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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File Number 1-13317
DOT HILL SYSTEMS CORP.
(Exact name of registrant as specified in its charter)
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<S> <C>
NEW YORK 13-3460176
(State of incorporation) (I.R.S. employer identification Number)
6305 EL CAMINO REAL 92009
CARLSBAD, CA (Zip code)
(Address of principal executive offices)
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760-931-5500
(Registrant's telephone number)
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Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
SHARES
OUTSTANDING AT NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS MARCH 20, 2000 WHICH REGISTERED
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Common stock, $.01 par value....................... 24,109,603 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 20, 2000 was $154,941,884.
Documents incorporated by reference:
Portions of Dot Hill's definitive Proxy Statement dated March 30, 2000 into
Part III of Form 10-K.
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DOT HILL SYSTEMS CORP.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
PART I
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Item 1. Business.................................................... 3
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to Vote of Security Holders........... 23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 24
Item 6. Selected Financial Data..................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 36
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 37
Item 11. Executive Compensation...................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 37
Item 13. Certain Relationships and Related Transactions.............. 37
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form
8-K......................................................... 37
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PART I
ITEM 1. BUSINESS
Certain statements contained in this report, including statements regarding
the development, growth and expansion of Dot Hill Systems Corp.'s ("Dot Hill" or
the Company") business, the successful integration of the operations and
businesses of Box Hill Systems Corp. ("Box Hill") and Artecon, Inc. ("Artecon"),
the intent, belief or current expectations of the Company, its directors or its
officers, primarily with respect to the future operating performance of the
Company and the products it expects to offer and other statements contained
herein regarding matters that are not historical facts, are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act
(the "Reform Act"). Future filings with the Securities and Exchange Commission,
future press releases and future oral or written statements made by or with the
approval of the Company which are not statements of historical fact may contain
forward-looking statements under the Reform Act. Because such statements include
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Some of the factors
that could cause actual results to differ materially from those expressed or
implied by such forward-looking statements are set forth at the end of this Item
1 in "Certain Risk Factors Related to the Company's Business," in the section
entitled "Management Discussion and Analysis of Financial Condition and Results
of Operations," and elsewhere throughout this Annual Report on Form 10-K.
The Company is an independent provider of high-performance data storage and
Storage Area Network ("SAN") solutions. The Company designs, manufactures,
markets and supports data storage systems for the Open Systems computing
environment, particularly UNIX, Windows, Novell and Linux environments. The
Company'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 reliability, availability, performance,
manageability and fault-tolerance, as well as the highest level of customer and
technical support. The Company has a history of providing high-end storage
solutions that meet these requirements by combining extensive design and
implementation experience with leading edge technologies. The Company is one of
the few in the industry to offer NEBS-certified, carrier-class storage systems.
The NEBS standard was developed by Bellcore for telephone equipment and speaks
to system ruggedness and reliability.
Effective August 2, 1999, Box Hill and Artecon completed a merger (the
"Merger") in which the two companies were merged in a tax-free, stock-for-stock
transaction. The Merger was accounted for as a pooling-of-interests. Subsequent
to the Merger, the combined company changed its name to Dot Hill Systems Corp.
Under the terms of the merger agreement, the Company issued 8,734,523 shares of
its common stock to the former Artecon shareholders, representing 0.4 shares of
the Company's common stock in exchange for each share of Artecon common stock
outstanding. Additionally, Artecon's convertible Series A preferred shares were
converted into 719,037 shares of the Company's Common stock. The historical
financial statements of the Company have been retroactively restated to reflect
the Merger. During the third quarter of 1999, the Company recorded expenses
totaling $13.3 million related to the Merger and management's restructuring and
integration plan associated with the Merger.
During fiscal 1997, Artecon and Storage Dimensions, Inc. ("SDI") completed a
reverse merger accounted for as a purchase of SDI by Artecon, and the surviving
company changed its name to Artecon. As such, the historical financial results
of Artecon for all years prior to the SDI merger are those of Artecon.
Additionally, in August 1997, Artecon acquired substantially all of the assets
and liabilities of Falcon Systems, Inc. The acquisition was accounted for as a
purchase.
In the United States, the Company employs a direct marketing strategy and
targets data-intensive industries, which to date primarily include Internet
service providers (ISPs), financial services, telecommunications, health care,
government/defense and academia. Abroad, the Company sells
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directly to end-users in certain regions, and sells through local resellers in
others. The Company has four hubs, located in Carlsbad, California, New York
City, New York, the Netherlands and Japan. The Company has other offices across
the United States, in France and in the United Kingdom. Box Hill was
incorporated in New York in April 1988 under the name Box Hill and completed its
initial public offering in September 1997 on the New York Stock Exchange under
the symbol BXH. Dot Hill remains a NYSE-listed company, but now trades under the
symbol HIL.
INDUSTRY OVERVIEW
The rapid proliferation of new data-intensive applications, such as the
Internet, intranets, digital broadcasting, data warehousing, data mining, and
the migration of mission-critical applications off mainframe computers, has
fueled the demand for Open-Systems data storage. High-end disk storage systems,
tape backup systems and storage management software that are designed to operate
on multiple platforms increasingly are becoming a critical part of a company's
MIS system and computer purchase decisions are becoming "storage centric." 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 variants such as Solaris
(Sun), HPUX (Hewlett Packard), AIX (IBM) and IRIX (SGI)) and Windows NT
(Microsoft) servers operating in multi-platform environments, generally running
mission-critical applications.
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 Ultra SCSI, Ultra 2 and
Ultra 3, which were designed to transfer data at increasingly higher rates with
enhanced reliability and lower error rates, has been the interface most commonly
used in most storage systems. Fibre Channel is an emerging high-speed serial
interface that became commercially available in 1997 and has gained acceptance
since then. Fibre Channel enables the transfer of data between computers and
peripherals at increased rates and cabling lengths, and among a greater number
of hosts. Fibre Channel also enables Storage Area Networks (SAN), which
generally cannot be configured using the SCSI standard.
SAN BASED ON FIBRE CHANNEL
A SAN is a network that sits between servers and storage devices, and
commonly is based on the Fibre Channel protocol. SANs can be used to create
centralized pools of storage and backup devices that can be accessed at high
speeds by multiple and disparate hosts. SANs can also be used to create
redundant data paths to the same storage systems and backup devices, thereby
improving a system's fault-tolerance and transfer rates.
The Company was among the first storage vendors to provide SANs to its
customers. In September 1999, the Company launched its new line of storage
systems, SANnet-TM-, that is engineered to operate in SAN environments. SANnet
comes bundled with SANscape, a Dot Hill-developed storage management software
package that greatly enhances the benefits and performance of SANs. While SANs
appear to be gaining industry acceptance, SAN technology is in its infancy and
the Company cannot predict the timing and magnitude of customer demand for SANs.
THE DOT HILL SOLUTION
Dot Hill develops and markets a comprehensive range of storage systems and
backup devices designed to meet the requirements of the Open Systems market. The
Company's products and services are intended to provide users with the following
benefits:
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RELIABILITY
The Company designs into its storage systems redundancy, reliability and
high-performance. Redundant components such as power inlets, fans and
controllers, are hot-swappable, which means that there are at least two of the
components in the system and customers can replace, upgrade or service the
components in the field without interrupting network activity.
Certain of the Company's products are NEBS-certified, including the
SANnet-TM- line of systems. The NEBS (Network Equipment-Building System)
standard was created by Bellcore to ensure that telephone equipment would
continue to operate under extreme conditions. Dot Hill's NEBS-certified products
were tested on the NEBS standard by an independent, outside agency. Those tests
required that the Company's products be subjected to various extreme conditions
including: vibrations comparable to a Zone 4 earthquake; temperature
fluctuations from -5C to 50C; humidity fluctuations from 5 to 90%; airborne
contaminants comparable to a 400 mile an hour dust storm; an electrostatic
discharge of 15,000 volts, and; the need to self extinguish when on fire.
CAPACITY AND DENSITY
The Company's disk storage systems scale from a few hundred gigabytes (GB)
up to seven terabytes (TB) in a single 72" cabinet. The Company's tape backup
solutions scale from a few hundred GBs up to 41.2TBs in a library. The Company
believes that its new SANnet line of storage systems is among the densest in the
industry. The SANnet 2200 can house ten drives in a single, 3u enclosure. The
SANnet 3200 and 4200 can house ten drives plus two, hot-swappable and redundant
hardware RAID controllers in a single 4u enclosure.
ALL-ENCOMPASSING SOLUTIONS.
The Company delivers all-encompassing solutions and professional services,
including design consulting, installation, integration, training, and 24-hour,
post-sales service and technical support, as well as software-based management
tools. The Company 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 issues. The
Company believes this value-added capability fosters customer loyalty and allows
the Company to identify emerging customer requirements.
MULTI-PLATFORM SUPPORT.
As an independent provider of storage products, Dot Hill is well positioned
to provide storage solutions on a variety of platforms including UNIX, Windows,
Linux and Novell. The Company's new SANnet line of systems supports multiple
servers operating on different platforms simultaneously. This cross-platform
capability allows customers to standardize on a single storage system that can
readily be reconfigured and re-deployed at minimal cost as the customer's
operating systems or other Open Systems components change.
SCALABILITY
The Company's products are designed to be flexible and modular, thereby
allowing the Company to size and configure storage systems to meet the specific
requirements of individual customers. This modular architecture also allows the
Company to expand or reconfigure a customer's system as the customer's needs
change, thereby allowing customers to retain capital value in their underlying
systems.
MANAGEABILITY
The Company believes that the ability to manage storage systems,
particularly through storage management software, is becoming a key
differentiation among storage vendors. The Company has a
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team of software engineers focused on software management efforts. The Company's
storage management software offerings enable customers to more easily manage,
configure and respond to their systems. SANpath and SANscape, the Company's
recently introduced software products, offer various management tools,
including: automatic balancing of data loads among multiple data paths;
automatic routing of data from non-functioning paths; LUN-masking; remote
monitoring of multi-site systems; and remote configuration of multi-site
systems.
PRODUCTS AND SYSTEMS
The Company 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, Dot Hill's storage solutions range from SCSI Disk Array
configurations to multi-terabyte Ultra2 RAID storage systems to Fibre
Channel-based SANs. Dot Hill's backup solutions incorporate "best of breed" tape
libraries and backup management software, most of which is manufactured and
developed by third parties.
In September 1999, the Company launched a new line of storage systems,
SANnet-TM-, which comes bundled with a new storage management software offering
SANscape-TM-. The Company also offers legacy products from Artecon and Box Hill.
Both the new SANnet line and the legacy lines are flexible and highly scalable.
SANNET-TM- PRODUCT LINE.
SANnet is the Company's new line of SAN-ready disk storage solutions,
designed with the reliability, flexibility, and performance necessary to meet
the needs of today's data-intensive, Internet-generation applications. SANnet
solutions support single or multiple servers simultaneously and are compatible
with many of today's popular Open Systems server platforms. The Company offers
SANnet storage systems in many topologies, including SCSI, Ultra3, and Fibre
Channel. All critical components of the SANnet systems, including RAID
controllers, battery backups and power supplies, are hot-swappable, redundant
and field-replaceable, which allows for upgrades and servicing to occur without
server interruptions.
SANNET 4200 is a carrier-class RAID storage system for one-to-many
servers. Featuring Fibre Channel technology, SANnet 4200 provides transfer
rates up to 400MB/s on multiple loops and support for RAID levels 0, 1, 0+1,
3 and 5. The SANnet 4200 supports single or multiple servers simultaneously
and supports a number of operating systems including UNIX, Windows NT,
Windows 2000 and Linux. Each system can hold from 3 to 10 drives, and store
27GB to 3.7 TB of data.
SANNET 3200 is a carrier-class RAID storage solution for single or dual
servers. Using Ultra2 LVD technology, this product provides transfer rates
up to 160MB/s on dual loops and supports RAID levels 0, 1, 0+1, 3 and 5.
Each system can hold from 3 to 10 drives, and store 27GB to 3.7 TB of data.
SANNET 2200 is a carrier-class RAID storage solution for single servers.
Using Ultra3 LVD technology, SANnet 2200 supports dual-channel transfer
rates up to 320MB/son dual loops. SANnet 2200 works directly with Windows,
Solaris, or Linux server operating systems as a JBOD (Just a Bunch of Disks)
or as expansion chassis in conjunction with a 3200 or 4200 RAID subsystem.
Each system holds 1 to 10 drives and has a capacity of 9GB to 730GBs of
data.
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SANMAN-TM- SUITE OF SOFTWARE
The Company's SANman suite of software consists of two key software packages
developed by Dot Hill, SANpath-TM- and SANscape-TM-
SANPATH-TM- helps to ensure availability and also failover and failback
of data across a SAN and enhances network-server bandwidth by balancing data
loads among functioning data paths and automatically routing data away from
non-functioning paths. Once a non-functioning path is healed, the software
automatically re-balances the data load. SANpath also enables modifications
to the SAN without server restarts, and provides LUN Masking capabilities.
SANSCAPE-TM- is a Java-based software utility that combines SAN
configuration, maintenance, and monitoring tools into a single, application.
SANscape allows customers to administer Dot Hill's storage systems located
worldwide from a single console by sending system information across the
Internet, intranets, or telephone lines. SANscape also notifies customers of
issues with their systems by email, beeper or other means and allows for
remote configuration and trouble-shooting through an interactive GUI.
TANNET-TM- PRODUCT LINE.
TANnet is the Company's line of back-up solutions. A TANnet solution
consists of the tape libraries of third parties, including StorageTek and
Qualstar, and backup management software of third parties including Veritas and
Legato. The solution may also consist of routers, and nearly always involves the
Company's professional services experts. TANnet offerings include the following.
THE L700-TM- LIBRARY, when equipped with the new Fibre 9840 Eagle-TM-
tape drives, is the first all-Fibre Channel Automated Tape Storage Solution.
A single L700 library accepts multiple tape drive types as well as mixed
media. This library offers flexible connectivity, high speed robotics, and
data management.
QUALSTAR AIT: The AIT-TM- line of tape libraries is comprised of ten
models with capacities from 500GB to over 36TB of data and can store 50GB
per tape at 6MB/sec native, or over 43GB/hour per tape drive with
compression.
PROFESSIONAL SERVICES
Dot Hill's team of applications engineers offers professional services
designed to maximize a customer's investment in their Dot Hill solutions.
Professional Services will assess a customer's needs through a pre-sales
evaluation; custom tailor a solution design that is pre-tested in Dot Hill's
Customer Integration Lab; install the solution; and provide training, giving
clients the option to operate, service and support their system.
LEGACY PRODUCTS
The Company will continue to offer a number of legacy products developed by
Box Hill and Artecon prior to the Merger. Those products include, but are not
limited to, the following:
THE FIBREBOX-REGISTERED TRADEMARK- (NOW CALLED SANNET 6008) is a Fibre
Channel storage system for single to multiple servers. It offers capacity up
to 400GB per unit and 6.25TB per arbitrated loop, and offers transfer rates
up to 200MB/s with dual loops. SANnet 6008 is designed to support
controller-less RAID using Dot Hill's FBAE-TM- software. All active
components are hot-swappable, redundant and field-replaceable. Each system
holds from 1 to 8 drives.
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THE LYNXARRAY II is a NEBS-certified Fibre Channel-compatible RAID
storage system that comes in two models: High Performance and High Capacity.
The High Performance system uses a dual-channel backplane and supports up to
16 disk drives with a capacity of up to 576 GB. The High Capacity system
uses a single-channel backplane and supports up to 43 disk drives with a
capacity of 1.55TB. Both systems can achieve aggregate transfer rates of up
to 200 MB/s and come with the option of redundant RAID controllers which
support RAID levels 0, 1, 0+1, 3 and 5.
CUSTOMERS
Dot Hill markets its products principally to high-end users in the Open
Systems market. The Company has installed storage systems primarily in
data-intensive industries in which customers require reliable, high-performance,
high-availability storage solutions, such as ISPs, financial services,
telecommunications, health care, government/defense and academia.
Since the Merger, the Company's strategy has been to target customers that
are running Internet-generation applications, which the Company defines as
applications that are related to the Internet or have arisen during this time of
the Internet, such as digital broadcasting and video editing. The Company
historically has targeted ISPs, financial services and telecommunications
companies, and a material portion of the Company's net revenues to date has been
derived from sales to customers in those industries. Direct sales to customers
in the financial services and telecommunications industries were approximately,
18% and 21%, respectively, of Dot Hill's 1999 net revenues. Direct sales to
customers in the financial services and telecommunications industries were
approximately 27% and 20%, respectively, of 1998 net revenues and 21% and 24%,
respectively, of 1997 net revenues.
Historically, a material percentage of the Company's net revenues in each
year have been derived from a limited number of customers. For the years ended
December 31, 1999, 1998 and 1997, the Company's top five customers, including
distributors, accounted for approximately 25%, 22% and 19%, respectively, of the
Company's net revenues. Sales to one customer, Uunet Technologies, Inc.
accounted for 10% of the Company's net revenue for the year ended December 31,
1999; no sales to one customer exceeded 10% of total net revenue for the years
ended December 31, 1998 and 1997. The Company generally does not enter into
long-term contracts with its customers, and customers generally have certain
rights to extend, delay or cancel the shipment of their orders without penalty.
A significant amount of the Company's revenues to date have been
concentrated in the UNIX marketplace, and within the UNIX marketplace, a
significant portion of the Company's revenues are associated with versions of
UNIX manufactured by Sun Microsystems, Inc.
SALES AND MARKETING
During 1999, the Company began to focus on Internet-generation applications,
which the Company defines as Internet-related storage applications and those
applications that have arisen during this time of the Internet, such as digital
broadcasting and video editing. Historically, the Company has focused on ISPs,
financial service providers and telecommunication companies. The Company
complements its sales force with applications engineers, who generally are
highly qualified storage experts. As of December 31, 1999, the Company employed
22 applications engineers, both domestically and internationally, to provide a
variety of Professional Services to customers, including pre-sales and
pre-deployment consulting, installation services, training and support.
Feedback from the applications engineers allows the Company to better
identify emerging customer requirements for future data storage products. Design
engineers also receive feedback from the Company's technical support, marketing
managers and production engineering teams, which helps contribute to the
quality, manufacturability and usability of products from design to deployment.
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DOMESTIC SALES AND MARKETING
The Company's domestic marketing strategy is to sell directly to end-users.
As of December 31, 1999, the Company's domestic sales team consisted of 64 sales
and support employees, 15 marketing employees, and 35 technical service and
support employees. There are seven sales offices located in the United States,
and a number of sales representatives work from their homes to cover a local
territory. Domestic sales represented approximately 88%, 94%, and 89% of the
Company's net revenues for 1999, 1998, and 1997, respectively. The vast majority
of the Company's domestic sales are made directly to end-users.
INTERNATIONAL SALES AND MARKETING
The Company's international marketing strategy is to sell directly to
end-users in certain regions and to use local distributors in others. The
Company provides marketing and technical support services in connection with
international sales. As of December 31, 1999, the Company's international sales
team consisted of 19 sales employees and 13 technical service and support
employees. There are six international Dot Hill sales offices: two in the United
Kingdom, two in Japan, one in the Netherlands and one in France. The Company's
distributors are located in approximately twenty different countries.
International sales represented approximately 12%, 8%, and 11% of the Company's
net revenues for 1999, 1998, and 1997, respectively.
ENGINEERING AND PRODUCT DEVELOPMENT
The Company's research, engineering and development team is focused on
developing innovative storage and SAN solutions, along with storage management
software, for the Open Systems market. The Company's areas of expertise include
UNIX, Windows and Linux driver and system software design; SAN Storage resource
management software design; data storage system design and integration;
high-speed interface design for SCSI, Ultra SCSI, Ultra2, Ultra3 and Fibre
Channel, and; design, qualification and integration of disk drives, tape drives,
robotics and other storage components. The Company has a history of industry
firsts, including the first successfully commercialized hot-swappable SCSI Disk
Array and RAID storage system for the UNIX environment, the first Fibre Channel
storage system, one of the first turnkey SAN solutions for the Open Systems
market and the first NEBS-certified line of storage systems.
The Company 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 also
allows the Company to focus research and development resources on specific
product innovations and advancements. The modular architecture allows solutions
to be tailored to customers' specific needs and products to be adapted to
changes in technology and in their computing environments.
The Company is currently focusing development efforts on its SANnet-TM- line
of systems and storage management software. Projects include improvements to the
features, functions and performance of the SANnet line, and the Company's
SANpath and SANscape storage management software offerings as well as a pure
Fibre Channel hardware RAID system, which the Company expects to complete during
the first half of the year 2000. The Company has contracted with a software
engineering team in China that helps write code for the Company.
Engineering and product development expenses of the Company (which do not
include compensation for applications and technical support engineers--such
compensation is recorded as sales and marketing expenses) for fiscal years 1999,
1998 and 1997 were $7.4 million, $9.9 million and $5.5 million, respectively. As
of December 31, 1999, the Company had 48 full-time employees engaged in
engineering research and development activities.
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CUSTOMER SERVICE AND SUPPORT
Dot Hill recognizes that providing comprehensive, proactive and responsive
support is essential to establishing new customer accounts and securing repeat
business. Dot Hill is committed to providing the highest levels of customer
service and support aimed at simplifying installation, reducing field failures,
minimizing system downtime and streamlining administration.
As a standard Dot Hill service, Dot Hill technical support engineers are
available by phone on a seven-day, 24-hour basis and can offer support in a
variety of different languages. Dot Hill also offers more intensive on-site
maintenance and support programs for a quarterly or annual fee, by which the
Company will dispatch either its own technical personnel or those of a global
third-party service provider to visit customer sites typically within a few
hours.
The Company provides standard warranties, which typically run from one to
five years, with all products sold. Under the standard warranty, the Company
typically ships replacement hardware components to customers in advance of
receiving returns of defective components. The Company occasionally issues
credit in lieu of replacing a piece of equipment. A customer may also contract
for an extended warranty on all products.
MANUFACTURING
Dot Hill's major manufacturing is conducted in 43,000 square feet of its
70,000 square-foot facility in Carlsbad, California. The products are
manufactured in a work cell production process. The manufacturing consists of
assembling and integrating components and subassemblies into the Company's
products. Certain of those subassemblies are manufactured by independent
contractors. The units are assembled and configured to order. Before the Company
ships units, 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. The Company
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.
