employees) resulting
from the announcement or pendency of any of the transactions contemplated by
this Agreement; (vii) any conditions, events, circumstances, changes or effects
resulting from compliance by the Company or Parent with, or the taking of any
action contemplated or permitted by, the terms of this Agreement; or (viii) any
adverse consequence arising out of or resulting from the Class Action Proceeding
that is attributable to a fact, condition, circumstance or event that was
disclosed in writing by Parent to the Company prior to the date hereof.
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"Merger" has the meaning ascribed to it in the Recitals.
"Named Individuals" has the meaning ascribed to it in Section 4.23.
"NASD" means the National Association of Securities Dealers.
"NMS" shall mean the Nasdaq National Market System.
"NYSE" means the New York Stock Exchange, Inc.
"Parent Acquisition Transaction" has the meaning ascribed to it in Section
5.4(b).
"Parent" has the meaning ascribed to it in the Recitals.
"Parent Common Stock" means the common stock of Parent, par value $.01 per
share.
"Parent Required Consents" has the meaning ascribed to it in Section 4.16.
"Parent Current Balance Sheet" means the consolidated balance sheet of the
Parent and the Parent Subs as at March 31, 1999, including the notes thereto.
"Parent Disclosure Schedule" means the disclosure schedule listing certain
information referred to in this Agreement and delivered to the Company
contemporaneously with the execution and delivery of this Agreement.
"Parent Options" shall mean all outstanding options and warrants to
purchase Parent Common Stock pursuant to the 1995 Stock Incentive Plan.
"Parent Material Agreements" has the meaning ascribed to it in Section
4.16.
"Parent Plans" means employee benefit plans programs and arrangements
maintained for the benefit of any current or former employee, officer or
director of the Parent or any Parent Sub.
"Parent SEC Reports" has the meaning ascribed to it in Section 4.7(a).
"Parent Shareholders' Meeting" has the meaning ascribed to it in Section
5.6.
"Parent Sub" has the meaning ascribed to it in Section 4.1.
"Parent Triggering Event" A "Parent Triggering Event" shall be deemed to
have occurred if: (i) the board of directors of Parent shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to the Company its unanimous recommendation in
favor of the issuance of the shares of Parent Common Stock in the Merger or the
Merger or approval or adoption of this Agreement or the Certificate of
Amendment; (ii) Parent shall have failed to include in the Proxy Statement the
unanimous recommendation of the board of directors of Parent in favor of
approval and adoption and declaring the advisability of this Agreement, the
Merger or the Certificate of Amendment; (iii) the board of directors of Parent
shall have approved, endorsed or recommended any Parent Acquisition Transaction;
(iv) Parent shall have entered into any letter of intent or similar document or
any contract or other agreement relating to any Parent Acquisition Transaction;
(v) Parent shall have failed to hold the Parent Stockholders' Meeting as
promptly as practicable and in any event within forty-five (45) days after the
definitive Proxy Statement was filed with the SEC (which 45-day period shall be
extended on a day-for-day basis if and for so long as any stop order or other
similar action is in place, pending or threatened by the SEC); (vi) a tender or
exchange offer relating to securities of Parent shall have been commenced and
Parent shall not have sent to its securityholders, within ten (10) Business Days
after the commence-
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ment of such tender or exchange offer, a statement disclosing that Parent
recommends rejection of such tender or exchange offer; (vii) a Parent
Acquisition Transaction is publicly announced, and Parent (A) fails to issue a
press release announcing its opposition to such Parent Acquisition Transaction
within ten (10) Business Days after such Parent Acquisition Transaction is
announced or (B) otherwise fails to actively oppose such Parent Acquisition
Transaction; or (viii) a Person or group (as defined in the Exchange Act and the
rules promulgated thereunder) shall have acquired more than fifty percent (50%)
of Parent's voting securities (excluding persons and groups that, as of the date
of this Agreement, hold more than fifty percent (50%) of Parent's voting
securities or that may be deemed to have acquired such percentage upon execution
of the Voting Agreements).
"Parent Unaudited Financial Statements" has the meaning ascribed to it in
Section 4.7(b).
"Permitted Liens" means (A) Liens for current taxes and assessments not yet
past due which are adequately accrued in the most recent audited balance sheet
of the Company or Parent, as the case may be, in accordance with GAAP; (B)
inchoate mechanics' and materialmen's Liens for construction in progress; and
(C) workmen's, repairmen's, warehousemen's and carrier's Liens arising in the
ordinary course of business.
"Person" means an individual, corporation, partnership, limited
partnership, limited liability company, syndicate, person (including, without
limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act),
trust, association, entity or Governmental Entity.
"Proxy Statement" means the joint proxy statement in definitive form
relating to the meetings of the Company's and Parent's stockholders in
connection with the Merger.
"Privileged Information" has the meaning ascribed to it in Section 4.23.
"Purchaser" has the meaning ascribed to it in the Recitals.
"Requisite Regulatory Approvals" has the meaning ascribed to it in Section
6.1(d).
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary" has the meaning ascribed to it in Section 3.1.
"Surviving Corporation" has the meaning ascribed to it in Section 2.1.
"Transactions" has the meaning ascribed to it in Section 3.4.
"Voting Agreements" has the meaning ascribed to it in the Recitals.
"WARN Act" means the Worker Adjustment Retraining Notification Act.
ARTICLE II
THE MERGER
SECTION 2.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, at the Effective Time Purchaser shall be merged with
and into the Company in accordance with the DGCL. As a result of the Merger, the
separate corporate existence of Purchaser shall cease and the Company shall
continue as the surviving corporation of the Merger (the "Surviving
Corporation").
SECTION 2.2 Closing; Effective Time. The closing of the Merger (the
"Closing") will take place at 10:00 a.m. (New York time) on a date specified by
the parties hereto,
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which date shall not be later than two (2) Business Days after the satisfaction
or waiver of the conditions set forth in Sections 6.1, 6.2 and 6.3 at the
offices of Herrick, Feinstein LLP, Two Park Avenue, New York, New York 10016, or
such other time, date or place as agreed to in writing by the parties hereto
(the date on which the Closing shall occur being referred to in this Agreement
as the "Closing Date"). Contemporaneously with or as promptly as practicable
after the Closing, a certificate of merger (the "Certificate of Merger") shall
be duly prepared and acknowledged by the Surviving Corporation and thereafter
filed with the Secretary of State of the State of Delaware, in such form as is
required by, and executed in accordance with the relevant provisions of, the
DGCL. The Merger shall become effective upon the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware (the date and time
of such filing being the "Effective Time").
SECTION 2.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement and in the applicable provisions
of the DGCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers and
franchises of the Company and Purchaser shall vest in the Surviving Corporation,
and all debts, liabilities, obligations, restrictions, disabilities and duties
of the Company and Purchaser shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.
SECTION 2.4 Certificate of Incorporation and By-laws; Directors and
Officers. Unless otherwise determined by the Company and Parent prior to the
Effective Time and only to the extent that the shareholders of Parent
affirmatively vote to take such actions described in (a) and (b) below:
(a) Concurrent with the Effective Time, by the filing of a Certificate
of Amendment of Certificate of Incorporation of Parent with the Secretary of
State of the State of New York, Parent shall amend its Certificate of
Incorporation to (i) change its name to a name mutually agreed upon between
Parent and the Company and (ii) provide for a classified Board of Directors
whereby the directors shall be separated into three classes, with the members of
each class serving for a three year term, provided that the Class I directors
shall be elected at Parent's 2000 annual meeting of shareholders, the Class II
directors shall be elected at Parent's 2001 annual meeting of shareholders and
the Class III directors shall be elected at Parent's 2002 annual meeting of
shareholders; all as set forth in the Certificate of Amendment of Certificate of
Incorporation attached hereto as Exhibit A (the "Certificate of Amendment");
(b) Effective on or promptly following the Effective Time, the By-laws
of the Parent shall be amended and restated to provide for a classified Board of
Directors whereby the directors shall be separated into three classes, with the
members of each class serving time for a three year term, provided that the
Class I directors shall be elected at Parent's 2000 annual meeting of
shareholders, the Class II directors shall be elected at Parent's 2001 annual
meeting of shareholders and the Class III directors shall be elected at Parent's
2002 annual meeting of shareholders all as set forth in the Amended and Restated
Bylaws of Parent attached hereto as Exhibit B; and
(c) the Certificate of Incorporation and Bylaws of the Surviving
Corporation shall be substantially as set forth in Exhibit C.
(d) Directors and Officers. The directors and officers of the Parent
immediately after the Effective Time shall be the individuals identified on
Exhibit D. The directors and
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officers of the Surviving Corporation immediately after the Effective Time shall
be the individuals identified on Exhibit E.
SECTION 2.5 Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of Parent, Purchaser, the Company
or the holders of any shares of the capital stock of the Company:
(a) All shares of Company Common Stock that are owned by the Company as
treasury stock and all shares of Company Common Stock that are owned by Parent
or any Parent Sub shall be canceled and retired and shall cease to exist and no
securities of Parent or other consideration shall be delivered in exchange
therefor.
(b) Subject to Section 2.6(e), each issued and outstanding share of
Company Common Stock, other than the shares to be canceled in accordance with
Section 2.5(a), shall be converted into 0.40 (the "Exchange Rate") of a fully
paid and nonassessable share of Parent Common Stock (i.e., each one hundred
(100) shares of Company Common Stock shall be converted into forty (40) shares
of Parent Common Stock, each one thousand (1,000) shares of Company Common Stock
shall be converted into four hundred (400) shares of Parent Common Stock, etc.).
All such shares of Company Common Stock shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each
certificate previously representing any such shares shall thereafter represent
only the right to receive, upon surrender of such certificate, shares of Parent
Common Stock and cash in lieu of any fractional shares of Parent Common Stock,
without interest, as contemplated by this Agreement.
(c) Each issued and outstanding share of Company Preferred Stock shall
be converted into the right to receive that number of shares of Parent Common
Stock equal to the quotient obtained by dividing (i)(1) $4,988,318, divided by
(2) the closing sales price of Parent Common Stock as traded on the NYSE
Composite Transactions Tape on the last trading day immediately prior to the
Closing Date, by (ii) 2,494,159. Any fractional shares of Parent Common Stock
shall be rounded upwards to the nearest whole number. All shares of Company
Preferred Stock shall no longer be outstanding after the Effective Time and
shall automatically be canceled and retired and shall cease to exist, and each
certificate previously representing any such shares shall thereafter represent
only the right to receive Parent Common Stock as provided herein.
(d) Each share of Common Stock of Purchaser then outstanding shall be
converted into one share of Common Stock of the Surviving Corporation.
(e) All rights with respect to Company Common Stock under Company
Options that are then outstanding, if any, shall be converted into and become
rights with respect to Parent Common Stock, and Parent shall assume each Company
Option in accordance with the terms (as in effect as of the date hereof) of the
1996 Stock Option Plan and the stock option agreements by which such options are
evidenced, other than provisions contained in such plans and agreements which
grant the plan administrator discretion with respect to the terms and provisions
of such plans and agreements. From and after the Effective Time, (i) each
Company Option assumed by Parent may be exercised solely for shares of Parent
Common Stock, (ii) the number of shares of Parent Common Stock subject to each
Company Option shall be equal to the number of shares of Company Common Stock
subject to such Company Option immediately prior to the Effective Time
multiplied by the Exchange Rate, rounding down to the nearest whole share, (iii)
the per share exercise price under each such Company Option shall be adjusted by
dividing the per share exercise price under each such Company Option by the
Exchange Rate and rounding up to
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the nearest cent and (iv) any restriction on the exercise of any Company Option
shall continue in full force and effect and the term, exercisability, vesting
schedule and other provisions of such Company Option shall otherwise remain
unchanged; provided, however, that each such Company Option shall, in accordance
with its terms, be subject to further adjustment as appropriate to reflect any
stock split, reverse stock split, stock dividend, subdivision, reclassification,
reorganization, business combination or similar transaction subsequent to the
Effective Time. The Company and Parent shall take all action that may be
necessary (under the stock option plan or other agreements pursuant to which
Company Options are outstanding) to effectuate the provisions of this Section
2.5(e) and to ensure that, from and after the Effective Time, holders of Company
Options have no rights with respect thereto other than those specifically
provided herein and that all incentive stock options within the meaning of
Section 422 of the Code continue to qualify as such. Within one (1) Business Day
after the Effective Time, Parent shall file with the SEC a registration
statement on Form S-8 relating to the shares of Parent Common Stock issuable
with respect to the Company Options assumed by Parent in accordance with this
Section 2.5(e).
SECTION 2.6 Exchange of Certificates.
(a) As of the Effective Time, Parent shall deposit, or shall cause to be
deposited, with the Exchange Agent, for the benefit of the holders of shares of
Company Common Stock and the holders of Company Preferred Stock for exchange in
accordance with this Article II, through the Exchange Agent, certificates
representing the shares of the Parent Common Stock issuable pursuant to Section
2.5 in exchange for outstanding shares of Company Common Stock and Company
Preferred Stock.
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock or Company Preferred Stock (the
"Certificates") whose shares were converted into shares of Parent Common Stock
pursuant to Section 2.5, (i) a letter of transmittal, in form and substance
acceptable to Parent, which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent, and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
shares of Parent Common Stock. Upon surrender of a Certificate for cancellation
to the Exchange Agent together with such letter of transmittal, duly executed,
the holder of such Certificate shall be entitled to receive in exchange therefor
a certificate representing that number of shares of Parent Common Stock which
such holder has the right to receive in respect of the Certificate surrendered
pursuant to the provisions of this Article II (after taking into account all
shares of Company Common Stock and Company Preferred Stock then held by such
holder), and the Certificate so surrendered shall forthwith be canceled. In the
event of a transfer of ownership of Company Common Stock which is not registered
in the transfer records of the Company, a certificate representing the proper
number of shares of Parent Common Stock may be issued to a transferee if the
Certificate representing such Company Common Stock is presented to the Exchange
Agent, accompanied by all documents, in form and substance satisfactory to
Parent, required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.6(b), each Certificate shall be deemed at any
time after the Effective Time to represent only the right to receive upon such
surrender the certificate representing shares of Parent Common Stock and cash in
lieu of any fractional shares of Parent Common Stock as contemplated by this
Section 2.6. If any Certificate shall have
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been lost, stolen or destroyed, Parent shall issue a certificate representing
Parent Common Stock with respect to such lost, stolen or destroyed Certificate
in accordance with this Agreement upon delivery by the owner of such lost,
stolen or destroyed Certificate to Parent of an appropriate affidavit as
indemnity against any claim that may be made against Parent or the Surviving
Corporation with respect to such Certificate.
(c) No dividends or other distributions declared or made after the
Effective Time with respect to Parent Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock represented thereby, and no cash
payment in lieu of fractional shares shall be paid pursuant to Section 2.6(e)
until such holder of such Certificate shall surrender such Certificate as
contemplated by this Agreement. Subject to the effect of the applicable laws
following surrender of any such Certificate, there shall be paid to the holder
of the Certificates without interest at the time of such surrender, the amount
of any cash payable with respect to a fractional share of Parent Common Stock to
which such holder is entitled pursuant to Section 2.6(e) and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(d) All shares of Parent Common Stock issued upon conversion of shares
of Company Common Stock and Company Preferred Stock in accordance with the terms
of this Agreement (including any cash paid pursuant to Section 2.6(c) or 2.6(e))
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Company Common Stock and Company Preferred Stock.
The stock transfer books of the Company shall be closed at the Effective Time
and there shall be no further registration of transfers on the stock transfer
books of the Surviving Corporation of the shares of Company Common Stock or
Company Preferred Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged for
certificates representing Parent Common Stock as provided in this Article II.
(e) No certificates or scrip representing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of Certificates,
and such fractional share interests will not entitle the owner thereof to vote
or to any rights of a stockholder of Parent. Any holder of Company Common Stock
who would otherwise be entitled to receive a fraction of a share of Parent
Common Stock (after aggregating all fractional shares of Parent Common Stock
issuable to such holder) shall, in lieu of such fraction of and upon surrender
of such holder's Certificate(s), be paid in cash the dollar amount (rounded to
the nearest whole cent), without interest, determined by multiplying such
fraction of a share of Parent Common Stock by the closing sales price of one
share of Parent Common Stock as traded on the NYSE on the Closing Date (and if
such day is not a trading day, then on the first trading day immediately
preceding the Closing Date).
(f) Neither Parent nor the Company shall be liable to any holder of
shares of Company Common Stock or Company Preferred Stock for shares of Parent
Common Stock (or dividends or distributions with respect thereto) delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
SECTION 2.7 Tax Consequences. For federal income tax purposes, the Merger
is intended to constitute a reorganization within the meaning of Section 368(a)
of the Code. The parties to this Agreement hereby adopt this Agreement as a
"plan of reorganization" within the meaning of Sections 1.368-2(g) and
1.368-3(a) of the United States Treasury Regulations.
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SECTION 2.8 Accounting Consequences. For accounting purposes, the Merger
is intended to be accounted for as a "pooling of interests."
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Purchaser that
except as set forth in the Company Disclosure Schedule:
SECTION 3.1 Organization and Qualification; Subsidiaries. Each of the
Company and each subsidiary of the Company (each a "Subsidiary") is a
corporation or other business entity duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization and has the
requisite power (corporate or otherwise) and authority and all necessary
approvals to own, lease and operate its properties and to carry on its business
as it is now being conducted and as it will be conducted as of the Closing Date.
The Company and each Subsidiary is duly qualified or licensed as a foreign
corporation or other business entity to do business, and is in good standing, in
each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its business makes such qualification or
licensing necessary, except for such failures to be so qualified or licensed and
in good standing that would not, individually or in the aggregate, have a
Material Adverse Effect to the Company. A true and complete list of all the
Subsidiaries, together with the jurisdiction of organization of each Subsidiary
and the percentage of the outstanding capital stock of each Subsidiary owned by
the Company and each other Subsidiary, is set forth on Schedule 3.1 of the
Company Disclosure Schedules. Except as disclosed in Schedule 3.1 of the Company
Disclosure Schedule, the Company does not directly or indirectly own any equity
or similar interest in, or any interest convertible into or exchangeable or
exercisable for, any equity or similar interest in, any Person.
SECTION 3.2 Certificate of Incorporation and By-laws. The Company has
delivered to Parent a true, complete and correct copy of the Certificate of
Incorporation and the By-laws (each such document being referred to in this
Agreement as a "Charter Document"), each as amended to the date hereof, of the
Company and each Subsidiary. Neither the Company nor any Subsidiary is in
violation of any provision of its respective Charter Documents.
SECTION 3.3 Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of capital stock: 40,000,000 shares of Company
Common Stock and 10,000,000 shares of Company Preferred Stock. As of the date
hereof: (i) 21,779,307 shares of Company Common Stock are issued and
outstanding, all of which are validly issued, fully paid and nonassessable and
(ii) 1,762,254 shares of Company Common Stock are reserved for future issuances
pursuant to outstanding options under the 1996 Stock Option Plan and (iii)
101,599 shares are reserved for future issuances under the 1996 Employee Stock
Purchase Plan. All shares of capital stock subject to issuance as aforesaid,
upon issuance on the terms and conditions specified in the instruments pursuant
to which they are issuable, will be duly authorized, validly issued, fully paid
and nonassessable. There are 2,494,159 shares of Company Preferred Stock issued
and outstanding and all such shares are validly issued, fully paid and
nonassessable. Except as set forth in Schedule 3.3 of the Company Disclosure
Schedule, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character (including, without limitation,
registration rights) relating to the issued or unissued capital
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stock of the Company or any Subsidiary or obligating the Company or any
Subsidiary to issue or sell any shares of capital stock of, or other equity
interests in, the Company or any Subsidiary. There are no outstanding
contractual obligations of the Company or any Subsidiary to repurchase, redeem,
or otherwise acquire any shares or any capital stock or any other security,
instrument or right to acquire any equity interest of the Company or of any
Subsidiary or to provide funds to, or make any investment (in the form of a
loan, capital contribution or otherwise) in, the Company or any Subsidiary or
any other Person. Each outstanding share of capital stock of each Subsidiary is
duly authorized, validly issued, fully paid and nonassessable and each such
share owned by the Company or another Subsidiary is free and clear of all Liens.
SECTION 3.4 Authority Relative to this Agreement. The Company has all
necessary power and authority to execute and deliver this Agreement to perform
its obligations hereunder and to consummate the Merger and the other
transactions contemplated hereby (collectively, the "Transactions"). The
execution and delivery of this Agreement by the Company and the consummation by
Company of the Transactions have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement or to consummate the
Transactions (other than, with respect to the Merger, (i) the approval and
adoption of this Agreement by the holders of a majority of the then issued and
outstanding shares of Company Common Stock and Company Preferred Stock and (ii)
the filing of the Certificate of Merger as required by the DGCL). This Agreement
has been duly and validly executed and delivered by the Company and, assuming
the due authorization, execution and delivery by Parent and Purchaser,
constitutes the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
SECTION 3.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the Company do not,
and the performance of this Agreement by the Company will not: (i) conflict with
or violate any of the Charter Documents of the Company or any Subsidiary; (ii)
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to the Company or any Subsidiary or by which any material property or
asset of the Company or any Subsidiary is bound or affected; or (iii) except as
set forth in Schedule 3.5(a) of the Company Disclosure Schedule, result in any
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a breach or default) under, or give to others any
right of termination, amendment, acceleration or cancellation of, or result in
the creation of a lien or other encumbrance on any property or asset of the
Company or any Subsidiary pursuant to, any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or any property or asset of the Company or
any Subsidiary is bound or affected.
(b) Except for the approval of the holders of the Company Common Stock
and the holders of the Company Preferred Stock voting together as a single
class, the execution and delivery of this Agreement by the Company does not, and
the performance of this Agreement by the Company will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
Person, including without limitation, any Governmental Entity, where the failure
to obtain any such consents, approvals, authorizations or permits or make such
filings would not have a Material Adverse Effect on the Company except: (y) (i)
for applicable requirements, if any, of the Securities Act,
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the Exchange Act, Blue Sky Laws, NMS and NASD rules and regulations; (ii)
notices under the HSR Act; and (iii) the filing of the Certificate of Merger as
required by the DGCL; and (z) where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, other than
the Company Consents, would not prevent or delay consummation of the Merger, or
otherwise prevent the Company from performing its obligations under this
Agreement. The affirmative vote of the holders of a majority of the outstanding
shares of Company Common Stock and Company Preferred Stock voting together as a
single class, entitled to vote thereon is the only vote of the holders of any
class or series of capital stock of the Company necessary to approve this
Agreement and the Transactions.
SECTION 3.6 Compliance. The Company and each Subsidiary holds all permits,
licenses, vacancies, order and appeals which are material to the operation of
the Company and the Subsidiaries. Neither the Company nor any Subsidiary is in
conflict with, or in default or violation of: (i) any law, rule, regulation,
order, judgment or decree applicable to the Company or any Subsidiary or by
which any property or asset of the Company or any Subsidiary is bound or
affected; or (ii) any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which the
Company or any Subsidiary is a party or by which the Company or any Subsidiary
or any property or asset of the Company or any Subsidiary is bound or affected
other than, in the case of clauses (i) and (ii), such conflicts, defaults or
violations that do not have, nor would be reasonably expected to have, a
Material Adverse Effect on the Company or its Subsidiaries, taken as a whole.
SECTION 3.7 SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports and documents required to
be filed by it with the SEC between January 1997 and the date of this Agreement
(such forms, reports and other documents between January 1997 and the date
hereof are referred to herein, collectively, as the "Company SEC Reports"). The
Company SEC Reports: (i) complied in all material respects with the requirements
of the Securities Act and the Exchange Act, as the case may be, and the rules
and regulations thereunder, including, without limitation, Items 401 through 404
of Regulation S-K; and (ii) except to the extent that information contained in
any Company SEC Reports has been revised or superseded by a later-filed Company
SEC Report, did not at the time they were filed contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. No Subsidiary is
required to file any form, report or other document with the SEC.
(b) The Company has attached to Schedule 3.7(b) of the Company
Disclosure Schedules the Company Current Balance Sheet and the related unaudited
income statement of the Company for the three months ended March 31, 1999
(collectively, the "Company Unaudited Financial Statements").
(c) Each of the consolidated financial statements (including, in each
case, any notes thereto) contained in the Company SEC Reports and the Company
Unaudited Financial Statements was prepared in accordance with GAAP throughout
the periods indicated (except as may be indicated in the notes thereto) and
except that any unaudited financial statements, including the Company Unaudited
Financial Statements, may not contain footnotes and are subject to normal and
recurring year-end audit adjustments, which will not be, in the aggregate,
material in amount to the Company Unaudited Financial Statements) and each
fairly presented the consolidated financial position, results
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of operations and changes in financial position of the Company and the
consolidated Subsidiaries as at the respective dates thereof and for the
respective periods indicated therein.
(d) Between the date of the Company Current Balance Sheet attached to
Schedule 3.7(b) of the Company Disclosure Schedule and the date of this
Agreement, neither the Company nor any Subsidiary has incurred any liability or
obligation of any nature (whether accrued, absolute, contingent or otherwise)
which would be required to be reflected on a balance sheet, or in the notes
thereto, prepared in accordance with GAAP, except for liabilities and
obligations incurred in the ordinary course of business and in a manner
consistent with past practice between the date of the Company Current Balance
Sheet Date and the date hereof, which would not, individually or in the
aggregate, have a Material Adverse Effect to the Company.