The Company 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 registration from the
International Organization for Standardization for its manufacturing facility in
Carlsbad, California. The ISO 9002 certification covers the manufacture,
distribution and support of the Company's products. Attaining the certification
entailed examination of the Company's manufacturing standards and processes. The
Company must undergo periodic assessment by independent auditors in order to
retain the ISO 9002 registration. In July 1999, the Carlsbad facility passed a
registration audit. Since the Merger, the Company has transferred the
manufacture of all of its products to the Carlsbad facility.
The Company subcontracts some of its manufacturing, such as plastic molding,
metal bending, PCB fabrication and certain assembly to qualified partners in the
United States and Asia. The Company owns the design and tools/molds associated
with the manufacture of these parts. The third parties that the Company relies
on for these production activities include, but are not limited to Dovatron for
sub-assembly work and Escon for metal-bending. If the Company were required to
have other third-parties perform various work, it may take a few months to train
the companies to perform such work, and obtain the same levels of productivity.
The Company relies on other companies to supply certain key components of
its products and products that it re-sells. Many of these components and
third-party products are available only from limited sources in the quantities
and quality demanded by the Company. The Company purchases substantially all of
its disk drives from Seagate Technology Inc. and IBM, and substantially all of
its
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RAID controllers from CMD Technology and Infortrend. Approximately 23%, 22%, and
32% of the Company's total raw material purchases were from Seagate,
approximately 4%, 2% and 2% from Infortrend, and approximately 1%, 1%, and 2%
from CMD for the years ended December 31, 1999, 1998 and 1997, respectively.
Approximately 10% of the Company's raw material purchases in 1999 were from IBM.
The Company purchases substantially all of its raw materials pursuant to
purchase orders, rather than pursuant to long term purchase agreements. The
Company maintains minimum inventory levels. With respect to certain components,
such as disk drives and controllers, if Dot Hill had to seek alternative sources
of supply, the incorporation of such components from alternative suppliers and
the manufacture and shipment of the Company's products could be delayed while
modifications to such products and accompanying software were made to
accommodate the introduction of the alternative suppliers' components. The
Company estimates that replacing Infortrend and CMD's RAID controllers with
those of another supplier would involve several months of hardware and software
modification.
The Company resells the tape libraries and other products of Storage
Technology Corporation (StorageTek), among other companies. Approximately 17%,
15%, and 6% of the Company's total purchases were for Storage Tek products for
1999, 1998, and 1997, respectively. These products were then resold to
customers. If Dot Hill were to face a shortage of StorageTek products in the
future, Dot Hill believes it could, after some modification, integrate the
products of other manufacturers into its storage solutions. However, due to the
market acceptance of StorageTek, the Company 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. The Company competes primarily with traditional suppliers of
computer systems including, but not limited to Compaq Corporation,
Hewlett-Packard, Sun Microsystems, IBM, Hitachi and Dell Computer Corp., which
market storage systems as well as other computer products and which the Company
believes have become more focused on storage since 1998. The Company 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., nStor Technologies, MTI Technologies, Inc, Raid
Power, Amdahl, and Storage Technologies, Inc. In providing tape backup, the
Company competes with suppliers of tape-based storage systems such as ADIC,
Datalink Corporation, MTI Technologies, Inc., Dallas Digital and Cranel, Inc.
and numerous resellers.
Competitive pricing pressures exist in the data storage market, and have had
and may in the future have an adverse effect on the Company's revenues and
earnings. 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. The Company believes that pricing pressures are likely to continue
as competitors develop more competitive product offerings.
Many of the Company's current and potential competitors are significantly
larger than the Company and have significantly greater financial, technical,
marketing, purchasing and other resources than the Company, and as a result, may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or devote greater resources to the development, promotion
and sale of products than the Company, or to deliver competitive products at a
lower end-user price. The Company also expects that competition will increase as
a result of industry consolidations. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. 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 share, any of which
could have a material adverse effect on the Company's business, operating
results or financial condition.
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PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
Dot Hill's success depends significantly upon its proprietary technology.
The Company has limited patent protection for its products and has attempted to
protect its intellectual property rights primarily through copyrights, trade
secrets, employee and third-party nondisclosure agreements and other measures.
The Company seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. The Company generally enters into confidentiality agreements with
its employees and with key vendors and suppliers. As of December 31, 1999, the
Company had been awarded a total of seven U.S. patents covering certain elements
of its products. There are no assurances that the seven aforementioned patents
will provide the Company with competitive advantages or will not be challenged
by third parties.
The patents of others may have a material adverse effect on the Company's
ability to do business. The Company expects that competitors in the storage
system market will increasingly be subject to infringement claims as the number
of products and competitors in the market grows. Although Dot Hill 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 the Company in the future. From time to time, the
Company receives letters from patent owners asserting possible infringement and
request to explore a licensing relationship. In 1999, the Company received two
such letters. There can be no assurance that the Company will be able to
successfully defend against any such assertion or obtain a license to use such
technology or that a license could be obtained on terms that would not have a
material adverse effect on the Company. If the Company or its suppliers are
unable to license protected technology, the Company could be prohibited from
marketing products that incorporate such technology. The Company could also
incur substantial costs to redesign its products or to defend any legal action
taken against it. Should the Company's products be found to infringe protected
technology, Dot Hill could be required to pay damages to the infringed third
party or be enjoined from manufacturing and selling such products.
The Company has registered numerous trademarks and will continue to evaluate
the registration of additional trademarks as appropriate. Recently, the Company
applied for registered trademark protection for the marks SANman-TM-,
SANnet-TM-, SANpath-TM-, SANscape-TM-, "the storage in.com-TM-, Dot Hill and the
Dot Hill logo. The Company claims common law protection for and may seek to
register many other marks.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company 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
Dot Hill's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology,
duplicate the Company's products or design around patents issued to the Company
or the intellectual property rights of the Company.
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EMPLOYEES
As of December 31, 1999, Dot Hill had a total of 329 employees,
substantially all of whom are full-time. 48 employees were engaged in
engineering, research and development; 52 in applications and technical support
engineering and customer support; 111 in marketing and sales; 81 in
manufacturing; and 37 in general management and administration.
The Company's future operating results depend in significant part upon its
ability to attract, train, retain and motivate qualified management, technical,
manufacturing, sales and support personnel for its operations, which has been
particularly difficult recently due, in part, to Merger-related restructuring
activities, the enhanced recruiting efforts of competitors, and the generally
low unemployment rates. The Company provides equity incentives, in addition to
salary and benefits, to attract and retain qualified employees. Most members of
the sales force are compensated in a manner that includes a commission-based
component.
EXECUTIVE OFFICERS OF THE REGISTRANT AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
NAME AGE POSITION OFFICER SINCE
- ---- -------- --------------------------------------------- --------------
<S> <C> <C> <C>
Philip Black.......... 44 Co-Chief Executive Officer, Executive Vice May 1995
President of International Sales and
Director
James L. Lambert...... 46 Co-Chief Executive Officer, Chief Operating August 1999
Officer, President and Director
Preston Romm.......... 46 Chief Financial Officer, Treasurer and November 1999
Assistant Secretary
Benjamin Monderer..... 41 Executive Vice President of Applications April 1988
Engineering, Professional Services and
Director
Dana Kammersgard...... 44 Chief Technical Officer August 1999
</TABLE>
All officers are elected by the Board of Directors and serve at the pleasure
of the Board of Directors as provided in the By-laws.
PHILIP BLACK has served as Co-Chief Executive Officer, Executive Vice
President of International Sales and a Director of the Company since the Merger.
Prior to the Merger, Mr. Black was Chief Executive Officer and a Director of Box
Hill, and held those positions since joining Box Hill in May 1995. From
April 1994 until he joined the Company, Mr. Black was President and Chief
Executive Officer of Chevry, a backup software company. From September 1991
until June 1994, Mr. Black served as the Chief Executive Officer and Treasurer
of Avalon Control Technologies, a company specializing in products and services
related to Echelon's LONWorks technology. From March 1990 until August 1991,
Mr. Black served as Managing Director of Echelon Europe, of which he was a
co-founder. 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.
JAMES L. LAMBERT has served as Director, President, Chief Operating Officer
and Co-Chief Executive Officer of the Company since the Merger. A founder of
Artecon, Mr. Lambert served as President, Chief Executive Officer and Director
of Artecon from its inception in 1984 until the Merger. From 1979 to 1984,
Mr. Lambert served in various positions at CALMA, a division of General Electric
Company, most recently from 1981 to 1984 as Vice President of Research and
Development. Mr. Lambert currently serves as a Director of the Nordic Group of
Companies, a group of privately held companies, and of Snow Valley, Inc., a
privately-held resort enterprise affiliated with the Nordic Group. He holds a
B.S. and a M.S. in Civil and Environmental Engineering form the University of
Wisconsin, Madison.
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PRESTON ROMM joined the Company in November 1999 as Vice President of
Finance and Chief Financial Officer. From January 1997 to November 1999,
Mr. Romm was Vice President of Finance, Chief Financial Officer and Secretary of
Verteq, Inc., a privately held semiconductor equipment manufacturer. From
November 1994 to January 1997, Mr. Romm was Vice President of Finance and Chief
Financial Officer of STM Wireless, Inc. (NASD:STMI), a wireless data and voice
equipment manufacturer. From July 1990 to November 1994, Mr. Romm was Vice
President and Controller of MTI Technology Corporation (NASD:MTIC), a provider
of data storage systems. Mr. Romm has over 20 years of experience as a financial
executive at high technology companies. Mr. Romm holds a B.S. from the
University of Maryland and an M.B.A. from American University.
DR. BENJAMIN MONDERER, ENG.SC.D. has served as Executive Vice President of
Applications Engineering/Professional Services and a Director of the Company
since the Merger. Dr. Monderer was a co-founder of Box Hill, as well as
President and a Director since Box Hill's incorporation in 1988. He became
Chairman of the Board of Box Hill in July 1997. Dr. Monderer was 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 from Princeton University and a
Master of Science degree in Electrical Engineering and a Doctor of Engineering
Science from Columbia University.
DANA KAMMERSGARD has served as Chief Technical Officer since the Merger.
Mr. Kammersgard was a founder of Artecon and served as a director from its
inception in 1984 until the Merger. At Artecon, he served in various positions
since 1984 including Secretary and Senior Vice President of Engineering from
March 1998 until August 1999 and as Vice President of Sales and Marketing from
March 1997 until March 1998. Prior to co-founding Artecon, Mr. Kammersgard was
the Director of Software development at CALMA, a division of General Electric
Company. Mr. Kammersgard holds a B.A. in Chemistry from the University of
California, San Diego.
CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS
In addition to those risks identified elsewhere in this Annual Report on
Form 10-K and other filings such as the registration/joint proxy statement filed
in connection with the Merger, the Company's business and results of operations
are subject to numerous risks and uncertainties, including the following.
THE OPEN SYSTEMS STORAGE MARKET IS RAPIDLY CHANGING IN MANY WAYS AND DOT
HILL MAY BE UNABLE TO KEEP PACE OR PROPERLY PREPARE FOR THE EFFECTS OF
THOSE CHANGES.
The Open Systems data storage market in which Dot Hill operates 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 Dot Hill's
current or future products unmarketable. The introduction of products embodying
new technologies by Dot Hill's competitors and the emergence of new industry
standards also could render existing products as well as new products, such as
the SANnet line of systems, obsolete and unmarketable. For example, if customers
were to turn away from open systems computing in general, or fail to embrace the
Company's SANnet line of systems in particular, Dot Hill's revenue would decline
dramatically.
The success of Dot Hill depends upon its 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
the Company cannot successfully identify, manage, develop, manufacture or market
product enhancements or new products, its business will be materially and
adversely affected.
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<PAGE>
A number of mergers and acquisitions have taken place among open systems
storage companies recently, and that type of activity may continue. Such
corporate transactions may quickly and unpredictably alter the market, including
the competitive landscape and the availability of key components and third party
products. Such constant changes make accurate predictions difficult.
THE LOSS OF ONE OR MORE SUPPLIERS COULD ADVERSELY AFFECT DOT HILL'S ABILITY
TO MANUFACTURE AND SELL PRODUCTS.
The Company relies on other companies to supply certain key components of
its products and products that it re-sells. Many of these components and
third-party products are available only from limited sources in the quantities
and quality demanded by the Company. The Company purchases substantially all of
its disk drives from Seagate Technology Inc. and IBM, and substantially all of
its RAID controllers from CMD Technology and Infortrend. Approximately 23%, 22%,
and 32% of the Company's total raw material purchases were from Seagate,
approximately 4%, 2% and 2% from Infortrend, and approximately 1%, 1%, and 2%
from CMD for the years ended December 31, 1999, 1998 and 1997, respectively.
Approximately 10% of the Company's raw material purchases in 1999 were from IBM.
The Company purchases substantially all of its raw materials pursuant to
purchase orders, rather than pursuant to long term purchase agreements. The
Company maintains minimum inventory levels.
There is currently a significant market demand for disk drives, tape drives
and RAID controllers, and from time to time the Company may experience component
shortages, selective supply allocations and increased prices of such components.
With respect to certain components, such as disk drives and controllers, even if
alternative sources of supply became available, the incorporation of such
components from alternative suppliers could delay the manufacture and shipment
of the Company's products while modifications to such products and accompanying
software were made to accommodate the introduction of the alternative suppliers'
components. The Company estimates that replacing Infortrend and CMD's RAID
controllers with those of another supplier would involve several months of
hardware and software modification.
The Company subcontracts some of its manufacturing, such as plastic molding,
metal-bending, PCB fabrication and certain assembly to qualified partners in the
United States and Asia. The Company owns the design and tools/molds associated
with the manufacture of these parts. The third parties that the Company relies
upon for these various production activities includes, but is not limited to,
Dovatron for sub-assembly work and Escon for metal-bending. If the Company were
required to have alternate third-parties perform various manufacturing
activities, it may take a few months to train the companies and obtain the same
levels of productivity.
The Company resells the tape libraries and other products of Storage
Technology Corporation (StorageTek), among other companies. Approximately 17%,
15%, and 6% of the Company's total purchases were for Storage Tek products for
1999, 1998, and 1997, respectively. If Dot Hill were to face a shortage of
StorageTek products in the future, Dot Hill could, after some modification,
integrate the products of other manufacturers into its storage solutions.
However, due to the market acceptance of StorageTek, the Company believes that a
substantial number of customers would not be satisfied with the products of an
alternate manufacturer.
DOT HILL MAY HAVE DIFFICULTY PREDICTING RESULTS AND MAY EXPERIENCE OPERATING
LOSSES, EITHER OF WHICH WOULD LIKELY RESULT IN A STOCK PRICE DECLINE.
For the years ended December 31, 1999 and 1997, the Company incurred a loss.
There can be no assurance that the Company will be profitable on a quarterly or
annual basis. If the Company is unable to generate net income from operations,
its business will be adversely affected and its stock price will likely decline.
15
<PAGE>
The Company's quarterly operating results have in the past varied and may in
the future vary significantly depending on a number of factors, including:
- the level of competition;
- the size, timing, cancellation or rescheduling of significant orders;
- product configuration, mix and any quality issues;
- market acceptance of new products and product enhancements such as the new
SANnet line of systems; new product announcements or
introductions by competitors;
- deferrals of customer orders in anticipation of new products or product
enhancements;
- changes in pricing by the Company or its competitors;
- the ability of the Company to develop, introduce and market new products
and product enhancements on a timely basis;
- hardware component costs and availability, particularly with respect to
hardware components obtained from sole sources;
- hardware supply constraints;
- the company's success in expanding its sales and marketing programs;
- technological changes in the open systems storage market;
- levels of expenditures on research and development;
- changes in the Company's strategy;
- personnel changes; and
- general economic trends and other factors.
Sales for any future quarter are not predictable with any significant degree
of certainty. The Company generally operates with limited order backlog because
its products typically are shipped shortly after orders are received. Further,
the Company does not enter into long-term purchase contracts with customers, and
customers have certain rights to extent or delay shipment of their orders, as
well as the right to return products and cancel orders in some circumstances. As
a result, sales in any quarter are generally dependent on orders booked and
shipped in that quarter. Sales are also difficult to forecast because the open
systems storage market is rapidly evolving and the Company's sales cycles vary
substantially from customer to customer. Further, the Company has recently
launched a new line of products and is actively trying to move customers from
legacy products to this new product line which may effect sales cycles and the
predictability of orders. Due to the unpredictable timing of customer orders,
the Company may ship products representing a significant portion of its net
sales for a quarter during the last month of that quarter. Any significant
deferral of these sales could have a material adverse effect on the results of
operations in any particular quarter. To the extent that the Company completes
significant sales earlier than expected, operating results for subsequent
quarters may be adversely affected. The Company's expense levels will be based,
in part, on its expectations as to future sales. As a result, if sales levels
are below expectations, net income may be disproportionately affected. There can
be no assurance that the Company will experience sales growth with respect to
its legacy and new line of products in future periods.
Fluctuating operating results may increase the likelihood of the Company
becoming involved in expensive, time-consuming litigation. In 1998, a class
action lawsuit was filed against Box Hill Systems Corp., certain of its officers
and directors, and the underwriters of the Company's initial public offering
alleging certain violations of the federal securities laws. See "Item 3 -- Legal
Proceedings." If the
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<PAGE>
Company is not successful in defending this suit or any other suit that may
arise, or if the Company incurs greater expenses than it expects in defending
any suits, the Company's operating results for one or more quarters, as well as
the price of the Company's common stock, could be materially adversely affected.
Since the Company has undergone a number of mergers and acquisitions over
the last few years, period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as an indicator of
future performance. It is possible that in future quarters the Company's
operating results may be below the expectations of analysts and investors. In
such event, the price of the Company's common stock would likely be materially
and adversely affected.
AN ECONOMIC DOWNTURN IN AN INDUSTRY IN WHICH THE COMPANY CONCENTRATES COULD
MATERIALLY AND ADVERSELY AFFECT REVENUES.
Dot Hill's revenues to date have been derived primarily from sales to
customers in the financial services and telecommunications industries. Direct
sales to customers in the financial services and telecommunications industries
were approximately 18% and 21%, respectively, of Dot Hill's 1999 net revenues,
27% and 20%, respectively, of 1998 net revenues and 21% and 24%, respectively,
of 1997 net revenues.
Historically, a material percentage of the Company's net revenues in each
year has been derived from a limited number of customers. For the years ended
December 31, 1999, 1998 and 1997, the Company's top five customers, including
distributors, accounted for approximately 25%, 22% and 19%, respectively, of the
Company's net revenues. Sales to one customer, Uunet Technologies, Inc.
accounted for 10% of the Company's net revenue for the year ended December 31,
1999. Sales to any one customer did not exceed 10% of total new revenue for the
years ended December 31, 1998 and 1997. The Company generally does not enter
into long-term contracts with its customers, and customers generally have
certain rights to extend, delay or cancel the shipment of their orders without
penalty.
A very significant portion of the Company's revenues to date has been
concentrated in the UNIX marketplace, and within the UNIX marketplace, a
significant portion of the Company'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 Dot Hill's
products were thereby rendered incompatible with Sun Microsystems' products, Dot
Hill's business, financial position and results of operation would be materially
and adversely affected.
The Company expects that a high percentage of the Company's sales for the
foreseeable future will continue to come from a relatively small number of
customers. There can be no assurance that orders from existing customers will
continue at their historical levels, or that the Company will be able to obtain
orders from new customers. An economic downturn in any industry targeted by the
Company, or the loss of one or more customers, particularly a significant
customer, could result in a material decrease in revenues, thereby adversely
affecting Dot Hill's business.
BECAUSE THE COMPANY GENERALLY DOES NOT ENTER INTO LONG-TERM CONTRACTS WITH
ITS CUSTOMERS AND SALES CYCLES CAN BE LENGTHY, DELAYS OR CANCELLATIONS OF
CUSTOMER ORDERS COULD MATERIALLY AND ADVERSELY AFFECT DOT HILL'S OPERATING
RESULTS.
The Company generally does not enter into long-term volume purchase
contracts with its customers, and customers generally have certain rights to
extend or to delay the shipment of their orders. The Company's distributors and
value added resellers (VARs) may also carry competing product lines and could
reduce or discontinue sales of the Company's products, which could have a
material adverse effect on the Company's operating results. Although the Company
believes that it provides adequate allowances for product returns, there can be
no assurance that actual returns will not exceed recorded allowances which could
have a material adverse effect on the Company's operating
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<PAGE>
results. In addition, there can be no assurance 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 the Company. The loss of one or more of the Company's current customers,
particularly a principal customer, or cancellation or rescheduling of orders
already placed, could materially and adversely affect the Company's business,
operating results or financial condition.
Customer orders for the Company 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, and for new products, such as SANnet. Revenue
for Dot Hill is likely to be affected by the timing of large orders, which makes
it difficult for the Company 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, particularly orders for new
products such as the SANnet line of systems, include:
- time needed for technical evaluations by customers;
- customers' budget restrictions and changes to budgets during the course of
the sales cycle;
- customer internal review and testing procedures; and
- engineering work needed to integrate a storage solution with a customer's
system.
DOT HILL'S BUSINESS WILL MATERIALLY SUFFER IF IT ENCOUNTERS SIGNIFICANT
PRODUCT DEFECTS.
Storage system products like those offered by the Company may contain
undetected software errors or failures when first introduced or as new versions
are released. There can be no assurance that, despite testing, errors will not
be found in products after shipments (particularly new products such as the
SANnet line of systems), resulting in a loss of or delay in market acceptance,
which could have a material adverse effect on the Company's business, operating
results or financial condition. The Company's standard warranty provides that if
the system does not function to published specifications the Company will repair
or replace the defective component without charge. Significant warranty costs,
particularly those that exceed reserves, could have a material adverse effect on
the Company's business.
Although the Company has not received any product liability claims to date,
the sale and support of products by the Company and the incorporation of
products from other companies may entail the risk of such claims. A successful
product liability claim against the Company could have a material adverse effect
on the Company's business, operating results or financial condition.
DOT HILL HAS RECENTLY LAUNCHED A NEW LINE OF PRODUCTS AND IS ENCOURAGING
CUSTOMERS TO MOVE FROM LEGACY PRODUCTS TO THE NEW LINE, WHICH ENTAILS MANY
RISKS AND UNCERTAINTIES.
The Company has recently introduced a number of new products including its
SANnet line of systems and two software packages, SANman and SANscape. The
Company is actively encouraging customers to move from the Company's various
legacy products to the new product lines. These activities entail a number of
risks and uncertainties all of which could have a material and adverse affect on
the Company's business. Those risks and uncertainties include, but are not
limited to, the following:
- customer orders may be delayed while customers evaluate new products;
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<PAGE>
- customers may be disturbed by Company actions to encourage the use of the
new products and they may turn away from the Company;
- the new line of products may contain defects or bugs that are not yet
known to the Company, but that come to light after shipment of products
has occurred;
- customers may turn away from the new products;
- the Company likely will find it more difficult to accurately predict
future financial performance.
DOT HILL'S BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED IF IT CANNOT
ATTRACT OR RETAIN KEY PERSONNEL.
The Company's future performance depends in significant part upon the
continued service of its senior management and key personnel. The Company
provides incentives such as salary, benefits and option grants (which are
typically subject to vesting over four years) to attract and retain qualified
employees. In recent periods, the Company has experienced difficulties retaining
existing and attracting and training new, skilled personnel. Any inability to
attract, train and retain skilled sales personnel in future periods or the loss
of the services of one or more of the Company's officers or other key employees
could have a material adverse effect on the Company's business, operating
results or financial condition. Competition for such personnel is intense, and
there can be no assurance that the Company 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.
THE COMPUTER STORAGE MARKET IS HIGHLY COMPETITIVE.
The storage system market is intensely competitive. The Company competes
with various companies, including, but not limited to: Hewlett Packard, Sun
Microsystems, IBM, Hitachi, Compaq Corporation, and Dell Computer Corp., which
market storage systems as well as other computer products, and which have become
more focused on storage during the past few years. The Company also competes
against independent storage system suppliers to the high-end market including,
but not limited to: Network Appliance, nStor Technologies, Ciprico, StorageTek,
Procom Technology Inc., Storage Computer Corporation, Storage Works, MTI
Technology and EMC Corporation. In providing tape backup, the Company competes
with suppliers of tape-based storage systems including, but not limited to: ADIC
Datalink Corporation, MTI Technologies, Dallas Digital, Cranel, Inc. and others.
Many of these competitors are significantly larger than Dot Hill and have
significantly greater name recognition, engineering, manufacturing and marketing
capabilities, and greater financial and personnel resources than the Company. As
a result, competitors 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 the Company, or to
deliver competitive products at a lower end-user price.
The Company also expects that competition will increase as a result of
industry consolidations. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs of the Company's
prospective customers. 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 share, any of which could have a material
adverse effect on the Company's business, operating results or financial
condition. In fact, competitive pricing pressures have had, and may continue to
have, an adverse effect on Dot Hill's revenue and earnings.
The Company believes that the principal competitive factors affecting its
markets include: fault-tolerance reliability, performance, ease of use,
scalability, manageability, price and customer service and support. There can be
no assurance that the Company will be able to successfully incorporate these
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factors into its products and to compete against current or future competitors
or that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results or financial condition.
If Dot Hill is unable to develop and market products to compete with the
products of competitors, the Company's business will be materially and adversely
affected. In addition, if major customers who are competitors cease purchasing
Dot Hill products so that they can concentrate on sales of their own products,
the Company's business will be adversely affected.
Dot Hill sells its products through distributors and value added resellers
(VARs) internationally and, to a lesser extent, domestically. These VARs and
distributors may also carry competing product lines, and could reduce or
discontinue sales of the Dot Hill's products, which could have a material
adverse effect on operating results. In addition, the Company cannot assure that
existing end-user customers will not purchase storage equipment from the
manufacturer that provides their network computing systems and, as a result,
reduce or eliminate purchases from Dot Hill.
DOT HILL'S INTERNATIONAL BUSINESS ACTIVITIES SUBJECT IT TO RISKS THAT COULD
ADVERSELY AFFECT BUSINESS.
Dot Hill's international sales represented approximately 12% of net revenues
in 1999 and the Company currently has sales offices in Japan, France, England
and the Netherlands. Dot Hill believes that continued growth and profitability
will require expansion of international operations, particularly in Europe and
the Pacific Rim. The Company'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;
- difficulties in staffing and managing international operations;
- seasonal reductions in business activity during the summer months in
Europe and other times in other parts of the world; and
- problems in collecting accounts receivable.
A portion of the Company's international business is presently conducted in
currencies other than the U.S. dollar. Foreign currency transaction 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 the Company conducts its business relative to the
U.S. dollar will cause currency transaction gains and losses, which Dot Hill has
experienced in the past and continues to experience. Due to the substantial
volatility of currency exchange rates, among other factors, the Company cannot
predict the effect of exchange rate fluctuations upon future operating results.
There can be no assurance that the Company will not experience currency losses
in the future. The Company
20
<PAGE>
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, the Company has limited experience
in marketing and distributing its products internationally. Dot Hill cannot 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 of the Company.
DOT HILL'S LACK OF INTELLECTUAL PROPERTY PROTECTION AND CLAIMS OF PATENT
INFRINGEMENT MAY MATERIALLY AND ADVERSELY AFFECT THE COMPANY'S BUSINESS.
Dot Hill's success depends significantly upon its proprietary technology.
The Company has limited patent protection for its products and has attempted to
protect its intellectual property rights primarily through copyrights, trade
secrets, nondisclosure agreements and other measures. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which affords only limited protection. The Company
generally enters into confidentiality agreements with its employees and with key
third parties. As of December 31, 1999, the Company had been awarded a total of
seven U.S. patents covering certain elements of its products. The Company does
not have any patents pending or current plans to seek additional patents at this
time. There are no assurances that the seven aforementioned patents will provide
the Company with competitive advantages or will not be challenged by third
parties.
The patents of others may have a material adverse effect on the Company's
ability to do business. The Company expects that competitors in the storage
system market will increasingly be subject to infringement claims as the number
of products and competitors in the market grows. Although Dot Hill 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 the Company in the future. From time to time, the
Company receives letters from patent owners that indicate a possible
infringement and request to explore a licensing relationship. In 1999, the
Company received two such letters. If such inquiries result in the lodging of a
more formal claim, the Company 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 the Company will be able to obtain a
license to use such technology or that a license could be obtained on terms that
would not have a material adverse effect on the Company. If the Company or its
suppliers are unable to license protected technology, the Company could be
prohibited from marketing products that incorporate such technology. The Company
could also incur substantial costs to redesign its products or to defend any
legal action taken against it. Should the Company's products be found to
infringe protected technology, Dot Hill could be required to pay damages to the
infringed party or be enjoined from manufacturing and selling such products.
The Company has registered numerous trademarks and will continue to evaluate
the registration of additional trademarks as appropriate. Recently, the Company
has applied for registered trademark protection for the marks SANman-TM-,
SANnet-TM-, SANpath-TM-, SANscape-TM-, "the storage in.com-TM-, Dot Hill and the
Dot Hill logo. The Company claims common law protection for and may seek to
register many other marks.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company 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
Dot Hill's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not
21
<PAGE>
independently develop similar technology, duplicate the Company's products or
design around patents issued to the Company.
IF WE HAVE NOT ADEQUATELY PREPARED FOR THE TRANSITION TO YEAR 2000, OUR
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD SUFFER.
We have executed a plan designed to make our computer systems, applications,
computer and manufacturing equipment and facilities Year 2000 ready. To date,
none of our systems, applications, equipment or facilities have experienced
material difficulties from the transition to Year 2000, nor have we been
notified that any of our suppliers have had any such difficulties. However, due
to the breadth of potential issues related to the Year 2000, we cannot guarantee
that we will not experience any problems in the future and the final
determination may take several months. Where practicable, we have attempted to
mitigate our risks with respect to any failures of our critical external
suppliers related to the Year 2000. The effect on our results of operations from
any failure of our systems, applications, equipment or facilities, or our
critical external suppliers, related to the Year 2000 issue cannot yet be
determined
THE COMPANY'S EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES OWN MORE
THAN HALF OF THE COMPANY'S OUTSTANDING SHARES, WHICH COULD PREVENT A CHANGE
IN CONTROL OF THE COMPANY, AND ADVERSELY AFFECT DOT HILL'S STOCK PRICE.
As of March 2000, the Company's executive officers, directors and their
affiliates beneficially owned approximately 54% of the Company's outstanding
shares of common stock. As a result, these stockholders, if acting together,
would be able to influence matters requiring approval by the stockholders of the
Company, including the election of a majority of the directors. The voting power
of these stockholders under certain circumstances could have the effect of
delaying or preventing a change in control of the Company.
Further, the Company's Certificate of Incorporation, as amended, and Bylaws,
as amended, contain a number of provisions that could impede a takeover or
change in control of the Company, including but not limited to a classified
Board of Directors. If the shareholders adopt various proposals at the next
annual meeting of the shareholders scheduled for May 8, 2000, the newly adopted
Certificate of Incorporation and Bylaws will contain other provisions that could
impede a takeover or change in control of the Company, including but not limited
to the elimination of the stockholders' ability to take action by written
consent and a fair price requirement and the elimination of the ability of
stockholders to remove a director from office without cause.
The Board of Directors may issue additional shares of Common Stock or
establish one or more classes or series of Preferred Stock up to 5,000,000
shares (10,000,000 shares if shareholders adopt a particular proposal at the
next annual shareholders meeting scheduled for May 8, 2000), designations,
relative voting rights, dividend rates, liquidation and other rights,
preferences and limitations as determined by the Board without stockholder
approval.
Each of the foregoing provisions gives the Board, acting without stockholder
approval, the ability to prevent, or render more difficult or costly, the
completion of a takeover transaction that stockholders might view as being in
their best interests.
OUR STOCK PRICE IS VOLATILE.
The market price of the Company's common stock has been, and is expected to
continue to be, volatile. This volatility may result from a number of factors,
including fluctuations in the Company's quarterly revenues and net income,
announcements of products by the Company or its competitors, and conditions in
the Open Systems storage market. Also, the stock market has experienced and
continues to experience extreme price and volume fluctuations which have
affected the market prices of
22
<PAGE>
securities, particularly those of technology companies, and which often have
been unrelated to the operating performance of the companies. These broad market
fluctuations, as well as general economic and political conditions, may
adversely affect the market price of the Company's Common Stock in future
periods. Stock price volatility may increase the likelihood of the Company
becoming involved in expensive, time-consuming litigation. In 1998, a class
action lawsuit was filed against Box Hill Systems Corp., certain of its officers
and directors, and the underwriters of the Company's initial public offering
alleging certain violations of the federal securities laws. See "Item 3 -- Legal
Proceedings."
ITEM 2. PROPERTIES:
Dot Hill's headquarters and ISO 9002 certified manufacturing operations are
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 2001. The Company also has a major office in New York
City, which consists of approximately 52,000 square-feet of space and is
occupied under a long-term lease expiring in 2007. In addition, the Company
leases six offices throughout the United States, as well as offices in Japan,
France England and the Netherlands. The aggregate rent for the year ended
December 31, 1999 for all facilities was approximately $2.0 million The Company
believes that its existing facilities have the capacity to double their current
production and therefore are adequate to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS:
The Company is subject to a class action lawsuit filed against Box Hill
Systems Corp., certain of its officers and directors, and the underwriters of
the Company's September 16, 1997 initial public offering (the "Offering"). The
lawsuit is proceeding in the United States District Courts for the Southern
District of New York. The action was filed on December 4, 1998 on behalf of
purchasers of the stock of the Company during the period from September 16, 1997
to April 14, 1998. Plaintiffs allege that, in violation of federal securities
laws, defendants made misrepresentations of material fact and omitted material
facts required to be disclosed in the Company's registration statement and
prospectus issued in connection with the Offering and in statements allegedly
made by the Company and certain of its officers and directors subsequent to the
Offering. The lawsuit is in the discovery phase, the deadline for which is
currently scheduled for March 31, 2000.
The Company believes that it has meritorious defenses to plaintiffs' claims
and intends to vigorously defend against those claims. However, the Company
expects to incur significant legal expense in 2000 defending this litigation.
Such defense costs, and other amounts incurred in connection with this
litigation, will be expensed as incurred and will reduce the Company's 2000
results.
In addition to the complaints discussed above, the Company is subject to
various other legal proceedings and claims against the Company, asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
the claims against the Company cannot be predicted with certainty, such
litigation and claims may have a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been listed on the New York Stock Exchange
since September 16, 1997.
The following table sets forth, for the fiscal quarters indicated, the range
of high and low sale prices per share of the Company's common stock as reported
on the New York Stock Exchange.
<TABLE>
<CAPTION>
QUARTERLY PERIOD HIGH LOW
- ---------------- -------- --------
<S> <C> <C>
Fiscal Year Ended December 31, 1999
1st Quarter............................................... $ 7.13 $4.00
2nd Quarter............................................... 6.38 4.50
3rd Quarter............................................... 8.18 5.00
4th Quarter............................................... 7.13 4.63
Fiscal year ended December 31, 1998
1st Quarter............................................... $14.25 $9.50
2nd Quarter............................................... 13.88 6.63
3rd Quarter............................................... 9.13 6.13
4th Quarter............................................... 8.50 4.81
</TABLE>
As of March 20, 2000, there were 5,657 holders of record of the Company's
common stock.
The Company has never paid any cash dividends on its common stock, and
currently intends to retain future earnings, if any, to fund the development and
growth of its business. The Company does not anticipate paying any cash
dividends in the foreseeable future.
The last sales price for the Company's common stock, as reported by the New
York Stock Exchange on March 20, 2000 was $13.69.
During the period covered by this Annual Report on Form 10-K, the Company
did not issue or sell any equity securities that were not registered under the
Securities Act of 1933, as amended.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The accompanying historical financial statements of Dot Hill have been
retroactively restated to reflect the Merger of Box Hill and Artecon, which was
accounted for as a pooling of interests. The financial statements for the year
ended December 31, 1999 reflect the results of Dot Hill from the August 2, 1999
Merger date through December 31, 1999, in addition to the combined results of
Box Hill and Artecon from January 1, 1999 through the Merger date. The financial
statements for the years ended December 31, 1998, 1997, 1996, and 1995 combine
the results of operations of Box Hill for each of the years then ended with the
results of operations of Artecon for the fiscal years ended March 31, 1999,
March 31, 1998, March 29, 1997 and March 30, 1996 respectively. The following
financial information should be read in conjunction with the Company's financial
statements and related notes thereto and with "Management Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Annual Report on Form 10-K. As a result of changing Artecon's fiscal
year-end from March 31 to conform with the Company's December 31 year-end,
Artecon's results of operations for the three months ended March 31, 1999 are
identical in the combined results of operations for both the years ended
December 31, 1999 and 1998 and is reflected as an adjustment in the consolidated
statements of shareholders equity. Artecon's total revenue and net income for
this period were $18.3 million and $1.7 million, respectively. Artecon's cash
flows used in operating, investing, and financing activities for this period
were $2.6 million, $39,000 and $1.8 million, respectively.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997(2) 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues........................................ $124,216 $168,355 $136,684 $105,344 $87,397
Gross margin........................................ 37,604 58,591 40,211 29,925 28,613
Operating expenses:
Selling and marketing............................. 24,204 34,839 18,121 12,968 10,078
Engineering and product development............... 7,401 9,946 5,523 4,463 3,039
General and administrative........................ 10,837 9,981 7,049 4,011 3,927
Shareholder officer's compensation................ -- 1,275 7,538 6,347 9,067
Impairment of intangible assets................... 1,224 867 -- -- --
Merger and restructuring expense.................. 7,392 1,404 -- -- --
Acquired in-process research and development...... -- -- 18,200 -- --
-------- -------- -------- -------- -------
Operating income (loss)............................. (13,454) 279 (16,220) 2,136 2,502
Net income (loss)................................... $ (9,047) $ 584 $(14,230) $ 1,467 $ 1,622
======== ======== ======== ======== =======
Basic net income (loss) per share(1)................ $ (0.39) $ 0.03 $ (1.06) $ 0.12 $ 0.14
======== ======== ======== ======== =======
Diluted net income (loss) per share(1).............. $ (0.39) $ 0.02 $ (1.06) $ 0.10 $ 0.12
======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments... $ 47,951 $ 59,807 $ 58,194 $ 1,740 $ 4,271
Working capital..................................... 58,946 78,867 74,259 32,510 14,041
Total assets........................................ 103,658 127,030 131,162 14,879 28,327
Total long-term debt................................ 272 11,908 10,484 2,921 2,941
Total stockholders' equity.......................... 72,823 79,964 78,227 13,866 12,663
</TABLE>
- --------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements of Dot Hill Systems
Corp. for the three years in the period ended December 31, 1999 for an
explanation of shares used in computing basic and diluted net income (loss)
per share.
(2) Concurrent with the initial public offering of Box Hill in 1997, the Company
terminated its status as an S Corporation. Had the Company been a C
Corporation for the entire year, the proforma net loss and net loss per
basic and diluted share would have been $15,924 and $1.18, respectively,
based on the tax laws in effect during the period. The proforma information
presented in this paragraph is unaudited.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and the related notes thereto included herein. The
discussion in this Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in this section and the section entitled "Business,"
as well as those discussed elsewhere in this Annual Report on Form 10-K.
OVERVIEW
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,
internet service providers, multimedia, healthcare, government/defense and
academia. The Company's international strategy is to sell directly to end users
in certain regions, and to use local distributors in others. The Company focuses
on providing storage solutions to high-end customers, primarily in the UNIX,
Windows, Linux and Novell environment. The Company's strategy is to leverage its
expertise as a company focused exclusively on storage solutions.
Effective August 2, 1999, Box Hill and Artecon completed a Merger in which
the two companies were merged in a tax-free, stock-for-stock transaction. The
Merger was accounted for as a pooling-of-interests. The combined company changed
its name to Dot Hill Systems Corp. Under the terms of the merger agreement, the
Company issued 8,734,523 shares of its common stock to the former Artecon
shareholders, representing .4 shares of the Company's common stock in exchange
for each share of Artecon common stock outstanding. Additionally, Artecon's
convertible preferred Series A shares were converted into 719,037 shares of the
Company's common stock. The historical financial statements of the Company have
been restated to reflect the Merger.
During fiscal 1997, Artecon and SDI completed a reverse merger whereby SDI
acquired Artecon for legal and tax purposes. For financial reporting purposes,
the SDI merger was accounted for as an acquisition of SDI by Artecon, and, as
such, the historical financial results of Artecon for all years prior to the SDI
merger, which are included within the accompanying supplemental consolidated
financial statements, are those of Artecon. The SDI/Artecon combination was
accounted for as a purchase and the purchase price included an allocation to
goodwill and other intangible assets of $7.4 million. Additionally, in
August 1997, Artecon acquired substantially all of the assets and liabilities of
Falcon. The acquisition was accounted for as a purchase and the purchase price
included an allocation to goodwill and other intangible assets of $638,000.
The Company's manufacturing operations consist primarily of the assembly and
integration of components and subassemblies into the Company's products, with
certain of those subassemblies manufactured by independent contractors. The
Company's operations are primarily conducted from its facilities in California
and New York City. Generally, the Company extends to its customers the
warranties provided to the Company by its suppliers. To date, the Company's
suppliers have reimbursed the majority of the Company's warranty costs. On a
quarterly and annual basis the Company's gross margins have been and will
continue to be affected by a variety of factors, including competition, product
configuration, product mix, the availability of new products and product
enhancements, and the cost and availability of components.
Competitive pricing pressures exist in the data storage market, and have had
and may in the future continue to have an adverse effect on the Company's
revenue and earnings. The Company believes that pricing pressures are likely to
continue as competitors develop more competitive product offerings.
26
<PAGE>
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 the
Company and 2,200,000 shares were sold by individuals who were the founders and
sole shareholders of the Company prior to the initial public 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 Box Hill, after deducting estimated underwriting
discounts and offering expenses, were approximately $56.6 million.
The Company markets and distributes its products and services through its
direct sales force employed in 7 domestic offices and 6 overseas sales offices
located in Japan, France, England and the Netherlands. Domestically, the vast
majority of the Company's sales are made directly to end-users. Internationally,
the Company teams up with local resellers in certain regions, and sells directly
to end-users in other regions. Revenue generated 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, 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 Dot Hill's consolidated statement
of operations as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Revenues........................................... 100.0% 100.0% 100.0%
Gross Margin........................................... 30.3 34.8 29.4
Operating expenses
Selling and service.................................. 19.5 20.7 13.3
Engineering and product development.................. 6.0 5.9 4.0
General and Administration........................... 8.7 5.9 5.2
Shareholder officers' compensation................... -- .8 5.5
Impairment of intangible assets...................... 1.0 .5 --
Merger and restructuring expenses.................... 6.0 .8 --
Acquired in-process research and development......... -- -- 13.3
Operating income (loss)................................ (10.9) .2 (11.9)
Net income (loss)...................................... (7.3)% .3% (10.4)%
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
NET REVENUES.
Net revenues reflect the invoiced amounts for products shipped less reserves
for estimated returns and revenues from service contracts. Net revenues for the
year ended December 31, 1999 were $124.2 million compared to $168.4 million for
the year ended December 31, 1998 a decrease of approximately 26.2%. The decrease
in net revenues is primarily attributable to a decrease in volume of sales
coupled with price reductions. Comparisons of the Company's 1999 and 1998
results are difficult due to the significant corporate restructuring that the
Company and Artecon have undergone over the last several years, including the
Merger, and Artecon's acquisition of Storage Dimensions in March 1998 and of
Falcon in August 1997. The decrease in net revenue was due in part to the
Company's focus on the Merger and integration and restructuring issues, efforts
to merge the sales and product lines of Artecon and Box Hill, and the
unwillingness of certain customers to purchase storage products due to Year 2000
concerns. For 1999, sales of SCSI-based solutions were 64% of revenues, sales of
backup solutions were 15% of revenues, services were 10% of revenues, and sales
of other products and services were approximately 11% of revenues.
27
<PAGE>
GROSS MARGIN.
Gross margin for 1999 was $37.6 million, or 30.3% of net revenues, compared
to a gross margin of $58.6 million, or 34.8% of net revenues, for 1998. The
decrease in gross margin as a percentage of net revenues from 1998 to 1999 was
primarily attributable to a $5.0 million inventory write-down associated with
the Company's product line consolidation and as a result of related price
reductions. Excluding inventory write downs of $5.0 million and $403,000 for
1999 and 1998, respectively, gross margin was 34.3% of net revenues for 1999
compared to 35.0% of net revenues for 1998.
SALES AND MARKETING EXPENSES.
Selling and marketing expenses are comprised primarily of salaries,
commissions and marketing costs. Selling and marketing expenses decreased to
$24.2 million for 1999 from $34.8 million for 1998. The decrease in selling and
marketing expenses was primarily due to a decrease in the direct sales force and
field service staff as a result of Artecon's restructuring and operational
consolidations, which took place in fiscal 1998 after Artecon's merger with
Storage Dimensions. As a percentage of net revenues, sales and marketing
expenses decreased to 19.5% for 1999 from 20.7% in 1998, primarily as a result
of the decreases in personnel noted above.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES.