SECTION 3.8 Absence of Certain Changes or Events. Between March 31, 1999
and the date of this Agreement, except as contemplated by this Agreement or
disclosed in the most current Company SEC Report prior to the date of this
Agreement, the Company and the Subsidiaries have conducted their businesses only
in the ordinary course and in a manner consistent with past practice and there
has not been: (i) any fact, event or transaction which has or could result in a
Material Adverse Effect to the Company; (ii) any damage, destruction or loss
(whether or not covered by insurance) with respect to any property or asset of
the Company or any Subsidiary other than those which would not have a Material
Adverse Effect to the Company; (iii) any change by the Company or any Subsidiary
in its accounting methods, principles or practices; (iv) any revaluation by the
Company or any Subsidiary of any asset (including, without limitation, any
writing down of the value of inventory or writing off of notes or accounts
receivable), other than in the ordinary course of business and in a manner
consistent with past practice; (v) any entry by the Company or any Subsidiary
into any commitment or transaction material to the Company and the Subsidiaries
taken as a whole, other than this Agreement, which requires the payment or
receipt of more than $100,000; (vi) any declaration, setting aside or payment of
any dividend or distribution in respect of any capital stock of the Company or
any redemption, purchase or other acquisition of any of its securities; (vii)
any increase in or establishment of any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option (including,
without limitation, the granting of stock options, stock appreciation rights,
performance awards, or restricted stock awards), stock purchase or other
employee benefit plan, or any other increase in the compensation payable or to
become payable to any officers or key employees of the Company or any
Subsidiary, except in the ordinary course of business and in a manner consistent
with past practice and in accordance with the terms and provisions of this
Agreement; or (viii) any agreement, commitment or arrangement for the Company or
any Subsidiary to do any of the foregoing actions prior to or on the Closing
Date.
SECTION 3.9 Absence of Litigation. Except as disclosed in the Company
Disclosure Schedule or in the Company SEC Reports filed prior to the date of
this Agreement, there is no Legal Proceeding pending or, to the best knowledge
of the Company threatened against the Company or any Subsidiary, or any property
or asset of the Company or any Subsidiary which Legal Proceeding could
reasonably be expected to have a Material Adverse Effect on the Company. Neither
the Company nor any Subsidiary nor any property or asset of the Company or any
Subsidiary is subject to any order, writ, judgment, injunction, decree,
determination or award which is not expressly disclosed in the Company SEC
Reports.
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SECTION 3.10 Company Plans. Schedule 3.10 of the Company Disclosure
Schedule lists the Company Plans. True, correct and complete copies of each
Company Plan and each material document prepared in connection with each Company
Plan have been provided by the Company to Parent prior to the date hereof.
Except as set forth in Schedule 3.10 of the Company Disclosure Schedule: (i)
none of the Company Plans is a multiemployer plan within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"); (ii)
except as required by COBRA, none of the Company Plans promises or provides
retiree medical or life insurance benefits to any Person; (iii) each Company
Plan intended to be qualified under Section 401(a) of the Code, has received a
favorable determination letter from the Internal Revenue Service that it is so
qualified and nothing has occurred since the date of such letter to affect the
qualified status of such Company Plan; (iv) none of the Company Plans promises
or provides severance benefits or benefits contingent upon a change in ownership
or control, within the meaning of Section 280G of the Code; (v) each Company
Plan has been operated in all material respects in accordance with its terms and
the requirements of applicable law; (vi) with respect to each Company Plan
subject to Title IV of ERISA, the aggregate accumulated benefit obligations of
such Company Plan (as of the date of the most recent actuarial valuation
prepared for such Company Plan) do not exceed the fair market value of the
assets of such Plan (as of the date of such valuation); (vii) neither the
Company nor any Subsidiary has incurred any direct or indirect liability under,
arising out of or by operation of Title IV of ERISA in connection with the
termination of, or withdrawal from, any Company Plan or other retirement plan or
arrangement, and no fact or event exists that could give rise to any such
liability; and (viii) the Company and the Subsidiaries have not incurred any
liability under, and have complied in all material respects with, the WARN Act,
and no fact or event exists that could give rise to liability under such act.
SECTION 3.11 Labor Matters. Except as set forth in Schedule 3.11 of the
Company Disclosure Schedule: (i) there are no controversies pending or, to the
best knowledge of the Company, threatened between the Company or any Subsidiary
and any of their respective employees; (ii) neither the Company nor any
Subsidiary is a party to any collective bargaining agreement or other labor
union contract applicable to Persons employed by the Company or any Subsidiary,
nor, to the best knowledge of the Company, are there any activities or
proceedings of any labor union to organize any such employees; (iii) neither the
Company nor any Subsidiary has breached or otherwise failed to comply with any
provision of any such agreement or contract and there are no grievances
outstanding against the Company or any Subsidiary under any such agreement or
contract; (iv) there are no unfair labor practice complaints pending against the
Company or any Subsidiary before the National Labor Relations Board or any
current union representation questions involving employees of the Company or any
Subsidiary; and (v) there is no strike, slowdown, work stoppage or lockout, or,
to the best knowledge of the Company, threat thereof, by or with respect to any
employees of the Company or any Subsidiary.
SECTION 3.12 Real Property and Leases.
(a) The Company and the Subsidiaries have sufficient title to all their
properties and assets to conduct their respective businesses as currently
conducted.
(b) Each parcel of real property owned or leased by the Company or any
Subsidiary: (i) is owned or leased free and clear of all Liens, other than
Permitted Liens and (ii) is neither subject to any governmental decree or order
to be sold nor is being condemned, expropriated or otherwise taken by any public
authority with or without
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payment of compensation therefor, nor, to the best knowledge of the Company
after due inquiry, has any such condemnation, expropriation, or other taking
been proposed.
(c) All leases of real property leased for the use or benefit of the
Company or any Subsidiary to which the Company or any Subsidiary is a party
requiring rental payments in excess of $10,000 during the remaining period of
the lease, and all amendments and modifications thereto are in full force and
effect and have not been modified or amended, and there exists no default under
any such lease by the Company or any Subsidiary, nor any event which with notice
or lapse of time or both would constitute a default thereunder by the Company or
any Subsidiary.
SECTION 3.13 Intellectual Property Rights. The Company and the
Subsidiaries own their respective Intellectual Property Rights free and clear of
all Liens or have a valid and enforceable written agreement providing for the
unrestricted right to use all such Intellectual Property Rights currently used
and/or necessary for the current conduct of the business of the Company and the
Subsidiaries, other than restrictions on such Intellectual Property Rights which
are expressly contained in the agreements relating to such rights, all of which
such agreements have been provided by the Company to Parent prior to the date
hereof. There is no claim by any Person contesting the validity, enforceability,
use or ownership of any of the Intellectual Property Rights of the Company or
any Subsidiary. There is no loss or expiration of any Intellectual Property
Right of the Company or any Subsidiary that is pending, reasonably foreseeable
or threatened. The Company has not received any notice of, and is not aware of
any fact, event or transaction which indicates a likelihood of, any infringement
or misappropriation by, or conflict with, any Person with respect to the
Intellectual Property Rights of the Company or any Subsidiary. Neither the
Company nor any Subsidiary has infringed, misappropriated or otherwise
conflicted with any Intellectual Property Rights of any other Person and is not
aware of any infringement, misappropriation or conflict which would reasonably
be expected to occur as a result of conducting its business as currently
conducted. Immediately after the Effective Time, upon obtaining the Company
Consents the Intellectual Property Rights of the Company and the Subsidiaries
shall become the Intellectual Property Rights of the Surviving Corporation
without any further action required by any party other than the filing of an
applicable notice with the United States Patent and Trademark Office. The
Company and each Subsidiary have taken all necessary and desirable action to
maintain and protect their respective Intellectual Property Rights.
SECTION 3.14 Taxes. The Company and the Subsidiaries have filed all
federal, state, local and foreign tax returns and reports required to be filed
by them and have paid and discharged all taxes shown as due thereon and have
paid all applicable ad valorem and other taxes as are due. Neither the IRS nor
any other taxing authority or agency, domestic or foreign, is now asserting or,
to the best knowledge of the Company, threatening to assert against the Company
or any Subsidiary any deficiency or claim for additional taxes or interest
thereon or penalties in connection therewith. Neither the Company nor any
Subsidiary has granted any waiver of any statute of limitations with respect to,
or any extension of a period for the assessment of, any federal, state, county,
municipal or foreign income tax. The accruals and reserves for taxes reflected
in the Company Current Balance Sheet are adequate to cover all taxes accruable
through such date (including interest and penalties, if any, thereon) in
accordance with GAAP. Neither the Company nor any Subsidiary has made an
election under Section 341(f) of the Code.
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SECTION 3.15 Environmental Matters.
(a) Each of the Company and the Subsidiaries is currently operating, and
at all times during the applicable statute of limitations has operated, in
substantial compliance with all foreign, federal, state and local laws, rules
and regulations relating to environmental protection and conservation including,
but not limited to, laws, rules and regulations relating to pollution or
protection of the environment, including, without limitation, the laws, rules
and regulations relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, or hazardous or toxic materials or wastes
into ambient air, surface water, ground water, or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants or hazardous or toxic
materials or wastes, such as the Comprehensive Environmental Response,
Compensation and Liability Act, the Superfund Amendments and Reauthorization Act
of 1986, U.S.C. Section 9601 et seq., the Resource Conservation and Recovery
Act, the Clean Water Act, the Clean Air Act and any parallel or similar laws,
rules and regulations (as any of the above laws, rules and regulations may have
been amended, each an "Environmental Law").
(b) Each of the Company and each Subsidiary does not currently nor to the
best knowledge of the Company has in the past during the applicable period of
the statute of limitations, produced, used, stored, handled, discharged or
disposed of, in connection with the operation of its business or the use of its
properties (owned or leased) or otherwise, any Hazardous Substances, hazardous
wastes or other pollutants or deleterious substances, nor have during such
period any such substances or wastes been dumped, buried or otherwise disposed
of or stored on any of the properties (owned or leased) of the Company or any
Subsidiary or on any property previously owned or leased by the Company or any
Subsidiary.
(c) At no time during the applicable statute of limitations, has any
government, governmental agency or representative conducted any audits,
assessments, tests or other reviews in connection with environmental matters at
the properties (owned or leased) of the Company or any Subsidiary. To the best
knowledge of the Company, there is no existing or potential liability under any
Environmental Law in respect of any operations now or previously conducted by it
or any Subsidiary which would give rise to any liability or cost which would
require disclosure in a report filed with the SEC or would reasonably be
expected to have a Material Adverse Effect on the Company or its Subsidiaries,
taken as a whole. To the best knowledge of the Company, there is no asserted
present or past failure to so comply with any Environmental Law except where the
failure to be in compliance would not have nor reasonably be expected to have a
Material Adverse Effect on the Company. Each of the Company and each Subsidiary
has obtained and is in substantial compliance with all permits, licenses and
other authorizations required under Environmental Laws. There are no pending
applications for any such permits, licenses or authorizations, except where the
failure to be in compliance would not have nor reasonably be expected to have a
Material Adverse Effect on the Company. No Lien has attached to and no basis
exists for the attachment of a lien to any revenues or any real or personal
property owned or leased by the Company or any Subsidiary pursuant to
Environmental Laws. There are no circumstances within the control of the Company
which may interfere with or prevent continued compliance, or which may give rise
to any liability, or otherwise form the basis of any claim, or investigation
under Environmental Laws, relating to the operation of the business of the
Company or any Subsidiary. To the best knowledge of the Company, there is not
present any toxic, Hazardous Substance or chemical waste, substance or
contaminant in, on or under any part of the soil at the property (owned or
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leased) or caused as a result of the operations of the Company or any Subsidiary
including without limitation, the soils, surface waters and ground waters in, on
or under any part of such properties. To the extent any toxic, Hazardous
Substance is used on the property of the Company or any Subsidiary (owned or
leased), such use has been in substantial compliance with all applicable
Environmental Laws. There are no underground tanks for the storage of oil,
gasoline, the by-products thereof or any Hazardous Substance on, in or under the
property of the Company or any Subsidiary (owned or leased).
SECTION 3.16 Material Agreements. Except for those contracts listed in
Schedule 3.16 of the Company Disclosure Schedule, or as attached as an exhibit
to the Company SEC Reports (collectively, the "Company Material Agreements"),
neither the Company nor any of the Subsidiaries is a party to or is bound by any
written or oral contract, commitment or agreement which is material to the
Company and the Subsidiaries taken as a whole or which involves payments or
receipts of more than $100,000 in the aggregate over the remaining term thereof
or which restricts the Company or its Affiliates from engaging in any business
in a manner that would be consistent with its current practices and activities.
Each Company Material Agreement is in all material respects the validly
existing, enforceable obligation of the Company or one of the Subsidiaries, as
the case may be, enforceable against the Company or the Subsidiaries, as the
case may be, and, to the best knowledge of the Company, of the other parties
thereto. To the best knowledge of the Company, the Company and the Subsidiaries
are validly and lawfully operating in all material respects under the Company
Material Agreements to which they are a party and to the best knowledge of the
Company, the Company and the Subsidiaries have duly complied in all material
respects with all of the terms and conditions of each of the Company Material
Agreements to which they are a party except in each case, where the failure to
do so would not have, nor reasonably be expected to have, a Material Adverse
Effect on the Company and the Subsidiaries taken as a whole. Schedule 3.16 of
the Company Disclosure Schedule indicates each Company Material Agreement which
requires the Company to obtain the consent of a third party as a result of the
consummation of the Transactions in order to maintain the rights of the Company
under such agreements (all such consents being referred to herein as the
"Company Required Consents").
SECTION 3.17 Accounting Matters. To the knowledge of the Company, neither
the Company nor any of its Affiliates, having consulted with its accountants and
other advisors, has taken or agreed to take any action that would preclude
Parent from accounting for the Merger as a pooling of interests in accordance
with Accounting Principles Board Opinion (APB) No. 16, Business Combinations,
and the related published interpretations of the American Institute of Certified
Public Accountants and the Financial Accounting Standards Board, and the
published rules and regulations of the SEC (collectively, the "Accounting
Pronouncements") or which would preclude the independent public accountants of
Parent and the Company from issuing the letters described in Section 5.10 and
5.11, respectively).
SECTION 3.18 Section 203 of the DGCL Not Applicable. The provisions of
Section 203 of the DGCL will not, prior to the termination of this Agreement,
assuming the accuracy of the representations contained in Section 4.19, apply to
this Agreement or the Transactions.
SECTION 3.19 Ownership of Parent Common Stock. As of the date hereof,
except pursuant to the Voting Agreements neither the Company, nor, to the best
of its knowledge, any of its Affiliates or associates (as such term is defined
under the Exchange Act),
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(i) beneficially owns, directly or indirectly, or (ii) are parties to any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of, in each case, shares of capital stock of Parent, which
in the aggregate, represent 10% of more of the outstanding shares of capital
stock of Parent entitled to vote generally in the election of directors.
SECTION 3.20 Information Supplied. None of the information supplied or to
be supplied by the Company for inclusion or incorporation by reference in (i)
the Form S-4 will, at the time the Form S-4 is filed with the SEC and at the
time it becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein in light of the
circumstances under which they were made not misleading, and (ii) the Proxy
Statement will, on the date of mailing to the stockholders of the Parent and the
Company and at the times of the meetings of the stockholders of the Parent and
the Company to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Proxy
Statement (except for such portions thereof that relate only to the Parent) will
comply as to form in all material respects with the provisions of the Exchange
Act and the rules and regulations thereunder.
SECTION 3.21 Brokers. No broker, finder or investment banker (other than
Tucker Anthony) is entitled to any brokerage, finder's or other fee or
commission in connection with the Transactions based upon arrangements made by
or on behalf of the Company. The Company has heretofore furnished to Parent a
complete and correct copy of all agreements between the Company and Tucker
Anthony pursuant to which such firm would be entitled to any payment relating to
the Transactions.
SECTION 3.22 Fairness Opinion. Tucker Anthony has delivered to the Board
of Directors of the Company an opinion, a copy of which is attached hereto as
Exhibit F, to the effect that as of the date of such opinion and subject to
certain considerations stated therein, the consideration to be received in the
Merger by the holders of Company Common Stock and Company Preferred Stock
pursuant to the Agreement is fair from a financial point of view to the holders
of Company Common Stock and Company Preferred Stock.
SECTION 3.23 Assets. Except as disclosed in Schedule 3.23 of the Company
Disclosure Schedule, each of the Company and the Subsidiaries, as the case may
be, owns, leases or has the legal right to use all the properties and assets
used or intended to be used in the conduct of their businesses or otherwise
owned, leased or used by the Company and the Subsidiaries, and with, respect to
contract rights, is a party to and enjoys the right to the benefits of all
contracts, agreements and other arrangements used in or relating to the conduct
of their businesses (all such properties, assets and contract rights being the
"Company Assets"). Each of the Company or the Subsidiaries, as the case may be,
has good and marketable title to, or, in the case of the leased properties and
assets, valid and subsisting leasehold interests in, all the Company Assets,
free and clear of all Liens, except as disclosed in Schedule 3.23 of the Company
Disclosure Schedule.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER
Parent and Purchaser hereby, jointly and severally, represent and warrant
to the Company that except as set forth in the Parent Disclosure Schedule:
SECTION 4.1 Organization and Qualification; Subsidiaries. Each of Parent
and each subsidiary of Parent (each a "Parent Sub") is a corporation or other
business entity duly organized, validly existing and in good standing under the
laws of the jurisdiction of its organization and has the requisite power
(corporate or otherwise) and authority and all necessary approvals to own, lease
and operate its properties and to carry on its business as it is now being
conducted and as it will be conducted as of the Closing Date. Parent and each
Parent Sub is duly qualified or licensed as a foreign corporation or other
business entity to do business, and is in good standing, in each jurisdiction
where the character of the properties owned, leased or operated by it or the
nature of its business makes such qualification or licensing necessary, except
for such failures to be so qualified or licensed and in good standing that would
not, individually or in the aggregate, have a Material Adverse Effect to Parent.
A true and complete list of all the Parent Subs, together with the jurisdiction
of organization of each Parent Sub and the percentage of the outstanding capital
stock of each Parent Sub owned by Parent and each other Parent Sub, is set forth
on Schedule 4.1 of Parent Disclosure Schedules. Except as disclosed in such
Section of the Parent Disclosure Schedule. Parent does not directly or
indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any equity or similar interest in, any
Person.
SECTION 4.2 Certificate of Incorporation and By-laws. Parent has delivered
to the Company a true, complete and correct copy of the Charter Documents, each
as amended to date, of Parent, Purchaser and of each Parent Sub. Neither Parent,
Purchaser nor any Parent Sub is in violation of any provision of its respective
Charter Documents.
SECTION 4.3 Capitalization. The authorized capital stock of Parent
consists of 45,000,000 shares of capital stock: 40,000,000 shares of Parent
Common Stock and 5,000,000 shares of Preferred Stock, all such shares par value
$0.01 per share. As of the date hereof, (i) 14,314,384 shares of Parent Common
Stock are issued and outstanding, all of which are validly issued, fully paid
and nonassessable and (ii) 2,392,500 shares of Parent Common Stock are reserved
for future issuances pursuant to outstanding options under the 1995 Stock
Incentive Plan. There are no shares of Preferred Stock of Parent issued and
outstanding. All shares of capital stock subject to issuances as aforesaid, upon
issuance on the terms and conditions specified in the instruments pursuant to
which they are issuable, will be duly authorized, validly issued, fully paid and
nonassessable. Except as set forth in Schedule 4.3 of the Parent Disclosure
Schedule, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character (including, without limitation,
registration rights) relating to the issued or unissued capital stock of Parent
or any Parent Sub or obligating Parent or any Parent Sub to issue or sell any
shares of capital stock of, or other equity interests in, Parent or any Parent
Sub. There are no outstanding contractual obligations of Parent or any Parent
Sub to repurchase, redeem, or otherwise acquire any shares or any capital stock
or any other security, instrument or right to acquire any equity interest of
Parent or of any Parent Sub or to provide funds to, or make any investment (in
the form of a loan, capital contribution or otherwise) in, Parent or any Parent
Sub or any other Person. Each outstanding share of capital stock of each Parent
Sub is duly authorized, validly issued, fully paid and nonassessable and each
such share owned by Parent or another Parent Sub is free and clear of all Liens.
All the issued
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and outstanding shares of each Subsidiary are owned by Parent. The shares of
Parent Common Stock to be issued in connection with the Merger (including the
shares of Parent Common Stock to be issued to the holders of Company Common
Stock or Company Preferred Stock and the shares of Parent Common Stock to be
issued to the holders of options to purchase Company Common Stock in accordance
with the terms and provisions of this Agreement) have been duly authorized by
all necessary corporate action, and when issued in accordance with the terms of
this Agreement, will be validly issued, fully paid and nonassessable and not
subject to any preemptive rights, and will be issued in compliance with the
requirements of the Securities Act.
SECTION 4.4 Authority Relative to this Agreement. Each of Parent and
Purchaser has all necessary power and authority to execute and deliver this
Agreement, to perform their obligations hereunder and to consummate the Merger
and the other Transactions. The execution and delivery of this Agreement by
Parent and Purchaser and the consummation by each of Parent and Purchaser of the
Transactions have been duly and validly authorized by all necessary corporate
action and no other corporate proceedings on the part of Parent or Purchaser are
necessary to authorize this Agreement or to consummate the Transactions (other
than, with respect to the Merger, (i) the approval and adoption of this
Agreement by the holders of a majority of the then issued and outstanding shares
of Parent Common Stock and (ii) the filing of the Certificate of Merger as
required by the DGCL). This Agreement has been duly and validly executed and
delivered by each of Parent and Purchaser and, assuming the due authorization,
execution and delivery by Company, constitutes the legal, valid and binding
obligation of each of Parent and Purchaser, respectively enforceable against
Parent and Purchaser, as the case may be, in accordance with its terms.
SECTION 4.5 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Parent and Purchaser do
not, and the performance of this Agreement by Parent and Purchaser will not: (i)
conflict with or violate any of the Charter Documents of Parent or any Parent
Sub; (ii) conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to Parent or any Parent Sub or by which any property or asset
of Parent or any Parent Sub is bound or affected; or (iii) except as set forth
in Schedule 4.5(a) of Parent Disclosure Schedule, result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a breach or default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or other encumbrance on any property or asset of Parent or
any Parent Sub pursuant to, any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Parent or any Parent Sub is a party or by which Parent or
any Parent Sub or any property or asset of Parent or any Parent Sub is bound or
affected.
(b) Except for the approval of the holders of Parent Common Stock, the
execution and delivery of this Agreement by Parent and Purchaser do not, and the
performance of this Agreement by Parent and Purchaser will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any Person, including without limitation, any Governmental Entity where the
failure to obtain any such consent, approval, authorizations or permits or make
such filings would not have a Material Adverse Effect on Parent, except: (y)(i)
for applicable requirements, if any, of the Securities Act, the Exchange Act,
Blue Sky Laws, NYSE, NMS and NASD rules and regulations; (ii) notices under the
HSR Act; and (iii) filing of the Certificate of Merger as required by
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the DGCL; and (z) where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, other than
the Parent Consents, would not prevent or delay consummation of the Merger, or
otherwise prevent Parent or Purchaser from performing its respective obligations
under this Agreement. The affirmative vote of the holders of a majority of the
outstanding shares of Parent Common Stock entitled to vote thereon is the only
vote of the holders of any class or series of capital stock of Parent and
Purchaser necessary to approve this Agreement and the Transactions.
SECTION 4.6 Compliance. Parent and each Parent Sub holds all permits,
licenses, vacancies, order and appeals which are material to the operation of
Parent and the Parent Subs. Neither Parent nor any Parent Sub is in conflict
with, or in default or violation of: (i) any law, rule, regulation, order,
judgment or decree applicable to Parent or any Parent Sub or by which any
property or asset of Parent or any Parent Sub is bound or affected; or (ii) any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Parent or any Parent Sub is
a party or by which Parent or any Parent Sub or any property or asset of Parent
or any Parent Sub is bound or affected other than in the case of clauses (i) and
(ii), such conflicts, defaults or violations that do not have, nor would be
reasonably expected to have a Material Adverse Effect on Parent or any Parent
Sub, taken as a whole.
SECTION 4.7 SEC Filings; Financial Statements.
(a) Parent has filed all forms, reports and documents required to be filed
by it with the SEC since July 1997 (the forms, reports and other documents
required to be filed by Parent since July 1997 referred to herein, collectively,
as the "Parent SEC Reports"). The Parent SEC Reports: (i) complied in all
material respects with the requirements of the Securities Act and the Exchange
Act, as the case may be, and the rules and regulations thereunder including,
without limitation, Items 401 through 404 of Regulation S-K; and (ii) except to
the extent that information contained in any Parent SEC Reports has been revised
or superseded by a later-filed Parent SEC Report, did not at the time they were
filed contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. No Parent Sub is required to file any form, report or
other document with the SEC.
(b) Parent has attached to Section 4.7(b) of the Parent Disclosure
Schedules the Parent Current Balance Sheet and the related unaudited income
statement of Parent for the three months ended March 31, 1999 (collectively, the
"Parent Unaudited Financial Statements").
(c) Each of the consolidated financial statements (including, in each case,
any notes thereto) contained in the Parent SEC Reports was prepared in
accordance with GAAP throughout the periods indicated (except as may be
indicated in the notes thereto and except that any unaudited financial
statements, including the Parent Unaudited Financial Statements may not contain
footnotes and are subject to normal and recurring year-end adjustments, which
will not be, in the aggregate, material in amount to the Parent Unaudited
Financial Statements) and each fairly presented the consolidated financial
position, results of operations and changes in financial position of Parent and
the consolidated Parent Subs as at the respective dates thereof and for the
respective periods indicated therein.
(d) Between the date of the Parent Current Balance Sheet attached to
Schedule 4.7(b) of the Parent Disclosure Schedule and the date of this
Agreement, neither Parent
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nor any Parent Sub has incurred any liability or obligation of any nature
(whether accrued, absolute, contingent or otherwise) which would be required to
be reflected on a balance sheet, or in the notes thereto, prepared in accordance
with GAAP, except for liabilities and obligations incurred in the ordinary
course of business and in a manner consistent with past practice since the date
of the Parent Current Balance Sheet Date which would not, individually or in the
aggregate, have a Material Adverse Effect to Parent.