Engineering and product 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 decreased to $7.4 million for 1999 compared to $9.9 million for 1998.
The decrease in research and development expenses is primarily attributable to
Artecon's restructuring and operation consolidations in fiscal 1998. As a
percentage of net revenues, engineering and product development increased
slightly to 6.0% for 1999 compared to 5.9% for 1998.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses are comprised primarily of compensation
and overhead costs associated with Dot Hill's finance and administrative staff.
General and administrative expenses, including shareholder officers
compensation, for 1999 were $10.8 million, or 8.7% of net revenues, compared to
$11.3 million, or 6.7% of net revenues, for 1998. The decrease in general and
administrative expenses is primarily attributable to the restructuring and
operational consolidation which took place in 1998 after Artecon's merger with
Storage Dimensions and at Dot Hill after the Merger.
MERGER AND RESTRUCTURING EXPENSES AND IMPAIRMENT OF INTANGIBLE ASSETS.
During the third quarter of 1999, and in connection with the Merger, the
Company recorded expenses totaling $13.4 million related to the Merger and
management's restructuring and integration plan associated with the Merger, as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Inventory write-downs, reported with cost of goods sold..... $ 5,033
Professional fees........................................... 4,029
License termination......................................... 1,000
Employee termination costs.................................. 1,100
Write-down of intangibles................................... 937
Facility closures and related costs......................... 647
Other integration costs..................................... 616
-------
Total................................................... $13,362
=======
</TABLE>
28
<PAGE>
Management's restructuring and integration plan relates primarily to the
consolidation and discontinuance of product lines, which resulted in inventory
and intangible assets write-downs of $5.0 million and $937,000 respectively. As
a result of the product line consolidation, the Company also terminated a
license agreement with a third-party vendor, resulting in license termination
costs of $1.0 million. Additionally, management's plan includes consolidating
the Company's manufacturing operations and other functions into the Company's
headquarters in Carlsbad, California, which resulted in employee termination
charges of $1.1 million, consisting primarily of severance payments for 38
employees, facility closure costs of $647,000 and other integration costs of
$616,000. The Company completed the plan during the fourth quarter of 1999. The
major components of the charges and the remaining accrual balance as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
ACCRUED
RESTRUCTURING
EXPENSES PAID COSTS
-------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Professional services.......................... $4,029 $(4,029) $ --
License termination............................ 1,000 (1,000) --
Employee termination costs..................... 1,100 (620) 480
Facility closures and related costs............ 647 (125) 522
Other integration costs........................ 616 (526) 90
------ ------- ------
Total...................................... $7,392 $(6,300) $1,092
====== ======= ======
</TABLE>
The Company anticipates that the remaining merger and restructuring costs
liability at December 31, 1999, which consists primarily of employee termination
costs and lease and contract termination costs, will be paid in 2000 and
believes that there are no unresolved issues or additional liabilities that may
result in an adjustment to the merger and restructuring charge.
In December 1998, the Artecon 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. Such charges consisted primarily of
employee termination costs, inventory write-downs, facility closures and related
expenses, intangible asset impairment and tooling machinery write-offs.
Employee termination costs consisted primarily of severance payments for 43
employees, all of whom were terminated as of December 31, 1998. The majority of
the employees terminated were employed at the engineering facility in Milpitas,
California and at the various domestic sales and service locations. Inventory
write-downs and the tooling write-off primarily related 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 was included as a
separate component of cost of sales in the accompanying financial statements.
Facility closures and related expenses consisted of lease termination costs and
the write-off of certain property and equipment disposed of associated with the
29
<PAGE>
closures. The major components of the charges and the reconciliation of the
expenses and accrual activity during 1998 and 1999 was as follows:
<TABLE>
<CAPTION>
ACCRUED ACCRUED
AMOUNTS RESTRUCTURING AMOUNTS RESTRUCTURING
INITIAL UTILIZED COSTS AT UTILIZED COSTS AT
RESTRUCTURING IN FISCAL DECEMBER 31, IN FISCAL DECEMBER 31,
CHARGE YEAR 1998 1998 YEAR 1999 1999
------------- --------- ------------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Employee termination costs........... $ 254 $ (200) $ 54 $ (54) $ --
Inventory write-downs................ 403 (115) 300 (300) --
Facility closures and related
expenses........................... 715 (476) 239 (239) --
Tooling write-off.................... 135 (123) -- -- --
Intangible asset impairment.......... 300 (300) -- -- --
------ ------- ---- ----- ----
Total............................ $1,807 $(1,214) $593 $(593) $ --
====== ======= ==== ===== ====
</TABLE>
In connection with the acquisitions of Falcon and SDI, Artecon allocated
$420,000 and $1.6 million, respectively, to an assembled workforce intangible
asset. Artecon recorded an impairment of these intangible assets of $300,000
during the year ended December 31, 1998, 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, Artecon recognized
additional amortization of $287,000 in 1999 based on the specific attrition and
termination of additional employees who had been the basis for the valuation of
the assembled workforce intangible asset.
In connection with the merger with SDI, Artecon recorded a reserve for
acquisition related costs of $6.6 million, of which $661,000 was outstanding at
December 31, 1998. All of the acquisition related costs were included in the
purchase price allocation performed during 1997. The major components of the
reserve and the reconciliation of the accrual activity during 1998 and 1999 was
as follows:
<TABLE>
<CAPTION>
INITIAL MERGER ACCRUED MERGER ACCRUED MERGER
COSTS AMOUNTS COSTS AMOUNTS COSTS
(DECEMBER 31, 1997) UTILIZED (DECEMBER 31, 1998) UTILIZED (DECEMBER 31, 1999)
------------------- -------- ------------------- -------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Employee termination
costs (80
employees)............ $2,923 $(2,761) $162 $(162) $ --
Professional service
fees.................. 2,225 (1,909) 316 -- 316
Other costs............. 1,433 (1,250) 183 (117) 66
------ ------- ---- ----- ----
Total............... $6,581 $(5,920) $661 $(279) $382
====== ======= ==== ===== ====
</TABLE>
The Company anticipates that the remaining merger costs liability at
December 31, 1999, which consists primarily of miscellaneous professional
services obligations and lease and contract termination costs, will be paid in
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.
OTHER INCOME, NET.
Total other income is comprised of interest income earned on the Company's
cash and cash equivalents, the majority of which is exempt from federal income
taxes, less interest expense and other expenses. Total other income for 1999 was
$1.4 million compared to $1.3 million for 1998. The increase in total other
income was primarily attributable to a reduction in interest expense associated
with repayment of Artecon's previously outstanding line of credit in the third
quarter of 1999.
30
<PAGE>
INCOME TAXES.
The Company's effective income tax rate was (24.8)% for the year ended
December 31, 1999 compared to 62.7% for the comparable 1998 period. The 1999
effective income tax rate reflects federal, state and local taxes, offset by
non-deductible merger and restructuring expenses. The effect of state and local
taxes was 54.6% during the 1998 period as a result of the various jurisdictions
in which the Company's taxable income was earned.
As of December 31, 1999 and 1998, the Company has federal and state net
operating losses of approximately $20.4 million and $10.2 million, which begin
to expire in the years ending 2009 and 2011, respectively. The Company also has
federal and state tax credit carryforwards of $1.2 million and $774,000,
respectively. The annual use of Artecon's federal net operating loss and credit
carryforwards is limited to an annual amount of approximately $3.0 million per
year as a result of the Merger.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUE.
Net revenue increased 23.2% to $168.4 million for the year ended
December 31, 1998, compared to $136.7 million for the year ended December 31,
1997. The increase in net revenue is primarily attributable to an increase in
volume, mostly as a result of the SDI acquisition, partially offset by price
reductions. The increase in volume was also due to increases in sales of back-up
products, Fibre Channel and RAID products, partially offset by a decrease in
sales of legacy storage products. The increase in sales of back-up products was
the result of the additional focus on backing-up mission critical data by the
Company's traditional customer base, and the successful sales efforts in
obtaining new customers requiring the Company's knowledge and experience in
back-up integration.
GROSS MARGIN.
Gross margin increased 45.7% to $58.6 million in 1998 from $40.2 million for
the comparable period of 1997. As a percentage of net revenues, gross profit
increased from 29.4% in 1997 to 34.8% in 1998, principally as a result of
different product mix and inventory write-offs, which adversely effected margins
in the comparable period.
SALES AND MARKETING.
Sales and marketing expenses increased 92.3% to $34.8 million for the year
ended December 31, 1998 from $18.1 million for the year ended December 31, 1997.
As a percentage of net revenue, sales and marketing expenses increased to 20.7%
in 1998 from 13.3% in 1997. The increase was primarily due to an increase in the
direct sales force and field service staff, increased commissions based on the
increase in sales and increased sales management overhead as a result of the SDI
acquisition.
ENGINEERING AND PRODUCT DEVELOPMENT.
Engineering and product development expenses increased 80.0% to
$9.9 million for the year ended December 31, 1998 from $5.5 million for the
comparable period of 1997. As a percentage of net revenue, engineering and
product development increased to 5.9% in 1998 from 4.0% in 1997. The increase is
primarily due to an increase in the number of employees engaged in research and
development activities.
31
<PAGE>
GENERAL AND ADMINISTRATIVE.
General and administrative expenses increased 41.6% to $10.0 million for the
year ended December 31, 1998 from $7.0 million for the year ended December 31,
1997. As a percentage of net revenue, general and administrative expenses
increased to 5.9% in 1998 from 5.2% in 1997. The increase is primarily due to
additional depreciation and amortization expense of $1.5 million and
$1.7 million, respectively, for goodwill and other intangible assets associated
with the SDI and Falcon acquisitions and additional rent expense resulting from
an expanded facility in New York.
SHAREHOLDER OFFICERS' COMPENSATION.
Shareholder officers' compensation consists of salaries and bonuses paid to
Box Hill's three original shareholder officers. Shareholders officers'
compensation decreased 83.1% 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 the
Company's initial public offering.
RESTRUCTURING EXPENSES AND IMPAIRMENT OF INTANGIBLE ASSETS.
In December 1998, Artecon's Board of Directors approved a plan for Artecon
to consolidate one of its 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 $1.8 million to cover the
costs associated with these actions.
In connection with Artecon's acquisitions of Falcon and SDI, Artecon
allocated $420,000 and $1.6 million, respectively, to an assembled workforce
intangible asset. Artecon recorded an impairment of these intangible assets of
$300,000 during the year ended December 31, 1998, which has been included as a
component of the restructuring charge, as the impairment was a direct result of
employee terminations associated with activities that were exited. Furthermore,
as a result of significant attrition and terminations of employees which had
been utilized as the basis for the assembled workforce valuation, Artecon
recognized a write-down of the intangible assets associated with the workforce
of $867,000.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT.
In connection with Artecon's acquisitions of SDI and Falcon, management
determined that certain hardware and software products in development had no
future alternative use. Accordingly, Artecon recognized a charge of
$14.5 million and $3.7 million for the year ended December 31, 1997 for the
write-off of in-process research and development costs relating to the reverse
merger with SDI and the acquisition of Falcon, respectively. No such charges
were recorded for the year ended December 31, 1998.
OTHER INCOME, NET.
Other income increased $1.7 million to $1.3 million for the year ended
December 31, 1998 from a loss of $404,000 for the comparable period of 1997. The
increase is primarily the result of interest income earned on the proceeds from
the Company's initial public offering in September 1997 and legal settlement
income received in 1998.
INCOME TAXES.
The Company's effective income tax rate was 62.7% for the year ended
December 31, 1998 versus (14.4)% for the comparable period of 1997. The 1998
effective income tax rate reflects federal, state
32
<PAGE>
and local taxes, partially offset by research and development credits and a tax
benefit from the Company's foreign sales corporation. The effect of state and
local taxes was 54.6% during the 1998 period as a result of the various
jurisdictions in which the Company's taxable income was earned. The 1997
effective income tax rate reflects federal, state and local taxes on Artecon's
taxable income, the Dot Hill C Corporation's pro rata portion of Dot Hill's 1997
taxable income, state franchise taxes, a one-time tax benefit of $855,000
related to the recognition of the net deferred tax asset recorded by Dot Hill
upon terminating its S Corporation status and the impact of non-deductible
charges for acquired in-process research and development.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $48.0 million of cash and cash
equivalents and short-term investments. As of December 31, 1999, working capital
was $58.9 million.
For the year ended December 31, 1999, cash used in operating activities was
$747,000 compared to cash provided by operating activities of $1.3 million for
the same period in 1998. The decrease in net cash provided by operating
activities is primarily attributable to the net loss of $9.0 million offset by a
reduction in inventories and accounts receivable in 1999.
Cash used by investing activities in 1999 consisted of $896,000 of purchases
of property and equipment compared to cash provided by investing activities of
$4.6 million in 1998 as a result of sales of short-term investments of
$5.8 million offset by $1.2 million of property and equipment purchases.
Cash used in financing activities was $11.8 million for 1999 as a result of
payment of Artecon's outstanding debt, partially offset by $359,000 from the
exercise of stock options under the Company's 1995 Stock Incentive Plan and the
Company's 1997 Employee Stock Purchase Plan.
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. Subsequent to the Merger on August 2, 1999, the Company repaid all
outstanding debt under this credit facility.
The Company'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
$343,000 at December 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 December 31, 1999, the total amount outstanding under the
three credit lines was 28 million Yen (approximately US $272,000 at
December 31, 1999).
In August 1997, prior to the Merger, Artecon acquired Falcon Systems for
$3.5 million. That purchase price included $1.0 million in cash and a promissory
note in the original principal amount of $1.3 million, which was later amended
by Artecon and Falcon to $750,000 (the "Artecon Note"). Concurrently, Falcon
transferred the Falcon Technology to Founding Partners, a California general
partnership ("Founding Partners"), in exchange for a promissory note with a
principal amount of $1.8 million (the "Founding Partners Note"). Dana
Kammersgard, James Lambert and W.R. Sauey, each of whom is an executive officer
and/or director of the Company, were the general partners of Founding Partners.
Founding Partners was considered a "special purpose entity" and, accordingly,
has been consolidated with the Company for financial reporting purposes. The
purchase price of Falcon consisted of $10.2 million for other assets acquired,
$638,000 for goodwill and other tangible assets, $14.1 million for liabilities
assumed and in-process research and development expenses of $3.7 million, which
had no future alternative use, based on management assumptions. Under the terms
of the Artecon Note and the Founding Partners Note (collectively, the "Notes"),
Artecon and Founding Partners were required to make monthly payments to Falcon
of $15,935 and $37,182, respectively, through August 2002. Each of the Notes
bore interest at the rate of 10% per annum. After the Merger
33
<PAGE>
in August 1999, the Company paid the Notes in full and payments to Founding
Partners were discontinued. On December 27, 1999, Founding Partners was
dissolved.
In connection with the Falcon acquisition and the transfer of Falcon's
technology to Artecon, Artecon 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. On
December 27, 1998, Founding Partners and Artecon amended the Technology License
Agreement to provide for, among other things, the transfer of the Falcon
technology from Founding Partners to Artecon upon the satisfaction in full of
Artecon's obligations under the Founding Partners Note. On August 2, 1999, the
Founding Partners Note was fully satisfied, and on August 9, 1999, Founding
Partners transferred all of Founding Partners' right, title and interest in the
Falcon technology to Artecon, a wholly owned subsidiary of the Company.
In December 1998, four shareholder class action lawsuits were filed against
Box Hill, certain of its officers and directors, and the underwriters of the
Company's 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.
As of December 31, 1999, the Company's future commitments under its
operating leases totaled approximately $6.9 million.
The Company'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;
- the Company's ability to continue to design, develop and market new
products and services;
- market acceptance of new products, such as the new SANnet line of systems;
- the Company'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 the Company'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 the Company and the timing of
such needs;
- product quality problems;
- fluctuations in foreign currency exchange rates; and
- general economic trends and other factors.
34
<PAGE>
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.
The Company presently expects cash and cash equivalents and short-term
investments, together with cash generated from operations to be sufficient to
meet its operating and capital requirements for at least the next twelve months.
However, the Company may need additional capital to pursue acquisitions or
significant capital improvements, neither of which is currently contemplated.
The actual amount and timing of working capital and capital expenditures that
Dot Hill 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
In late 1999, we completed our remediation and testing of our products and
hardware and software systems to assess their year 2000 readiness. As a result
of those planning and implementation efforts, we experienced no significant
malfunctions in our products or disruptions in mission critical information
technology and non-information technology systems and believe those products and
systems successfully responded to the year 2000 date changes. To date, the
Company has not hired any additional employees or made any significant purchases
to carry out its year 2000 compliance program. At this time, the Company is not
aware of any material expenses that were incurred during 1999 in connect with
remediating our products and systems. We are not aware of any material problems
resulting from year 2000 issues, either with our products and internal systems
or the products and services of third parties. We will continue to monitor our
products and mission critical computer applications and those of our suppliers
and vendors throughout the year 2000 to ensure that any latent year 2000 matters
that may arise are addressed promptly.
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 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 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 $3.9 million and $454,000, respectively, or
3.6% of Dot Hill's total revenue for 1999. Based on this percentage of revenue
generated from these two countries, Dot Hill does not anticipate that this
conversion of the euro will have a significant impact on its financial
statements. The Company is continuing to evaluate the impact this conversion
will have on its financial condition and results of operations.
35
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivative financial instruments in its investment
portfolio. The Company's exposure to market rate risk for changes in interest
rates relates primarily to the Company's investment portfolio. The Company
places its investments in instruments that meet high credit quality standards,
as specified in the Company's investment policy guidelines; the policy also
limits the amount of credit exposure to any one issue, issuer, and type of
instrument. The Company does not expect any material loss with respect to its
investment portfolio.
The following table provides information about the Company's investment
portfolio at December 31, 1999 and 1998. For investment securities, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates. All investment securities at December 31, 1999 are
expected to mature in 2000:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash equivalents....................................... $39,923 $48,833
Average interest rate.................................. 3.3% 3.5%
Short-term investments................................. $ 3,500 $ 3,500
Average interest rate.................................. 3.6% 4.3%
Total portfolio........................................ $43,423 $52,333
Average interest rate.................................. 3.3% 3.6%
</TABLE>
The Company considers the carrying value of its investment securities to
approximate their fair value due to the relatively short period of time between
origination of the investments and their expected realization. Accordingly,
changes in the market interest rate would not have a material effect on the fair
value of such investments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference from
pages F-1 through F-31 of this Annual Report on Form 10-K.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Because the Company's headquarters, primary manufacturing facility and
finance department were, following the Merger, relocated to the former
headquarters of Artecon in Carlsbad, California, the Board of Directors
concluded that it would be more convenient to retain Deloitte and Touche LLP
("Deloitte and Touche"), the independent accountants of Artecon, as the
Company's independent accountants. The Company's audit committee recommended
that the Company dismiss Arthur Andersen and retain Deloitte & Touche LLP as the
Company's independent accountants.
On December 9, 1999, the Company dismissed Arthur Andersen LLP ("Arthur
Andersen") as its independent accountants. The reports of Arthur Andersen on the
Company's financial statements as of December 31, 1997 and 1998 and for each of
the years in the three-year period ended December 31, 1998 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
During the Company's fiscal years ended December 31, 1997 and 1998 and
through December 9, 1999, there have been no disagreements with Arthur Andersen
on a matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Arthur Andersen would have caused them to make reference
thereto in their report.
36
<PAGE>
During the fiscal years ended December 31, 1997 and 1998 and through
December 9, 1999, there have been no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)).
The Company engaged Deloitte & Touche LLP as its new independent accountants
effective December 10, 1999. During the fiscal years ended December 31, 1997 and
1998 and through December 9, 1999, the Company has not consulted with
Deloitte & Touche LLP on items which (1) were or should have been subject to
Statement of Auditing Standard No. 50 or (2) concerned the subject matter of a
disagreement or reportable event with the former accountants (as described in
Regulation S-K Item 304(a)(2)).
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Some of the information required by this item is incorporated by reference
to the Registrant's Definitive Proxy Statement to be filed with the Commission
pursuant to Regulation 14A in connection with the 2000 Annual Meeting (the
"Proxy Statement") under the headings "Proposal 1" and "Section 16(a) Beneficial
Ownership Reporting Compliance." Other information required by this item is
incorporated by reference to Item 1 of Part I of this Annual Report on
Form 10-K under the heading "Executive Officers of the Registrant at
December 31, 1999."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial statements:
The consolidated balance sheets for the years ended December 31, 1999 and
1998, and the consolidated statements of operations, comprehensive
operations, statements of shareholders' equity and cash flows for each of
the years ended December 31, 1999, 1998 and 1997 together with notes
thereto.
(2) Financial statement schedules required to be filed by Item 8 of this
Form:
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
3.1.......... Amended and Restated Certificate of Incorporation of the
Company.
3.2.......... Amended and Restated By-laws of the Company.(1)
4.1.......... Form of Common Stock certificate of the Company.(1)
9.1.......... Voting Agreement dated July 31, 1997 among Dr. Monderer, Ms.
Turchin and Mr. Mays.(1)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.1......... Compensation Plan and agreement between the Company and
Philip Black.(1)
10.2......... Employment Agreement between the Company and Carol
Turchin.(1)
10.3......... Employment Agreement between the Company and Benjamin
Monderer.(1)
10.4......... Employment Agreement between the Company and Mark Mays.(1)
10.5......... Incentive Program of the Company, as amended.
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 Company's facilities in New
York City.(1)
10.8......... Employee Stock Purchase Plan.
10.9......... Lease Modification Agreement.(2)
10.10........ 1999 Compensation Plan and Agreement between the Company and
Philip Black.(2)
10.11........ Separation letter agreement dated October 13, 1999 between
the Company and Elizabeth Strong.
10.12........ Employment letter agreement dated August 2, 1999 between the
Company and James L. Lambert.
10.13........ Employment letter agreement dated August 2, 1999 between the
Company and Dana W. Kammersgard.
10.14........ Employment offer letter dated November 12, 1999 between the
Company and Preston Romm.
10.16........ Amendment dated August 2, 1999 to compensation plan and
agreement between the Company and Philip Black.
10.17........ Employment letter agreement dated August 2, 1999 between the
Company and Benjamin Monderer.
16.1......... Letter re: change in certifying accountants.(3)
23.1......... Consent of Deloitte & Touche LLP.
23.2......... Consent of Arthur Andersen LLP.
24.1......... Power of Attorney. Reference is made to page .
27.1......... Financial Data Schedule.
</TABLE>
- ------------------------
(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
December 9, 1999 and incorporated herein by reference.
(b) Reports on Form 8-K:
(i) The Company filed a Current Report on Form 8-K dated December 9, 1999
reporting under Item 4 ("Change in Registrant's Certifying Accountant")
the change in the Company's independent accountants from Arthur Andersen
LLP to Deloitte & Touche LLP.
38
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
<TABLE>
<S> <C> <C>
DOT HILL SYSTEMS CORP.
(Registrant)
By: /s/ PHILIP BLACK
-----------------------------------------
Philip Black
(CO-CHIEF EXECUTIVE OFFICER)
Date: March 28, 2000
By: /s/ JAMES L. LAMBERT
-----------------------------------------
James L. Lambert
(CO-CHIEF EXECUTIVE OFFICER)
Date: March 28, 2000
</TABLE>
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Philip Black and James L. Lambert and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ PHILIP BLACK Co-Chief Executive Officer, March 28, 2000
------------------------------------------- Executive Vice President of
Philip Black International Sales and
Director (Principal
Executive Officer)
/s/ JAMES L. LAMBERT Co-Chief Executive Officer, March 28, 2000
------------------------------------------- President, Chief Operating
James L. Lambert Officer and Director
(Principal Executive
Officer)
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ PRESTON ROMM Chief Financial Officer and March 28, 2000
------------------------------------------- Treasurer (Principal
Preston Romm Accounting Officer)
/s/ W.R. SAUEY Chairman of the Board of March 28, 2000
------------------------------------------- Directors
W.R. Sauey
/s/ CAROL TURCHIN Vice Chairman of the Board of March 28, 2000
------------------------------------------- Directors
Carol Turchin
/s/ BENJAMIN MONDERER Executive Vice President of March 28, 2000
------------------------------------------- Applications Engineering,
Benjamin Monderer Professional Services
and Director
/s/ BENJAMIN BRUSSELL Director March 28, 2000
-------------------------------------------
Benjamin Brussell
/s/ NORMAN R. FARQUHAR Director March 28, 2000
-------------------------------------------
Norman R. Farquhar
/s/ DR. CHONG SUP PARK Director March 28, 2000
-------------------------------------------
Dr. Chong Sup Park
</TABLE>
40
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
3.1.......... Amended and Restated Certificate of Incorporation of the
Company.
3.2.......... Amended and Restated By-laws of the Company.(1)
4.1.......... Form of Common Stock certificate of the Company.(1)
9.1.......... Voting Agreement dated July 31, 1997 among Dr. Monderer, Ms.
Turchin and Mr. Mays.(1)
10.1......... Compensation Plan and agreement between the Company and
Philip Black.(1)
10.2......... Employment Agreement between the Company and Carol
Turchin.(1)
10.3......... Employment Agreement between the Company and Benjamin
Monderer.(1)
10.4......... Employment Agreement between the Company and Mark Mays.(1)
10.5......... Incentive Program of the Company, as amended.
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 Company's facilities in New
York City.(1)
10.8......... Employee Stock Purchase Plan.
10.9......... Lease Modification Agreement.(2)
10.10........ 1999 Compensation Plan and Agreement between the Company and
Philip Black.(2)
10.11........ Separation letter agreement dated October 13, 1999 between
the Company and Elizabeth Strong.
10.12........ Employment letter agreement dated August 2, 1999 between the
Company and James L. Lambert.
10.13........ Employment letter agreement dated August 2, 1999 between the
Company and Dana W. Kammersgard.
10.14........ Employment offer letter dated November 12, 1999 between the
Company and Preston Romm.
10.16........ Amendment dated August 2, 1999 to compensation plan and
agreement between the Company and Philip Black.
10.17........ Employment letter agreement dated August 2, 1999 between the
Company and Benjamin Monderer.
16.1......... Letter re: change in certifying accountants.(3)
23.1......... Consent of Deloitte & Touche LLP.
23.2......... Consent of Arthur Andersen LLP.
24.1......... Power of Attorney. Reference is made to page 39.
27.1......... Financial Data Schedule.
</TABLE>
- ------------------------
(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
December 9, 1999 and incorporated herein by reference.
41
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-3
INDEPENDENT AUDITORS' REPORT................................ F-4
FINANCIAL STATEMENTS:
Consolidated balance sheets as of December 31, 1999 and
1998...................................................... F-5
Consolidated statements of operations and comprehensive
operations for the years ended December 31, 1999, 1998,
and 1997.................................................. F-6
Consolidated statements of shareholders' equity for the
years ended December 31, 1999, 1998, and 1997............. F-7
Consolidated statements of cash flows for the years ended
December 31, 1999, 1998, and 1997......................... F-8
Notes to consolidated financial statements for the years
ended December 31, 1999, 1998, and 1997................... F-9
Independent Auditor's Report on Schedule.................... S-1
Report of Independent Public Accountants.................... S-2
Schedule II--Valuation and Qualifying Accounts.............. S-3
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Dot Hill Systems Corp.
We have audited the accompanying consolidated balance sheets of Dot Hill
Systems Corp. and subsidiaries (the Company) as of December 31, 1999, and the
related consolidated statements of operations and comprehensive operations,
shareholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Dot Hill Systems
Corp. and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Costa Mesa, California
January 25, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dot Hill Systems Corp:
We have audited the accompanying consolidated balance sheet of Dot Hill
Systems Corp. (formerly Box Hill Systems Corp., a New York Corporation) and
subsidiaries as of December 31, 1998, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the two 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 did not audit the
financial statements of Artecon, Inc., a company acquired during 1999 in a
transaction accounted for as a pooling of interests, as discussed in Note 1, as
of March 31, 1999, and for each of the two years in the period ended March 31,
1999. Such statements are included in the consolidated financial statements of
Dot Hill Systems Corp. and reflect total assets and total revenue of 34% and
57%, respectively, in fiscal 1998 and total revenue of 49% in fiscal 1997, of
the related consolidated totals. These statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Artecon, Inc., is based solely on the report of the
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Dot Hill Systems Corp. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1998, all in conformity with accounting principles generally accepted in the
United States.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania,
August 2, 1999
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
of Artecon, Inc.
We have audited the consolidated balance sheets of Artecon, Inc. and its
subsidiaries (the Company) as of March 31, 1999, and the related consolidated
statements of operations, comprehensive operations, shareholders' equity, and
cash flows for each of the two years in the period ended March 31, 1999 (none of
which are presented separately herein). 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Artecon, Inc. and its
subsidiaries at March 31, 1999, and the results of their operations and their
cash flows for each of the two years in the period ended March 31, 1999, in
conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Costa Mesa, California
May 5, 1999
F-4
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 44,451 $ 56,307
Short-term investments...................................... 3,500 3,500
Accounts receivable, net of allowance of $1,727 and
$1,657.................................................... 20,403 25,832
Inventories................................................. 12,279 19,764
Prepaid expenses and other.................................. 2,503 3,190
Prepaid income taxes........................................ -- 737
Deferred income taxes....................................... 5,879 4,223
-------- --------
Total current assets.................................... 89,015 113,553
PROPERTY AND EQUIPMENT, net................................. 2,675 2,967
OTHER ASSETS................................................ 46 114
GOODWILL, net............................................... 554 1,252
OTHER INTANGIBLE ASSETS, net................................ 258 1,059
DEFERRED INCOME TAXES....................................... 11,110 8,085
-------- --------
$103,658 $127,030
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........................... $ -- $ 483
Accounts payable............................................ 15,094 19,459
Accrued expenses............................................ 6,644 6,690
Merger and restructuring accrual............................ 1,474 1,254
Customer deposits........................................... 1,692 2,173
Deferred revenue............................................ 3,626 3,842
Income taxes payable........................................ 1,539 785
-------- --------
Total current liabilities............................... 30,069 34,686
BORROWINGS UNDER LINE OF CREDIT............................. 272 10,552
LONG-TERM DEBT.............................................. -- 1,356
DEFERRED RENT AND OTHER LONG-TERM LIABILITIES............... 448 420
MINORITY INTEREST........................................... 46 52
-------- --------
Total liabilities....................................... 30,835 47,066
COMMITMENTS AND CONTINGENCIES (Note 15)
SHAREHOLDERS' EQUITY:
Preferred stock $.01 par value, 5,000,000 shares authorized,
none issued............................................... -- --
Convertible Preferred A shares; $.005 par value, none and
2,494,159 shares issued and outstanding, liquidation
preference of $0 and $4,988............................... -- 12
Common stock $.01 par value, 40,000,000 shares authorized;
23,887,871 and 23,009,881 shares issued and outstanding... 239 230
Additional paid-in capital.................................. 97,137 96,775
Accumulated other comprehensive operations.................. (215) (62)
Accumulated deficit......................................... (24,338) (16,991)
-------- --------
Total shareholders' equity.............................. 72,823 79,964
-------- --------
$103,658 $127,030
======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET REVENUE................................................. $124,216 $168,355 $136,684
COST OF GOODS SOLD.......................................... 81,579 109,361 96,473
INVENTORY WRITE-DOWN........................................ 5,033 403 --
-------- -------- --------
GROSS MARGIN................................................ 37,604 58,591 40,211
OPERATING EXPENSES:
Sales and marketing......................................... 24,204 34,839 18,121
Engineering and product development......................... 7,401 9,946 5,523
General and administrative.................................. 10,837 9,981 7,049
Shareholder officers' compensation.......................... -- 1,275 7,538
Impairment of intangible assets............................. 1,224 867 --
Merger and restructuring expenses........................... 7,392 1,404 --
Acquired in-process research and development costs.......... -- -- 18,200
-------- -------- --------
Total operating expenses.................................. 51,058 58,312 56,431
-------- -------- --------
OPERATING (LOSS) INCOME..................................... (13,454) 279 (16,220)
OTHER INCOME (EXPENSE):
Interest income (expense), net.............................. 1,136 906 (139)
Other income (expense), net................................. 381 395 (124)
Loss on foreign currency transactions, net.................. (94) (14) (141)
-------- -------- --------
Total other income (expense).............................. 1,423 1,287 (404)
-------- -------- --------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) PROVISION......... (12,031) 1,566 (16,624)
INCOME TAX (BENEFIT) PROVISION.............................. (2,984) 982 (2,394)
-------- -------- --------
NET (LOSS) INCOME........................................... $ (9,047) $ 584 $(14,230)
======== ======== ========
Basic net (loss) income per share........................... $ (0.39) $ 0.03 $ (1.06)
======== ======== ========
Weighted average shares used to calculate basic net (loss)
income per share.......................................... 23,385 22,903 13,456
======== ======== ========
Diluted net (loss) income per share......................... $ (0.39) $ 0.02 $ (1.06)
======== ======== ========
Weighted average shares used to calculate diluted net (loss)
income per share.......................................... 23,385 24,442 13,456
======== ======== ========
PROFORMA DATA (UNAUDITED) (Note 1):
Net loss before income tax benefit.......................... $(16,624)
Proforma income tax benefit................................. (700)
--------
Proforma net loss........................................... $(15,924)
========
Proforma basic and diluted net loss per share............... $ (1.18)
========
COMPREHENSIVE OPERATIONS:
Net (loss) income........................................... $ (9,047) $ 584 $(14,230)
Foreign currency translation adjustments.................... (153) 35 233
-------- -------- --------
Comprehensive (loss) income................................. $ (9,200) $ 619 $(13,997)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
CONVERTIBLE ACCUMULATED
CONVERTIBLE PREFERRED A SHARES COMMON STOCK ADDITIONAL OTHER
PREFERRED --------------------- --------------------- PAID-IN COMPREHENSIVE
STOCK SHARES AMOUNT SHARES AMOUNT CAPITAL OPERATIONS
----------- ---------- -------- ---------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997...... $ 5,029 -- $ -- 11,977,200 $120 $ 580 $(330)
Sale of common stock, net of
offering costs.............. 4,125,000 41 56,514
Distribution to S corporation
shareholders................
Termination of S corporation
status...................... (115)
Issuance of common stock...... (125) 340,400 3 814
Conversion of preferred
stock....................... (4,904) 2,494,159 12 11,600 1 4,891
Assumed issuance of common
stock in connection with
acquisition of SDI (Note
2).......................... 6,125,600 61 32,884
Exercise of stock options..... 113,871 1 92
Foreign currency translation
adjustment.................. 233
Net loss......................
------- ---------- ---- ---------- ---- ------- -----
BALANCE, December 31, 1997.... -- 2,494,159 12 22,693,671 227 95,660 (97)
Acquisition of Box Hill
Europe...................... 4,959 52
Issuance of common stock
warrants.................... 213
Exercise of stock options,
including tax benefit....... 232,070 2 506
Sale of common stock under
employee stock purchase
plan........................ 79,181 1 344
Foreign currency translation
adjustment.................. 35
Net income....................
------- ---------- ---- ---------- ---- ------- -----
BALANCE, December 31, 1998.... -- 2,494,159 12 23,009,881 230 96,775 (62)
Conversion of preferred
shares...................... (2,494,159) (12) 719,037 7 5
Exercise of stock options,
including tax benefit....... 118,634 1 235
Sale of common stock under
employee stock purchase
plan........................ 40,319 1 122
Foreign currency translation
adjustment.................. (153)
Net loss......................
Adjustment to conform Artecon
to the Company's year-end...
------- ---------- ---- ---------- ---- ------- -----
BALANCE, December 31, 1999.... $ -- -- $ -- 23,887,871 $239 $97,137 $(215)
======= ========== ==== ========== ==== ======= =====
<CAPTION>
RETAINED
EARNINGS TOTAL
(ACCUMULATED SHAREHOLDERS'
DEFICIT) EQUITY
------------ -------------
<S> <C> <C>
BALANCE, January 1, 1997...... $ 8,467 $ 13,866
Sale of common stock, net of
offering costs.............. 56,555
Distribution to S corporation
shareholders................ (11,927) (11,927)
Termination of S corporation
status...................... 115
Issuance of common stock...... 692
Conversion of preferred
stock.......................
Assumed issuance of common
stock in connection with
acquisition of SDI (Note
2).......................... 32,945
Exercise of stock options..... 93
Foreign currency translation
adjustment.................. 233
Net loss...................... (14,230) (14,230)
-------- --------
BALANCE, December 31, 1997.... (17,575) 78,227
Acquisition of Box Hill
Europe...................... 52
Issuance of common stock
warrants.................... 213
Exercise of stock options,
including tax benefit....... 508
Sale of common stock under
employee stock purchase
plan........................ 345
Foreign currency translation
adjustment.................. 35
Net income.................... 584 584
-------- --------
BALANCE, December 31, 1998.... (16,991) 79,964
Conversion of preferred
shares......................
Exercise of stock options,
including tax benefit....... 236
Sale of common stock under
employee stock purchase
plan........................ 123
Foreign currency translation
adjustment.................. (153)
Net loss...................... (9,047) (9,047)
Adjustment to conform Artecon
to the Company's year-end... 1,700 1,700
-------- --------
BALANCE, December 31, 1999.... $(24,338) $ 72,823
======== ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (9,047) $ 584 $(14,230)
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operating activities, excluding effect
from acquisitions:
Depreciation and amortization............................. 1,757 4,674 1,280
Asset impairment charges.................................. 937 1,490 --
Acquired in-process research and development costs........ -- -- 18,200
Provision for doubtful accounts........................... 70 123 271
Deferred income taxes..................................... (4,687) (3,627) (3,688)
Stock-based compensation expense.......................... -- 213 699
Other..................................................... -- 64 70
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable..................................... 5,359 6,326 (4,370)
Inventories............................................. 7,485 (59) 2,039
Prepaid expenses and other.............................. 748 (1,184) (709)
Prepaid income taxes.................................... 737 (565) --
Accounts payable........................................ (4,365) (2,738) 3,032
Accrued expenses........................................ (46) (5,243) (27)
Merger and restructuring accrual........................ 220 -- --
Customer deposits....................................... (481) 30 797
Deferred revenue........................................ (216) 1,831 995
Income taxes payable.................................... 754 (757) 757
Long-term liabilities................................... 28 120 (91)
Other................................................... -- 57 (15)
-------- -------- --------
Net cash (used in) provided by operating activities... (747) 1,339 5,010
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (896) (1,159) (1,291)
Sales (purchases) of short-term investments................. -- 5,805 (9,305)
Cash received in acquisitions, net.......................... -- -- 7,351
-------- -------- --------
Net cash (used in) provided by investing activities... (896) 4,646 (3,245)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to S corporation shareholders................. -- (227) (11,700)
Net proceeds from initial public offering................... -- -- 56,555
Proceeds from exercise of stock options..................... 236 198 93
Proceeds from sale of stock to employees.................... 123 345 --
Proceeds from bank and other borrowings..................... 23,139 48,292 24,988
Payments on bank and other borrowings....................... (35,258) (47,210) (24,802)
Issuance of common shares................................... -- -- 17
-------- -------- --------
Net cash (used in) provided by financing activities... (11,760) 1,398 45,151
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (153) 35 233
ADJUSTMENT FOR CHANGE IN ARTECON YEAR-END................... 1,700 -- --
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (11,856) 7,418 47,149
CASH AND CASH EQUIVALENTS, beginning of year................ 56,307 48,889 1,740
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ 44,451 $ 56,307 $ 48,889
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid
during the year for:
Interest.................................................. $ 642 $ 817 $ 663
======== ======== ========
Income taxes.............................................. $ 129 $ 4,498 $ 1,328
======== ======== ========
</TABLE>
See Note 2 for details of assets acquired and liabilities assumed in purchase
transactions.
F-8
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND--Dot Hill Systems Corp. (Dot Hill or 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, internet service providers,
multimedia, healthcare, government/defense and academia. The Company's
international strategy is to sell directly to end users, when possible, and to
use distributors. 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 the Company's
California and New York City facilities.
BASIS OF PRESENTATION--On August 2, 1999, Box Hill Systems Corp. (Box Hill)
and Artecon, Inc. (Artecon) completed a Merger (the Merger) in which the two
companies were merged in a tax-free, stock-for-stock transaction. The Merger was
accounted for using the pooling-of-interests method. Subsequent to the Merger,
the combined Company changed its name to Dot Hill Systems Corp. The accompanying
consolidated financial statements set forth a presentation of the Company's
financial statements retroactively restated to reflect the combination with
Artecon. The historical financial statements of Box Hill as of December 31,
1998, and for each of the two years in the period ended December 31, 1998, have
been combined with the financial statements of Artecon as of March 31, 1999, and
for each of the two years in the period ended March 31, 1999, respectively. As a
result of changing Artecon's fiscal year-end from March 31 to conform with the
Company's December 31 year-end, the results of operations for the three months
ended March 31, 1999, are included in the combined results of operations for
both the years ended December 31, 1999 and 1998, and are reflected as an
adjustment in the consolidated statements of shareholders' equity. Artecon's
total revenue and net income for this period was $18.3 million and
$1.7 million, respectively. Artecon's cash flows used in operating, investing,
and financing activities for this period were $2.6 million, $39, and
$1.8 million, respectively.
During the third quarter of 1999, and in connection with the Box Hill and
Artecon Merger, the Company recorded expenses totalling $13,362 related to the
Merger and management's restructuring and integration plan associated with the
Merger (Note 5).
Revenue and net income (loss) as previously reported for Box Hill for six
months ended June 30, 1999 and the years ended December 31, 1998, and 1997, and
for Artecon for the six months ended
F-9
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
June 30, 1999 and the years ended March 31, 1999 and 1998, respectively, and as
restated using the pooling-of-interest method, are as follows:
<TABLE>
<CAPTION>
REVENUE NET INCOME (LOSS)
-------- -----------------
<S> <C> <C>
Six-months ended June 30, 1999 (unaudited):
Box Hill......................................... $ 28,265 $ 924
Artecon.......................................... 37,484 (588)
-------- --------
Restated......................................... $ 65,749 $ 336
======== ========
1998:
Box Hill......................................... $ 72,476 $ 5,934
Artecon.......................................... 95,879 (5,350)
-------- --------
Restated......................................... $168,355 $ 584
======== ========
1997:
Box Hill......................................... $ 70,344 $ 5,058
Artecon.......................................... 66,340 (19,288)
-------- --------
Restated......................................... $136,684 $(14,230)
======== ========
</TABLE>
INITIAL PUBLIC OFFERING--Box Hill 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
Box Hill and 2.2 million shares were sold by individuals who were the only
shareholders of Box Hill prior to the 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.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of Dot Hill Systems Corp., and its subsidiaries.
All significant intercompany transactions and balances have been eliminated in
consolidation.
USE OF ACCOUNTING ESTIMATES--The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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, net of any allowances for estimated
product returns. Revenue from maintenance contracts is deferred and recognized
on a straight-line basis over the contract term, generally twelve months. The
cost of maintenance contracts purchased from third-parties for resale is
deferred and recognized as expense over the contract term. At December 31, 1999,
the balance of deferred costs of purchase maintenance contracts was $968 and is
included in prepaid expenses and other assets.
F-10
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For product sales that include a software element, the Company applies
Statement of Position No. 97-2, SOFTWARE REVENUE RECOGNITION, whereby revenue is
recognized from software licenses at the time the product is shipped, provided
there are no significant Company obligations related to the sale and the
resulting receivable is deemed collectible and there is vendor-specific
objective evidence supporting the value of the separate contract elements.
Revenue from software maintenance agreements is recognized ratably over the term
of the related agreement. Revenue from consulting and other software-related
services is recognized as the services are rendered.
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 reimbursed the majority of the
Company's warranty costs. There can be no assurance that such suppliers will
continue to reimburse 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. Short-term investments are generally comprised of variable rate
securities that provide for early redemption within twelve months.
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 recorded at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets (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.
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 $422 and $679 at December 31, 1999 and 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, which may
indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of goodwill and other intangible assets
utilizing expected future undiscounted cash flows to determine whether or not
impairment to such values has occurred. During the years ended December 31, 1999
and 1998, the Company recorded impairments associated with certain other
intangible assets of $1,224 and $867, respectively (Note 5).
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
F-11
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 utilizing expected
future undiscounted cash flows 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 December 31, 1999. During the years ended December 31,
1999 and 1998, the Company recognized an impairment of certain long-lived assets
in connection with the merger and restructuring activities (Note 5).