SECTION 4.8 Absence of Certain Changes or Events. Between March 31, 1999
and the date of this Agreement, except as contemplated by this Agreement or
disclosed in the most current Parent SEC Report prior to the date of this
Agreement, Parent and the Parent Subs have conducted their businesses only in
the ordinary course and in a manner consistent with past practice and, there has
not been: (i) any fact, event or transaction which has or could would reasonably
be expected to result in a Material Adverse Effect to Parent; (ii) any damage,
destruction or loss (whether or not covered by insurance) with respect to any
property or asset of Parent or any Parent Sub other than in the ordinary course
and in a manner consistent with past practice; (iii) any change by Parent or any
Parent Sub in its accounting methods, principles or practices; (iv) any
revaluation by Parent or any Parent Sub of any asset (including, without
limitation, any writing down of the value of inventory or writing off of notes
or accounts receivable), other than in the ordinary course of business and in a
manner consistent with past practice; (v) any entry by Parent or any Parent Sub
into any commitment or transaction material to Parent and the Parent Subs taken
as a whole, other than this Agreement, which requires the payment or receipt of
more than $100,000; (vi) any declaration, setting aside or payment of any
dividend or distribution in respect of any capital stock of Parent or any
redemption, purchase or other acquisition of any of its securities; (vii) any
increase in or establishment of any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option (including,
without limitation, the granting of stock options, stock appreciation rights,
performance awards, or restricted stock awards), stock purchase or other
employee benefit plan, or any other increase in the compensation payable or to
become payable to any officers or key employees of Parent or any Parent Sub,
except in the ordinary course of business and in a manner consistent with past
practices and in accordance with the terms and provisions of this Agreement; or
(viii) any agreement, commitment or arrangement for Parent or any Parent Sub to
do any of the foregoing actions prior to or on the Closing Date.
SECTION 4.9 Absence of Litigation. Except as disclosed in the Parent
Disclosure Schedule or in the Parent SEC Reports filed prior to the date of this
Agreement, there is no Legal Proceeding pending or, to the best knowledge of
Parent, threatened against Parent or any Parent Sub, or any property or asset of
Parent or any Parent Sub which Legal Proceeding could reasonably be expected to
have a Material Adverse Effect on Parent. Neither Parent nor any Parent Sub nor
any property or asset of the Parent and Purchaser or any Parent Sub is subject
to any order, writ, judgment, injunction, decree, determination or award which
is not expressly disclosed in the Parent SEC Reports.
SECTION 4.10 Parent Plans. Schedule 4.10 of the Parent Disclosure Schedule
lists all the Parent Plans. True, correct and complete copies of each Parent
Plan and each material document prepared in connection with each Parent Plan has
been provided by Parent to the Company prior to the date hereof. Except as set
forth in Schedule 4.10 of the Parent Disclosure Schedule: (i) none of the Parent
Plans is a multiemployer plan within the meaning of ERISA; (ii) except as
required by COBRA, none of the Parent Plans promises or provides retiree medical
or life insurance benefits to any Person; (iii) each Parent Plan intended to be
qualified under Section 401(a) of the Code, has
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received a favorable determination letter from the Internal Revenue Service that
it is so qualified and nothing has occurred since the date of such letter to
affect the qualified status of such Parent Plan; (iv) none of the Parent Plans
promises or provides severance benefits or benefits contingent upon a change in
ownership or control, within the meaning of Section 280G of the Code; (v) each
Parent Plan has been operated in all material respects in accordance with its
terms and the requirements of applicable law; (vi) with respect to each Parent
Plan subject to Title IV of ERISA, the aggregate accumulated benefit obligations
of such Parent Plan (as of the date of the most recent actuarial valuation
prepared for such Parent Plan) do not exceed the fair market value of the assets
of such Parent Plan (as of the date of such valuation); (vii) neither Parent nor
any Parent Sub has incurred any direct or indirect liability under, arising out
of or by operation of Title IV of ERISA in connection with the termination of,
or withdrawal from, any Parent Plan or other retirement plan or arrangement, and
no fact or event exists that could give rise to any such liability; and (viii)
Parent and the Parent Subs have not incurred any liability under, and have
complied in all material respects with, the WARN Act, and no fact or event
exists that could give rise to liability under such act.
SECTION 4.11 Labor Matters. Except as set forth in Section 4.11 of the
Parent Disclosure Schedule: (i) there are no controversies pending or, to the
best knowledge of Parent, threatened between Parent or any Parent Sub and any of
their respective employees; (ii) neither Parent nor any Parent Sub is a party to
any collective bargaining agreement or other labor union contract applicable to
Persons employed by Parent or any Parent Sub, nor, to the best knowledge of
Parent, are there any activities or proceedings of any labor union to organize
any such employees; (iii) neither Parent nor any Parent Sub has breached or
otherwise failed to comply with any provision of any such agreement or contract
and there are no grievances outstanding against Parent or any Parent Sub under
any such agreement or contract; (iv) there are no unfair labor practice
complaints pending against Parent or any Parent Sub before the National Labor
Relations Board or any current union representation questions involving
employees of Parent or any Parent Sub; and (v) there is no strike, slowdown,
work stoppage or lockout, or, to the best knowledge of Parent, threat thereof,
by or with respect to any employees of the Parent or any Parent Sub.
SECTION 4.12 Real Property and Leases.
(a) Parent and the Parent Subs have sufficient title to all their
properties and assets to conduct their respective businesses as currently
conducted.
(b) Each parcel of real property owned or leased by Parent or any Parent
Sub: (i) is owned or leased free and clear of all Liens, other than Permitted
Liens and (ii) is neither subject to any governmental decree or order to be sold
nor is being condemned, expropriated or otherwise taken by any public authority
with or without payment of compensation therefor, nor, to the best knowledge of
Parent, has any such condemnation, expropriation, or other taking been proposed.
(c) All leases of real property leased for the use or benefit of Parent
or any Parent Sub to which Parent or any Parent Sub is a party requiring rental
payments in excess of $10,000 during the remaining period of the lease, and all
amendments and modifications thereto are in full force and effect and have not
been modified or amended, and there exists no default under any such lease by
Parent or any Parent Sub, nor any event which with notice or lapse of time or
both would constitute a default thereunder by Parent or any Parent Sub.
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SECTION 4.13 Intellectual Property Rights. Parent and the Parent Subs own
their respective Intellectual Property Rights free and clear of all Liens or
have a valid and enforceable written agreement providing for the unrestricted
right to use all such Intellectual Property Rights currently used and/or
necessary for the current conduct of the business of Parent and the Parent Subs,
other than restrictions on such Intellectual Property Rights which such
agreements are expressly contained in the agreements relating to such rights,
all of which such agreements have been provided by the Company to Parent prior
to the date hereof. There is no claim by any Person contesting the validity,
enforceability, use or ownership of any of the Intellectual Property Rights of
Parent or any Parent Sub. There is no loss or expiration of any Intellectual
Property Right of Parent or any Parent Sub that is pending, reasonably
foreseeable or threatened. Parent has not received any notice of, and is not
aware of any fact, event or transaction which indicates a likelihood of, any
infringement or misappropriation by, or conflict with, any Person with respect
to the Intellectual Property Rights of Parent or any Parent Sub. Neither Parent
nor any Parent Sub has infringed, misappropriated or otherwise conflicted with
any Intellectual Property Rights of any other Person and is not aware of any
infringement, misappropriation or conflict which could occur as a result of
conducting its business as currently conducted.
SECTION 4.14 Taxes. Parent and the Parent Subs have filed all federal,
state, local and foreign tax returns and reports required to be filed by them
and have paid and discharged all taxes shown as due thereon and have paid all
applicable ad valorem and other taxes as are due. Neither the IRS nor any other
taxing authority or agency, domestic or foreign, is now asserting or, to the
best knowledge of Parent, threatening to assert against Parent or any Parent Sub
any deficiency or claim for additional taxes or interest thereon or penalties in
connection therewith. Neither Parent nor any Parent Sub has granted any waiver
of any statute of limitations with respect to, or any extension of a period for
the assessment of, any federal, state, county, municipal or foreign income tax.
The accruals and reserves for taxes reflected in the Parent Current Balance
Sheet are adequate to cover all taxes accruable through such date (including
interest and penalties, if any, thereon) in accordance with GAAP. Neither Parent
nor any Parent Sub has made an election under Section 341(f) of the Code.
SECTION 4.15 Environmental Matters.
(a) Each of Parent and each Parent Sub is currently and at all times
during the applicable statute of limitations has operated in substantial
compliance with all Environmental Laws.
(b) Each of Parent and each Parent Sub does not currently nor to the
best knowledge of Parent has in the past during the applicable period of the
statute of limitations, produced, used, stored, handled, discharged or disposed
of, in connection with the operation of its business or the use of its
properties (owned or leased) or otherwise, any Hazardous Substances, hazardous
wastes or other pollutants or deleterious substances, nor have during such
period any such substances or wastes been dumped, buried or otherwise disposed
of or stored on any of the properties (owned or leased) of Parent or any Parent
Sub or on any property previously owned or leased by Parent or any Parent Sub.
(c) At no time during the applicable statute of limitations, has any
government, governmental agency or representative conducted any audits,
assessments, tests or other reviews in connection with environmental matters at
the properties (owned or leased) of Parent or any Parent Sub. To the best
knowledge of Parent, there is no existing or potential liability under any
Environmental Law in respect of any operations now or
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previously conducted by it or any Parent Sub which would give rise to any
liability or cost which would require disclosure in a report filed with the SEC
or would reasonably be expected to have a Material Adverse Effect on Parent or
the Parent Subs, taken as a whole. To the best knowledge of Parent there is no
asserted present or past failure to so comply with any Environmental Law. Each
of Parent and each Parent Sub has obtained and is in substantial compliance with
all permits, licenses and other authorizations required under Environmental
Laws, except where the failure to be in compliance would not have nor reasonably
be expected to have a Material Adverse Effect on Parent. There are no pending
applications for any such permits, licenses or authorizations. No Lien has
attached to and no basis exists for the attachment of a lien to any revenues or
any real or personal property owned or leased by Parent or any Parent Sub
pursuant to Environmental Laws. There are no circumstances within the control of
Parent which may interfere with or prevent continued compliance, or which may
give rise to any liability, or otherwise form the basis of any claim, or
investigation under Environmental Laws, relating to the operation of the
business of Parent or any Parent Sub. To the best knowledge of Parent, there is
not present any toxic, Hazardous Substance or chemical waste, in, on or under
any part of the soil at the property (owned or leased) or caused as a result of
the operations of Parent or any Parent Sub including without limitation, the
soils, surface waters and ground waters in, on or under any part of such
properties. To the extent any toxic, hazardous substance is used on the property
of Parent or any Parent Sub (owned or leased), such use has been in substantial
compliance with all applicable Environmental Laws. There are no underground
tanks for the storage of oil, gasoline, the by-products thereof or any hazardous
substance on, in or under the property of Parent or any Parent Sub (owned or
leased).
SECTION 4.16 Material Agreements. Except for those contracts listed in
Schedule 4.16 of the Parent Disclosure Schedule or attached as an exhibit to the
Parent SEC Reports (collectively, the "Parent Material Agreements"), neither
Parent nor any of the Parent Subs is a party to or is bound by any written or
oral contract, commitment or agreement which is material to Parent and the
Parent Subs taken as a whole or which involves payments of more than $100,000 in
the aggregate over the remaining term thereof or which restricts Parent or its
Affiliates from engaging in any business in a manner that would be consistent
with its current practices and activities. Each Parent Material Agreement is in
all material respects the validly existing enforceable obligation of Parent or
one of the Parent Subs, enforceable against Parent or a Parent Sub, as the case
may be, and, to the best knowledge of Parent, of the other parties thereto. To
the best knowledge of Parent, Parent and the Parent Subs are validly and
lawfully operating in all material respects under the Material Agreements to
which they are a party and to the best knowledge of Parent, Parent and Parent
Subs have duly complied in all material respects with all of the terms and
conditions of each of the Parent Material Agreements to which they are a party
except in each case, where the failure to do so would not have, nor reasonably
be expanded to have, a Material Adverse Effect on Parent and the Parent Subs,
taken as a whole. Schedule 4.16 of Parent Disclosure Schedule lists each Parent
Material Agreement which requires Parent to obtain the consent of a third party
as a result of the consummation of the Transactions in order to maintain the
rights of Parent under such agreements (all such consents being referred to
herein as the "Parent Required Consents").
SECTION 4.17 Accounting Matters. To the knowledge of Parent, neither
Parent nor any of its Affiliates, having consulted with its accountants and
other advisors, has taken or agreed to take any action that would preclude the
Company from accounting for the Merger as a pooling of interests in accordance
with the Accounting Pronouncements or
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which would preclude the independent public accountants of the Company and
Parent from issuing the letters described in Section 5.10 and 5.11,
respectively.
SECTION 4.18 Section 912 Not Applicable. The provisions of Section 912 of
the New York Business Corporation Law will not, prior to the termination of this
Agreement, assuming the accuracy of the representations contained in Schedule
3.19, apply to this Agreement or the Transactions.
SECTION 4.19 Ownership of Company Common Stock. As of the date hereof,
except pursuant to the Voting Agreements, neither Parent, Purchaser, nor, to the
best of its knowledge, any of its Affiliates or associates (as such term is
defined under the Exchange Act), (i) beneficially owns, directly or indirectly,
or (ii) are parties to any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of, in each case, shares of
capital stock of Company, which in the aggregate, represent 10% of more of the
outstanding shares of capital stock of Company entitled to vote generally in the
election of directors.
SECTION 4.20 Information Supplied. None of the information supplied or to
be supplied by Parent for inclusion or incorporation be reference in (i) the
Form S-4 will, at the time the Form S-4 is filed with the SEC and at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and (ii) the Proxy Statement will, on the
date of mailing to the stockholders of Parent and the Company, and at the times
of the meetings of the stockholders of Parent and the Company to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The Proxy Statement (except for such portions that relate
only to the Company) will comply as to form in all material respects with the
provisions of the Exchange Act and rules and regulations thereunder.
SECTION 4.21 Brokers. No broker, finder or investment banker (other than
Salomon Smith Barney Inc.) is entitled to any brokerage, finder's or other fee
or commission in connection with the Transactions based upon arrangements made
by or on behalf of Parent. Parent has heretofore furnished to the Company a
complete and correct copy of all agreements between the Parent and Salomon Smith
Barney Inc. pursuant to which such firm would be entitled to any payment
relating to the Transactions.
SECTION 4.22 Fairness Opinion. As of the date hereof, Salomon Smith Barney
Inc. has delivered to the Board of Directors of Parent an opinion, a copy of
which is attached hereto as Exhibit G to the effect that, as of the date of such
opinion and subject to certain considerations stated therein, the consideration
to be paid in the Merger is fair to Parent from a financial point of view.
SECTION 4.23 Class Action Proceeding. (a) Parent and those former and
current directors and officers of Parent set forth on Schedule 4.23 of the
Parent Disclosure Schedules, Salomon Smith Barney Inc. and Nationsbanc
Montgomery Securities Inc. (collectively, the "Named Individuals") have been
named as parties to that certain shareholder class action securities litigation
proceeding (the "Class Action Proceeding") described in Item 3 of Part I of
Parent's Annual Report on Form 10-K for the year ended December 31, 1998. Parent
has provided to the Company and its counsel true and complete copies of all
complaints, filings, motions, scheduling orders, stipulations,
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affidavits, notices, including all exhibits, supplements, amendments and
modifications thereto, and all other materials filed, issued or delivered, on
behalf of Parent or any Named Individuals, by or to any Person (including Parent
and each Named Individual) or Governmental Entity in connection with the Class
Action Proceeding which are in the possession of Parent as of the date hereof,
other than any of the foregoing materials that are subject to the protections of
attorney-client privilege and which, if provided to the Company, would not be
entitled to the protections afforded to materials subject to the attorney-client
privilege (such privileged information referred to herein as "Privileged
Information").
(b) Parent has delivered to the Company and its counsel true and
complete copies of all policies of insurance that provide coverage to Parent or
any of the Named Individuals for any and all Damages that could arise from the
Class Action Proceeding. To the best knowledge of Parent, all such policies of
insurance are valid, outstanding and enforceable.
SECTION 4.24 Purchaser Organization. Purchaser has been formed by Parent
solely for the purpose of consummating the Merger and has not and does not now
have any operations, assets or liabilities.
ARTICLE V
COVENANTS
SECTION 5.1 Conduct of Business by the Company Pending the Merger. The
Company covenants and agrees that, between the date of this Agreement and the
Effective Time, unless Parent shall otherwise consent in writing, (which consent
will not be unreasonably withheld) or as contemplated or permitted by this
Agreement, the businesses of the Company and the Subsidiaries shall be conducted
only in, and the Company and the Subsidiaries shall not take any action except
in, the ordinary course of business and in a manner consistent with past
practice; and the Company shall use its commercially reasonable best efforts to
preserve substantially intact the business organization of the Company and the
Subsidiaries, to keep available the services of the current officers, employees
and consultants of the Company and the Subsidiaries and to preserve the current
relationships of the Company and the Subsidiaries with customers, suppliers and
other Persons with which the Company or any Subsidiary has significant business
relations. By way of amplification and not limitation of the foregoing, except
as contemplated by this Agreement neither the Company nor any Subsidiary shall,
between the date of this Agreement and the Effective Time, directly or
indirectly do, or propose to do, any of the following without the prior written
consent of Parent (which consent will not be unreasonably withheld) and except
as contemplated or permitted by this Agreement:
(a) amend or otherwise change its respective Charter Documents;
(b) issue, sell, pledge, dispose of, grant, encumber, or authorize the
issuance, sale, pledge, disposition, grant or encumbrance, of (i) any shares of
capital stock of any class of the Company or any Subsidiary, or any options,
warrants, convertible securities or other rights of any kind to acquire any
shares of such capital stock, or any other ownership interest (including,
without limitation, any phantom interest), of the Company or any Subsidiary
(except that the Company may issue shares of Company Common Stock upon the
exercise of Company Options outstanding as of the date of this Agreement) or
(ii) any material asset of the Company or any Subsidiary;
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(c) declare, set aside, make or pay any dividend or other distribution,
payable in cash, stock, property or otherwise, with respect to any of its
capital stock;
(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(e) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any corporation, partnership,
limited liability company or other business organization or any division thereof
or any material amount of assets; (ii) incur any indebtedness for borrowed money
(other than borrowings pursuant to its current credit facility) or issue any
debt securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for, the obligations of any Person, or make any
loans or advances; (iii) enter into any material contract or agreement; (iv)
authorize any single capital expenditure which is in excess of $25,000 or
capital expenditures which are, in the aggregate, in excess of $100,000 for the
Company and the Subsidiaries taken as a whole; or (v) enter into or amend any
contract, agreement, commitment or arrangement with respect to any matter set
forth in this Section 5.1(e);
(f) increase the compensation payable or to become payable to its
officers or employees, except for regularly scheduled increases in a manner
consistent with past practices in salaries of employees of the Company or any
Subsidiary who are not officers of the Company, or grant any severance or
termination pay to, or enter into any employment or severance agreement with any
director, officer or other employee of the Company or any Subsidiary (other than
severance or termination or other payments owed to directors, officers or other
employees of the Company or any Subsidiary and indicated on Schedule 5.1(f) of
the Company Disclosure Schedule pursuant to, the agreements or arrangements
existing as of the date hereof, or, except as required to comply with applicable
law and except as otherwise permitted or contemplated by this Agreement), or
establish, adopt, enter into or amend any collective bargaining, bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, agreement, trust, fund, policy or arrangement for the benefit of any
director, officer or employee;
(g) changes any accounting policies or procedures (including, without
limitation, procedures with respect to the payment of accounts payable and
collection of accounts receivable);
(h) make any tax election or settle or compromise any material federal,
state, local or foreign income tax liability; or
(i) pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction, in the ordinary course of business and
in a manner consistent with past practice, of liabilities reflected or reserved
against in the Company Current Balance Sheet or subsequently incurred in the
ordinary course of business and in a manner consistent with past practice;
(j) hire any employee with an annual base salary in excess of $100,000;
(k) commence or settle any Legal Proceeding other than those seeking or
claiming, individually or in the aggregate, under $75,000 in damages; or
(l) agree or commit to take any of the actions described in clauses (a)
through (k) of this Section 5.1.
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SECTION 5.2 Conduct of Business by Parent Pending the Merger. Parent
covenants and agrees that, between the date of this Agreement and the Effective
Time, unless the Company shall otherwise consent in writing (which consent will
not be unreasonably withheld) as contemplated or permitted by this Agreement,
the businesses of Parent and Parent Subs shall be conducted only in, and Parent
and Parent Subs shall not take any action except in, the ordinary course of
business and in a manner consistent with past practice; and Parent shall use
commercially reasonable efforts to preserve substantially intact the business
organization of Parent and Parent Subs, to keep available the services of the
current officers, employees and consultants of Parent and Parent Subs and to
preserve the current relationships of Parent and Parent Subs with customers,
suppliers and other Persons with which Parent or any Parent Sub has significant
business relations. By way of amplification and not limitation of the foregoing,
except as contemplated by this Agreement, neither Parent nor any Parent Sub
shall, between the date of this Agreement and the Effective Time, do, or propose
to do, any of the following without the prior written consent of the Company
(which consent will not be unreasonably withheld) and except as contemplated or
permitted by this Agreement:
(a) amend or otherwise change its respective Charter Documents;
(b) issue, sell, pledge, dispose of, grant, encumber, or authorize the
issuance, sale, pledge, disposition, grant or encumbrance, of (i) any shares of
capital stock of any class of Parent or any Parent Sub, or any options,
warrants, convertible securities or other rights of any kind to acquire any
shares of such capital stock, or any other ownership interest (including,
without limitation, any phantom interest), of Parent or any Parent Sub (except
that Parent may issue shares of Parent Common Stock upon the exercise of Parent
Options outstanding as of the date of this Agreement), or (ii) any material
asset of Parent or any Parent Sub;
(c) declare, set aside, make or pay any dividend or other distribution,
payable in cash, stock, property or otherwise, with respect to any of its
capital stock;
(d) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(e) acquire (including, without limitation, by merger, consolidation, or
acquisition of stock or assets) any corporation, partnership, limited liability
company or other business organization or any division thereof or any material
amount of assets; (ii) incur any indebtedness for borrowed money (other than
borrowings pursuant to its current credit facility) or issue any debt securities
or assume, guarantee or endorse, or otherwise as an accommodation become
responsible for, the obligations of any Person, or make any loans or advances,
except in the ordinary course of business and in a manner consistent with past
practice; (iii) enter into any material contract or agreement; (iv) authorize
any single capital expenditure which is in excess of $25,000 or capital
expenditures which are, in the aggregate, in excess of $100,000 for Parent and
Parent Subs taken as a whole; or (v) enter into or amend any contract,
agreement, commitment or arrangement with respect to any matter set forth in
this Section 5.2(e);
(f) increase the compensation payable or to become payable to its
officers or employees, except for regularly scheduled increases in a manner
consistent with past practices in salaries of employees of Parent or any Parent
Sub who are not officers of Parent, or grant any severance or termination pay
to, or enter into any employment or severance agreement with any director,
officer or other employee of Parent or any Parent Sub (other than severance or
termination or other payments owed to directors, officers or
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other employees of Parent or any Parent Sub pursuant to agreements or
arrangements existing as of the date hereof and indicated on Schedule 5.2(f) of
the Parent Disclosure Schedule, or, except as required to comply with applicable
law), establish, adopt, enter into or amend any collective bargaining, bonus,
profit sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, agreement, trust, fund, policy or arrangement for the benefit of any
director, officer or employee;
(g) change any accounting policies or procedures (including, without
limitation, procedures with respect to the payment of accounts payable and
collection of accounts receivable);
(h) make any tax election or settle or compromise any material federal,
state, local or foreign income tax liability;
(i) pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction, in the ordinary course of business and
in a manner consistent with past practice, of liabilities reflected or reserved
against in Parent Current Balance Sheet or subsequently incurred in the ordinary
course of business and in a manner consistent with past practice;
(j) hire any employee or with an annual base salary in excess of
$100,000;
(k) (y) commence or settle any Legal Proceeding other than those seeking
or claiming, individually or in the aggregate, under $75,000 in damages and (z)
settle any pending Legal Proceeding except those covered by insurance or except
those requiring Parent to pay not in excess of $3,000,000; or
(l) agree or commit to take any of the actions described in clauses (a)
through (k) of this Section 5.2.
SECTION 5.3 No Solicitation of Transactions by the Company.