ADVERTISING COSTS--The Company expenses advertising costs as incurred. For
the years ended December 31, 1999, 1998 and 1997, advertising expense was $768,
$1,340, and $996, 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 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--The Company accounts for its income taxes under the provisions
of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Deferred taxes on income result
from temporary differences between the reporting of income for financial
statements and tax reporting purposes. Measurement of the deferred items is
based on enacted tax laws. In the event the future consequences of differences
between financial reporting bases and tax bases of the Company's assets and
liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation
of the probability of being able to realize the future benefits indicated by
such asset. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion or all of the deferred tax
asset will not be realized.
Box Hill was subject to taxation under Subchapter "S" of the Internal
Revenue Code and the New York State Tax Code until the termination of its S
corporation status concurrent with its initial public offering in
September 1997. Accordingly, prior to the offering, no provision was made for
federal or state income taxes on Box Hill's taxable income, and the Box Hill
shareholders were taxed directly on their proportionate share of the Company's
taxable income. In connection with the offering, Box Hill terminated its S
corporation status and was subject to federal and state income taxes for the C
corporation's pro rata share of Box Hill'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 (Note 10).
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees, using the intrinsic value method in accordance with Accounting
Principles Board (APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
NET INCOME PER SHARE--The Company computes net income per share in
accordance with SFAS No. 128, EARNINGS PER SHARE. Basic earnings per share is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities by including other common
stock
F-12
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equivalents, including stock options, in the weighted average number of common
shares outstanding for a period, if dilutive.
The table below sets forth the reconciliation of the denominator of the
earnings per share calculation for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Shares used in computing basic net income per
share............................................. 23,385 22,903 13,456
Conversion of preferred stock....................... -- 719 --
Dilutive effect of stock options.................... -- 820 --
------ ------ ------
Shares used in computing diluted net income per
share............................................. 23,385 24,442 13,456
====== ====== ======
</TABLE>
For the year ended December 31, 1999, options to purchase 2,219,037 shares
of common stock with exercise prices ranging from $0.50 to $17.50 were
outstanding, but were not included in the computation of dilutive net loss per
share because a net loss was incurred for the year. Additionally, preferred
stock convertible into 419,438 shares of common stock (based on the weighted
average of such shares under SFAS No. 128) has also been excluded in the
computation of dilutive net loss per share because a net loss was incurred for
the year.
For the year ended December 31, 1998, options to purchase 1,105,007 shares
of common stock with exercise prices ranging from $9.50 to $18.13 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. For the year ended December 31, 1997,
options to purchase 1,980,527 shares of common stock with exercise prices
ranging from $.20 to $18.13 were outstanding, but were not included in the
computation of dilutive net loss per share because a net loss was incurred for
the year.
FOREIGN CURRENCY TRANSLATION--The accounts of foreign subsidiaries have been
translated from their respective functional currencies at appropriate exchange
rates in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Cumulative
translation adjustments are included as a separate component of shareholders'
equity. Gains and losses on short-term intercompany foreign currency
transactions are recognized through income as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Pursuant to SFAS No. 107, DISCLOSURE
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, the Company is required to estimate
the fair value of all financial instruments included on its balance sheet at
December 31, 1999 and 1998. The Company considers the carrying value of such
amounts in the financial statements to approximate their fair value due to the
relatively short period of time between origination of the instruments and their
expected realization.
COMPREHENSIVE INCOME--Pursuant to SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, the Company has included consolidated statements of comprehensive
operations in the accompanying consolidated financial statements. See Note 4 for
further discussion.
F-13
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENT--In 1998, the Company adopted SFAS No. 131,
DISCLOSURE 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 (Note 16).
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which the Company is required to adopt
effective in its fiscal year 2001. 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 investments and does not presently engage nor does
it intend to engage in future hedging activities, but will continue to evaluate
the effects of adopting SFAS No. 133.
RECLASSIFICATIONS--Certain prior year balances have been reclassified to
conform with the current year presentation.
PROFORMA DATA (UNAUDITED)--Concurrent with the initial public offering of
Box Hill in 1997, the Company terminated its status as an S corporation and is
subject to federal and state income taxes. Accordingly, for informational
purposes, the accompanying consolidated statement of operations for the year
ended December 31, 1997 includes a pro forma adjustment for the income taxes
which would have been recorded if the Company had been a C corporation for the
entire period, based on the tax laws in effect during the period. The proforma
adjustment for income taxes does not include the one-time income tax benefit of
$855 recorded in recognition of the deferred tax assets (Note 10).
2. ACQUISITIONS
STORAGE DIMENSIONS, INC.--During fiscal 1997, Artecon completed a reverse
merger into Storage Dimensions, Inc. (SDI). Immediately following the merger,
SDI changed its name to Artecon. In the merger, shareholders of the former
Artecon received approximately 62% of the total issued and outstanding common
stock, and 100% of the total issued and outstanding preferred stock of the
merged company. Therefore, the merger was treated as a purchase of SDI by
Artecon for accounting purposes. SDI's operating results have been included in
the Company's financial statements from the date of acquisition. The purchase
price for accounting purposes was determined based on the fair market value of
the outstanding SDI stock on December 18, 1997, using the average bid and ask
price of $3.96875. The purchase price was allocated $17,281 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. During the year ended December 31, 1998, Artecon 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.
FALCON SYSTEMS, INC.--On August 21, 1997, Artecon 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
F-14
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
2. ACQUISITIONS (CONTINUED)
accounted for as a purchase and Falcon's results of operations for the period
from August 21, 1997, 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 debt and liabilities assumed, and $3,700 to in-process
research and development expenses, which had no future alternative use. 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. Effective
December 31, 1999, the partnership was terminated. The termination of the
partnership did not have a material effect on the Company's results of
operations.
The following table displays the assets and liabilities that were acquired
as a result of these acquisitions:
<TABLE>
<CAPTION>
SDI FALCON
-------- --------
<S> <C> <C>
Fair value of other assets acquired....................... $17,281 $10,232
Acquired in-process research and development costs........ 14,500 3,700
Other intangible assets................................... 2,400 420
Goodwill.................................................. 4,538 127
Acquired developed technology............................. 500 91
Note to Falcon shareholder................................ -- (2,500)
Fair market value of SDI stock............................ (32,945) --
Cash paid for acquisition, net of cash acquired........... 7,783 (432)
------- -------
Liabilities assumed....................................... $14,057 $11,638
======= =======
</TABLE>
Unaudited pro forma supplemental results of operations of the Company for
the year ended December 31, 1997, are included below. Such pro forma
presentation has been prepared assuming that the acquisitions had occurred as of
January 1, 1997:
<TABLE>
<CAPTION>
<S> <C>
Net revenue................................................. $214,939
Net loss.................................................... (5,884)
Pro forma basic and diluted net loss per share.............. (0.30)
Weighted average shares used to calculate pro forma
basic and diluted net loss per share........................ 19,387
</TABLE>
The pro forma results include pro forma adjustments, including amortization
of goodwill and other intangible assets, and interest expense related to the
promissory notes issued to Falcon's previous shareholder. In-process research
and development expense has been excluded from the pro forma results of
operations for the year ended December 31, 1997.
F-15
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
3. 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 limited number of
production facilities, 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. A significant portion of the Company's net revenue
is derived from sales to customers in the financial services and
telecommunications industries. For the years ended December 31, 1999, 1998 and
1997, direct sales to customers in the financial services and telecommunications
industries as a percentage of total net revenues were 18% and 21%, 27% and 20%,
and 21% and 24%, respectively. For the year ended December 31, 1999, one
customer accounted for 10% of total net revenues. For the years ended
December 31, 1998, and 1997, no single customer accounted for greater than 10%
of the Company's net revenue.
EXPORT SALES--The following table summarizes export sales by geographical
region as a percentage of net revenue at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Asia...................................................... 3.8% 3.3% 5.6%
Europe.................................................... 9.8 6.1 8.4
Other..................................................... 2.2 0.7 0.6
---- ---- ----
15.8% 10.1% 14.6%
==== ==== ====
</TABLE>
DEPENDENCE ON SUPPLIERS--The Company purchases substantially all of its disk
drives, a critical component of its storage products, from one supplier.
Approximately 23%, 22%, and 32% of the Company's total component purchases were
made from this supplier for the years ended December 31, 1999, 1998 and 1997,
respectively. The Company resells the products of various third parties
including one supplier of tape libraries and other products. During 1999, 1998
and 1997, approximately 17%, 15%, and 6%, respectively, of total purchases were
from this supplier.
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.
F-16
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
4. OTHER COMPREHENSIVE OPERATIONS
Accumulated other comprehensive operations for each of the three years in
the period ended December 31, 1999, is comprised of the following:
<TABLE>
<CAPTION>
FOREIGN CURRENCY
TRANSLATION ADJUSTMENTS
-----------------------
<S> <C>
Balance, January 1, 1997................................. $(330)
Foreign currency translation adjustment.................. 233
-----
Balance, December 31, 1997............................... (97)
Foreign currency translation adjustment.................. 35
-----
Balance, December 31, 1998............................... (62)
Foreign currency translation adjustment.................. (153)
-----
Balance, December 31, 1999............................... $(215)
=====
</TABLE>
5. ACCRUED MERGER AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
During the third quarter of 1999, and in connection with the Box Hill and
Artecon merger, the Company recorded expenses totaling $13,362 related to the
Merger and management's restructuring and integration plan associated with the
Merger, as follows:
<TABLE>
<CAPTION>
<S> <C>
Inventory write-downs....................................... $ 5,033
Professional fees........................................... 4,029
License termination......................................... 1,000
Employee termination costs.................................. 1,100
Write-down of intangibles................................... 937
Facility closures and related costs......................... 647
Other integration costs..................................... 616
-------
Total................................................... $13,362
=======
</TABLE>
Management's restructuring and integration plan relates primarily to the
consolidation and discontinuance of product lines, which resulted in inventory
and intangible assets write-downs of $5,033 and $937, respectively. As a result
of the product line consolidation, the Company also terminated a license
agreement with a third-party vendor, resulting in license termination costs of
$1,000. Additionally, management's plan includes consolidating the Company's
manufacturing operations and other functions into the Company's headquarters in
Carlsbad, California, which resulted in employee termination charges of $1,100,
consisting primarily of severance payments for 38 employees, facility closure
costs of $647 and other integration costs of $616. The Company completed the
plan during the
F-17
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
5. ACCRUED MERGER AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
(CONTINUED)
fourth quarter of 1999. The major components of the charges and the remaining
accrual balance as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
ACCRUED
RESTRUCTURING
EXPENSES PAID COSTS
-------- -------- -------------
<S> <C> <C> <C>
Professional services.......................... $4,029 $(4,029) $ --
License termination............................ 1,000 (1,000) --
Employee termination costs..................... 1,100 (620) 480
Facility closures and related costs............ 647 (125) 522
Other integration costs........................ 616 (526) 90
------ ------- ------
Total.......................................... $7,392 $(6,300) $1,092
====== ======= ======
</TABLE>
In December 1998, Artecon's Board of Directors approved a plan for Artecon
to consolidate one of its 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. Such charges consisted primarily of employee
termination costs, inventory write-downs, facility closures and related
expenses, an intangible asset impairment and tooling machinery write-offs.
Employee termination costs consist primarily of severance payments for 43
employees, all of which were terminated as of December 31, 1998. The majority of
the employees terminated were employed at the engineering facility in Milpitas,
California and at the various domestic sales and service locations. 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 in
connection with the closures. The major components of the charges and the
reconciliation of the expenses and accrual activity during 1998 and 1999 was as
follows:
<TABLE>
<CAPTION>
ACCRUED ACCRUED
AMOUNTS RESTRUCTURING AMOUNTS RESTRUCTURING
INITIAL UTILIZED COSTS AT UTILIZED COSTS AT
RESTRUCTURING IN FISCAL DECEMBER 31, IN FISCAL DECEMBER 31,
CHARGE YEAR 1998 1998 YEAR 1999 1999
------------- --------- ------------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Employee termination costs........... $ 254 $ (200) $ 54 $ (54) $ --
Inventory write-downs................ 403 (115) 300 (300) --
Facility closures and related
expenses........................... 715 (476) 239 (239) --
Tooling write-off.................... 135 (123) -- -- --
Intangible asset impairment.......... 300 (300) -- -- --
------ ------- ---- ----- ----
Total............................ $1,807 $(1,214) $593 $(593) $ --
====== ======= ==== ===== ====
</TABLE>
F-18
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
5. ACCRUED MERGER AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
(CONTINUED)
In connection with Artecon's acquisitions of Falcon and SDI, Artecon
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 December 31, 1998, which has been included as a component
of the restructuring charge, as the impairment was a direct result of employee
terminations associated with activities that were exited. 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 a write-down of the intangible assets associated with the workforce
of $867.
In connection with the merger with SDI, Artecon recorded a reserve for
acquisition related costs of $6.6 million, of which $661,000 was outstanding at
December 31, 1998. All of the acquisition related costs were included in the
purchase price allocation performed during 1997. The major components of the
reserve and the reconciliation of the accrual activity during 1998 and 1999 was
as follows:
<TABLE>
<CAPTION>
INITIAL MERGER ACCRUED MERGER ACCRUED MERGER
COSTS AMOUNTS COSTS AMOUNTS COSTS
(DECEMBER 31, 1997) UTILIZED (DECEMBER 31, 1998) UTILIZED (DECEMBER 31, 1999)
------------------- -------- ------------------- -------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Employee termination
costs (80
employees)............ $2,923 $(2,761) $162 $(162) $ --
Professional service
fees.................. 2,225 (1,909) 316 -- 316
Other costs............. 1,433 (1,250) 183 (117) 66
------ ------- ---- ----- ----
Total............... $6,581 $(5,920) $661 $(279) $382
====== ======= ==== ===== ====
</TABLE>
The Company anticipates that the remaining merger costs liability at
December 31, 1999, which consists primarily of miscellaneous professional
services obligations and lease and contract termination costs, will be paid in
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.
6. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Purchased parts and materials............................. $ 9,093 $16,476
Work-in-process........................................... 438 163
Finished goods............................................ 2,748 3,125
------- -------
$12,279 $19,764
======= =======
</TABLE>
F-19
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Machinery and equipment..................................... $7,237 $5,798
Furniture, fixtures, and computer equipment................. 636 1,212
Leasehold improvements...................................... 930 949
------ ------
8,803 7,959
Less accumulated depreciation............................... (6,128) (4,992)
------ ------
$2,675 $2,967
====== ======
</TABLE>
Depreciation expense was $1,752, $2,760, and $1,138 for the years ended
December 31, 1999, 1998 and 1997, respectively.
8. CREDIT FACILITIES
BOX HILL FACILITY--In October 1997, Box Hill entered into an agreement with
a commercial bank which provides for a $10 million revolving line of credit. Box
Hill did not have any borrowings under this facility in 1999 or 1998. 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
expired in May 1999.
ARTECON FACILITIES--Artecon had a $15 million revolving credit facility with
a domestic commercial bank (the Agreement). The Agreement provided for financing
collateralized by all assets of Artecon, as defined by the Agreement, and
matures on May 14, 2001, unless otherwise renewed. The line of credit bore
interest at the bank's prime rate. Monthly payments consisted of interest only,
with the principal due at maturity. Subsequent to the Merger with Artecon on
August 2, 1999, the Company repaid all outstanding debt under this facility.
Artecon's Japanese subsidiary has two lines of credit with a Japanese bank
for borrowings up to an aggregate 35 million Yen (US$343 at December 31, 1999)
at rates ranging from 1.8% to 2.5%. At December 31, 1999, 28 million Yen
(approximately US$272) were outstanding. Interest is due monthly with the
principal due on various dates through August 2005. Borrowings are
collateralized by inventories of the Japanese subsidiary.
F-20
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
9. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Promissory notes payable to former shareholder of Falcon
(Note 2), bearing interest at 10% per annum, monthly
installments of principal and interest of $53 through
August 2002 (paid in full in August 1999)................. $ -- $1,839
Less current portion........................................ -- (483)
--------- ------
$ -- $1,356
========= ======
</TABLE>
Interest expense related to long-term debt was $114, $207, and $160 for the
years ended December 31, 1999, 1998, and 1997, respectively.
10. INCOME TAXES
The components of the income tax provision are as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................................... $ 1,366 $ 3,081 $ 884
State, local, and foreign................................... 337 1,528 410
------- ------- -------
1,703 4,609 1,294
------- ------- -------
Deferred:
Federal..................................................... (3,566) (3,054) (2,150)
State, local, and foreign................................... (1,121) (573) (683)
Recognition of deferred tax asset upon termination of S
corporation status........................................ -- -- (855)
------- ------- -------
(4,687) (3,627) (3,688)
------- ------- -------
$(2,984) $ 982 $(2,394)
======= ======= =======
</TABLE>
The provision for income taxes for the years ended December 31, 1999 and
1998 consists of federal, state and local income taxes. The provision for income
taxes for the year ended December 31, 1997, consists of federal, state and local
income taxes on Artecon's taxable income and the Box Hill C corporation's pro
rata portion of Box Hill's 1997 taxable income, state franchise taxes and a
one-time tax benefit of $855 related to the recognition of the net deferred tax
asset recorded by Box Hill upon terminating its S corporation status.
F-21
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
10. INCOME TAXES (CONTINUED)
The reconciliation of the federal statutory income tax rate and the
effective income tax rate is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate............................. (35.0)% 34.0% (34.0)%
State and local income taxes, net of federal
benefit.......................................... (4.6) 54.6 (0.8)
Impact of Box Hill's S corporation status.......... -- -- (4.3)
In-process research and development................ -- -- 29.7
Recognition of deferred tax asset.................. -- -- (5.1)
Amortization of goodwill and intangible assets..... 2.5 14.0 --
Tax exempt interest income......................... (4.0) (21.9) (0.1)
Merger costs....................................... 11.7 -- --
Tax credits and other.............................. 4.6 (18.0) 0.2
----- ----- -----
(24.8)% 62.7% (14.4)%
===== ===== =====
</TABLE>
F-22
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
10. INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to deferred income
taxes are as follows at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Warranty accrual............................................ $ 373 $ 372
Inventory reserve and uniform capitalization................ 4,301 1,890
Vacation accrual............................................ 301 113
Allowance for bad debts..................................... 733 233
Depreciation and amortization............................... -- 77
Deferred rent............................................... 135 123
Other accruals and reserves................................. 510 1,564
In-process research and development......................... 723 1,418
Net operating losses and tax credits........................ 9,959 7,538
Restructuring reserve....................................... -- 231
Acquisition costs........................................... 1,461 64
Acquired intangibles........................................ 93 --
------- -------
18,589 13,623
Deferred tax liabilities:
State taxes................................................. 1,257 784
Depreciation and amortization............................... 48 --
Import reserve.............................................. 295 277
Acquired intangibles........................................ -- 254
------- -------
1,600 1,315
------- -------
Net deferred tax assets..................................... $16,989 $12,308
======= =======
Current..................................................... $ 5,879 $ 4,223
Long-term................................................... 11,110 8,085
------- -------
Total....................................................... $16,989 $12,308
======= =======
</TABLE>
As of December 31, 1999, the Company has federal and state net operating
losses of $20,358 and $10,239, which begin to expire in the tax years ending
2009 and 2011, respectively. In addition, the Company has federal and state tax
credit carryforwards of $1,239 and $774, respectively.
Pursuant to the Tax Reform Act of 1986, annual use of Artecon's federal net
operating loss and credit carryforwards is limited as a result of a cumulative
change in ownership of more than 50% as a result of the Merger. The annual
limitation is approximately $3,045 per year. Management believes that it is more
likely than not that future taxable income will be sufficient to realize the net
deferred tax asset.
F-23
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
11. CONVERTIBLE PREFERRED A SHARES
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 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. In
connection with the merger between Box Hill and Artecon, the convertible
Preferred A shares were converted into 719,037 shares of the Company's common
stock, representing the liquidation value of the Preferred A shares.
12. STOCK INCENTIVE PLAN
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 4,392,500 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, as restated for the
combination with the Artecon plan, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
BALANCE, January 1, 1997................................. 1,508,780 $ 3.19
Grants............................................... 774,650 13.46
Forfeitures.......................................... (130,632) 11.85
Exercises............................................ (172,271) 1.24
--------- ------
BALANCE, December 31, 1997............................... 1,980,527 6.90
Grants............................................... 1,155,500 8.21
Forfeitures.......................................... (963,047) 10.95
Exercises............................................ (232,470) 0.85
--------- ------
BALANCE, December 31, 1998............................... 1,940,510 6.41
Grants............................................... 1,136,875 5.48
Forfeitures.......................................... (739,714) 10.80
Exercises............................................ (118,634) 0.70
--------- ------
BALANCE, December 31, 1999............................... 2,219,037 $ 4.80
========= ======
</TABLE>
The options generally vest ratably over four or five year period and are
exercisable over a period of ten years.
F-24
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
12. STOCK INCENTIVE PLAN (CONTINUED)
Information with respect to options issued under the Plan at December 31,
1999, is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE PRICE OUTSTANDING PRICE
- ----------------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.50--$0.64........................... 422,928 5.39 $0.64 370,721 $ 0.64
$0.75--$3.75........................... 214,485 6.06 0.87 139,149 0.85
$4.06--$5.38........................... 185,426 9.34 5.00 23,284 4.59
$5.50.................................. 997,400 9.81 5.50 2,000 5.50
$5.94--$8.44........................... 234,950 8.37 8.03 52,975 8.04
$9.38--$17.50.......................... 163,848 7.93 11.53 150,648 11.71
--------- ---- ----- ------- ------
2,219,037.. 8.27 $4.80 738,777 $ 3.60
========= ==== ===== ======= ======
</TABLE>
As of December 31, 1998 and 1997, approximately 732,000 and 938,000 options
were exercisable at a weighted average exercise price of $4.68 and $6.92,
respectively.
The Company applies APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and the related interpretations in accounting for its employee stock options.
Had compensation cost for the Plan been determined based upon the fair value
of the options 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 for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net (loss) income:
As reported............................................. $ (9,047) $ 584 $(14,230)
As adjusted............................................. (10,180) (1,424) (14,969)
Basic net (loss) income per share:
As reported............................................. $ (0.39) $ 0.03 $ (1.06)
As adjusted............................................. (0.44) (0.06) (1.11)
Diluted net (loss) income per share:
As reported............................................. $ (0.39) $ 0.02 $ (1.06)
As adjusted............................................. $ (0.44) (0.06) (1.11)
</TABLE>
The weighted average fair value of each stock option granted during the
years ended December 31, 1999, 1998, and 1997, was $3.86, $9.29, and $8.87,
respectively.