(a) Neither the Company nor any Subsidiary shall, directly or
indirectly, through any officer, director, agent, employee, representative, or
otherwise, (i) solicit, initiate or encourage (including, without limitation, by
way of furnishing non-public information) the submission, making or announcement
of any Company Acquisition Transaction, (ii) take any other action to facilitate
any inquiries or the making of any proposal to effect a Company Acquisition
Transaction, (iii) approve, endorse or recommend any Company Acquisition
Transaction, (iv) enter into any letter of intent or similar document or any
contract or other agreement contemplating or otherwise relating to any Company
Acquisition Transaction, (v) enter into discussions or negotiate with any Person
regarding a Company Acquisition Transaction, or (vi) authorize or permit any of
the officers, directors or employees of the Company or any investment banker,
financial advisor, attorney, accountant or other representative retained by or
acting on behalf of the Company to take any such action set forth in clauses (i)
through (vi) above; provided, however, that nothing contained in this subsection
(a) shall prohibit the board of directors of the Company from (I) furnishing
non-public information to, or entering into discussions or negotiations with,
any Person in response to a Superior Company Proposal (defined below) made by
such Person (and not withdrawn) relating to a Company Acquisition Transaction if
(A) neither the Company, nor any of the Subsidiaries, directors, officers,
employees, attorneys, accountants, investment bankers, financial advisors or
other representatives retained by or acting on behalf of the Company shall have
violated any of the
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restrictions set forth in this Section 5.3, (B) the board of directors of the
Company determines in good faith after consultation with Cooley Godward LLP,
that the failure to provide information in response to a written request by a
Person considering a Company Acquisition Transaction and the failure to consider
the Company Acquisition Transaction would be reasonably likely to constitute a
breach of its fiduciary duties to the Company's stockholders under applicable
law, (C) prior to furnishing such information to, or entering into discussions
or negotiations with, such Person the Company requires such Person to enter into
a confidentiality agreement with the Company in customary form (which
confidentiality agreement also contains a standstill agreement whereby such
Person agrees that it will not, either directly or indirectly, seek to acquire
any interest in the Company (whether by way of merger, asset acquisition, tender
offer or otherwise), without the approval of the Company's board of directors,
for a period of twenty-four (24) months from the date of the confidentiality
agreement), (D) at least five (5) Business Days prior to furnishing any such
nonpublic information to, or entering into discussions or negotiations with any
such Person, the Company gives Parent written notice of the identity of such
Person, the terms and conditions of such Company Superior Proposal and of the
Company's intention to furnish nonpublic information to such Person, and (E) at
least five (5) Business Days prior to furnishing any nonpublic information to
such Person, the Company furnishes such nonpublic information to Parent (to the
extent not already furnished to Parent), (II) withdrawing or modifying its
recommendation referred to in Section 5.5(b) following receipt of a Superior
Company Proposal, if, after duly considering the advice of Cooley Godward LLP,
the board of directors of the Company determines in good faith that failure to
do so would be reasonably likely to constitute a breach of its fiduciary duties
to the Company's stockholders under applicable law or (III) complying with Rule
14e-2 promulgated under the Exchange Act with regard to a Company Acquisition
Transaction. Without limiting the generality of the foregoing, the Company
acknowledges and agrees that any violation of any of the restrictions set forth
in the preceding sentence by any representative of the Company or any of the
Subsidiaries, whether or not such representative is purporting to act on behalf
of the Company or any of the Subsidiaries, shall be deemed to constitute a
breach of this Section 5.3 by the Company. The Company shall keep Parent fully
informed with respect to the status of any such Company Acquisition Transaction
and any modification or proposed modification thereto. The Company shall also
give Parent the ability to match any Superior Company Proposal by providing
Parent with the terms of such Superior Company Proposal in writing and allowing
Parent five (5) Business Days to respond with a new offer.
(b) Definitions. The following terms shall have the meanings set forth
below:
(i) "Company Acquisition Transaction" means any transaction or
series of transactions involving:
(1) any merger, consolidation, share exchange, business
combination, issuance of securities, acquisition of securities, tender offer,
exchange offer, or other similar transaction (i) in which the Company or any
Subsidiary is a constituent corporation or involving the capital stock of the
Company, (ii) in which a Person or "group" (as defined in the Exchange Act and
the rules promulgated thereunder) or Persons directly or indirectly acquires the
Company or any Subsidiary or more than 20% of the Company's business or assets,
or directly or indirectly becomes the beneficial owner (as such term is used in
Section 13d-3 of the Exchange Act) or record owner of securities representing,
or exchangeable for or convertible into, more than 20% of the outstanding
securities of any class of voting securities of the Company or any Subsidiary,
or (iii) in which the Company
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or any Subsidiary issues securities representing more than 20% of the
outstanding securities of any class of voting securities of the Company;
(2) any sale, lease, exchange, transfer, license, acquisition
or disposition of more than 20% of the assets of the Company or any Subsidiary;
or
(3) any liquidation or dissolution of the Company or any
Subsidiary.
(i) "Superior Company Proposal" means an unsolicited, bona fide
written offer made by a third party relating to any Company Acquisition
Transaction on terms that the board of directors of the Company determines, in
its reasonable judgment, based upon the advice of its financial advisor, and
upon consultation with its counsel, to be more favorable to the Company's
stockholders than the terms of the Merger; provided however, that any such offer
shall not be deemed to be a "Superior Company Proposal" if (1) any financing
required to consummate the transaction contemplated by such offer is not
committed (in a writing signed by a Person that the board of directors of the
Company reasonably believes has the financial ability to meet such commitment)
and is not likely to be obtained by such third party on a timely basis, and (2)
such offer sets forth material terms which taken as a whole are less favorable
to the Company than the terms set forth in this Agreement.
(c) The Company immediately shall cease and cause to be terminated all
existing inquiries, contacts, discussions or negotiations with any Person (other
than Parent or Purchaser) conducted heretofore with respect to any Company
Acquisition Transaction. The Company shall notify Parent promptly if any Company
Acquisition Transaction is proposed by any Person after the date hereof and
shall, in any such notice to Parent, indicate in reasonable detail the identity
of the Person making such proposed Company Acquisition Transaction (and its
significant Affiliates), and the terms and conditions of such proposed Company
Acquisition Transaction. The Company agrees not to release any third party from,
or waive any provision of, any confidentiality or standstill agreement to which
the Company is a party. Each amendment or other modification to any proposed
Company Acquisition Transaction shall be considered a new and separate proposal
for a Company Acquisition Transaction for the purposes of this Agreement.
SECTION 5.4 No Solicitation of Transactions by Parent.
(a) Neither Parent nor Parent Sub shall, directly or indirectly, through
any officer, director, agent, employee, representative, or otherwise, (i)
solicit, initiate or encourage (including, without limitation, by way of
furnishing non-public information) the submission, making or announcement of any
Parent Acquisition Transaction, (ii) take any other action to facilitate any
inquiries or the making of any proposal to effect a Parent Acquisition
Transaction, (iii) approve, endorse or recommend any Parent Acquisition
Transaction, (iv) enter into any letter of intent or similar document or any
contract or other agreement contemplating or otherwise relating to any Parent
Acquisition Transaction, (v) enter into discussions or negotiate with any Person
regarding an Parent Acquisition Transaction, or (vi) authorize or permit any of
the officers, directors or employees of Parent or any investment banker,
financial advisor, attorney, accountant or other representative retained by or
acting on behalf of Parent to take any such action set forth in clauses (i)
through (vi) above; provided, however, that nothing contained in this subsection
(a) shall prohibit the board of directors of Parent from (I) furnishing non-
public information to, or entering into discussions or negotiations with, any
Person in response to a Superior Parent Proposal (defined below) made by such
Person (and not withdrawn) relating to a Parent Acquisition Transaction if (A)
neither Parent, nor any of
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its subsidiaries, directors, officers, employees, attorneys, accountants,
investment bankers, financial advisors or other representatives retained by or
acting on behalf of Parent shall have violated any of the restrictions set forth
in this Section 5.4, (B) the board of directors of Parent determines in good
faith after consultation with Herrick, Feinstein LLP, that the failure to
provide information in response to a written request by a Person considering a
Parent Acquisition Transaction and the failure to consider the Parent
Acquisition Transaction would be reasonably likely to constitute a breach of its
fiduciary duties to Parent's stockholders under applicable law, (C) prior to
furnishing such information to, or entering into discussions or negotiations
with, such Person Parent requires such Person to enter into a confidentiality
agreement with Parent in customary form (which confidentiality agreement also
contains a standstill agreement whereby such Person agrees that it will not,
either directly or indirectly, seek to acquire any interest in Parent (whether
by way of merger, asset acquisition, tender offer or otherwise), without the
approval of Parent's board of directors, for a period of twenty-four (24) months
from the date of the confidentiality agreement), (D) at least five (5) Business
Days prior to furnishing any such nonpublic information to, or entering into
discussions or negotiations with any such Person, Parent gives Parent written
notice of the identity of such Person, the terms and conditions of such Superior
Parent Proposal and of Parent's intention to furnish nonpublic information to
such Person, and (E) at least five (5) Business Days prior to furnishing any
nonpublic information to such Person, Parent furnishes such nonpublic
information to Parent (to the extent not already furnished to Parent), (II)
withdrawing or modifying its recommendation referred to in Section 5.6(b)
following receipt of a Superior Parent Proposal, if, after duly considering the
advice of Herrick, Feinstein LLP, the board of directors of Parent determines in
good faith that failure to do so would be reasonably likely to constitute a
breach of its fiduciary duties to Parent's shareholders under applicable law or
(III) complying with Rule 14e-2 promulgated under the Exchange Act with regard
to a Parent Acquisition Transaction. Without limiting the generality of the
foregoing, Parent acknowledges and agrees that any violation of any of the
restrictions set forth in the preceding sentence by any representative of Parent
or any Parent Sub, whether or not such representative is purporting to act on
behalf of Parent or any Parent Sub, shall be deemed to constitute a breach of
this Section 5.4 by Parent. Parent shall keep the Company fully informed with
respect to the status of any such Parent Acquisition Transaction and any
modification or proposed modification thereto. Parent shall also give the
Company the ability to match any Superior Parent Proposal by providing Parent
with the terms of such Superior Parent Proposal in writing and allowing the
Company five (5) Business Days to respond with a new offer.
(b) Definitions. The following terms shall have the meanings set forth
below:
(i) "Parent Acquisition Transaction" means any transaction or
series of transactions involving:
(1) any merger, consolidation, share exchange, business
combination, issuance of securities, acquisition of securities, tender offer,
exchange offer, or other similar transaction (i) in which Parent or any Parent
Sub is a constituent corporation or involving the capital stock of Parent, (ii)
in which a Person or "group" (as defined in the Exchange Act and the rules
promulgated thereunder) or Persons directly or indirectly acquires Parent or any
Parent Sub or more than 20% of Parent's business or assets, or directly or
indirectly becomes the beneficial owner (as such term is used in Section 13d-3
of the Exchange Act) or record owner of securities representing, or exchangeable
for or convertible into, more than 20% of the outstanding securities of any
class of voting securities of Parent or
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any Parent Sub, or (iii) in which Parent or any Parent Sub issues securities
representing more than 20% of the outstanding securities of any class of voting
securities of Parent;
(2) any sale, lease, exchange, transfer, license, acquisition
or disposition of more than 20% of the assets of Parent or any Parent Sub; or
(3) any liquidation or dissolution of Parent or any Parent
Sub.
(i) "Superior Parent Proposal" means an unsolicited, bona fide
written offer made by a third party relating to any Parent Acquisition
Transaction on terms that the board of directors of Parent determines, in its
reasonable judgment, based upon the advice of its financial advisor, and upon
consultation with its counsel, to be more favorable to Parent's stockholders
than the terms of the Merger; provided however, that any such offer shall not be
deemed to be a "Superior Parent Proposal" if (1) any financing required to
consummate the transaction contemplated by such offer is not committed (in a
writing signed by a Person that the board of directors of Parent reasonably
believes has the financial ability to meet such commitment) and is not likely to
be obtained by such third party on a timely basis, and (2) such offer sets forth
material terms which taken as a whole are less favorable to Parent than the
terms set forth in this Agreement.
(c) Parent immediately shall cease and cause to be terminated all
existing inquiries, contacts, discussions or negotiations with any Person (other
than Parent or Purchaser) conducted heretofore with respect to any Parent
Acquisition Transaction. Parent shall notify Parent promptly if any Parent
Acquisition Transaction is proposed by any Person after the date hereof and
shall, in any such notice to Parent, indicate in reasonable detail the identity
of the Person making such proposed Parent Acquisition Transaction (and its
significant Affiliates), and the terms and conditions of such proposed Parent
Acquisition Transaction. Parent agrees not to release any third party from, or
waive any provision of, any confidentiality or standstill agreement to which
Parent is a party. Each amendment or other modification to any proposed Parent
Acquisition Transaction shall be considered a new and separate proposal for a
Parent Acquisition Transaction for the purposes of this Agreement.
SECTION 5.5 Company Stockholders' Meeting.
(a) The Company shall take all action necessary under all applicable
Legal Requirements to call, give notice of, convene and duly hold a meeting of
the holders of Company Common Stock and Company Preferred Stock (the "Company
Stockholders' Meeting") to consider, act upon and vote upon the adoption and
approval of this Agreement and approval of the Merger. The Company Stockholders'
Meeting will be held as promptly as practicable and in any event within 45 days
after the Form S-4 is declared effective under the Securities Act (which 45-day
period shall be extended on a day-for-day basis if and for so long as any stop
order or other similar action is in place, pending or threatened by the SEC).
The Company's obligation to call, give notice of, convene and hold the Company
Stockholders' Meeting in accordance with this Section 5.5(a) shall not be
limited or otherwise affected by the commencement, disclosure, announcement or
submission of any Superior Company Proposal or other Company Acquisition
Transaction related to the Company, or by any withdrawal, amendment or
modification of the recommendation of the board of directors of the Company with
respect to the Merger.
(b) Subject to Section 5.5(c): (i) the board of directors of the Company
shall unanimously recommend that the Company's stockholders vote in favor of and
adopt and approve this Agreement and approve the Merger at the Company
Stockholders' Meeting; (ii) the Proxy Statement shall include a statement to the
effect that the board of directors
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of the Company has unanimously recommended that the Company's stockholders vote
in favor of and adopt and approve this Agreement and approve the Merger at the
Company Stockholders' Meeting; and (iii) neither the board of directors of the
Company nor any committee thereof shall withdraw, amend or modify, or propose or
resolve to withdraw, amend or modify, in a manner adverse to Parent, the
unanimous recommendation of the board of directors of the Company that the
Company's stockholders vote in favor of the adoption and approval this Agreement
and the approval of the Merger. For purposes of this Agreement, said
recommendation of the board of directors of the Company shall be deemed to have
been modified in a manner adverse to Parent if said recommendation shall no
longer be unanimous.
(c) Nothing in Section 5.5(b) shall prevent the board of directors of
the Company from withdrawing, amending or modifying its unanimous recommendation
in favor of the Merger if (i) a Superior Company Proposal is made to the Company
and is not withdrawn, (ii) neither the Company nor any of its representatives
shall have violated any of the restrictions set forth in Section 5.3, and (iii)
the board of directors of the Company concludes in good faith, after
consultation with Cooley Godward LLP, that the failure to withdraw, amend or
modify such recommendation would reasonably be likely to constitute a breach of
the board of directors' fiduciary obligations to the Company's stockholders
under applicable law. Nothing contained in this Section 5.5 shall limit the
Company's obligation to call, give notice of, convene or hold the Company
Stockholders' Meeting (regardless of whether the unanimous recommendation of the
board of directors of the Company shall have been withdrawn, amended or
modified), provided that nothing contained in this Section 5.5 shall require the
Company to call, give notice of, convene or hold the Company Stockholders'
Meeting in the event this Agreement is terminated pursuant to Section 7.1.
SECTION 5.6 Parent Shareholders' Meeting.
(a) Parent shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and duly hold a meeting of the
holders of Parent Common Stock (the "Parent Shareholders' Meeting") to consider,
act upon and vote upon the approval of the issuance of the shares of Parent
Common Stock to be issued in the Merger, the adoption and approval of this
Agreement, the Merger and the Certificate of Amendment. The Parent Shareholders'
Meeting will be held as promptly as practicable and in any event within 45 days
after the Form S-4 is declared effective under the Securities Act (which 45-day
period shall be extended on a day-for-day basis if and for so long as any stop
order or other similar action is in place, pending or threatened by the SEC).
Parent's obligation to call, give notice of, convene and hold Parent
Shareholders' Meeting in accordance with this Section 5.6(a) shall not be
limited or otherwise affected by the commencement, disclosure, announcement or
submission of any Superior Parent Proposal or other Parent Acquisition
Transaction related to Parent, or by any withdrawal, amendment or modification
of the recommendation of the board of directors of Parent with respect to the
Merger.
(b) Subject to Section 5.6(c): (i) the board of directors of Parent
shall unanimously recommend that Parent's stockholders vote in favor of and
approve the issuance of the shares of Parent Common Stock to be issued in the
Merger and adopt and approve this Agreement, the Merger and the Certificate of
Amendment; (ii) the Proxy Statement shall include a statement to the effect that
the board of directors of Parent has unanimously made such recommendation; and
(iii) neither the board of directors of Parent nor any committee thereof shall
withdraw, amend or modify, or propose or resolve to
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withdraw, amend or modify, in a manner adverse to the Company, such unanimous
recommendation. For purposes of this Agreement, said recommendation of the board
of directors of Parent shall be deemed to have been modified in a manner adverse
to the Company if said recommendation shall no longer be unanimous.
(c) Nothing in Section 5.6(b) shall prevent the board of directors of
Parent from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger if (i) a Superior Parent Proposal is made to Parent and is
not withdrawn, (ii) neither Parent nor any of its representatives shall have
violated any of the restrictions set forth in Section 5.4, and (iii) the board
of directors of Parent concludes in good faith, after consultation with Herrick,
Feinstein LLP, that the failure to withdraw, amend or modify such recommendation
would reasonably be likely to constitute a breach of the board of directors'
fiduciary obligations to Parent's shareholders under applicable law. Nothing
contained in this Section 5.6 shall limit Parent's obligation to call, give
notice of, convene and hold Parent Shareholders' Meeting (regardless of whether
the unanimous recommendation of the board of directors of Parent shall have been
withdrawn, amended or modified), provided that nothing contained in this Section
5.6 shall require Parent to call, give notice of, convene or hold the Parent
Shareholders' Meeting in the event this Agreement is terminated pursuant to
Section 7.1.
SECTION 5.7 Proxy Statement/Form S-4.
(a) As promptly as practicable after the date of this Agreement, Parent
and the Company shall prepare and cause to be filed with the SEC a preliminary
Proxy Statement to be sent to the stockholders of Parent and the Company in
connection with Parent Shareholders' Meeting and the Company Stockholders'
Meeting, respectively, and Parent shall prepare and cause to be filed with the
SEC the Form S-4. Parent and the Company shall use all reasonable efforts to
cause the Proxy Statement to comply with the rules and regulations promulgated
by the SEC, to respond promptly to any comments of the SEC or its staff and to
have the Proxy Statement cleared by the SEC for distribution to Parent's
shareholders and the Company's stockholders. The Proxy Statement (and any other
documents required by the Securities Act or the Exchange Act) will be included
in the Form S-4. The parties acknowledge and agree that the foregoing
arrangements may be altered by mutual consent of the parties as reasonably
necessary to respond to any comments or requests received from the SEC. Parent
shall use all reasonable efforts to cause the Form S-4 (including the Proxy
Statement) to comply with the rules and regulations promulgated by the SEC, to
respond promptly to any comments of the SEC or its staff and to have the Form
S-4 declared effective under the Securities Act as promptly as practicable after
it is filed with the SEC. Parent and the Company will use all reasonable efforts
to cause the Proxy Statement to be mailed to their respective stockholders as
promptly as practicable after the Form S-4 is declared effective under the
Securities Act. The Company shall promptly furnish to Parent all information
concerning the Company and the Company's stockholders that may be required or
reasonably requested in connection with any action contemplated by this Section
5.7. If the Company or Parent becomes aware of any information that should be
set forth in an amendment or supplement to the Form S-4 or the Proxy Statement,
then the Company or Parent, as applicable, shall promptly inform the other party
thereof and shall cooperate with the other party in filing such amendment or
supplement with the SEC and, if appropriate, in mailing such amendment or
supplement to the stockholders of the Company and Parent.
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(b) Prior to the Effective Time Parent shall make all required filings
with the NYSE and shall ensure that Parent Common Stock to be issued in the
Merger will be qualified under the Securities Act.
(c) Parent shall amend its 1997 Employee Stock Purchase Plan to provided
that Company employees will be eligible to participate in such plan effect no
later than five (5) Business Days following the Closing and that the offering
period with respect to such employees under such plan shall commence as close as
possible to such day (and shall to the extent feasible have purchase dates and
otherwise ending days consistent with those for Parent's employees). To the
extent required by the rules and regulations of the SEC, the amendment to
Parent's 1997 Employee Stock Purchase Plan shall be reflected in the Proxy
Statement.
SECTION 5.8 Accounting Methods. Neither the Company nor Parent shall
change (i) its methods of accounting which are currently in effect or (ii) its
fiscal year. Neither the Company nor Parent shall take or cause or permit to be
taken any action, whether before or after the Effective Time, which would
disqualify the Merger as a "pooling of interests" for financial reporting
purposes or as a "tax-free reorganization" within the meaning of Section 368(a)
of the Code.
SECTION 5.9 Indemnification Agreement. Two Business Days prior to filing
the Form S-4 with the SEC, the Company shall execute and deliver to Parent and
Purchaser an Indemnity Agreement, and Parent and Purchaser shall execute and
deliver to the Company and deliver to the Company an Indemnity Agreement, in the
forms attached hereto as Exhibit H.
SECTION 5.10 Letters of the Company's Accountants.
(a) The Company shall use all reasonable efforts to cause to be
delivered to Parent two letters of Deloitte & Touche LLP pursuant to Statement
on Auditing Standards No. 72 ("SFAS 72") (each a "Comfort Letter"), one dated a
date within two Business Days before the date on which the Form S-4 shall become
effective and one dated a date within three Business Days before the Closing
Date, each addressed to Parent, in customary form, scope and substance relating
to the performance by Deloitte & Touche LLP of its procedures with respect to
the financial statements of the Company contained in or incorporated by
reference in the Form S-4.
(b) The Company shall use all its reasonable efforts to cause to be
delivered to Parent a copy of a letter from Deloitte & Touche LLP, addressed to
the Company, dated as of the Closing Date (which letter may contain customary
qualifications and assumptions), to the effect that Deloitte & Touche LLP
concurs with the Company's Management's conclusion that no conditions exist that
would prevent the Company from accounting for the Merger as a pooling of
interests in accordance with APB 16 (as defined in Section 5.11(b)) and
applicable rules and regulations of the SEC as such criteria relate only to the
Company (and not to Parent).
SECTION 5.11 Letters of Parent's Accountants.
(a) Parent shall use all reasonable efforts to cause to be delivered to
the Company two Comfort Letters from Arthur Andersen LLP, one dated a date
within two Business Days before the date on which the Form S-4 shall become
effective and one dated a date within three Business Days before the Closing
Date, each addressed to the Company, in customary form, scope and substance
relating to the performance by Arthur
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Andersen LLP of its procedures with respect to the financial statements of
Parent contained in or incorporated by reference in the Form S-4.
(b) Parent shall use its reasonable efforts to cause to be delivered to
the Company a copy of a letter from Arthur Andersen LLP, addressed to Parent,
dated as of the Closing Date (which letter may contain customary qualifications
and assumptions), to the effect that Arthur Andersen LLP concurs with Parent's
management's conclusion that no conditions exist that would prevent Parent from
accounting for the Merger as a pooling of interests transaction under Opinion 16
of the Accounting Principles Board ("APB 16") and applicable rules and
regulations of the SEC.
SECTION 5.12 Access to Information; Confidentiality. (a) Upon reasonable
notice, the Company and Parent shall each (and shall cause each of their
respective subsidiaries to) afford to the officers, employees, accountants,
counsel and other representatives of the other, access, during normal business
hours during the period prior to the Effective Time or the termination of this
Agreement, to all its properties, books, contracts, commitments and records and,
during such period, each of the Company and Parent shall (and shall cause each
of their respective subsidiaries to) make available to the other (a) a copy of
each report, schedule, registration statement and other document filed or
received by it during such period pursuant to the requirements of Federal
securities laws (other than reports or documents which such party is not
permitted to disclose under applicable law) and (b) all other information
concerning its business, properties and personnel as such other party may
reasonably request. No investigation by either the Company or Parent shall
affect the representations and warranties of the other, except to the extent
such representations and warranties are by their terms qualified by disclosures
made to such first party.
(b) Each of the parties agree, on behalf of themselves and their
respective Affiliates and representatives, to retain in strict confidence, and
not to use for any purpose whatsoever, or divulge, disseminate or disclose to
any third party (other than as may be required by court order or by law) any
proprietary or confidential information obtained in connection with the
negotiation of this Agreement or the Transactions.
SECTION 5.13 Employee Benefit Plans.
(a) As of the Effective Time, the Company shall amend each of the
Company Plans to provide that Parent is the sole entity authorized to amend,
modify, discontinue, merge or terminate any such Company Plan. Parent shall take
all actions necessary or appropriate to permit the employees of the Company and
its Subsidiaries (collectively, the "Company Employees") to continue to
participate from and after the Closing Date in the Company Plans maintained by
the Company immediately prior to the Effective Time. Notwithstanding the
foregoing, Parent may in its sole discretion, cause any such Company Plans to be
terminated or discontinued or merged with and into a comparable Parent Plan, on
or after the Effective Time provided that Parent shall take all actions
necessary or appropriate to permit the Company Employees participating in such
Company Plans to immediately thereafter participate in the comparable Parent
Plan maintained by Parent or any Parent Sub for their similarly situated
employees. If the Company Plan that is terminated, discontinued or merged by
Parent is a group health plan, then Parent shall permit each Company Employee
participating in such group health plan to be covered under a Parent Plan that
(i) provides group health benefits to each such Company Employee effective
immediately upon the cessation of coverage of such individuals under such group
health plan, and (ii) credits such Company Employee, for the year under which
such coverage under such Company Plan begins, with any deductibles and
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co-payments already incurred during such year under such group health plans.
Parent and the Parent Plan shall recognize each Company Employee's years of
service and level of seniority with the Company and its Subsidiaries for
purposes of terms of employment and eligibility, vesting and benefit
determination under the Parent Plans. This Section 5.13(a) shall survive the
consummation of the Merger.
(b) As of the Effective Time, the Company's 1996 Employee Stock Purchase
Plan shall be terminated. The rights of participants in such plan with respect
to any offering period underway thereunder immediately prior to the Effective
Time shall be determined by treating the last business day prior to the
Effective Time as the last day of such offering period but otherwise treating
such offering period as a fully effective and completed offering period for all
purposes of such plan.
SECTION 5.14 Stock Exchange Listing. Parent shall use all reasonable
efforts to cause the shares of Parent Common Stock to be issued in the Merger to
be approved for listing on the NYSE, subject to official notice of issuance,
prior to or on the Effective Time.
SECTION 5.15 Notification of Certain Matters. The Company shall give
prompt notice to Parent, and Parent shall give prompt notice to the Company, of:
(i) the occurrence, or non-occurrence, of any event the occurrence, or
non-occurrence, of which would be likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate such that the conditions
set forth in Sections 6.2(a) and 6.3(a) would not be satisfied as a result
thereof; and (ii) any failure of the Company, Parent or Purchaser, as the case
may be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder such that the conditions set forth in
Sections 6.2(b) and 6.3(b) would not be satisfied as a result thereof; provided,
however, that the delivery of any notice pursuant to this Section 5.15 shall not
limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
SECTION 5.16 Subsequently Filed SEC Documents. The Company and Parent will
each file with the SEC all reports, schedules, forms, statements and other
documents required to be filed under the Exchange Act from the date hereof
through the Effective Date (the "Exchange Act Filings") and promptly provide the
other party with a copy of each such Exchange Act Filing. Each Exchange Act
Filing, as of its respective date: (i) will comply in all material respects with
the requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable to each such Filing; and (ii) will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
SECTION 5.17 Further Action; Reasonable Best Efforts. Each of the parties
hereto shall: (i) make promptly its respective filings, and thereafter make any
other of its respective required submissions, under the Securities Act, Exchange
Act, HSR Act and the NYSE, NMS and NASD rules and regulations with respect to
the Transactions; and (ii) use its reasonable best efforts to take, or cause to
be taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the Transactions; provided, however, that no provision of this
Section 5.17 shall require a party to bear the expense of another party hereto
unless otherwise provided in this Agreement.
SECTION 5.18 Public Announcements. Parent and the Company shall consult
with each other before issuing any press release or otherwise making any public
statements with
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respect to this Agreement or the Merger and shall not issue any such press
release or make any such public statement without the written consent of the
other party, except as may be required by law or any listing agreement with the
NYSE, NMS or NASD to which Parent or the Company is a party.
SECTION 5.19 Indemnification of Directors and Officers.
(a) From and after the consummation of the Merger, Parent will and will
cause the Surviving Corporation to, fulfill and honor in all material respects
the obligations of Parent and the Company pursuant to (i) each indemnification
agreement in effect at such time which is referenced in Section 5.19 between
Parent and each person who is or was a director or officer of Parent and the
Company at or prior to the Effective Time and (ii) any indemnification
provisions under Parent's and the Company's Certificate of Incorporation or
Bylaws, as each is in effect on the date hereof (the persons to be indemnified
pursuant to this agreement and provisions referred to in clauses (i) and (ii) of
this Section 5.19 shall be referred to individually as an "Indemnified Party"
and collectively as the "Indemnified Parties"). The Certificate of Incorporation
and the Bylaws of Parent and the Company shall continue to contain the
provisions with respect to indemnification and exculpation from liability set
forth in such documents as of the date of this Agreement and such provisions
shall not be amended, repealed or otherwise modified for a period of six (6)
years after the Effective Time in any manner that would adversely affect the
rights thereunder of any Indemnified Party.
(b) For a period of six (6) years after the Effective Time, Parent shall
maintain in effect the current level and scope of directors' and officers'
liability insurance covering those persons which are currently covered by the
Company's directors' and officers' liability insurance policy (a copy of which
has been heretofore delivered to Parent), provided, however, that in no event
shall Parent be required to expend in any one year an amount in excess of 150%
of the annual premium currently paid by the Company for such insurance, and
provided further that if the annual premiums of such insurance exceed such
amount, Parent shall be obligated to obtain a policy with the greatest coverage
available for a cost not to exceed such amount.
(c) Parent and the Surviving Corporation jointly and severally agree to
pay all expenses, including attorney's fees, that may be incurred by the
Indemnified Parties in enforcing the indemnity and other obligations provided in
this Section 5.19.
(d) This Section 5.19 shall survive the consummation of the Merger and
the Effective Time, is intended to benefit and may be enforceable by the
Company, Parent, the Surviving Corporation and the Indemnified Parties, and
shall be binding on all successors and assigns of Parent and the Surviving
Corporation.
SECTION 5.20 Affiliates.
(a) As soon as practicable but in any event within thirty (30) Business
Days after the date hereof, the Company has delivered to Parent a letter
identifying all Persons who in the Company's judgment are or may be deemed to
be, at the time this Agreement is submitted to the Company's stockholders for
approval, "affiliates" of the Company for the purposes of Rule 145 under the
Securities Act or for purposes of qualifying the Merger for pooling of interests
financial reporting treatment under APB 16 and applicable rules and regulations
of the SEC. The Company has caused each such affiliate to execute and deliver to
Parent an affiliate letter substantially in the form attached hereto as Exhibit
I (the "Affiliate Letter").
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(b) As soon as practicable but in any event within thirty (30) Business
Days after the date hereof, Parent has delivered to the Company a letter
identifying all Persons who in Parent's judgment are or may be deemed to be, at
the time this Agreement is submitted to Parent's shareholders for approval,
"affiliates" of Parent for the purposes of Rule 145 under the Securities Act or
for purposes of qualifying the Merger for pooling of interests financial
reporting treatment under APB 16 and applicable rules and regulations of the
SEC. Parent has caused each such affiliate to execute and deliver to the Company
an Affiliate Letter.
SECTION 5.21 Reasonable Efforts. During the period from the date hereof to
the Effective Time, (a) the Company shall use its reasonable efforts to cause
the conditions set forth in Section 6.1 and Section 6.2 to be satisfied on a
timely basis, and (b) Parent and Purchaser shall use their reasonable efforts to
cause the conditions set forth in Section 6.1 and Section 6.3 to be satisfied on
a timely basis.
SECTION 5.22 Tax Representation Letters. At or prior to the filing of the
Form S-4 with the SEC, and to the extent necessary, at the Closing, Parent and
the Company shall each execute and deliver to Herrick, Feinstein LLP and Cooley
Godward LLP tax representation letters in substantially in the form attached
hereto as Exhibits N and O. Each of Parent and the Company shall use its
reasonable efforts to cause Herrick, Feinstein LLP and Cooley Godward LLP,
respectively, to deliver promptly to it a legal opinion satisfying the
requirements of Item 601 of the Regulation S-K promulgated under the Securities
Act. In rendering such opinion, each counsel shall be entitled to rely on the
tax representation letters.
SECTION 5.23 Disclosure Regarding Class Action Proceeding. During the
period between the date hereof and the Effective Time, Parent shall keep the
Company and its counsel fully appraised and informed of all facts,
circumstances, events or matters that relate to the Class Action Proceeding
including the nature and status of any discussion or negotiations related to the
Class Action Proceeding and provide notices and other information which is in
the possession of Parent other than Privileged Information.
ARTICLE VI
CONDITIONS TO THE MERGER
SECTION 6.1 Conditions to Each Party's Obligation To Effect the
Merger. The respective obligations of Parent, Purchaser and the Company to
effect the Merger shall be subject to the satisfaction on or prior to the
Closing Date of the following conditions:
(a) This Agreement and the Merger shall have been approved and adopted
by the affirmative vote of the holders of a majority of the outstanding shares
of Company Common Stock and Company Preferred Stock entitled to vote thereon.
(b) The issuance of the shares of Parent Common Stock to be issued in
the Merger, this Agreement, the Merger and the Certificate of Amendment shall
have been adopted and approved by the affirmative vote of the holders of a
majority of the outstanding shares of Parent Common Stock entitled to vote
thereon.
(c) The shares of Parent Common Stock issuable to the Company's
stockholders pursuant to this Agreement and such other shares required to be
reserved for issuance in connection with the Merger shall have been authorized
for listing on the NYSE upon official notice of issuance.
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(d) Other than any Requisite Regulatory Approvals which the failure to
obtain or file would not have a Material Adverse Effect, or the filing of the
Certificate of Merger, all authorizations, consents, orders or approvals of, or
declarations or filings with, and all expirations of waiting periods imposed by,
any Governmental Entity including without limitation the waiting period under
the HSR Act (all the foregoing, "Consents") which are necessary for the
consummation of the Merger and the other Transactions shall have been filed,
occurred or been obtained (all such permits, approvals, filings and consents and
the lapse of all such waiting periods being referred to as the "Requisite
Regulatory Approvals") and all such Requisite Regulatory Approvals shall be in
full force and effect.
(e) The Form S-4 shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceedings seeking a stop
order.
(f) No Injunction preventing the consummation of the Merger shall be in
effect, nor shall any proceeding by any Governmental Entity seeking the
foregoing be pending. There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Merger which makes the consummation of the Merger illegal.
(g) Parent and the Company shall have received the letters from Arthur
Andersen LLP and Deloitte & Touche LLP contemplated by Sections 5.10 and 5.11.
SECTION 6.2 Conditions to Obligations of Parent and Purchaser. The
obligations of Parent and Purchaser to effect the Merger are subject to the
satisfaction or waiver of the following conditions:
(a) The representations and warranties of the Company set forth in this
Agreement shall be true and correct in all respects as of the date of this
Agreement (except to the extent such representations and warranties which are
expressly stated to be made as of an earlier date, which shall be true and
correct in all respects as of such date) it being understood that for purposes
of determining the accuracy of such representations or warranties each of the
following shall be disregarded: (i) any "Material Adverse Effect" qualification
or any other materiality qualifications contained in such representations and
warranties, (ii) any inaccuracy that does not, together with all other
inaccuracies, have a Material Adverse Effect on the Company, (iii) any
inaccuracy that results from or relates to general business or economic
conditions, (iv) any inaccuracy that results from or relates to conditions
generally affecting the industry in which the Company competes, (v) any
inaccuracy that results from or relates to the announcement or pendency of the
Merger or any of the other transactions contemplated hereby, and (vi) any
inaccuracy that results from or relates to the taking of any action contemplated
by this Agreement; and Parent shall have received a certificate signed on behalf
of the Company by the Chairman and Chief Executive Officer or the Vice Chairman
and by the Executive Vice President and Chief Financial Officer of the Company
to such effect.
(b) The Company shall have performed all obligations required to be
performed by it under this Agreement at or prior to the Closing Date, except
where the failure to perform such obligations would not have a Material Adverse
Effect on the Company or Parent and Parent shall have received a certificate
signed on behalf of the Company by the Chairman and Chief Executive Officer or
the Vice Chairman and by the Executive Vice President and Chief Financial
Officer of the Company to such effect.
(c) The Company shall have obtained all the Company Required Consents.
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(d) Parent shall have received from Cooley Godward LLP, Company's
counsel, a legal opinion, addressed to Parent and dated the Closing Date,
opining as to the matters set forth in Exhibit J attached hereto, with customary
exceptions and qualifications thereto and Parent shall have received from its
counsel an opinion that the Merger will constitute a tax free reorganization
within the meaning of Section 368 of the Code in the form attached hereto as
Exhibit P.
(e) Each of the persons set forth on Exhibit M shall have received
employment agreements containing at a minimum the terms set forth opposite such
person's name on Exhibit M, as the case maybe, duly executed by those persons
set forth on Exhibit M, and such employment agreements shall become effective as
of the Closing Date and be in full force and effect as of the date thereof.
SECTION 6.3 Conditions to Obligations of the Company. The obligation of
the Company to effect the Merger is subject to the satisfaction of the following
conditions unless waived by the Company:
(a) The representations and warranties of Parent and Purchaser set forth
in this Agreement shall be true and correct in all respects as of the date of
this Agreement (except to the extent such representation is expressly stated to
be made as of an earlier date, which shall be true and correct in all respects
as of such date) it being understood that for purposes of determining the
accuracy of such representations or warranties each of the following shall be
disregarded: (i) any "Material Adverse Effect" qualification or any other
materiality qualifications contained in such representations and warranties,
(ii) any inaccuracy that does not, together with all other inaccuracies, have a
Material Adverse Effect on Parent, (iii) any inaccuracy that results from or
relates to general business or economic conditions, (iv) any inaccuracy that
results from or relates to conditions generally affecting the industry in which
Parent competes, (v) any inaccuracy that results from or relates to the
announcement or pendency of the Merger or any of the other transactions
contemplated hereby, (vi) any inaccuracy that results from or relates to the
taking of any action contemplated by this Agreements and the Company shall have
received a certificate signed on behalf of Parent by the Chairman or the
President or a Vice Chairman and by the Chief Financial Officer of Parent to
such effect.
(b) Parent and Purchaser shall have performed all obligations required
to be performed by them under this Agreement, at or prior to the Closing Date
except where the failure to perform such obligation would not have a Material
Adverse Effect on the Company or Parent, and the Company shall have received a
certificate signed on behalf of the Company by the Chairman and Chief Executive
Officer or the Vice Chairman and by the Executive Vice President and Chief
Financial Officer of the Company to such effect.
(c) Parent and Purchaser shall have obtained the Parent Consents.
(d) The Company shall have received from Herrick, Feinstein LLP,
Parent's and Purchaser's counsel, a legal opinion, addressed to the Company and
dated the Closing Date, opining as to the matters set forth in Exhibit L
attached hereto, with customary exceptions and qualifications thereto, and the
Company shall have received from its counsel an opinion that the Merger will
constitute a tax-free reorganization within the meaning of Section 368 of the
Code in the form attached as Exhibit Q.
(e) Each of the persons set forth on Exhibit K shall have received
employment agreements containing at a minimum the terms set forth opposite such
person's name on Exhibit M, duly executed by Parent and those parties set forth
on Exhibit K, and such
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employment agreements shall become effective as of the Closing Date and be in
full force and effect as of the date thereof.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1 Termination. This Agreement may be terminated and the Merger
and the other Transactions may be abandoned at any time prior to the Effective
Time, notwithstanding any approval or adoption of this Agreement and the
Transactions by the stockholders of the Company and/or Parent:
(a) By mutual written consent duly authorized by the boards of directors
of Parent, Purchaser and the Company;
(b) By either Parent or the Company if: (i) the Effective Time shall not
have occurred on or before September 30, 1999 or such later date as Parent and
the Company shall agree to in writing; provided, however, that the right to
terminate this Agreement under this Section 7.1(b) shall not be available to any
party if the failure to consummate the Merger is the result of willful breach of
this Agreement by the party seeking to terminate this Agreement; or (ii) there
shall have occurred (A) any general suspension of, or limitation on prices for,
trading in securities on the NYSE and/or the Nasdaq Stock Market, Inc. which
shall have continued for five (5) Business Days and is in effect on the date of
such termination, or (B) a declaration of a banking moratorium or any suspension
of payments in respect of banks in the United States, which shall have continued
for five (5) Business Days and is in effect on the date of such termination;
(c) by either Parent or the Company if a court of competent jurisdiction
or other Governmental Entity shall have issued a final and nonappealable order,
decree or ruling, or shall have taken any other action, having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger;
(d) by either Parent or the Company if (i) Parent Shareholders' Meeting
(including any adjournments thereof) shall have been held and completed and
Parent's shareholders shall have taken a final vote on a proposal to approve the
issuance of the shares of Parent Common Stock to be issued in the Merger and to
approve and adopt this Agreement, the Merger and the Certificate of Amendment
and (ii) the issuance of shares of Parent Common Stock, the Merger, this
Agreement and the Certificate of Amendment shall not have been adopted and
approved at such meeting by the required affirmative vote of Parent
shareholders; provided, however, that Parent shall not be permitted to terminate
this Agreement pursuant to this Section 7.1(d) if the failure of Parent's
shareholders to approve the issuance of the Parent Common Stock and to adopt and
approve this Agreement, the Merger and the Certificate of Amendment at Parent
Shareholders' Meeting is attributable to a failure on the part of Parent to
perform any material obligation required to have been performed by Parent under
this Agreement;
(e) by either the Company or Parent if (i) the Company Stockholders'
Meeting (including any adjournments thereof) shall have been held and completed
and the Company's stockholders shall have taken a final vote on a proposal to
approve and adopt this Agreement and the Merger and (ii) this Agreement and the
Merger shall not have been adopted and approved at such meeting by the required
affirmative vote of the Company stockholders; provided, however, that Company
shall not be permitted to terminate this Agreement pursuant to this Section
7.1(e) if the failure of the Company's stockholders to adopt and approve this
Agreement and the Merger at the Company
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Stockholders' Meeting is attributable to a failure on the part of the Company to
perform any material obligation required to have been performed by the Company
under this Agreement; or
(f) at any time prior to the adoption and approval of this Agreement and
the Merger by the Company's stockholders and Parent's shareholders, (i) by the
Company if a Parent Triggering Event shall have occurred, or (ii) by Parent if a
Company Triggering Event shall have occurred;
(g) by either party if any of the other party's covenants contained in
this Agreement shall have been breached in any respect whereby such breach shall
have resulted in a Material Adverse Effect on the non-breach party; provided,
however, that if a breach of a covenant by a party is curable by such party and
such party is continuing to exercise all reasonable efforts to cure such breach,
then the other party may not terminate this Agreement under this Section 7.1(g)
on account of such breach and provided, further, that a party may not terminate
this Agreement pursuant to this Section 7.1(g) if it shall have materially
breached this Agreement;
(h) by the Company in the event that the board of directors of the
Company determines in good faith after consultation with Cooley Godward LLP that
the failure to terminate this Agreement may constitute a breach of the board of
directors' fiduciary duty to the stockholders of the Company, provided that the
Company may not terminate this Agreement under this Section 7.1(h) as a result
of a change in the trading prices of either the Company's or Parent's equity
securities; or
(i) by Parent in the event that the board of directors of Parent
determines in good faith after consultation with Herrick, Feinstein LLP that
failure to terminate this Agreement may constitute a breach of the board of
directors' fiduciary duty to the shareholders of Parent provided that Parent may
not terminate this Agreement under this Section 7.1(i) as a result of a change
in the trading prices of either the Company's or Parent's equity securities.
SECTION 7.2 Effect of Termination. The termination of this Agreement shall
be effectuated by the delivery by the party terminating this Agreement to each
other party of a written notice of such termination. In the event of the
termination of this Agreement pursuant to Section 7.1, this Agreement shall
forthwith become void, and (i) neither Parent, Purchaser nor the Company shall
be obligated to perform its obligations under this Agreement except as set forth
in Sections 5.12, 7.3 and 8.1, and (ii) nothing herein shall relieve any party
from liability for any willful or material breach of such party's
representations and warranties.
SECTION 7.3 Fees and Expenses.
(a) In the event that this Agreement is terminated by Parent or the
Company pursuant to Section 7.1(e), the Company shall pay Parent not later than
one (1) Business Day after such termination in immediately available funds a
cash fee equal to one hundred twenty percent (120%) of all out-of-pocket
expenses and fees (including, without limitation, fees and expenses payable to
all investment banking firms structuring the Transactions and all reasonable
fees of counsel, accountants, experts and consultants to Parent and Purchaser,
and all printing expenses) incurred or accrued by Parent and Purchaser in
connection with the negotiation, preparation, execution and performance of this
Agreement.
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(b) In the event that this Agreement is terminated by Parent or the
Company pursuant to Section 7.1(d), Parent shall pay the Company not later than
one (1) Business Day after such termination in immediately available funds a
cash fee equal to one hundred twenty percent (120%) of all out-of-pocket
expenses and fees (including, without limitation, fees and expenses payable to
all investment banking firms, structuring the Transactions and all reasonable
fees of counsel, accountants, experts and consultants to the Company and all
printing expenses) incurred or accrued by the Company in connection with the
negotiation, preparation, execution and performance of this Agreement.
(c) In the event that this Agreement is terminated by the Company
pursuant to Section 7.1(f)(i) or by Parent pursuant to Section 7.1(i), Parent
shall pay the Company not later than one (1) Business Day after such termination
in immediately available funds a cash fee equal to $2,500,000.
(d) In the event that this Agreement is terminated by Parent pursuant to
Section 7.1(f)(ii) or by the Company pursuant to Section 7.1(h) the Company
shall pay Parent not later than one (1) Business Day after such termination in
immediately available funds a cash fee equal to $2,500,000.
(e) Notwithstanding anything contained in Section 7.3(a) or 7.3(b) to
the contrary, the amount payable pursuant to Section 7.3(a) or 7.3(b), as the
case may be, shall not exceed $2,500,000 in the aggregate.
(f) Except as set forth in this Section 7.3, all costs and expenses
incurred in connection with this Agreement and the Transactions shall be paid by
the party incurring such expenses, whether or not the Merger is consummated.
(g) Any amounts owed by the Company pursuant to Section 7.3(a) and any
amounts owed by Parent pursuant to Section 7.3(b) shall be deemed to include the
costs and expenses actually incurred or accrued by such party (including,
without limitation, reasonable fees and expenses of counsel) in connection with
the collection under and enforcement of this Section 7.3, together with interest
on such unpaid amounts, commencing on the date that the fee became due, at a
rate equal to the lesser of: (x) the rate of interest publicly announced by
Citibank, N.A., from time to time, in the City of New York, as such bank's Base
Rate plus eight percent (8%), and (y) the maximum rate permitted by law.
SECTION 7.4 Amendment. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective Boards of Directors at any
time prior to the Effective Time; provided, however, that, after the approval
and adoption of this Agreement and the transactions contemplated hereby by the
stockholders of Parent and the Company, no amendment may be made which would
reduce the amount or change the type of consideration into which each share of
Company Common Stock or Company Preferred Stock shall be converted upon
consummation of the Merger. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
SECTION 7.5 Waiver. At any time prior to the Effective Time, any party
hereto may (i) extend the time for the performance of any obligation or other
act of any other party hereto, (ii) waive any inaccuracy in the representations
and warranties contained herein or in any document delivered pursuant hereto and
(iii) waive compliance with any agreement or condition contained herein, except
that Parent shall not waive any obligation, representation, warranty, agreement
or condition of Purchaser and Purchaser shall not waive any obligation,
representation, warranty, agreement or condition of Parent. Any such
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extension or waiver shall be valid if set forth in an instrument in writing
signed by the party or parties to be bound thereby.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 7.1, as the case may be, except that the agreements set
forth in Section 5.12 and Section 7.3 shall survive termination indefinitely.
SECTION 8.2 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, telecopy or
by registered or certified mail (postage prepaid, return receipt requested) or
by overnight courier, facsimile to the respective parties at the following
addresses (or at such other address for a party as shall be specified in a
notice given in accordance with this Section 8.2):
if to Parent or Purchaser:
BOX HILL SYSTEMS CORP. and
BH ACQUISITION CORP.
161 Avenue of the Americas
New York, New York 10017
Telephone No: (212) 989-6817
Attn: Carol Turchin
with a copy to:
Herrick, Feinstein LLP
Two Park Avenue
New York, New York 10016
Telecopier No: (212) 889-7577
Attn: Irwin A. Kishner, Esq.
if to the Company:
ARTECON, INC.
6305 El Camino Real
Carlsbad, California 92009
Telecopier No: (760) 431-4419
Attn: James Lambert
with a copy to:
Cooley Godward LLP
4365 Executive Drive
Suite 1100
San Diego, CA 92121
Telecopier No: (619) 550-6000
Attn: Thomas A. Coll, Esq.
SECTION 8.3 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other
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conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the Transactions
is not affected in any manner adverse to any party. Upon such determination that
any term or other provision is invalid, illegal or incapable of being enforced,
the parties hereto shall negotiate in good faith to modify this Agreement so as
to effect the original intent of the parties as closely as possible in a
mutually acceptable manner in order that the Transactions be consummated as
originally contemplated to the fullest extent possible.
SECTION 8.4 Entire Agreement; Assignment. This Agreement constitutes the
entire agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements and undertakings, both written and oral, among
the parties, or any of them, with respect to the subject matter hereof. This
Agreement shall not be assigned by operation of law or otherwise, without the
prior written consent of the other parties.
SECTION 8.5 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other Person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 8.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York governing
agreements made wholly within the State of New York.
SECTION 8.7 Headings. The descriptive headings contained in this Agreement
are included for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 8.8 Interpretation. Any word or term used in this Agreement in any
form shall be masculine, feminine, neuter, singular or plural, as proper reading
requires. The words "herein", "hereof", "hereby" or "hereto" shall refer to this
Agreement unless otherwise expressly provided. Any reference herein to a Section
or any exhibit or schedule shall be a reference to a Section of, and an exhibit
or schedule to, this Agreement unless the context otherwise requires.
SECTION 8.9 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
[SIGNATURE PAGE TO FOLLOW]
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IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
<TABLE>
<S> <C>
BOX HILL SYSTEMS CORP.
By: /s/ PHILIP BLACK
----------------------------------------------
Name: Philip Black
Title: Chief Executive Officer
Attest: BH ACQUISITION CORP.
- --------------------------------------------- By: /s/ PHILIP BLACK
----------------------------------------------
Name: Philip Black
Title: President
Attest: ARTECON, INC.
- --------------------------------------------- By: /s/ JAMES L. LAMBERT
----------------------------------------------
Name: James L. Lambert
Title: President and Chief Executive Officer
</TABLE>
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APPENDIX B
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BOX HILL SYSTEMS CORP.
(UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW)
HERRICK, FEINSTEIN LLP
2 PARK AVENUE, 21ST FLOOR
NEW YORK, NEW YORK 10016
ATTN: DAVID LUBIN, ESQ.
(212) 592-1400
B-1
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AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BOX HILL SYSTEMS CORP.
(UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW)
We, Philip Black and Mark Mays, being respectively the President and
Secretary of Box Hill Systems Corp., in accordance with Section 807 of the
Business Corporation Law do hereby certify:
FIRST: The name of the corporation is Box Hill Systems Corp.
SECOND: The certificate of incorporation was filed by the Department of
State on April 5, 1988.