F-25
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
12. STOCK INCENTIVE PLAN (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 for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Risk free interest.......................... 5.0%-6.0% 5.5% 6.4%
Expected dividend yield..................... -- -- --
Expected life............................... 5-7 years 5-7 years 5-7 years
Expected volatility......................... 65.0% 60.0% 60.0%
</TABLE>
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. This option
was exercised 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.
13. 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, 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 Box Hill's founding
shareholders, collectively, in exchange for 100% of the shares of Box Hill
Europe (the BHE Merger). The transaction has been accounted for as a merger
between entities under common control in a manner similar to a pooling of
interests.
After the BHE Merger, Box Hill Europe became a wholly owned subsidiary of
Box Hill. On January 1, 1998, the fair value of the 4,959 shares of Box Hill
common stock issued to the founding shareholders was $52, which was equal to the
net book value of Box Hill Europe on that date. No restatement of the Company's
financial statements is required as a result of this transaction because the
results of Box Hill Europe, consisting only of sales and marketing expenses,
which have been included in the Company's statements of operations for all
periods prior to the BHE Merger.
F-26
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
13. RELATED-PARTY TRANSACTIONS (CONTINUED)
SALES TO AND PURCHASES FROM RELATED PARTIES--Revenues from sales to
affiliated companies for the years ended December 31, 1999, 1998, and 1997, were
approximately $18, $48, and $125, respectively. Artecon purchased 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 Artecon's
merger with SDI. Purchases from affiliated companies for the years ended
December 31, 1999, 1998 and 1997, were approximately $89, $80, and $130,
respectively.
14. EMPLOYEE BENEFIT PLANS
BOX HILL 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, 1999, 1998 and 1997.
ARTECON SAVINGS PLAN--Artecon 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. Artecon matches 50% of eligible employees' contributions up to
a specified limit ($500). The Company's matching contributions to the savings
plan were $49, $67, and $38 for the years ended December 31, 1999, 1998, and
1997, respectively.
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 750,000 shares of common
stock for issuance pursuant to this plan. For the years ended December 31, 1999
and 1998, 40,319 and 79,181 shares were issued under the plan.
15. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Company leases office space and equipment under
noncancellable operating leases which expire at various dates through
September 2007. Rent expense for the years ended December 31, 1999, 1998, and
1997, was $2,199, $2,636, and $1,499, respectively.
F-27
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments, on a cash basis, under all noncancelable
operating leases at December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000........................................................ $1,741
2001........................................................ 901
2002........................................................ 739
2003........................................................ 710
2004........................................................ 698
Thereafter.................................................. 2,098
------
$6,887
======
</TABLE>
EMPLOYMENT AGREEMENTS--In connection with the Box Hill/Artecon Merger,
effective August 2, 1999, the Company entered into employment contracts with six
of its executive officers. These contracts provide for base salaries totaling
$1,780 per year. In addition, each executive will be eligible to receive, at the
discretion of the Board of Directors, a cash bonus of up to 50% of such
executives then annual base salary. If an executive's employment is terminated
under certain circumstances, such executive will be entitled to receive a lump
sum cash severance payment of up to 125% of such executive's then annual base
salary.
CLASS ACTION LAWSUITS--In December 1998, four shareholder class action
lawsuits were filed against Box Hill, certain of its officers and directors, and
the underwriters of Box Hill's 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.
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-makers are its Chief Co-Executive Officers. The operating
segments of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.
F-28
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
16. GEOGRAPHICAL AND SEGMENT INFORMATION (CONTINUED)
Historically, Artecon reported operating segments in certain market
divisions. Subsequent to the merger, the Company operates in a single reporting
segment following the integration of Box Hill and Artecon. In the six months
since the merger, the Company's operating segments are organized on the basis of
products and services. The Company has identified operating segments to consist
of Disk, Tape, Services and other products and services. The accounting policies
of the Company's operating segments are the same as those described in Note 1,
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The Company currently evaluates
performance based on stand-alone segment revenue. The Company is in the process
of identifying performance based on stand-alone segment gross margin. Because
the Company does not currently evaluate performance based on segment gross
margin, operating income or return on assets at the operating segment level,
such information is not presented.
Products and services revenue for the six months ended December 31, 1999 is
as follows:
<TABLE>
<CAPTION>
DISK TAPE SERVICES OTHER CONSOLIDATED
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Six-months ended December 31, 1999
Net revenues............................ $ 37,930 $ 7,445 $ 4,875 $ 8,217 $ 58,467
======== ======= ======= ======= ========
</TABLE>
Reliable information prior to June 1, 1999 is not available and,
accordingly, has not been provided.
Information concerning principal geographic areas in which the Company operates
was as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
United States........................................... $108,922 $155,460 $122,227
Europe.................................................. 11,965 10,435 10,945
Japan................................................... 3,329 2,460 3,512
-------- -------- --------
$124,216 $168,355 $136,684
======== ======== ========
Income (loss) before taxes:
United States........................................... $(14,686) $ (421) $(19,620)
Europe.................................................. 2,665 2,122 3,239
Japan................................................... (10) (135) (243)
-------- -------- --------
$(12,031) $ 1,566 $(16,624)
======== ======== ========
Assets:
United States........................................... $102,206 $126,161 $129,418
Europe.................................................. 494 416 231
Japan................................................... 1,259 902 2,126
Eliminations............................................ (301) (449) (613)
-------- -------- --------
$103,658 $127,030 $131,162
======== ======== ========
</TABLE>
F-29
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The unaudited quarterly financial information has been restated for all
prior periods to reflect the acquisition of Artecon, which was accounted for as
a pooling-of-interests. The information presented below reflects all adjustments
which, in the opinion of management, are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
Box Hill (as previously reported):
Revenues............................. $14,285 $13,980 $ -- $ -- $ --
Income before income taxes........... 917 586 -- -- --
Net income........................... 564 360 -- -- --
Basic earnings per share............. 0.04 0.03 -- -- --
Diluted earnings per share........... 0.04 0.02 -- -- --
Artecon:
Revenues............................. 18,327 19,157 -- -- --
Income (loss) before income taxes.... (1,747)(b) 736 -- -- --
Net income (loss).................... (1,154) 566 -- -- --
Basic earnings (loss) per share...... (0.05) 0.03 -- -- --
Diluted earnings (loss) per share.... (0.05) 0.03 -- -- --
Combined:
Revenues............................. 32,612 33,137 28,333 30,134 124,216
Income (loss) before income taxes.... (830) 1,322 (13,327)(a) 804 (12,031)
Net income (loss).................... (590) 926 (10,833) 1,450 (9,047)
Basic earnings (loss) per share...... (0.03) 0.04 (0.46) 0.06 (0.39)
Diluted earnings (loss) per share.... (0.03) 0.04 (0.46) 0.06 (0.39)
Year Ended December 31, 1998
Box Hill (as previously reported):
Revenues............................. $16,045 $19,802 $21,718 $14,911 $ 72,476
Income before income taxes........... 2,105 3,523 3,571 541 9,740
Net income........................... 1,295 2,106 2,200 333 5,934
Basic earnings per share............. 0.09 0.15 0.15 0.02 0.42
Diluted earnings per share........... 0.09 0.14 0.15 0.02 0.39
Artecon:
Revenues............................. 26,945 30,968 19,639 18,327 95,879
Income (loss) before income taxes.... 125 527 (7,079)(b) (1,747)(b) (8,174)
Net income (loss).................... 69 282 (4,548) (1,153) (5,350)
Basic earnings (loss) per share...... -- 0.01 (0.21) (0.05) (0.25)
Diluted earnings (loss) per share.... -- 0.01 (0.21) (0.05) (0.25)
</TABLE>
F-30
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Combined:
Revenues............................. 42,990 50,770 41,357 33,238 168,355
Income (loss) before income taxes.... 2,230 4,050 (3,508) (1,206) 1,566
Net income (loss).................... 1,364 2,388 (2,348) (820) 584
Basic earnings (loss) per share...... 0.06 0.10 (0.10) (0.04) 0.03
Diluted earnings (loss) per share.... 0.06 0.10 (0.10) (0.04) 0.02
</TABLE>
- ------------------------
(a) Includes pre-tax charges of $13,362 related to the Merger and management's
restructuring and integration plan associated with the Merger.
(b) Include pre-tax charges of $2,387 in the third quarter of 1998 and $287 in
the fourth quarter of 1998 for restructuring and impairment of certain
intangible assets.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Stockholders and the Board of Directors
Dot Hill Systems Corp.
Carlsbad, California
We have audited the financial statements of Dot Hill Systems Corp. and its
subsidiaries (the Company) as of December 31, 1999, and for the year then ended,
and have issued our report thereon dated January 25, 2000; such report is
included elsewhere in this Form 10-K. Our audit also included the consolidated
financial statement schedule for the year ended December 31, 1999, of the
Company listed in Item 14. The consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, such financial statement schedule
for the year ended December 31, 1999, when considered in relation to the basic
1999 financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
January 25, 2000
Costa Mesa, California
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dot Hill Systems Corp.:
We have audited the consolidated financial statements of Dot Hill Systems Corp.
and its subsidiaries (the "Company") as of December 31, 1998 and for each of the
two years in the period ended December 31, 1998. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule of valuation and qualifying accounts is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, based on our audit and the report of other auditors, is fairly stated
in all material respects in relation to the basic financial statements taken as
a whole.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
August 2, 1999
S-2
<PAGE>
SCHEDULE II
DOT HILL SYSTEMS CORP.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS END OF PERIOD
------------ ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts and
sales returns
Year ended December 31, 1999......... 1,657 752 -- 682(2) 1,727
Year ended December 31, 1998......... 1,160 1,672 -- 1,175(2) 1,657
Year ended December 31, 1997......... 376 320 1,215 751(2) 1,160
Reserve for excess and obsolete
inventories
Year ended December 31, 1999......... 4,314 6,811 -- 1,577(3) 9,548
Year ended December 31, 1998......... 5,691 3,627 -- 5,004(3) 4,314
Year ended December 31, 1997......... 1,075 4,000 1,338 722(3) 5,691
</TABLE>
- ------------------------
(1) Reserves of companies acquired.
(2) Uncollectible receivables charged off and credit issued for product returns.
(3) Consists primarily of the write-off of excess/obsolete inventories
S-3
<PAGE>
EXHIBIT 3.1
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 100 16
ATTN: DAVID LUBIN, ESQ.
(212) 592-1400
<PAGE>
RESTATED
CERTIFICATE OF INCORPORAT10N
OF
BOX HILL SYSTEMS CORP.
(Under Section 807 of the Business Corporation Law)
- --------------------------------------------------------------------------------
We, Philip Black and Mark Mays, being respectively Co-Chief Executive
Officer 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 Dot Hill Systems Corp.,
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
1.
<PAGE>
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.
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,
2.
<PAGE>
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.
3.
<PAGE>
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 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 (iii) 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.
4.
<PAGE>
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:
Dot Hill Systems Corp.
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 III Directors.
5.
<PAGE>
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.
6.
<PAGE>
IN WITNESS WHEREOF, we have hereunto signed our names and affirm this
certificate as of August 2, 1999.
/s/ Philip Black /s/ Valerie Greenberg
- ----------------------------------- -----------------------------------
Philip Black Valerie Greenberg
Co-Chief Executive Officer Assistant Secretary
7.
<PAGE>
EXHIBIT 10.5
DOT HILL SYSTEM CORPORATION
1995 INCENTIVE PROGRAM
The 1995 Incentive Program (the "PROGRAM") provides for the grant to
officers, directors and employees of Hill Systems Corporation and its direct and
indirect subsidiaries (collectively, the "COMPANY"), and certain consultants to
the Company, certain rights to acquire shares of the Company's common stock, par
value $.01 per share (the "COMMON STOCK"). The Company believes that this
Program will cause those persons to contribute materially to the growth and
success of the Company, thereby benefitting its stockholders.
1. ADMINISTRATION.
The Program shall be administered and interpreted by the Board of
Directors of the Company or by one or more Committees appointed by the Board of
Directors of the Company from among its members (the "PLAN ADMINISTRATOR"). The
Board of Directors may appoint different Committees to handle different duties
under the Program. The Plan Administrator's decisions shall be final and
conclusive with respect to the interpretation and administration of the Program
and any Grant made under it.
2. GRANTS.
Incentives under the Program shall consist of incentive stock options,
non-qualified stock options, stock appreciation rights in tandem with stock
options or freestanding, and restricted stock grants (any of the foregoing, in
any combination, collectively, "GRANTS"). All Grants shall be subject to the
terms and conditions set out herein and to such other terms and conditions
consistent with this Program as the Plan Administrator deems appropriate. The
Plan Administrator shall approve the form and provisions of each Grant. Grants
under a particular section of the Program need not be uniform, and Grants under
two or more sections may be combined in one instrument.
3. ELIGIBILITY FOR GRANTS.
Grants may be made to any employee, officer, key executive, director,
professional or administrative employee, consultant or advisor to the Company or
any subsidiary of the Company selected by the Plan Administrator to receive
Grants under the Program (persons so selected, the "GRANTEES").
4. SHARES AVAILABLE FOR GRANT.
(a) SHARES SUBJECT TO ISSUANCE OR TRANSFER. Subject to adjustment as
provided in Section 4(b), the aggregate number of shares of Common Stock (the
"SHARES") that may be issued or transferred under the Program is 1,000,000
Shares plus, (i) any Shares which are forfeited under the Program after the
Program becomes effective; plus (ii) any Shares surrendered to the Company in
payment of the exercise price of options issued under the Program. However, no
award may be issued that would bring the total of all outstanding awards
1.
<PAGE>
under the Program to more than 20% of the total number of Shares of Common
Stock of the Company at the time outstanding. The Shares may be authorized
but unissued Shares or Treasury Shares. The number of Shares available for
Grants at any given time shall be reduced by the aggregate of all Shares
previously issued or transferred pursuant to the Program plus the aggregate
of all Shares which may become subject to issuance or transfer under
then-outstanding and then-currently exercisable Grants. Notwithstanding
anything to the contrary contained herein, all share amounts referred to
herein shall be deemed to reflect the 200,000-for-one stock split with regard
to the Common Stock of the Company approved by the Board of Directors of the
Company on May 23, 1995 regardless of when the necessary documents to effect
such stock split shall be filed with the applicable state officials and
regardless of when any associated Charter Amendment shall be deemed effective.
(b) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR OTHER EVENTS. Upon
changes in the Common Stock of the Company by reason of a stock dividend, stock
split, reverse split, recapitalization, merger, consolidation, combination or
exchange of shares, separation, reorganization or liquidation, the number and
class of Shares available under the Program as to which Grants may be made (both
in the aggregate and to any one Grantee), the number and class of Shares under
each then-outstanding Stock Option and the Option Price per share of such
options, and the terms of stock appreciation rights shall be correspondingly
adjusted by the Plan Administrator, such adjustments to be made in the case of
outstanding Stock Options without change in the total price applicable to such
options. In the event of a merger, consolidation, combination, reorganization or
other transaction in which the Company will not be the surviving corporation, or
in which the Company becomes a wholly-owned subsidiary of the new corporation, a
Grantee of Stock Options under the Program shall be entitled to options on that
number of shares of stock in the new corporation which the Grantee would have
received had the Grantee exercised all of the unexercised options available to
the Grantee under the Program, whether or not then exercisable, at the instant
immediately prior to the effective date of such transaction, and, if such
unexercised options had related stock appreciation rights, the Grantee also will
receive new stock appreciation rights related to the new options. Thereafter,
adjustments as provided above shall relate to the options or stock appreciation
rights of the new corporation. Except as otherwise specifically provided in the
instrument of Grant, in the event of a Change in Control (as defined below),
merger, consolidation, combination, reorganization or other transaction in which
the shareowners of the Company will receive cash or securities (other than
Common Stock) or in the event that an offer is made to the holders of Common
Stock of the Company to sell or exchange such Common Stock for cash, securities
or stock of another corporation and such offer, if accepted, would result in the
offeror becoming the owner of (a) at least 50% of the outstanding Common Stock
of the company or (b) such lesser percentage of the outstanding Common Stock
which the Plan Administrator in its sole discretion determines will materially
adversely affect the market value of the Common Stock after the tender or
exchange offer, the Plan Administrator shall have the right, but not the
obligation, in the exercise of its business judgment, prior to the shareowners'
vote on such transaction or prior to the expiration date (without extensions) of
the tender or exchange offer, (i) accelerate the time of exercise so that all
Stock options and stock appreciation rights which are outstanding shall become
immediately exercisable in full, and all Restricted Stock Grants shall
immediately vest in full, without regard to any limitations of time, performance
or amount otherwise contained in the Program or in the instruments of Grant
and/or (ii) determine that the options and stock appreciation rights shall be
adjusted and make such adjustments by substituting for Common
2.
<PAGE>
Stock of the Company subject to options and stock appreciation rights, common
stock of the surviving corporation or offeror if such stock of such
corporation is publicly traded or, if such stock is not publicly traded, by
substituting common stock of a parent of the surviving corporation or offeror
if the stock of such parent is publicly traded, in which event the aggregate
option price shall remain the same and the number of shares subject to
outstanding grants shall be the number of shares which could have been
purchased on the closing day of such transaction or the expiration date of
the offer with the proceeds which would have been received by the Grantee if
the option had been exercised in full prior to such transaction or expiration
date and the Grantee had exchanged all of such shares in the transaction or
sold or exchanged all of such shares pursuant to the tender or exchange
offer, and if any such option has related stock appreciation rights, the
stock appreciation rights shall likewise be adjusted. For purposes of this
Section 4(b), "CHANGE IN CONTROL" means (i) any "PERSON", as such term is
used in Section 13(d) and 14(d) of the Securities Exchange Act of1934, as
amended (the "EXCHANGE ACT") (other than the Company, any trustee or other
fiduciary holding securities under an employee benefit plan of the Company,
or any corporation owned, directly or indirectly, by the shareowners of the
Company in substantially the same proportion as their ownership of stock of
the Company), is or becomes the "BENEFICIAL OWNER" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of the Company's then
outstanding securities without the approval of the Board of Directors of the
Company; (ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board, and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause (i),
(iii), or (iv) of this sentence) whose election by the Board or nomination
for election by the Company's shareowners was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved cease for any reason to constitute at
least a majority thereof; (iii) the shareowners of the Company approve a
merger or consolidation of the Company with any other company, other than (1)
a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation or (2) a merger or consolidation effected
to implement a recapitalization of the Company (or similar transaction) in
which no "PERSON" (as hereinabove defined) acquires more than 50% of the
combined voting power of the Company's then outstanding securities; or (iv)
the shareowners of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets and properties.
5. STOCK OPTIONS.
The Plan Administrator may grant options qualifying as incentive stock
options under the Internal Revenue Code of 1986, as amended ("INCENTIVE STOCK
OPTIONS"), or non-qualified options not entitled to special tax treatment under
Section 422 of the Internal Revenue Code of 1986 (the "CODE"), as amended
(collectively, "STOCK OPTIONS"). The following provisions of this Section 5 are
applicable to Stock Options:
3.
<PAGE>
(a) EXERCISE OF OPTION. A Grantee may exercise a Stock Option by
delivering a notice of exercise to the Company, either with or without
accompanying payment of the option price (the "OPTION PRICE"). The notice of
exercise, once delivered, shall be irrevocable.
(b) SATISFACTION OF OPTION PRICE. The Grantee shall pay the option
Price in cash or by delivering shares of Common Stock which have been owned by
the Grantee for a minimum of six (6) months and which have a Fair Market Value
on the date of exercise equal to the Option Price, or a combination of cash and
Shares. The Grantee shall pay the Option Price not later than thirty (30) days
after the date of a statement from the Company following exercise setting forth
the Option Price, Fair Market Value of Common Stock on the exercise date, the
number of shares of Common Stock that may be delivered in payment of the Option
Price, and the amount of withholding tax due, if any. If the Grantee fails to
pay the option Price within the thirty (30) day period, the Plan Administrator
shall have the right to take whatever action it deems appropriate, including
voiding the option exercise. The Company shall not issue or transfer shares of
Common Stock upon exercise of a Stock Option until the Option Price is fully
paid.
(c) SHARE WITHHOLDING. With respect to any non-qualified option or SAR
(as defined below), the Plan Administrator may, in its discretion and subject to
such rules as the Plan Administrator may adopt (including, without limitation,
rules relating to minimum holding periods for Common Stock), permit the Grantee
to satisfy,, in whole or in part, any withholding tax obligation which may arise
in connection with the exercise of the non-qualified option or SAR by electing
to have the Company withhold shares of Common Stock having a Fair Market Value
equal to the amount of the withholding tax. Notwithstanding the foregoing, as a
condition of the Grant of any Stock Option or SAR to any officer or director of
the Company subject to the reporting requirements (a "REPORTING PERSON") of
Section 16 promulgated under the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), the Plan Administrator shall require, upon the exercise of
any Stock Option or SAR by any Reporting Person, at a time when the Company
shall be required to file periodic reports under Section 13 of the Exchange Act,
that the number of shares of Common Stock otherwise issuable upon the exercise
of such Stock Option or SAR shall be reduced by the number of shares of Common
Stock having an aggregate Fair Market Value equal to the amount of the Reporting
Person's liability for any and all taxes required by law to be withheld.
(d) PRICE AND TERM. The option Price per share, term and other
provisions of Stock Options granted under the Program shall be specified by the
Grant, as limited, in the case of Incentive Stock Options, by the provisions of
Section 5(e) below, if granted pursuant to such Section. In addition, the Plan
Administrator may prescribe such other conditions as it may deem appropriate,
which conditions shall be specified in the instrument of Grant.
(e) LIMITS ON INCENTIVE STOCK OPTIONS. The aggregate fair market value
of the stock covered by Incentive Stock Options granted under the Program or any
other stock option plan of the Company or any subsidiary or parent of the
Company that become exercisable for the first time by any employee in any
calendar year shall not exceed $100,000. The aggregate Fair Market Value will be
determined at the time of grant. The period for exercise of an Incentive Stock
Option shall not exceed ten (10) years from the date of the Grant (or five years
if the Grantee is also a 10% stockholder). The Option Price at which Common
Stock may be purchased by the Grantee under an Incentive Stock Option shall be
the Fair Market Value (or
4.
<PAGE>
110% of the Fair Market Value if the Grantee is a 10% stockholder) of the
Common Stock on the date of the Grant. Incentive Stock Options may only be
granted to employees of the Company or any subsidiary or parent of the
Company. Incentive Stock Options by their terms shall not be transferrable by
the Grantee other than by the laws of descent and distribution, and shall be
exercisable, during the lifetime of the Grantee, only by the Grantee.