THIRD: The certificate of incorporation as now in full force and effect is
hereby amended to effect the following changes authorized by Section 801 of the
Business Corporation Law: to change the name of the Corporation to provide that
the board of directors of the Corporation be divided into three classes, and to
set the number of directors of each class and their respective terms of office.
The certificate of incorporation is hereby restated to set forth its entire text
as amended as follows.
FIRST: The name of the corporation is [ ], hereinafter
sometimes called the "Corporation".
SECOND: The purposes for which the Corporation is formed are as follows:
To engage in any lawful act or activity for which corporations may be
organized under the business corporation law, provided that the
corporation is not formed to engage in any act or activity which
requires the act or approval of any state official, department, board,
agency or other body without such approval or consent first being
obtained.
To manufacture, make, buy sell, exchange, install, repair, service,
supply, exploit, develop, protect and generally trade and deal in (as
principal or agent) products, processes and techniques of all kinds
pertaining or related to or connected with electronics and related
industries, including, without limitation, equipment, parts and
components for radio, television and phonograph, products for military
electronics and industrial electronics, transistors, rectifiers, diodes
and other semiconductors of every kind and description, aircraft,
missile and other airborne apparatus surveillance systems, beaconry,
radio transmitting, receiving and relay equipment, microwave equipment,
telephone and telegraph terminal equipment, air traffic control devices,
telephone and telegraph terminal equipment, air traffic control devices,
communications equipment, meteorological devices, transducers and other
acoustical devices, electronic cleaning equipment, fixed and variable
capacitors, delay lines and pulse forming networks, television tuners,
deflection components, transformers, power generators and other power
supply and silicon supplies and crystals, cast germanium, resistors,
computer components, thin films, intermetallics and other advanced solid
state techniques, and electrophotographic processes.
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To develop, experiment with, conduct research on, connect, manufacture,
produce, assemble, buy, rent or otherwise acquire, hold, own, operate,
use, install, equip, replace, maintain, service, process, reprocess,
repair, remodel, recondition, import, export, sell, lease, market,
distribute, transport or otherwise dispose of and generally to deal in
and with, as contractor, subcontractor, principal, agent, commission
merchant, broker, factor or any combination of the foregoing and at
wholesale or retail or both, any and all kinds of computer hardware and
computer software and all allied apparatus, systems, parts, supplies,
tools, implements, raw materials, natural products, manufactured
articles and products, and goods, wares, merchandise and tangible
property of every kind, use or capable of being used for any purpose
whatever.
To engage in research and development, purchase, sale, import, export,
license, distribution, manufacture, or rental of any product, machine,
apparatus, appliance merchandise and property of every kind and
description, ideas, systems and procedures of any nature, including,
without limiting the generality of the foregoing, all types of products
which possess an internal intelligence for recognizing and correlating
any type of data or information to be processed, pattern interpretation,
recognition and memory systems and equipment, optical scanning, analog,
and digital computers, components, all types of electrical, mechanical,
electro-mechanical and electronic products and systems such as for
analysis of visible, radar, sonar or other inputs, voice recognition and
identification of voice elements and magnetic storage and drums.
To acquire by purchase, subscription, underwriting or otherwise, and to
own, hold for investment, or otherwise, and to use, sell, assign,
transfer, mortgage, pledge, exchange or otherwise dispose of real and
personal property of every sort and description and wheresoever
situated, including shares of stock, bonds, debentures, notes, scrip,
securities, evidences of indebtedness, contracts or obligations of any
corporation or association, whether domestic or foreign, or of any firm
or individual or of the United States or any state, territory or
dependency of the United States or foreign country, or any municipality
or local authority within or without the United States, and also to
issue in exchange therefor, stocks, bonds, or other securities or
evidences of indebtedness of this corporation and, while the owner or
holder of any such property, to receive, collect and dispose of the
interest, dividends and income on or from such property and to possess
and exercise in respect thereto all of the rights, powers and privileges
of ownership, including all voting powers thereon.
To construct, build, purchase, lease or otherwise acquire, equip, hold,
own, improve, develop, manage, maintain, control, operate, lease,
mortgage, create liens upon, sell, convey or otherwise dispose of and
turn to account, any and all plants, machinery, works, implements and
things or property, real and personal, of every kind and description,
incidental to, connected with, or suitable, necessary or convenient for
any of the purposes enumerated herein, including all or any part or
parts of the properties, assets, business and good will of any persons,
firms, associations or corporations.
The powers, rights and privileges provided in this certificate are not
to be deemed to be in limitation of similar, other or additional powers,
rights and privileges granted or permitted to a corporation by the
Business Corporation Law, it being
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intended that this corporation shall have all the rights, powers and
privileges granted or permitted to a corporation by such statute.
THIRD: The office of the Corporation is to be located in the County of New
York, State of New York.
FOURTH: The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is Forty Five Million (45,000,000),
which shall consist of (i) Forty Million (40,000,000) shares of common stock,
par value $.01 per share and (ii) Five Million (5,000,000) shares of preferred
stock, par value $.01 per share. The preferred stock shall have the
designations, rights and preferences as determined from time to time by the
Board of Directors.
FIFTH: The Secretary of State of the State is designated as the agent of
the Corporation upon whom process against it may be served. The post office
address to which the Secretary of State of the State of New York shall mail a
copy of any process against the Corporation served upon him is:
The Corporation
161 Sixth Avenue
New York, New York 10013
SIXTH: The personal liability of directors to the corporation or its
shareholders for damages for any breach of duty in such capacity is hereby
eliminated except that such personal liability shall not be eliminated if a
judgment or other final adjudication adverse to such director establishes that
his acts or omissions were in bad faith or involved intentional misconduct or a
knowing violation of law or that he personally gained in fact a financial profit
or other advantage to which he was not legally entitled or that his acts
violated Section 719 of the Business Corporation Law.
SEVENTH: The board of directors of the corporation shall consist of three
classes, and the directors of each class shall be designated Class I Directors,
Class II Directors and Class III Directors, respectively. The initial term of
the Class I Directors shall expire on the date of the next annual meeting of
shareholders following the filing of this certificate, the initial term of the
Class II Directors shall terminate on the date of the second annual meeting of
shareholders following the filing of this certificate and the initial term of
the Class III Directors shall expire on the date of the third annual meeting of
shareholders following the filing of this certificate. At each such annual
meeting, directors shall be elected for a full term of three years to succeed
those directors whose terms expire at such annual meeting.
There shall initially be two (2) Class I Directors, three (3) Class II
Directors and three (3) Class IV Directors.
The directors of the Corporation shall have the right to appoint members of
committees thereof by plurality vote of the entire board, in accordance with the
Corporation's by-laws.
EIGHTH: Any director may be removed for cause at any time by majority vote
of the additional directors. Vacancies so created, or created by the resignation
of any director, shall be filled by a majority vote of the remainder of the
board.
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IN WITNESS WHEREOF, we have hereunto signed our names and affirm this
certificate as of , 1999.
<TABLE>
<CAPTION>
- ------------------------------------- -------------------------------------
<S> <C>
Philip Black Mark Mays
President Secretary
</TABLE>
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APPENDIX C
OPINION OF SALOMON SMITH BARNEY INC.
[SALOMON SMITH BARNEY INC. LETTERHEAD]
April 29, 1999
Board of Directors
Box Hill Systems Corp.
161 Avenue of the Americas
New York, New York 10013
Ladies and Gentlemen:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to Box Hill Systems Corp. ("Box Hill") of the
Exchange Ratio (as defined below) and the Preferred Exchange Ratio (as defined
below) in connection with the proposed merger (the "Proposed Merger") of BH
Acquisition Corp., a wholly owned subsidiary of Box Hill ("Merger Sub"), with
and into Artecon, Inc. (the "Company"), pursuant to the Agreement and Plan of
Merger (the "Agreement"), dated as of April 29, 1999, among Box Hill, Merger Sub
and the Company.
As more specifically set forth in the Agreement, and subject to the terms
and conditions thereof, Merger Sub will merge with and into the Company, and
each issued and outstanding share of common stock, par value $0.005 per share
(the "Company Common Stock"), of the Company (except shares of Company Common
Stock owned by the Company, Box Hill or any of their respective subsidiaries),
will be converted in the Proposed Merger into the right to receive 0.40 (the
"Exchange Ratio") of a share of common stock, par value $0.01 per share (the
"Box Hill Common Stock"), of Box Hill. In addition, each outstanding share of
the Series A Preferred Stock, par value $0.005 per share, of the Company, will
be converted in the Proposed Merger into the right to receive a number (the
"Preferred Exchange Ratio") of shares of Box Hill Common Stock equal to (A) (i)
$4,988,318, divided by (ii) the average closing price per share of Box Hill
Common Stock for the twenty trading-day period ending on the last trading day
immediately prior to the Closing Date (as defined in the Agreement), divided by
(B) 2,494,159.
In connection with rendering our opinion we have reviewed and analyzed,
among other things, the following: (i) the Agreement; (ii) certain publicly
available information concerning Box Hill, including the Annual reports on form
10-K of Box Hill for each of the years in the two-year period ended December 31,
1998; (iii) certain other internal information, primarily financial in nature,
including projections, concerning the business, assets and operations of Box
Hill, furnished to us by Box Hill for purposes of our analysis; (iv) certain
publicly available information concerning the trading of, and the trading market
for, Box Hill Common Stock; (v) certain publicly available information
concerning the Company, including the Annual reports on Form 10-K of the Company
for the fiscal years ended December 31, 1997 and March 31, 1998 and the
Quarterly reports on Form 10-Q of the Company for the quarters ended June 30,
1998, September 30, 1998 and December 31, 1998; (vi) certain other internal
information, primarily financial in nature, including projections, concerning
the business, assets and operations of the Company, furnished to us by the
Company for the purposes of our analysis; (vii) certain publicly available
information concerning the trading of, and the trading market for, Company
Common Stock; (viii) certain publicly available information with respect to
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certain other companies that we believe to be comparable to Box Hill or the
Company and the trading markets for certain of such other companies' securities;
and (ix) certain publicly available information concerning the nature and terms
of certain other transactions that we consider relevant to our inquiry. We also
have considered such other information, financial studies, analyses,
investigations and financial, economic and market criteria that we deemed
relevant. We also have met with certain officers and employees of Box Hill and
the Company to discuss the foregoing, as well as other matters we believe
relevant to the Company.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available and have neither attempted
independently to verify nor assumed responsibility for verifying any of such
information. We have not conducted a physical inspection of any of the
properties or facilities of Box Hill or the Company, nor have we made or
obtained, or assumed any responsibility for making or obtaining, any independent
evaluations or appraisals of any of such properties or facilities. With respect
to projections, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of Box Hill or the Company, as the case may be, and we express no
view with respect to such projections or the assumptions on which they were
based. We also have assumed that the Proposed Merger will be consummated in a
timely manner and in accordance with the terms of the Agreement, without waiver
of any of the conditions precedent to the Proposed Merger contained in the
Agreement. We understand, and have assumed, that the Proposed Merger will
qualify as a tax-free reorganization under the provisions of Section 368 of the
Internal revenue Code of 1986, as amended, and that the proposed Merger will be
accounted for as a pooling of interests for financial reporting purposes.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors we have deemed appropriate
under the circumstances including, among others, the following: (i) the
historical and current financial position and results of operations of Box Hill
and the Company; (ii) the business prospects of Box Hill and the Company; (iii)
the historical and current market for Box Hill Common Stock, Company Common
Stock and for the equity securities of certain other companies that we believe
to be comparable to Box Hill or the Company; and (iv) the nature and terms of
certain other merger transactions that we believe to be relevant. We have not
been asked to consider, and our opinion does not address, the relative merits of
the Proposed Merger as compared to any alternative business strategy that might
exist for Box Hill. Our opinion necessarily is based upon conditions as they
exist and can be evaluated on the date hereof, and we assume no responsibility
to update or review our opinion based on circumstances or events occurring after
the date hereof. Our opinion is, in any event, limited to the fairness, from a
financial point of view, of the Exchange Ratio and the Preferred Exchange Ratio
to Box Hill and does not address Box Hill's underlying business decision to
effect the Proposed Merger. Nor does this opinion constitute a recommendation of
the Proposed Merger to Box Hill or a recommendation to any holder of Box Hill
Common Stock as to how such holder should vote with respect to the Proposed
Merger. Nor does our opinion constitute an opinion or imply any conclusion as to
the likely trading range for Box Hill Common Stock following consummation of the
Proposed Merger.
As you are aware, Salomon Smith Barney Inc. ("Salomon Smith Barney") is
acting as financial advisor to Box Hill in connection with the Proposed Merger
and will receive certain fees for our services, a substantial portion of which
fees is contingent on
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consummation of the Proposed Merger. In addition, in the ordinary course of
business, Salomon Smith Barney and its affiliates may actively trade the
securities of Box Hill and the Company for their own accounts and for the
accounts of customers and, accordingly, may at any time hold a short or long
position in such securities. We or our predecessors or affiliates previously
have rendered certain investment banking and financial advisory services to Box
Hill and the Company, for which we or such predecessors or affiliates received
customary compensation. Salomon Smith Barney and its affiliates (including
Citigroup Inc. and its affiliates) may have other business and financial
relationships with Box Hill or the Company.
This opinion is intended for the benefit and use of Box Hill (including its
management and directors) in considering the transaction to which it relates and
may not be used by Box Hill for any other purpose or reproduced, disseminated,
quoted or referenced to by Box Hill at any time, in any manner or for any
purpose, without the prior written consent of Salomon Smith Barney, except that
this opinion may be reproduced in full, and references to the opinion and to
Salomon Smith Barney and its relationship with Box Hill (in each case in such
form as Salomon Smith Barney may approve) may be included in any proxy statement
or prospectus relating to the Proposed Merger that Box Hill files with the U.S.
Securities and Exchange Commission and distributes to holders of Box Hill Common
Stock in connection with the Proposed Merger. Based upon and subject to the
foregoing, we are of the opinion as investment bankers that, as of the date
hereof, the Exchange Ratio and the Preferred Exchange Ratio are fair, from a
financial point of view, to Box Hill.
Very truly yours,
/s/ Salomon Smith Barney Inc.
SALOMON SMITH BARNEY INC.
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APPENDIX D
OPINION OF TUCKER ANTHONY INCORPORATED
TUCKER ANTHONY INCORPORATED LETTERHEAD
April 29, 1999
Board of Directors
Artecon, Inc.
6305 El Camino Real
Carlsbad, CA 92009-1606
Gentlemen:
We understand that Artecon, Inc., a Delaware corporation ("Artecon" or the
"Company"), is contemplating a merger (the "Artecon Merger") with BH Acquisition
Corp., a Delaware corporation (the "Merger Sub"), a wholly-owned subsidiary of
Box Hill Systems Corp., a New York corporation ("Box Hill") pursuant to an
Agreement and Plan of Merger dated as of April 29,1999, (the "Merger
Agreement"). We further understand that James L. Lambert, W.R. Sauey, Dana
Kammersgard and their affiliates (the "Artecon Principal Shareholders") who
beneficially own an aggregate of 10,157,402 shares of the Company's Common Stock
and all of the 2,494,159 outstanding shares of Series A Preferred Stock, par
value $.005 (the "Artecon Preferred Stock") have entered into agreements with
Box Hill dated as of April 29, 1999, pursuant to which they have agreed, subject
to the terms and conditions thereof, to vote in favor of the Artecon Merger (the
"Shareholder Agreements").
Pursuant to the Merger Agreement, each share of common stock, par value of
$0.05 of the Company ("Artecon Common Stock") shall be converted into and
exchanged for the right to receive .40 of a share of common stock, par value
$0.01, of Box Hill ("Box Hill Common Stock"). The Artecon Preferred Stock will
be exchanged for Box Hill Common Stock based upon its liquidation value and the
closing stock price of Box Hill Common Stock on the trading day immediately
preceding the closing. The shares of Box Hill Common Stock to be received by the
holders of Artecon Common Stock and Artecon Preferred Stock is referred to
herein as the "Consideration". Additionally, 1,762,254 Artecon stock options
shall be exchanged for Box Hill stock options. We understand and have assumed
that the Artecon Merger will constitute a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code and will be treated as a
pooling-of-interests for accounting purposes.
You have requested our opinion (the "Opinion") as to whether the
Consideration as provided for in the Merger Agreement to be received by the
holders of the Artecon Common Stock and Artecon Preferred Stock, is fair, from a
financial point of view, to the holders of Artecon Common Stock and Artecon
Preferred Stock.
Tucker Anthony Incorporated ("Tucker Anthony"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and for corporate and other purposes. We have
in the ordinary course of business, provided our clients with research coverage
of the Company and Box Hill. In addition, in the ordinary course of our
business, we actively trade the securities of the Company for our own account
and the securities of the Company and Box Hill for the accounts of customers and
accordingly, may at any time hold a long or short position in such securities.
Tucker Anthony has acted as the Company's financial advisor in connection with,
and has
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participated in the negotiations leading to, the Artecon Merger. Tucker Anthony
will receive fees for rendering this opinion and for acting as financial
advisor, a substantial portion of such advisory fee is contingent upon the
closing of the Artecon Merger. Tucker Anthony has not provided investment
banking services to Box Hill.
In arriving at the Opinion, we have, among other things:
(i) reviewed, as set forth below, the most recently available draft of
the Merger Agreement, including exhibits thereto;
(ii) reviewed certain historical financial and other information
concerning the Company for the three fiscal years ended March 31, 1998 and
preliminary results for the fiscal year ended March 31, 1999, including publicly
available financial information on Artecon's Quarterly Reports on Form 10-Q for
the quarterly periods ending December 31, 1998 and Artecon's Proxy Statement
dated March 9, 1998;
(iii) reviewed certain historical financial and other information
concerning Box Hill including its Prospectus dated September 16, 1997; its proxy
statement dated March 31, 1998 and its Annual Report on Form 10-K for the fiscal
years ended December 31, 1997 and 1998;
(iv) reviewed certain other information, including publicly available
information relating to the business, earnings, cash flow, assets and prospects
of Artecon and Box Hill, respectively;
(v) held discussions with the senior management of the Company and Box
Hill with respect to their past and current business, operations, assets and
financial performance, financial condition and future prospects;
(vi) reviewed certain internal financial and other information of the
Company and Box Hill including financial projections provided to us by their
respective managements;
(vii) analyzed certain financial information, operating statistics and
market trading information of publicly traded companies that we deemed
comparable or otherwise relevant to our inquiry, and compared the Company from a
financial point of view with these companies; analyzed certain financial and
operating statistics of publicly traded companies that we deemed comparable or
otherwise relevant to our inquiry, and compared Box Hill from a financial point
of view with these companies;
(viii) compared the Consideration with the consideration received by
shareholders in other acquisitions of companies that we deemed comparable or
otherwise relevant to our inquiry;
(ix) reviewed the market prices, historical trading activity and
ownership data of the Artecon Common Stock and Box Hill Common Stock and
considered the prospects for price movements; and
(x) conducted such other financial studies and analyses and reviewed
such other information as we deemed appropriate to enable us to render the
Opinion. In our review, we have also taken into account an assessment of general
economic and business conditions and certain industry trends and related
matters.
In our review and analysis and in arriving at the Opinion, we have assumed
and relied upon the accuracy and completeness of all the financial and other
information provided to us by the Company and Box Hill or that is publicly
available, and have not attempted to verify any of such information. We have
assumed (i) the financial projections of the
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Company and Box Hill have been reasonably prepared on a basis reflecting the
best currently available estimates and judgments of the Company's and Box Hill's
managements as to future financial performance and (ii) that such projections
will be realized in the amounts and time periods currently estimated by the
respective managements. We did not make or obtain any independent evaluation or
appraisals of any assets or liabilities of the Company or Box Hill. The Opinion
is necessarily based upon prevailing market conditions (including current market
prices for the Artecon Common Stock and Box Hill Common Stock) and other
circumstances and conditions as they exist and can be evaluated as of the date
hereof, and does not represent our opinion as to what the actual value of the
Artecon Common Stock or Box Hill Common Stock will be after the date hereof. We
disclaim any undertakings or obligations to advise any person of any change in
any fact or matter affecting the Opinion which may come or be brought to our
attention after the date of the Opinion.
For the purposes of the Opinion, we have not been asked to consider, and we
have not considered, the effect of any federal, state or local tax laws on the
holders of Artecon Common Stock or Artecon Preferred Stock and have confined our
review to the receipt by the holders of Artecon Common Stock and Artecon
Preferred Stock of the Consideration provided for in the Merger Agreement.
Further, we have not addressed the terms of the Shareholder Agreements and make
no statements as to the fairness of these agreements.
This letter is being furnished for the use and benefit of the Company's
Board of Directors in evaluating the fairness, from a financial point of view,
of the Consideration to be received by the holders of Artecon Common Stock and
Artecon Preferred Stock. The Opinion does not constitute a recommendation as to
any action the Board of Directors of the Company or any shareholder of the
Company should take in connection with the Artecon Merger or any aspect thereof.
We hereby consent, however, to the inclusion of the Opinion as an exhibit or
annex to any proxy or registration statement filed in connection with the
Artecon Merger. The Opinion rendered herein is given as of the date hereof, and
is limited in scope and subject matter as set forth herein. No other opinions
should be inferred beyond the opinion expressly stated herein.
Based upon and subject to the foregoing, it is our Opinion that, as of the
date hereof, the Consideration to be received by the holders of Artecon Common
Stock and Artecon Preferred Stock pursuant to the Merger Agreement is fair, from
a financial point of view, to the holders of Artecon Common Stock and Artecon
Preferred Stock.
Very truly yours,
TUCKER ANTHONY INCORPORATED
By: /s/ WILLIAM E. ROMAN
-----------------------------------
William E. Roman
Managing Director
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APPENDIX E
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS.
(a) Any shareholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the shareholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "shareholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the shareholders entitled to receive notice of and to vote at the meeting of
shareholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the shareholders of the surviving
corporation as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to sec.sec. 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
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c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
shareholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its shareholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each shareholder electing to demand the appraisal of
such shareholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
shareholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the shareholder and that the shareholder
intends thereby to demand the appraisal of such shareholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
shareholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
shareholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to sec. 228 or
sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
shareholders of the effective date of the merger or consolidation. Any
shareholder entitled to appraisal rights
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<PAGE> 313
may, within 20 days after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably informs the corporation
of the identity of the shareholder and that the shareholder intends thereby to
demand the appraisal of such holder's shares. If such notice did not notify
shareholders of the effective date of the merger or consolidation, either (i)
each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to each shareholder who
is entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the shareholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if the notice is
given on or after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any shareholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such shareholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any shareholder shall have the right to
withdraw such shareholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any shareholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the shareholder within 10 days
after such shareholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a shareholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all shareholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail
E-3
<PAGE> 314
to the surviving or resulting corporation and to the shareholders shown on the
list at the addresses therein stated. Such notice shall also be given by 1 or
more publications at least 1 week before the day of the hearing, in a newspaper
of general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
shareholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the shareholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any shareholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such shareholder.
(h) After determining the shareholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any shareholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the shareholder entitled to an appraisal. Any
shareholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such shareholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such shareholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
shareholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such shareholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a shareholder, the Court may order all or a portion of the
expenses incurred by any shareholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
shareholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to shareholders of record at a date which is prior
to the effective date of the merger or consolidation);
E-4
<PAGE> 315
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such shareholder
shall deliver to the surviving or resulting corporation a written withdrawal of
such shareholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such shareholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any shareholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting shareholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
E-5
<PAGE> 316
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The certificate of incorporation of the Registrant provides that a director
of the Registrant shall not be liable to the Registrant or its shareholders for
damages for any breach of duty in such capacity unless a judgment or other final
adjudication adverse to such director establishes that his acts or omissions
were in bad faith or involved intentional misconduct or a knowing violation of
law or that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled or that his or her acts
violated Section 719 of the New York Business Corporation Law.
The by-laws of the Registrant further provide that the Registrant shall
indemnify any officer or director of the Registrant for his or her reasonable
expenses, including attorneys' fees, actually and necessarily incurred by him or
her in connection with his or her defense of any action (except an action by the
Registrant in its own right) to which he or she becomes a party by reason of the
fact that such individual served as an officer or director or employee of the
Registrant or of any corporation in which he or she served at the request of the
Registrant, unless judgment or final adjudication adverse to the officer or
director establishes that his or her acts were committed in bad faith or were
the result of active and deliberate dishonesty and were material to the cause of
action so adjudicated, or that he or she personally gained in fact a financial
profit or other advantage to which he or she was not legally entitled.
Section 722 of the New York Business Corporation Law provides, in
substance, that New York corporations may indemnify their directors and officers
in connection with actions or proceedings (other than one by or in the right of
the corporation to procure a judgment in its favor) brought against such
directors or officers, including actions brought against such directors or
officers by or in the right of any other corporation, by reason of the fact that
they are or were such directors or officers, against judgements, fines, amounts
paid in settlement and reasonable expenses.
The Registrant's employment agreements with Dr. Benjamin Monderer, Ms.
Carol Turchin and Mr. Mark Mays, all executive officers and directors of the
company, its compensation agreement with Mr. Philip Black, a director of the
Registrant and its Chief Executive Officer, and an agreement with Mr. Finis
Conner, a former director of the Registrant, provide for the indemnification of
those individuals to the extent of the foregoing.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- -------- ------- -----------------------
<C> <S> <C>
(3) 2.1 Agreement and Plan of Merger by and among the Registrant, BH
Acquisition Corp. and Artecon, Inc. ("Artecon") dated as of
April 29, 1999.*
(1) 3.1 Registrant's Certificate of Incorporation.
(1) 3.2 Registrant's Amended and Restated Bylaws.
3.3 Registrant's Amended and Restated Certificate of
Incorporation. See Appendix B to the prospectus/joint proxy
statement.
3.4 Certificate of Incorporation of BH Acquisition Corp.
("Merger Sub").
3.5 Bylaws of Merger Sub.
</TABLE>
II-1
<PAGE> 317
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- -------- ------- -----------------------
<C> <S> <C>
(1) 4.1 Form of Registrant's Common Stock Certificate.
5.1 Opinion of Herrick, Feinstein LLP.
8.1 Tax Opinion of Herrick, Feinstein LLP.
8.2 Tax Opinion of Cooley Godward LLP.
(1) 9.1 Voting Agreement dated July 31, 1997 among Dr. Monderer, Ms.
Turchin and Mr. Mays.
(3) 9.2 Form of Box Hill Voting Agreement dated as of April 29, 1999
entered into between certain shareholders of the Registrant
and Artecon.
(3) 9.3 Form of Artecon Voting Agreement dated as of April 29, 1999
entered into between certain stockholders of Artecon and the
Registrant.
(1) 10.1 Compensation Plan and agreement between the Registrant and
Philip Black.
(1) 10.2 Employment Agreement between the Registrant and Carol
Turchin.
(1) 10.3 Employment Agreement between the Registrant and Benjamin
Monderer.
(1) 10.4 Employment Agreement between the Registrant and Mark Mays.
(1) 10.5 Incentive Program of the Registrant, as amended.
(1) 10.6 License Agreement with Emulex Corporation.
(1) 10.7 Lease Agreement, dated as of December 23, 1993, as extended
and modified, related to the Registrant's facilities in New
York City.
(1) 10.8 Employee Stock Purchase Plan.
(2) 10.9 Lease Modification Agreement.
(2) 10.10 1999 Compensation Plan and Agreement between the Registrant
and Philip Black.
(4) 10.11 Form of Affiliate Agreement to be entered into by and
between the Registrant, Artecon and each of Philip Black,
Benjamin Monderer, Carol Turchin, Mark A. Mays, Mischa
Schwartz, Benjamin Brussell, Monderer 1999 GRAT u/a/d March
1999, Robert C. Miller, Elizabeth Strong, Adam T. Temple,
Kenneth Pitz, R. Robert Rebmann, Jr., Tom Loomis and Daniel
Kalagher.
(5) 10.12 Form of Affiliate Agreement to be entered into by and
between Box Hill Systems Corp. and each of James L. and
Pamela Lambert, Dana Kammersgard, W. R. Sauey, Flambeau
Corporation, Flambeau Products Corporation, Seats, Inc., the
W.R. and Floy A. Sauey Grandparents Trust, Jason C. Sauey,
Chong Sup Park, Maxtor Corporation, Brian D. Fitzgerald, CP
Acquisition L.P. No. 4A, CP Acquisition L.P. No. 4B, Capital
Partners, Inc., FGS, Inc., Norman R. Farquhar and William J.
Filip.
(1) 16.1 Letter re: change in certifying accountants.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Deloitte & Touche LLP, Independent Accountants.
23.3 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.4 Consent of Salomon Smith Barney Inc. Reference is made to
Appendix C to the prospectus/joint proxy statement.
23.5 Consent of Tucker Anthony Incorporated.
23.6 Consent of Cooley Godward LLP. (Included in the opinion
filed as Exhibit 8.2 hereto.)
23.7 Consent of Herrick, Feinstein LLP. (Included in the opinion
filed as Exhibit 8.1 hereto.)
24.1 Power of Attorney. See page II-4.
(2) 27.1 Financial Data Schedule.
99.1 Form of proxy card for the Registrant's Special Meeting of
Shareholders.
99.2 Form of proxy card for Artecon's Special Meeting of
Stockholders.
</TABLE>
II-2
<PAGE> 318
- ---------------
* Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the Commission
supplementally upon request.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-31873) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
April 29, 1999 and incorporated herein by reference.
(4) Filed as an exhibit to the Schedule 13D filed by the Registrant on May 10,
1999 with respect to the common stock of Artecon and incorporated herein by
reference.
(5) Filed as an exhibit to the Schedule 13D filed by Artecon on May 10, 1999
with respect to the common stock of the Registrant and incorporated herein
by reference.
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts.
ITEM 22. UNDERTAKINGS.
(1) The Registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this Registration Statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any provision or arrangement, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy, as expressed in the Act, and will be governed by the final adjudication
of such issue.
II-3
<PAGE> 319
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, Box
Hill Systems Corp. has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, County of New York, State of New York, on the 10th day of June, 1999.
BOX HILL SYSTEMS CORP.
By: /s/ DR. BENJAMIN MONDERER
-----------------------------------
Dr. Benjamin Monderer
Chairman of the Board, President
and
Chief Technical Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dr. Benjamin Monderer and Philip Black, or any of
them, his attorney-in-fact, each with the power of substitution, for him in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BENJAMIN MONDERER Chairman of the Board, June 10, 1999
- --------------------------------------------- President, and Chief
Dr. Benjamin Monderer Technical Officer
/s/ PHILIP BLACK Chief Executive Officer, June 10, 1999
- --------------------------------------------- and Director (Principal
Philip Black Executive Officer)
/s/ R. ROBERT REBMANN, JR. Chief Financial Officer, June 10, 1999
- --------------------------------------------- and Treasurer (Principal
R. Robert Rebmann, Jr. Accounting Officer)
/s/ CAROL TURCHIN Executive Vice President, June 10, 1999
- --------------------------------------------- Strategic Planning, and
Carol Turchin Director
</TABLE>
II-4
<PAGE> 320
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARK A. MAYS Vice President, Secretary, June 10, 1999
- --------------------------------------------- and Director
Mark A. Mays
/s/ BENJAMIN BRUSSELL Director June 10, 1999
- ---------------------------------------------
Benjamin Brussell
/s/ MISCHA SCHWARTZ Director June 10, 1999
- ---------------------------------------------
Mischa Schwartz
</TABLE>
II-5
<PAGE> 321
SCHEDULE I
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Box Hill Systems Corp.:
Our report on the consolidated financial statements of Box Hill Systems Corp.
and subsidiaries is included on page F-2 of this Form S-4. Our audits were made
for the purpose of forming an opinion on the basic financial statements taken as
a whole. The supplemental schedule listed on Schedule II is presented for
purposes of complying with the Securities and Exchange Commissions rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in our audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 5, 1999
S-I
<PAGE> 322
SCHEDULE II
BOX HILL SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
CLASSIFICATIONS OF PERIOD EXPENSES DEDUCTIONS PERIOD
- --------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
For the Year Ended, December 31, 1998
Allowance for doubtful accounts....... $267,000 $373,000 $-- $640,000
======== ======== == ========
For the Year Ended, December 31, 1997
Allowance for doubtful accounts....... $206,000 $ 61,000 $-- $267,000
======== ======== == ========
For the Year Ended, December 31, 1996
Allowance for doubtful accounts....... $162,000 $ 44,000 $-- $206,000
======== ======== == ========
</TABLE>
S-II
<PAGE> 323
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- -------- ------- -----------------------
<C> <C> <S>
(3) 2.1 Agreement and Plan of Merger by and among the Registrant, BH
Acquisition Corp. and Artecon, Inc. ("Artecon") dated as of
April 29, 1999.*
(1) 3.1 Registrant's Certificate of Incorporation.
(1) 3.2 Registrant's Amended and Restated Bylaws.
3.3 Registrant's Amended and Restated Certificate of
Incorporation. See Appendix B to the prospectus/joint proxy
statement.
3.4 Certificate of Incorporation of BH Acquisition Corp.
("Merger Sub").
3.5 Bylaws of Merger Sub.
(1) 4.1 Form of Registrant's Common Stock Certificate.
5.1 Opinion of Herrick, Feinstein LLP.
8.1 Tax Opinion of Herrick, Feinstein LLP.
8.2 Tax Opinion of Cooley Godward LLP.
(1) 9.1 Voting Agreement dated July 31, 1997 among Dr. Monderer, Ms.
Turchin and Mr. Mays.
(3) 9.2 Form of Box Hill Voting Agreement dated as of April 29, 1999
entered into between certain shareholders of the Registrant
and Artecon.
(3) 9.3 Form of Artecon Voting Agreement dated as of April 29, 1999
entered into between certain stockholders of Artecon and the
Registrant.
(1) 10.1 Compensation Plan and agreement between the Registrant and
Philip Black.
(1) 10.2 Employment Agreement between the Registrant and Carol
Turchin.
(1) 10.3 Employment Agreement between the Registrant and Benjamin
Monderer.
(1) 10.4 Employment Agreement between the Registrant and Mark Mays.
(1) 10.5 Incentive Program of the Registrant, as amended.
(1) 10.6 License Agreement with Emulex Corporation.
(1) 10.7 Lease Agreement, dated as of December 23, 1993, as extended
and modified, related to the Registrant's facilities in New
York City.
(1) 10.8 Employee Stock Purchase Plan.
(2) 10.9 Lease Modification Agreement.
(2) 10.10 1999 Compensation Plan and Agreement between the Registrant
and Philip Black.
(4) 10.11 Form of Affiliate Agreement to be entered into by and
between the Registrant, Artecon and each of Philip Black,
Benjamin Monderer, Carol Turchin, Mark A. Mays, Mischa
Schwartz, Benjamin Brussell, Monderer 1999 GRAT u/a/d March
1999, Robert C. Miller, Elizabeth Strong, Adam T. Temple,
Kenneth Pitz, R. Robert Rebmann, Jr., Tom Loomis and Daniel
Kalagher.
(5) 10.12 Form of Affiliate Agreement to be entered into by and
between Box Hill Systems Corp. and each of James L. and
Pamela Lambert, Dana Kammersgard, W. R. Sauey, Flambeau
Corporation, Flambeau Products Corporation, Seats, Inc., the
W.R. and Floy A. Sauey Grandparents Trust, Jason C. Sauey,
Chong Sup Park, Maxtor Corporation, Brian D. Fitzgerald, CP
Acquisition L.P. No. 4A, CP Acquisition L.P. No. 4B, Capital
Partners, Inc., FGS, Inc., Norman R. Farquhar and William J.
Filip.
</TABLE>
<PAGE> 324
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
FOOTNOTE NUMBER DESCRIPTION OF DOCUMENT
- -------- ------- -----------------------
<C> <C> <S>
(1) 16.1 Letter re: change in certifying accountants.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2 Consent of Deloitte & Touche LLP, Independent Accountants.
23.3 Consent of Pricewaterhouse Coopers LLP, Independent
Accountants.
23.4 Consent of Salomon Smith Barney Inc. Reference is made to
Appendix C to the prospectus/joint proxy statement.
23.5 Consent of Tucker Anthony Incorporated.
23.6 Consent of Cooley Godward LLP. (Included in the opinion
filed as Exhibit 8.2 hereto.)
23.7 Consent of Herrick, Feinstein LLP. (Included in the opinion
filed as Exhibit 8.1 hereto.)
24.1 Power of Attorney. See page II-4.
(2) 27.1 Financial Data Schedule.
99.1 Form of proxy card for the Registrant's Special Meeting of
Shareholders
99.2 Form of proxy card for Artecon's Special Meeting of
Stockholders
</TABLE>
- ---------------
* Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the
Commission. Registrant undertakes to furnish such schedules to the Commission
supplementally upon request.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-31873) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
April 29, 1999 and incorporated herein by reference.
(4) Filed as an exhibit to the Schedule 13D filed by the Registrant on May 10,
1999 with respect to the common stock of Artecon and incorporated herein by
reference.
(5) Filed as an exhibit to the Schedule 13D filed by Artecon on May 10, 1999
with respect to the common stock of the Registrant and incorporated herein
by reference.
<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF INCORPORATION
OF
BH ACQUISITION CORP.
(UNDER SECTION 102 OF THE DELAWARE GENERAL CORPORATION LAW)
FIRST: The name of this corporation is BH ACQUISITION CORP.
SECOND: The Corporation's registered office in the State of Delaware is
located at 30 Old Rudnick Lane, Suite 100, Dover, Delaware 19901, County of Kent
and its registered agent at such address is LEXIS DOCUMENT SERVICES INC.
THIRD: The purpose or purposes of the corporation is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The name and mailing address of the incorporator is Patrice N.
Malcolm, c/o Herrick, Feinstein LLP, 2 Park Avenue, New York, New York 10016.
FIFTH: The total number of shares of stock which the Corporation has
authority to issue is One Thousand (1,000) shares, all of which are designated
common stock, par value of One Dollar ($1.00) per share.
SIXTH: The Board of Directors is expressly authorized to adopt, amend or
repeal By-Laws, subject to the reserved power of the stockholders to amend and
repeal any By-Laws, adopted by the Board of Directors.
SEVENTH: No person who is or was a director of the Corporation shall be
personally liable to the Corporation for monetary damages for breach of
fiduciary duty as a director unless, and only to the extent that, such director
is liable (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of the State of Delaware or any
amendment thereto or successor provision thereto, or (iv) for any transaction
from which the director derived an improper personal benefit. No amendment to,
repeal or adoption of any provision of the certificate of incorporation
inconsistent with this article shall apply to or have any effect on the
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment, repeal, or
adoption of any inconsistent provision.
IN WITNESS WHEREOF, the undersigned, being the incorporator hereinbefore
named, has executed, signed and acknowledged this certificate of incorporation
this 27th day of April, 1999.
--------------------------------------
Patrice N. Malcolm
Sole Incorporator
<PAGE> 1
EXHIBIT 3.5
BY-LAWS
OF
BH ACQUISITION CORP.
ARTICLE I
OFFICES AND BRANCHES
Section 1. Registered Office. The registered office of the Corporation in
the State of Delaware shall be located at the principal place of business in
said state of the corporation or individual acting as the Corporation's
registered agent.
Section 2. Other Offices. The Corporation may have other offices, either
within or without the State of Delaware, at such place or places as the Board of
Directors may from time to time select.
Section 3. Foreign Offices and Branches. The Corporation shall have the
authority to establish and operate branches and offices and otherwise legally
qualify to do business, carry on business operations, and create, manage and
participate in subsidiaries, investments, partnerships, funds joint ventures or
any other form of business operation, and to purchase lease, sell, own and
operate property of every description, in any and all foreign countries outside
of the United States.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meetings. An annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting, shall be held at such date, time and place,
either within or without the State of Delaware, as the Board of Directors shall
determine each year.
Section 2. Special Meetings. Special meetings of the stockholders for any
purpose may be called by the President or the Secretary, or by the directors,
and may be held at any date, time and place, within or without the State of
Delaware, as shall be stated in the notice of meeting.
Section 3. Notice of Meetings. Written notice of each annual or special
meeting of the stockholders, stating the place, date and time of the meeting,
and in the case of a special meeting the purpose of such meeting, shall be
given, not less than ten nor more than sixty days before the date of the
meeting, to each stockholder entitled to vote at such meeting, at his address as
it appears on the records of the Corporation.
Section 4. Voting. Each stockholder shall be entitled to one vote, in
person or by proxy, for each share of stock entitled to vote which is registered
in his name on the record date for the meeting. No proxy shall be voted after
three years from its date unless such proxy provides for a longer period.
Elections for directors and all other questions shall be decided by majority
vote except as otherwise required by the certificate of incorporation or by law.
<PAGE> 2
Section 5. Quorum. Except as otherwise required by law, the holders of a
majority of the stock of the corporation entitled to vote, present in person or
by proxy, shall constitute a quorum at all meetings of the stockholders. If a
quorum shall not be present at any meeting, the Chairman of the meeting or a
majority of the holders of the stock of the Corporation entitled to vote who are
present at such meeting, in person or by proxy, shall have the power to adjourn
the meeting to another place, date, or time, without notice other than
announcement at the meeting; provided, however, that if the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting. At any adjourned
meeting any business may be transacted which might have been transacted at the
original meeting.
Section 6. Stockholders List. A complete list of stockholders entitled to
vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in his name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or if not so specified, at the place where the
meeting is to be held. The stockholders list shall also be kept at the place of
the meeting during the whole time thereof and shall be open to the examination
of any such stockholder who is present. This list shall presumptively determine
the identity of the stockholders entitled to vote at the meeting and the number
of shares held by each of them.
Section 7. Action Without Meeting. Any action required or permitted to be
taken at any annual or special meeting of stockholders, including, without
limitation, election of directors, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. Number and Term. The first Board of Directors shall consist of
four (4) members, and thereafter the number of directors constituting the entire
Board shall be not more than nine nor less than one (1) member, as fixed from
time to time by action of the stockholders or the Board of Directors. The
directors shall be elected to serve until the next annual meeting of the
stockholders and until their respective successors shall have been elected and
qualified.
Whenever the authorized number of directors is increased between the annual
meetings of the stockholders, a majority of the directors then in office shall
have the power to elect such new directors for the balance of a term and until
their successors are elected and qualified. Any decrease in the authorized
number of directors shall not become effective until the expiration of the term
of the directors then in office unless, at the time
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of such decrease, there shall be vacancies on the Board which are being
eliminated by the decrease.
Section 2. Resignations. Any director, member of a committee or officer
may resign at any time. Such resignation shall be made in writing, and shall
take effect at the time specified therein, and if no time be specified, at the
time of its receipt by the President or the Secretary. The acceptance of a
resignation shall not be necessary to make it effective.
Section 3. Vacancies. If the office of any director, member of a
committee or officer becomes vacant for any reason, the remaining directors in
office, though less than a quorum, by a majority vote, may elect a successor who
shall hold office for the unexpired term and until his successor shall be
elected and qualified.
Section 4. Removal. Any director or directors may be removed with or
without cause at any time by the affirmative vote of the holders of a majority
of all the shares of stock outstanding and entitled to vote.
Section 5. Powers. The Board of Directors shall exercise all of the
powers of the Corporation except such as are by law, or by the certificate of
incorporation or by these by-laws conferred upon or reserved to the
stockholders.
Section 6. Meetings. Regular meetings of the Board of Directors may be
held without notice at such dates, times and places as shall be established from
time to time by the Board of Directors and publicized among all directors.
Special meetings of the Board of Directors may be called by the President or by
the Secretary on the request of any director on at least twenty-four hours'
notice of the date, time and place thereof given to each director. Unless
otherwise indicated in the notice thereof, any and all business may be
transacted at a special meeting.
Members of the Board of Directors, or any committee designated by the Board
of Directors, may participate in a meeting of such Board or committee, by means
of a conference telephone or similar communications equipment that enables all
persons participating in the meeting to hear each other, and such participation
in a meeting shall constitute presence in person at the meeting.
Action by a majority of the directors present at a meeting at which a
quorum is present shall constitute the act of the Board of Directors.
Section 7. Quorum. A majority of the directors shall constitute a quorum
for the transaction of business. If a quorum shall not be present at any meeting
of the Board of Directors, a majority of those present may adjourn the meeting
to another place, date or time, without further notice (other than announcement
at the meeting) or waiver thereof.
Section 8. Compensation. Directors may receive such compensation for
their services as directors as the Board shall from time to time determine by
resolution.
Section 9. Action Without Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof, may
be taken without a meeting, if a written consent thereto is signed by all
members of the Board of Directors, or of such committee, as the case may be, and
such written consent is filed with the minutes of proceedings of the Board of
Directors or such committee.
Section 10. Committees of the Board of Directors. The Board of Directors,
by a vote of a majority of the whole Board, may from time to time designate
committees of the Board, with such lawfully delegable powers and duties as it
thereby confers, to serve at the
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pleasure of the Board and shall elect a director or directors to serve as the
member or members of those committees, designating, if it desires, other
directors as alternative members who may replace any absent or disqualified
member at any meeting of the committee. Any committee so designated may exercise
the power and authority of the Board of Directors to declare a dividend or to
authorize the issuance of stock if the resolution which designates the committee
or a supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his place, the member or members of the committee present at the
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may by unanimous vote appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified member.
ARTICLE IV
OFFICERS
Section 1. Generally. The officers of the Corporation shall be a
Chairman, a President, one or more Vice Presidents, a Treasurer, a Secretary and
one or more Assistant Secretaries, all of whom shall be elected by the Board of
Directors. Each officer shall hold office until his successor is elected and
qualified or until his earlier resignation or removal. The Board of Directors
may elect such other officers and agents as it may deem advisable, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board of Directors.
None of the officers of the Corporation need be directors. Two or more offices
may be held by the same person. Any officer may be removed at any time, with or
without cause, by the Board of Directors.
Section 2. Chairman. The Chairman shall have such powers and shall
perform such duties as shall from time to time be designated by the Board of
Directors.
Section 3. President. The President shall be the Chief Executive Officer
and the Chief Operating Officer of the Corporation. He shall preside at all
meetings of the stockholders and of the Board of Directors. Subject to the
provisions of these by-laws and to the direction of the Board of Directors, he
shall have the responsibility for the general management and control of the
affairs and business of the Corporation and shall perform all duties and have
all powers which are commonly incident to the offices of Chief Executive Officer
and Chief Operating Officer or which from time to time are delegated to him by
the Board of Directors. The President shall have power to sign, in the name of
the Corporation, all authorized stock certificates, contracts, documents, tax
returns, instruments, checks and bonds or other obligations of the Corporation
and shall have general supervision and direction of all of the other officers
and agents of the Corporation.
Section 4. Vice-Presidents. Each Vice-President shall have such powers
and shall perform such duties as shall from time to time be designated by the
Board of Directors.
Section 5. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate account of
receipts and disbursements in books belonging to the Corporation. He shall
deposit all moneys and other valuables in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the Corporation as may be ordered
by the Board of Directors or the President, taking proper vouchers for such
disbursements. He shall render to the President and Board of Directors at the
regular meetings of the Board
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of Directors, or whenever they may request it, an account of all his
transactions as Treasurer and of the financial condition of the Corporation. If
required by the Board of Directors, he shall give the Corporation a bond for the
faithful discharge of his duties in such amount and with such surety as the
Board of Directors shall prescribe.
Section 6. Secretary. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors, and all other notices
required by law or by these by-laws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the President, directors, or stockholders, upon whose requisition the meeting
is called as provided in the by-laws. He shall record all the proceedings of the
meetings of the Corporation and of the directors in a book to be kept for that
purpose, and shall perform such other duties as may be assigned to him by the
directors or the President. He shall have the custody of the seal of the
Corporation and shall affix the same to all instruments requiring it, when
authorized by the directors or the President, and attest the same.
Section 7. Assistant Secretaries. Each Assistant Secretary shall have
such powers and shall perform such duties as shall from time to time be
designated by the Board of Directors.
Section 8. Additional Powers of Officers. In addition to the powers
specifically provided in these bylaws, each officer (including officers other
than those referred to in these by-laws) shall have such other or additional
authority and perform such duties as the Board of Directors may from time to
time determine.
Section 9. Action With Respect to Securities of Other
Corporations. Unless otherwise directed by the Board of Directors, the
President shall have the power to vote and otherwise act on behalf of the
Corporation, in person or by proxy, at any meeting of stockholders of or with
respect to any action of stockholders of any other corporation in which this
Corporation may hold securities and otherwise to exercise any and all rights and
powers which this Corporation may possess by reason of its ownership of
securities in such other Corporation.
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Nature of Indemnity. Subject to the provisions of Section 145
of the General Corporation Law of the State of Delaware:
(1) The Corporation shall indemnify any person made, or threatened to be
made, a party to an action or proceeding whether civil or criminal,
including an action by or in the right of any other corporation of any
type or kind, domestic or foreign, or any partnership, joint venture,
trust, employee benefit plan or other enterprise, which any Director or
officer of the Corporation served in any capacity at the request of the
Corporation, by reason of the fact that he or she, his or her testator
or intestate, was a Director or officer of the Corporation, or served
such other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise in any capacity, against judgments,
fines, amounts paid in settlement and reasonable expenses, including
attorney's fees actually necessarily incurred as a result of such
action or proceeding, or any appeal therein, provided that no
indemnification may be made to or on behalf of any such Director or
officer if a judgment or other final adjudication adverse to the
Director of officer establishes that his or her acts were committed in
bad faith or were the result of active and
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deliberate dishonesty and were material to the cause of action so
adjudicated, or that he or she personally gained in fact a financial
profit or other advantage to which he or she was not legally entitled.
The foregoing limitation shall prohibit such indemnification only to
the extent that such indemnification is prohibited by Section 145 of
the General Corporation Law of the State of Delaware.
(2) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or
its equivalent, shall not in itself create a presumption that any such
Director or officer did not act, in good faith, for a purpose which he
reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit
plan or other enterprise, not opposed to, the best interests of the
Corporation or that he or she had reasonable cause to believe that his
or her conduct was unlawful.
(3) The Corporation shall also indemnify any person made, or threatened to
be made, a party to an action by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he or she,
his or her testator or intestate, is or was a Director of officer of
the Corporation or is or was serving at the request of the Corporation
as a director or officer of any other corporation of any type or kind,
domestic or officer of any other corporation of any type or kind,
domestic or foreign, of any partnership, joint venture, trust, employee
benefit plan or other enterprise, against amounts paid in settlement
and reasonable expenses, including attorneys' fees, actually and
necessarily incurred by him in connection with the defense or
settlement of such action, or in connection with an appeal therein
provided that no indemnification may be made to or on behalf of any
such Director or officer if a judgment or other final adjudication
adverse to the Director or officer establishes that his or her acts
were committed in bad faith or were the result of active and deliberate
dishonesty and were material to the cause of action so adjudicated, or
that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled. The foregoing
limitation shall prohibit such indemnification only to the extent that
such indemnification is prohibited by Section 145 of the General
Corporation Law of the State of Delaware, or any successor provision;
except that no indemnification shall be made in respect of (1) a
threatened action, or a pending action which is settled or otherwise
disposed of, or (2) any claim, issue or matter as to which such persons
shall have been adjudged to be liable to the Corporation, unless and
only to the extent that the court in which the action was brought or,
if no action was brought, any court of competent jurisdiction,
determines upon application that, in view of all the circumstances of
the case, the person is fairly and reasonably entitled to indemnity for
such portion of the settlement amount and expenses as the court deems
proper.
(4) For the purpose of this Article V, the Corporation shall be deemed to
have requested a person to serve an employee benefit plan where the
performance by such person of his or her duties to the Corporation also
imposes duties on, or otherwise involves services by, such person to
the plan or participants or beneficiaries of the plan. Excise taxes
assessed on a person with respect to an employee benefit plan pursuant
to applicable law shall be considered fines; and action taken or
omitted by a person with respect to an employee benefit plan in the
performance of such person's duties for a purpose reasonably believed
by such person to be in the interest of the participants and
beneficiaries of the plan shall
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be deemed to be for a purpose which is not opposed to the best
interests of the Corporation.
Section 2. Successful Defense. A person who has been successful, on the
merits or otherwise, in the defense of a civil or criminal action or proceeding
of the character described in Section 1 of this Article V shall be entitled to
indemnification as authorized in such Section 1.
Section 3. Determination that Indemnification is Proper. Except as
provided in Section 2 of this Article V, any indemnification under Section 1 of
this Article V, unless ordered by a court, shall be made by the Corporation,
only if authorized in a specific case:
1. by the Board of Directors, acting by a quorum consisting of Directors
who are not parties to such action or proceeding, upon a finding that
the Director or officer has met the standard of conduct set forth in
Section 1 of this Article V;
2. if such a quorum is not obtainable or, even if obtainable, a quorum of
disinterested Directors so directs;
3. by the Board of Directors upon the opinion in writing of independent
legal counsel that indemnification is proper in the circumstances
because the applicable standard of conduct set forth in Section 1 has
been met by such Director of officer; or
4. by the shareholders upon a finding that the Director or officer has met
the applicable standard of conduct set forth in such Section 1.
Section 4. Advance Payment of Expenses. Unless the Board of Directors
otherwise determines in a specific case, expenses incurred by a Director or
officer in defending a civil or criminal action or proceeding shall be paid by
the Corporation in advance of final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of the Director or officer to
repay such amount or an appropriate portion thereof if it is ultimately found,
under the procedure set forth in this Article V, that he or she is not entitled
to any indemnification or to indemnification to the full extent of the expenses
advanced by the Corporation.
Section 5: Survival; Preservation of Other Rights. The foregoing
provisions for indemnification and advancement of expenses shall be deemed to be
a contract between the Corporation and each Director, officer, employee and
agent who serves in any such capacity at any time while these provisions as well
as the relevant provisions of the General Corporation Law of the State of
Delaware are in effect and any repeal or modification thereof shall not affect
any right or obligation then existing with respect to any state of facts then or
previously existing or any action, suit or proceeding previously or thereafter
brought or threatened based in whole or in part upon any such state of facts.
Such a contract right may not be modified retroactively without the consent of
such Director, officer, employee or agent.
The indemnification and advancement of expenses provided by this Article V
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled, whether contained in the Certificate of Incorporation of the
Corporation or these By-laws or, when authorized by (i) the Certificate of
Incorporation or these By-laws, (ii) a resolution of shareholders, (iii) a
resolution of Directors, or (iv) an agreement providing for such
indemnification. The Corporation may enter into an agreement with any of its
Directors, officers, employees or agents providing for indemnification and
advancement of expenses, including attorneys' fees, that may change, enhance,
qualify or limit any right to indemnification or advancement of expenses created
by this Article V, provided that no
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indemnification may be made to or on behalf of any Director or officer if a
judgment or other final adjudication adverse to the Director or officer
establishes that his acts were committed in bad faith or were the result of
active and deliberate dishonesty and were material to the cause of action so
adjudicated, or that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
Section 6. Severability. If this Article V or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each employee or agent of the
Corporation as to costs, charges and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the Corporation, to the fullest extent
permitted by any applicable portion of this Article V that shall not have been
invalidated and to the fullest extent permitted by applicable law.
Section 7. Subrogation. In the event of payment of indemnification to a
person described in Section 1 of this Article V, the Corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
Corporation, shall execute all documents and do all things that the Corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the Corporation effectively to
enforce any such recovery.
Section 8. No Duplication of Payments. The Corporation shall not be
liable under this Article V to make any payment in connection with any claim
made against a person described in Section 1 of this Article V to the extent
such person has otherwise received payment (under any insurance policy, by-law
or otherwise) of the amounts otherwise payable as indemnity hereunder.
ARTICLE VI
STOCK
Section 1. Certificates of Stock. Certificates of stock, signed by the
President or a Vice-President, and by the Treasurer or an Assistant Treasurer,
or the Secretary or an Assistant Secretary, shall be issued to each stockholder,
certifying the number of shares owned by him in the Corporation. Any of or all
the signatures on the certificates may be facsimiles.
Section 2. Lost, Stolen or Destroyed Certificates. A new certificate of
stock may be issued in the place of any certificate therefore issued by the
Corporation, alleged to have been lost, stolen or destroyed, and the directors
may, in their discretion, require the owner of the lost, stolen or destroyed
certificate, or his legal representative, to give the Corporation a bond, in
such sum as they may direct, to indemnify the Corporation against any claim that
may be made against it on account of the alleged loss, theft, or destruction of
any such certificate or the issuance of any such new certificate.
Section 3. Transfer of Shares. Transfer of stock shall be made only upon
the transfer books of the Corporation kept at an office of the Corporation or by
transfer agents designated to transfer shares of the stock of the Corporation.
Upon surrender to the Corporation or its transfer agent of a certificate for
shares dully indorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, the Corporation shall issue or cause its
transfer agent to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
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Section 4. Stockholders Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
ARTICLE VII
MISCELLANEOUS
Section 1. Dividends. Subject to the provisions of the certificate of
incorporation, the Board of Directors may, out of funds legally available
therefor at any regular or special meeting, declare dividends upon the capital
stock of the corporation as and when they deem expedient. Before declaring any
dividend, there may be set apart out of any funds of the Corporation available
for dividends such sum as the directors from time to time in their discretion
deem proper for working capital or as a reserve fund to meet contingencies or
for equalizing dividends or for such other purposes as the directors shall deem
conducive to the interests of the Corporation.
Section 2. Seal. The corporate seal shall be circular in form and shall
contain the name of the Corporation the year of its creation and the words
"CORPORATE SEAL" and "DELAWARE." Said seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 4. Checks. All checks, drafts or other orders for the payment of
money, notes or other evidences of indebtedness issued in the name of the
Corporation shall be signed by such officer or officers, agent or agents of the
Corporation, and in such manner as shall be determined from time to time by the
Board of Directors.
Section 5. Notice and Waiver of Notice. Whenever any notice is required
to be given, personal notice shall not be necessary unless expressly so stated,
and any notice so required shall be deemed to be sufficient if given by
depositing the same in the United States mail, first class mail (air-mail if to
an address outside of the United States), postage prepaid, addressed to the
person entitled thereto at his address as it appears on the records of the
Corporation, in which case such notice shall be deemed given on the day of such
mailing, unless it is notice of a directors' meeting, in which case such notice
shall be deemed given 5 days after the date of such mailing. Notice may also be
given personally, against receipt, or by telegram, telex or similar
communication and notice so given shall be deemed given when so delivered
personally or when delivered for transmission.
Stockholders not entitled to vote shall not be entitled to receive notice
of any meetings except as otherwise provided by statute.
Whenever any notice whatsoever is required or permitted to be given under
the provisions of any law, or under the provisions of the certificate of
incorporation or these
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by-laws, a waiver thereof in writing, signed by the person or persons entitled
to such notice, whether before or after the time such notice is required to be
given, shall be deemed equivalent thereto. A telegram, telex or similar
communication waiving any such notice sent by a person entitled to notice shall
be deemed equivalent to a waiver in writing signed by such person. Neither the
business nor the purpose of any meeting need be specified in any waiver.
ARTICLE VIII
AMENDMENTS
These By-Laws other than Article V may be amended by the Board of Directors
of the Corporation at any regular meeting or at any special meeting the notice
of which shall state that amendment of the By-Laws is to be one of the purposes
of the meeting. Article V of these By-Laws shall only be amended or repealed and
any other provision of these By-Laws or any amendments adopted by the Board may
be amended, or repealed by the vote of the shareholders of the Corporation at
any annual meeting or at any special meeting the notice of which shall state
that amendment of the By-Laws is to be one of the purposes of the meeting,
except no amendment of Section 5 of Article V which retroactively modifies the
contract rights of a Director, officer, employee or agent may be effective
without the consent of such person.
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EXHIBIT 5.1
Box Hill Systems Corp.
161 Avenue of the Americas
New York, New York 10013
Ladies and Gentlemen:
We have acted as counsel for Box Hill Systems Corp., a New York corporation
("Box Hill"), in connection with the proposed merger of a wholly-owned
subsidiary of Box Hill with and into Artecon, Inc., a Delaware corporation
("Artecon"), with Artecon being the surviving corporation and a wholly-owned
subsidiary of Box Hill (the "Merger"), pursuant to an Agreement and Plan of
Merger dated April 29, 1999 among Box Hill, Artecon and the Box Hill subsidiary
(the "Merger Agreement").
We have examined such corporate records and other documents, including the
registration statement on Form S-4 (the "Registration Statement") to be filed
with the Securities and Exchange Commission relating to shares of Box Hill
common stock (the "Common Stock") to be issued by Box Hill in connection with
the Merger and have reviewed such matters of law as we have deemed necessary for
this opinion.
Based upon the foregoing, we are of the opinion that under the laws of the
State of New York, upon the issuance of the shares of Common Stock in accordance
with the terms of the Merger Agreement after the Registration Statement becomes
effective, such shares of Common Stock will be duly authorized, validly issued,
fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement.
Yours very truly,
Herrick, Feinstein LLP
By: /s/ Herrick, Feinstein LLP
--------------------------------------
<PAGE> 1
EXHIBIT 8.1
<TABLE>
<S> <C> <C>
HERRICK, FEINSTEIN LLP
A LIMITED LIABILITY PARTNERSHIP
2 PARK AVENUE
NEW YORK, N.Y. 10016
104 CARNEGIE CENTER (212) 592-1400 FACSIMILE:
PRINCETON, N.J. 08540-6232 (212) 889-7577
TELEPHONE: (609) 452-3800
FACSIMILE: (609) 520-9095
</TABLE>
June 8, 1999
Box Hill Systems Corp.
161 Avenue of the Americas
New York, New York 10013
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger dated as of April 29, 1999 (the "Merger Agreement")
by and among Box Hill Systems Corp., a New York corporation ("Parent"), BH
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Parent
("Merger Sub"), and Artecon, Inc., a Delaware corporation (the "Company").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Merger Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Parent and Merger Sub in connection with
the Merger. We understand that Cooley Godward LLP, counsel to the Company, will
be rendering an opinion to the Company, substantially similar to this opinion.
For the purpose of rendering this opinion, we have examined, and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in the following documents (including all exhibits and
schedules attached thereto):
(a) the Merger Agreement;
(b) those certain tax representation letters dated June 3, 1999 and
delivered to us by Parent, Merger Sub and the Company containing
certain representations of Parent, Merger Sub and the Company (the "Tax
Representation Letters"); and
(c) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and
related to the consummation of the Merger and the other transactions
contemplated by the Merger Agreement as we have deemed necessary or
appropriate;
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
a) Original documents submitted to us (including signatures thereto) are
authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the
Effective Time) duly and validly
<PAGE> 2
HERRICK, FEINSTEIN LLP
Box Hill Systems Corp.
June 8, 1999
Page 2
executed and delivered where due execution and delivery are a
prerequisite to the effectiveness thereof;
b) All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees,
officers, directors and stockholders in connection with the Merger,
including, but not limited to, those set forth in the Merger Agreement
(including the exhibits thereto) and the Tax Representation Letters are
true and accurate at all relevant times;
c) All covenants contained in the Merger Agreement (including exhibits
thereto) and the Tax Representation Letters are performed without waiver
or breach of any material provision thereof;
d) The Merger will be reported by Parent and the Company on their
respective federal income tax returns in a manner consistent with the
opinion set forth below; and
e) Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the
limitations, qualifications, assumptions and caveats set forth herein, we are of
the opinion that, for federal income tax purposes, the Merger will be a
reorganization within the meaning of Section 368 of the Code.
In addition to your request for our opinion on this specific matter of
federal income tax law, you have asked us to review the discussion of federal
income tax issues contained in the Registration Statement. We have reviewed the
discussion entitled "Material Federal Income Tax Consequences" contained in the
Registration Statement and believe that, insofar as it relates to statements of
law and legal conclusions, is correct in all material respects.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Merger Agreement. In addition, no opinion is expressed as to
any federal income tax consequence of the Merger or the other transactions
contemplated by the Merger Agreement except as specifically set forth herein,
and this opinion may not be relied upon except with respect to the consequences
specifically discussed herein. No opinion is expressed as to the federal income
tax treatment that may be relevant to a particular investor in light of personal
circumstances or to certain types of investors subject to special treatment
under the federal income tax laws (for example, life insurance companies,
dealers in securities, taxpayers subject to the alternative minimum tax, banks,
tax-exempt organizations, non-United States persons, and stockholders who
acquired their shares of Company capital stock pursuant to the exercise of
options or otherwise as compensation or who hold their Company capital stock as
part of a straddle or risk reduction transaction).
No opinion is expressed as to any transaction other than the Merger as
described in the Merger Agreement, or as to any transaction whatsoever,
including the Merger, if all of the transactions described in the Merger
Agreement are not consummated in accordance
<PAGE> 3
HERRICK, FEINSTEIN LLP
Box Hill Systems Corp.
June 8, 1999
Page 3
with the terms of the Merger Agreement and without waiver of any material
provision thereof. To the extent that any of the representations, warranties,
statements and assumptions material to our opinion and upon which we have relied
are not accurate and complete in all material respects at all relevant times,
our opinion would be adversely affected and should not be relied upon.
This opinion only represents and is based upon our best judgment regarding
the application of the federal income tax laws under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and
there is no assurance that the Internal Revenue Service will not successfully
assert a contrary position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes or interpretations would not
adversely affect the accuracy of the conclusions stated herein. Nevertheless, by
rendering this opinion, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the federal income tax laws
or any material change with respect to any of the representations, warranties,
statements and assumptions material to our opinion and upon which we have
relied.
This opinion is being delivered solely in connection with the filing of the
Registration Statement. It is intended solely for the benefit of the Parent and
the Stockholders of the Parent and may not be relied upon or utilized for any
other purpose or by any other person any may not be made available to any other
person without our prior written consent.
We consent to the reference to our firm under the caption "Material Federal
Income Tax Consequences" in the Proxy Statement included in the Registration
Statement and to the reproduction and filing of this opinion as an exhibit to
the Registration Statement.
Sincerely,
HERRICK, FEINSTEIN LLP
<PAGE> 1
EXHIBIT 8.2
[COOLEY GODWARD LLP LETTERHEAD]
June 8, 1999
Artecon, Inc.
6305 El Camino Real
Carlsbad, California 92009
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Merger dated as of April 29, 1999 (the "Merger Agreement")
by and among Box Hill Systems Corp., a Delaware corporation ("Parent"), BH
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Parent
("Merger Sub"), and Artecon, Inc., a Delaware corporation (the "Company").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Merger Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to the Company in connection with the Merger. We
understand that Herrick, Feinstein LLP, counsel to Parent and Merger Sub, will
be rendering an opinion to Parent, substantially similar to this opinion. As
such, and for the purpose of rendering this opinion, we have examined, and are
relying upon (without any independent investigation or review thereof) the truth
and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in the following documents (including
all exhibits and schedules attached thereto):
(a) the Merger Agreement;
(b) those certain tax representation letters dated June 3, 1999 and
delivered to us by Parent, Merger Sub and the Company containing certain
representations of Parent, Merger Sub and the Company (the "Tax Representation
Letters"); and
(c) such other instruments and documents related to the formation,
organization and operation of Parent, Merger Sub and the Company and related to
the consummation of the Merger and the other transactions contemplated by the
Merger Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
<PAGE> 2
Artecon, Inc.
June 8, 1999
Page Two
(a) Original documents submitted to us (including signatures thereto)
are authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Time) duly and validly executed and delivered where due execution and delivery
are a prerequisite to the effectiveness thereof;
(b) All representations, warranties and statements made or agreed to by
Parent, Merger Sub and the Company, their managements, employees, officers,
directors and stockholders in connection with the Merger, including, but not
limited to, those set forth in the Merger Agreement (including the exhibits
thereto) and the Tax Representation Letters are true and accurate at all
relevant times;
(c) All covenants contained in the Merger Agreement (including exhibits
thereto) and the Tax Representation Letters are performed without waiver or
breach of any material provision thereof;
(d) The Merger will be reported by Parent and the Company on their
respective federal income tax returns in a manner consistent with the opinion
set forth below; and
(e) Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, the Merger will be a reorganization
within the meaning of Section 368 of the Code.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income tax
issues contained in the Registration Statement. We have reviewed the discussion
entitled "Material Federal Income Tax Consequences" contained in the
Registration Statement and believe that, insofar as it relates to statements of
law and legal conclusions, is correct in all material respects.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Merger or the other transactions
contemplated by the Merger Agreement. In addition, no opinion is expressed as to
any federal income tax consequence of the Merger or the other transactions
contemplated by the Merger Agreement except as specifically set forth herein,
and this opinion may not be relied upon except with respect to the consequences
specifically discussed herein. No opinion is expressed as to the federal income
tax treatment that may be relevant to a particular investor in light of personal
circumstances or to certain types of investors subject to special treatment
under the federal income tax laws (for example, life insurance companies,
dealers in securities, taxpayers subject to the alternative minimum tax, banks,
tax-exempt organizations, non-United States persons, and stockholders who
acquired their shares of
<PAGE> 3
Artecon, Inc.
June 8, 1999
Page Three
Company capital stock pursuant to the exercise of options or otherwise as
compensation or who hold their Company capital stock as part of a straddle or
risk reduction transaction).
No opinion is expressed as to any transaction other than the Merger as described
in the Merger Agreement, or as to any transaction whatsoever, including the
Merger, if all of the transactions described in the Merger Agreement are not
consummated in accordance with the terms of the Merger Agreement and without
waiver of any material provision thereof. To the extent that any of the
representations, warranties, statements and assumptions material to our opinion
and upon which we have relied are not accurate and complete in all material
respects at all relevant times, our opinion would be adversely affected and
should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the Merger and is not binding on the Internal Revenue Service or
any court of law, tribunal, administrative agency or other governmental body.
The conclusions are based on the Code, existing judicial decisions,
administrative regulations and published rulings. No assurance can be given that
future legislative, judicial or administrative changes or interpretations would
not adversely affect the accuracy of the conclusions stated herein.
Nevertheless, by rendering this opinion, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
This opinion is being delivered solely in connection with the filing of the
Registration Statement. It is intended solely for the benefit of the Company and
the stockholders of the Company and may not be relied upon or utilized for any
other purpose or by any other person and may not be made available to any other
person without our prior written consent.
<PAGE> 4
Artecon, Inc.
June 8, 1999
Page Four
We consent to the reference to our firm under the caption "Material Federal
Income Tax Consequences" in the Proxy Statement included in the Registration
Statement and to the reproduction and filing of this opinion as an exhibit to
the Registration Statement.
Sincerely,
Cooley Godward LLP
/s/ Susan Cooper Philpot
- ----------------------------------
Susan Cooper Philpot
SCP:dp
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Registrant
Silicon Alley Management Inc. - incorporated in the State of Delaware
Silicon Alley Technology Inc. - incorporated in the State of Delaware
BHS International Corp., Inc. - incorporated in Barbados
Box Hill Systems Europe Ltd. - incorporated in England
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
S-4 Registration Statement.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
June 8, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Box Hill Systems Corp.
on Form S-4 of our report for Artecon, Inc. dated May 6, 1999, appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Costa Mesa, California
June 7, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-4 of Box Hill Systems Corp. of our report dated January 16,
1998, relating to the financial statements of Storage Dimensions, Inc. which
appears on page F-50 of that registration statement. We also consent to the
reference to us under the heading "Experts" in that registration statement.
PricewaterhouseCoopers LLP
San Jose, California
June 8, 1999
<PAGE> 1
EXHIBIT 23.5
[TUCKER ANTHONY INCORPORATED LETTERHEAD]
June 7, 1999
Members of the Board of Directors
Artecon, Inc.
6305 El Camino Real
Carlsbad, CA 92009-1606
Members of the Board:
We hereby consent to the reference of the opinion of our Firm under the
heading "The Merger -- Opinion of Financial Advisor" and to the inclusion of
the foregoing opinion in the Registration Statement of Box Hill Systems Corp.
on Form S-4 to be filed with the Securities Exchange Commission in connection
with the proposed merger of Artecon, Inc. with Box Hill Systems Corp. In giving
such consent, we do not hereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
TUCKER ANTHONY INCORPORATED
By: /s/ WILLIAM E. ROMAN
-------------------------------------
William E. Roman
Managing Director
<PAGE> 1
EXHIBIT 99.1
BOX HILL SYSTEMS CORP.
161 Avenue of the Americas
New York, New York 10013
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersign hereby appoints Dr. Benjamin Monderer and Philip Black as
Proxies, each with power to appoint his substitute, and hereby authorizes them
to represent and to vote, as designated on the reverse, all the shares of Common
Stock of Box Hill Systems Corp. ("Box Hill") held of record by the undersigned
on , 1999 at the annual meeting of shareholders of Box Hill to be
held on , 1999 or any adjournment thereof, upon such business as
may properly come before the meeting, including the items on the reverse side of
this form as set forth in the Notice of Special Meeting and Proxy Statement
dated , 1999.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C> <C>
1. To approve (i) the issuance of shares of / / /
common stock of Box Hill pursuant to the --/ -----/ -----/
Agreement and Plan of Merger dated as of April
29, 1999, among Box Hill, Artecon, Inc., a
Delaware corporation, and BH Acquisition
Corp., a Delaware corporation wholly owned
subsidiary of Box Hill, (ii) the approval and
adoption of the Agreement and Plan of Merger,
and (iii) the merger of BH Acquisition Corp.
with and into Artecon.
2. To approve an amendment to Box Hill's / /
certificate of incorporation to provide for -----/ -----/
(i) a change of the name of Box Hill to
and (ii) a classified board of
directors whereby the board of directors will
be separated into three classes with members
of each class serving a three-year term.
3. To approve an increase of additional 500,000 / / /
shares of Box Hill Common Stock authorized for --/ -----/ -----/
issuance under the 1997 Box Hill Employee
Stock Purchase Plan.
4. To approve an increase of an additional / / /
2,000,000 shares of Box Hill Common Stock --/ -----/ -----/
authorized for issuance under the Stock
Incentive Plan.
5. To transact such other business as may
properly come before the Box Hill special
meeting or any adjournment or postponement
thereof.
</TABLE>
SIGNATURE(S)
- ------------------------------------------------------------------ DATE
- ----------
Note: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
<PAGE> 1
EXHIBIT 99.2
ARTECON, INC.
6305 EL CAMINO REAL, CARLSBAD, CA 92009-1606
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS OF ARTECON, INC.
TO BE HELD ON _________, 1999.
PROXY
The undersigned hereby appoints James L. Lambert and W.R. Sauey, and each
of them with full power of substitution, as proxies of the undersigned, to
attend the Special Meeting of Shareholders of Artecon, Inc. to be held at the
principal executive offices located at 6305 El Camino Real, Carlsbad, CA 92009
on ___________, 1999, at ___a.m., local time, and at any and all adjournments
thereof, and to vote all common stock and preferred stock of the Company, with
all powers the undersigned would possess if personally present at the meeting.
THIS PROXY WILL BE VOTED OR WITHHELD FROM BEING VOTED IN ACCORDANCE WITH
THE INSTRUCTIONS SPECIFIED. WHERE NO CHOICE IS SPECIFIED, THIS PROXY WILL CONFER
DISCRETIONARY AUTHORITY AND WILL BE VOTED FOR APPROVAL OF THE MERGER (AS
SPECIFIED ON THE REVERSE SIDE). THIS PROXY CONFERS AUTHORITY FOR THE ABOVE NAMED
PERSONS TO VOTE IN THEIR DISCRETION WITH RESPECT TO AMENDMENTS OR VARIATIONS TO
THE MATTERS IDENTIFIED IN THE NOTICE OF THE MEETING ACCOMPANYING THIS PROXY AND
SUCH OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING. A SHAREHOLDER HAS
THE RIGHT TO APPOINT A PERSON, WHO NEED NOT BE A SHAREHOLDER, TO ATTEND AND ACT
ON THEIR BEHALF AT THE MEETING, OTHER THAN THE PERSON DESIGNATED IN THIS FORM OF
PROXY. SUCH RIGHT MAY BE EXERCISED BY INSERTING THE NAME OF SUCH PERSON IN THE
BLANK SPACE PROVIDED.
(continued and to be signed on reverse side)
<PAGE> 2
[X] Please mark votes as in this example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
Approval and adoption of the Agreement and Plan of Merger dated as of
April 29, 1999 among Artecon, Box Hill Systems Corp., a Delaware
corporation, and BH Acquisition Corp., a Delaware corporation and wholly
owned subsidiary of Box Hill, and the approval of the merger of BH
Acquisition Corp. with and into Artecon. Upon consummation of the merger,
Artecon will become a wholly owned subsidiary of Box Hill, as more fully
set forth in the Notice of Special Meeting and Prospectus/Joint Proxy
Statement dated
________, 1999.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>
MARK HERE FOR ADDRESS CHANGE AND
NOTE AT LEFT [ ]
Please sign, date and return the
proxy card promptly in the
enclosed envelope.
NOTE: Please sign, exactly as name
appears hereon. When signing as
executor, administrator, attorney,
trustee or guardian please give
your full title as such. If a
corporation, please sign in full
corporation name by president or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person. If a joint tenancy, please
have both tenants sign.
Signature:
Date:___
Signature:
Date:___