(f) RESTORED OPTIONS. Stock Options granted under the Program may, with
the Plan Administrator's permission, include the right to acquire a restored
option (a "RESTORED OPTION"). If a Stock Option grant contains a Restored Option
feature and if a Grantee pays all or part of the Option Price of such Stock
Option with shares of Common Stock held by the Grantee, then upon exercise of
such Stock Option the Grantee shall be granted a Restored Option to purchase, at
the Fair Market Value of the Common Stock as of the date of the grant of the
Restored Option, the number of shares of Common Stock of the Company equal to
the sum of the number of whole shares used by the Grantee in payment of the
Option Price and the number of whole shares, if any, withheld by the Company as
payment for withholding taxes. A Restored Option may be exercised between the
date of grant and the date of expiration, which will be the same as the date of
expiration of the Stock Option to which such Restored Option is related.
6. STOCK APPRECIATION RIGHT.
The Plan Administrator may grant a Stock Appreciation Right ("SAR")
either independently or in conjunction with any Stock Option granted under the
Program. The following provisions are applicable to each SAR:
(a) OPTIONS TO WHICH RIGHT RELATES. Each SAR which is issued in
conjunction with a Stock Option shall specify the Stock Option to which the SAR
is related, together with the Option Price and number of option shares subject
to the SAR at the time of its grant.
(b) REQUIREMENT OF EMPLOYMENT. An SAR may be exercised only while the
Grantee is in the employment of the Company, except that the Plan Administrator
may provide for partial or complete exceptions to this requirement as it deems
equitable.
(c) EXERCISE. A Grantee may exercise an SAR in whole or in part by
delivering a notice of exercise to the Company, except that the Plan
Administrator may provide for partial or complete exceptions to this requirement
as it deems equitable.
(d) PAYMENT AND FORM OF SETTLEMENT. If a Grantee exercises an SAR which
is issued in conjunction with a Stock Option, he shall receive the aggregate of
the excess of the fair market value of each share of Common Stock with respect
to which the SAR is being exercised over the Option Price of each such share.
Payment, in any event, may be made in cash, Common Stock which has been held by
the Grantee for at least six (6) months or a combination of the two, in the
discretion of the Plan Administrator. Fair Market Value shall be determined as
of the date of exercise.
(e) EXPIRATION AND TERMINATION. Each SAR shall expire on a date
determined by the Plan Administrator at the time of grant. If a Stock option is
exercised in whole or in part, any SAR related to the Shares purchased in
connection with such exercise shall terminate immediately.
5.
<PAGE>
7. RESTRICTED STOCK GRANTS.
The Plan Administrator may issue or transfer shares of Common Stock
("RESTRICTED STOCK") to a Grantee under a Restricted Stock Grant. Shares of
Restricted Stock are subject to forfeiture unless and until specified employment
vesting and/or performance vesting conditions are met, as determined by the Plan
Administrator. Until the shares vest or are forfeited, as the case may be, the
Grantee shall be entitled to vote the shares and to receive any dividends paid.
The following provisions are applicable to Restricted Stock Grants:
(a) REQUIREMENT OF EMPLOYMENT. If the Grantee's employment terminates
prior to the fulfillment of the conditions for vesting of the Restricted Stock,
as set forth in the specific instrument of Grant, all shares of Restricted Stock
held by him or her and still subject to restriction will be forfeited and must
be returned immediately to the Company. However, the Plan Administrator may
provide for partial or complete exceptions to this requirement as it deems
equitable.
(b) RESTRICTIONS OF TRANSFER AND LEGEND ON STOCK CERTIFICATE. Prior to
the fulfillment of the conditions for vesting, a Grantee may not sell, assign,
transfer, pledge, or otherwise dispose of the shares of Common Stock except to a
Successor Grantee under Section 9(a). Each certificate for shares issued or
transferred under a Restricted Stock Grant shall contain a legend giving
appropriate notice of the restrictions applicable to the Grant. The Plan
Administrator may, in its sole discretion, require that such certificates be
placed into escrow with the Company until vesting.
(c) LAPSE OF RESTRICTIONS. All restrictions imposed under a Restricted
Stock Grant shall lapse upon the fulfillment of the conditions for vesting set
forth in the instrument of Grant provided that all of the conditions stated in
Sections 7(a) and (b) have been met as of the date of such lapse. The Grantee
shall then be entitled to have the legend removed from the certificate.
8. AMENDMENT AND TERMINATION OF THE PROGRAM.
(a) AMENDMENT. The Board of Directors of the Company may from time to
time amend, alter, suspend or discontinue the Program, subject to any
requirement of stockholder approval required by applicable law, rule or
regulation, including Section 162(m) of the Code or, if the Common Stock is then
listed or admitted for trading on any United States securities exchange or on
the National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ"), any requirement for stockholder approval required under the rules of
such exchange or NASDAQ, as the case may be; provided, however, that no
amendment shall be made without stockholder approval if such amendment would (1)
increase the maximum number of shares of Common Stock available for issuance
under this Program (subject to Section 4(b)), (2) reduce the minimum Option
Price in the case of an option or the base price in the case of an SAR, (3)
effect any change inconsistent with Section 422 of the Code or (4) extend the
term of this Program.
(b) TERMINATION OF THE PROGRAM. The Program shall terminate on the
tenth anniversary of its effective date unless terminated earlier by the Board
or unless extended by the Board.
6.
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(c) TERMINATION AND AMENDMENT OF OUTSTANDING GRANTS. A termination or
amendment of the Program that occurs after a Grant is made shall not result in
the termination or amendment of the Grant unless the Grantee consents or unless
the Plan Administrator acts under Section 9(d). The termination of the Program
shall not impair the power and authority of the Plan Administrator with respect
to outstanding Grants. Whether or not the Program has terminated, an outstanding
Grant may be terminated or amended under Section 9(d) or may be amended by
agreement of the Company and the Grantee on terms consistent with the Program.
9. GENERAL PROVISIONS.
(a) PROHIBITIONS AGAINST TRANSFER. Only a Grantee or his or her
authorized representative may exercise rights under a Grant. Such persons may
not transfer those rights, except upon the express written consent of the
Company, which may be granted or denied in the Company's discretion. Except as
otherwise expressly provided herein or in the instrument of grant, when a
Grantee dies, the personal representative or other person entitled under a Grant
under the Program to succeed to the rights of the Grantee ("SUCCESSOR Grantee")
may exercise the rights. A Successor Grantee must furnish proof satisfactory to
the Plan Administrator of his or her right to receive the Grant under the
Grantee's will or under the applicable laws of descent and distribution.
(b) SUITABLE GRANTS. The Plan Administrator may make a Grant to an
employee of another corporation who becomes an Eligible Grantee by reason of a
corporate merger, consolidation, acquisition of stock or property, share
exchange, reorganization or liquidation involving the Company in substitution
for a stock option, stock appreciation right, performance award, or restricted
stock grant previously granted by such corporation (the "ORIGINAL INCENTIVES").
The terms and conditions of the substitute Grant may vary from the terms and
conditions required by the Program and from those of the Original Incentives.
The Plan Administrator shall prescribe the exact provisions of the substitute
Grants, preserving where possible the provisions of the Original Incentives.
(c) SUBSIDIARIES. The term "SUBSIDIARY" means a corporation in which
the Company owns directly or indirectly 50% or more of the voting power.
(d) COMPLIANCE WITH LAW. The Program, the exercise of Grants, and the
obligations of the Company to issue or transfer shares of Common Stock under
Grants shall be subject to all applicable laws and to approvals by any
governmental or regulatory agency as may be required. The Plan Administrator may
revoke any Grant if it is contrary to law or modify a Grant to bring it into
compliance with any valid and mandatory government regulation. The Plan
Administrator may also adopt rules regarding the withholding of taxes on payment
to Grantees.
(e) OWNERSHIP OF STOCK. A Grantee or Successor Grantee shall have no
rights as a stockholder of the Company with respect to any Shares covered by a
Grant until the Shares are issued or transferred to the Grantee or Successor
Grantee on the Company's books.
(f) NO RIGHT TO EMPLOYMENT. The Program and the Grants under it shall
not confer upon any Grantee the right to continue in the employment of the
Company or affect in any way the right of the Company to terminate the
employment of a Grantee at any time.
7.
<PAGE>
(g) EFFECTIVE DATE OF THE PROGRAM. The Program shall become effective
upon its approval by the Company's stockholders.
(h) FAIR MARKET VALUE. For the purposes of the Program, the term Fair
Market Value means, as of any date, the closing price of a share of Common Stock
of the Company on such date. The closing price shall be (i) if the Common Stock
is then listed or admitted for trading on any national securities exchange, or
if not so listed or admitted for trading, is listed or admitted for trading on
NASDAQ, the last sale price of the Common Stock, regular way, or the mean of the
bid and asked prices thereof for any trading day on which no such sale occurred,
in each case as officially reported on the principal securities exchange on
which the Common Stock is listed or admitted for trading or on NASDAQ, as the
case may be, or (ii) if not so listed or admitted for trading on a national
securities exchange or NASDAQ, the mean between the closing high bid and low
asked quotations for the Common Stock in the over-the-counter market as reported
by NASDAQ, or any similar system for the automated dissemination of securities
prices then in common use, if so quoted, as reported by any member firm of the
New York Stock Exchange selected by the Company; PROVIDED, HOWEVER, that if, by
reason of extended or continuous trading hours on any exchange or in any market
or for any other reason, the time, with respect to any trading day, of the close
of trading for the purpose of determining the "last sale price" or the "closing"
bid and asked prices is not objectively determinable, the time on such trading
day used for the purpose of reporting any compilation of last sale prices or
closing bid and asked prices in THE WALL STREET JOURNAL shall be the time on
such trading day as of which the "last sale price" or "closing" bid and asked
prices are determined for purposes of this definition. If the Common Stock is
quoted on a national securities or central market system in lieu of a market or
quotation system described above, the closing price shall be determined in the
manner set forth in clause (i) of the preceding sentence if actual transaction
are reported, and in the manner set forth in clause (ii) of the preceding
sentence if bid and asked quotations are reported but actual transactions are
not. If on the date in question, there is no exchange or over-the-counter market
for the Common Stock, the "fair market value" of such Common Stock shall be
determined by the Plan Administrator acting in good faith.
(i) APPLICATION OF FUNDS. The proceeds received by the Company from the
issuance of Grants pursuant to the Program will be used for general corporate
purposes.
(j) NO OBLIGATION TO EXERCISE OPTION. The granting of an option to any
Grantee under the Program shall impose no obligation upon such Grantee to
exercise such option.
(k) SEVERABILITY. If any provision of the Program, or any term or
condition of any Grant granted or form executed or to be executed thereunder, or
any application thereof to any person or circumstances is invalid, such
provision, term, condition or application shall to that extent be void (or, in
the discretion of the Plan Administrator, such provision, term or condition may
be amended so as to avoid such invalidity or failure), and shall not affect
other provisions, terms or conditions or applications thereof, and to this
extent such provisions, terms and conditions are severable.
(l) INSTRUMENT OF GRANT. Each Grant under this Program shall be
evidenced by an agreement (i.e., an instrument of Grant) setting forth the terms
and conditions applicable to such Grant. No Grant shall be valid until an
agreement is executed by the Company and the recipient
8.
<PAGE>
of such award and, upon execution by each party and delivery of the agreement
to the Company, such award shall be effective as of the effective date set
forth in the Agreement.
(m) RESTRICTED SHARES. Each award made hereunder shall be subject to
the requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
award upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the delivery of shares
thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company may require that certificates evidencing shares of Common Stock
delivered pursuant to any award made hereunder bear a legend indicating that the
sale, transfer or other disposition thereof by the holder is prohibited except
in compliance with the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
(n) PROGRAM CONTROLS. In the case of any conflict or inconsistency
between the terms of this Program and the terms of any instrument of Grant, the
terms of this Program will control, unless the instrument of grant expressly
provides that the terms of such instrument of grant will control.
9.
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EXHIBIT 10.8
BOX HILL SYSTEMS CORP.
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1997 Employee Stock
Purchase Plan of Box Hill Systems Corp.
1. PURPOSE. The purpose of the Plan is to provide employees of
the Company and its Designated Subsidiaries with an opportunity to purchase
Common Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Company,
or a committee of the Board appointed in accordance with Section 13.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "COMMON STOCK" shall mean the Common Stock of the Company.
(d) "COMPANY" shall mean Box Hill Systems Corp., and any
Designated Subsidiary of the Company.
(e) "COMPENSATION" shall mean all base straight time gross
earnings paid in cash including commissions, overtime, shift premium, incentive
compensation, incentive payments, bonuses and other cash compensation, but
excluding any income received from the exercise of options.
(f) "DESIGNATED SUBSIDIARIES" shall mean the Subsidiaries
which have been designated by the Board from time to time in its sole discretion
as eligible to participate in the Plan.
(g) "EMPLOYEE" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and at least six (6) months as of the first day
of the applicable offering period. For purposes of the Plan, the employment
relationship shall be treated as continuing intact while the individual is on
sick leave or other leave of absence approved by the Company. Where the period
of leave exceeds 90 days and the individual's right to re-employment is not
guaranteed either by statute or by contract, the employment relationship shall
be deemed to have terminated on the 91st day of such leave.
(h) "ENROLLMENT DATE" shall mean the first day of each
Offering Period.
(i) "EXERCISE DATE" shall mean the last trading day of each
Purchase Period, if any, or each Offering Period.
1.
<PAGE>
(j) "FAIR MARKET VALUE" shall mean, as of any date, the value
of Common Stock determined as follows:
(1) If the Common Stock is listed on any
established stock exchange or a national market system, including without
limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The
Nasdaq Stock Market, its Fair Market Value shall be the closing sales price
for such stock (or the closing bid, if no sales were reported) as quoted on
such exchange or system for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable, or;
(2) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(4) For purposes of the Enrollment Date under the
first Offering Period under the Plan, the Fair Market Value shall be the initial
price to the public as set forth in the Prospectus filed pursuant to Rule 424(b)
with the Securities Act of 1933, as amended with respect to the registration
statement of its Company on Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock
(Registration Statement No. 333-31873).
(k) "OFFERING PERIOD" shall mean the period beginning with the
date an option is granted under the Plan and ending with the date determined by
the Board. During the term of the Plan, the duration of each Offering Period
shall be determined from time to time by the Board, provided that no Offering
Period may exceed twelve (12) months in duration. If determined by the Board, an
Offering Period may include one or more Purchase Periods. The first Offering
Period shall begin on the effective date of the foregoing Registration Statement
relating to the Company's initial public offering of its Common Stock registered
with the Securities and Exchange Commission (the "Effective Date") and shall end
on March 31, 1998.
(l) "PLAN" shall mean this Employee Stock Purchase Plan.
(m) "PURCHASE PRICE" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "PURCHASE PERIOD" shall mean the period commencing on an
Enrollment Date or after an Exercise Date and which is of such duration as the
Board shall determine.
(o) "RESERVES" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
2.
<PAGE>
(p) "SUBSIDIARY" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(q) "TRADING DAY" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. ELIGIBILITY.
(a) Any Employee who shall be employed by the Company on a
given Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) to
the extent that, immediately after the grant, such Employee (or any other person
whose stock would be attributed to such Employee pursuant to Section 424(d) of
the Code) would own capital stock of the Company and/or hold outstanding options
to purchase such stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of the capital stock of the
Company or of any Subsidiary, or (ii) to the extent that his or her rights to
purchase stock under all employee stock purchase plans of the Company and its
subsidiaries accrues at a rate which exceed Twenty-Five Thousand Dollars
($25,000) worth of stock (determined at the fair market value of the shares at
the time such option is granted) for each calendar year in which such option is
outstanding at any time.
4. OFFERING AND PURCHASE PERIODS. The Plan shall be implemented
by consecutive, overlapping Offering Periods, each of which shall be of such
duration (not to exceed 12 months) as the Board shall determine from time to
time in its discretion, and each of which shall consist of such number of
Purchase Periods as the Board shall determine from time to time in its
discretion. The Plan shall continue until terminated in accordance with Section
19 hereof The initial Offering Period shall commence on the Effective Date and
shall end on the last Trading Day on or before March 31, 1998. Unless otherwise
specified by the Board, or a Committee of the Board (the "Committee") Offering
Periods subsequent to the initial Offering Period shall be six months in
duration, without any Purchase Periods, with the second Offering Period
commencing on the first Trading Day on or after April 1, 1998 and ending on the
last Trading Day on or before September 30, 1998. The Board shall have the power
to change the duration of Offering Periods (including the commencement dates
thereof) at any time or from time to time, and shall have the power to implement
multiple Purchase Periods within any Offering Period, provided that (except as
the shareholders may otherwise approve) any such change shall be effected only
with respect to Offering Periods commencing after the date on which the change
is made.
5. PARTICIPATION.
(a) An eligible Employee may become a participant in the Plan
by completing a subscription agreement authorizing payroll deductions in the
form of Exhibit A to this Plan and filing it with the Company's payroll office
prior to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which
3.
<PAGE>
such authorization is applicable, unless sooner terminated by the participant
as provided in Section 10 hereof.
6. PAYROLL DEDUCTIONS.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period. The Board shall have the power to change the payroll deduction rate up
to a maximum rate of twenty percent (20%) at any time or from time to time;
provided that (except as the stockholders may otherwise approve) any such change
shall be effected only with respect to Offering Periods commencing after the
date the change is made.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in
the Plan as provided in Section 10 hereof, or may increase (subject to the limit
set forth in Section 6(a)) or decrease the rate of his or her payroll deductions
during the Offering Period by completing or filing with the Company a new
subscription agreement authorizing a change in payroll deduction rate. The Board
or Committee may, in its discretion, limit the number of participation rate
changes during any Offering Period. The change in rate shall be effective with
the first full payroll period following five (5) business days after the
Company's receipt of the new subscription agreement unless the Company elects to
process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b) (8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at such
time during any Purchase or Offering Period. Payroll deductions shall recommence
at the rate provided in such participant's subscription agreement at the
beginning of the first Offering Period, or, if applicable, first Purchase Period
which is scheduled to end in the following calendar year, unless terminated by
the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part,
or at the time some or all of the Company's Common Stock issued under the Plan
is disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall, not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
4.
<PAGE>
7. GRANT OF OPTION. On the Enrollment Date of each Offering
Period, each eligible Employee participating in such Offering Period shall be
granted an option to purchase on each Exercise Date during such Offering Period
(at the applicable Purchase Price) up to a number of shares of the Company's
Common Stock determined by dividing such Employee's payroll deductions
accumulated prior to such Exercise Date and retained in the Participant's
account as of the Exercise Date by the applicable Purchase Price. In no event
shall an Employee be permitted to purchase during each Offering Period, or
Purchase Period, if applicable, more than, $12,500 worth of Common Stock valued
at the Fair Market Value on the first day of such Offering Period; provided,
however, that for the first Offering Period under the Plan an Employee shall not
be permitted to purchase more than $25,000 worth of Common Stock valued at the
Fair Market Value on the first day of the first Offering Period; and provided
further that such purchase shall be subject to the limitations set forth in
Sections 3(b) and 12 hereof, including limitations on purchases in subsequent
offerings during the same calendar year to assure compliance with Section 3(b).
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall expire
on the last day of the Offering Period.
8. EXERCISE OF OPTION.
(a) Unless a participant withdraws from the Plan as provided
in Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period, or, if applicable, Purchase Period subject to earlier
withdrawal by the participant as provided in Section 10 hereof. Any other monies
left over in a participant's account after the Exercise Date shall be returned
to the participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
(b) On any given Exercise Date, the number of shares with
respect to which options are to be exercised shall not exceed 125,000 shares
(which number gives effect to a 3.3 for I split of the Common Stock approved by
the Board in July 1997 to be effective immediately prior to the initial public
offering of the Common Stock of the Company), provided, however, for the
Exercise Date of the first Offering Period under the Plan, the number of shares
with respect to which options are to be exercised shall not exceed 100,000
shares (which number gives effect to a 3.3 for 1 split of the Common Stock
approved by the Board in July 1997 to be effective immediately prior to the
initial public offering of the Common Stock of the Company). If, on a given
Exercise Date, the number of shares with respect to which options are to be
exercised exceeds the share limit described in this subsection, the Company
shall make a pro rata allocation of the shares remaining available for purchase
in as uniform a manner as shall be practicable and as it shall determine to be
equitable.
9. DELIVERY. As promptly as practicable after each Exercise Date
on which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of the shares purchased upon exercise of his
or her option.
5.
<PAGE>
10. WITHDRAWAL; TERMINATION OF EMPLOYMENT
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) Upon a participant's ceasing to be an Employee, for any
reason, he or she shall be deemed to have elected to withdraw from the Plan and
the payroll deductions credited to such participant's account during the
Offering Period but not yet used to exercise the option shall be returned to
such participant or, in the case of his or her death, to the person or persons
entitled thereto under Section 14 hereof, and such participant's option shall be
automatically terminated. The preceding sentence notwithstanding, a participant
who receives payment in lieu of notice of termination of employment shall be
treated as continuing to be an Employee for the participant's customary number
of hours per week of employment during the period in which the participant is
subject to such payment in lieu of notice.
(c) A participant's withdrawal from an Offering Period shall
not have any effect upon his or her eligibility to participate in any similar
plan which may hereafter be adopted by the company or in succeeding Offering
Periods which commence after the termination of the Offering Period from which
the participant withdraws.
11. INTEREST. No interest shall accrue on the payroll deductions
of a participant in the Plan.
12. STOCK.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be 250,000 shares
(which number gives effect to a 3.3 for 1 split of the Common Stock approved by
the Board in July 1997 to be effective immediately prior to the initial public
offering of the Common Stock of the Company), subject to adjustment upon other
changes in capitalization of the Company as provided in Section 18 hereof. If,
on a given Exercise Date, the number of shares with respect to which options are
to be exercised exceeds the number of shares then available under the Plan, the
Company shall make a pro rata allocation of the shares remaining available for
purchase in as uniform a manner as shall be practicable and as it shall
determine to be equitable.
(b) The participant shall have no interest or voting right in
shares covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan
shall be registered in the name of the participant or in the name of the
participant and his or her spouse.
6.
<PAGE>
13. ADMINISTRATION. The Plan shall be administered by the Board or
a committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
14. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to an Exercise Date on which the option is exercised but prior to
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
15. TRANSFERABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
16. USE OF FUNDS. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. REPORTS. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
7.
<PAGE>
18. ADJUSTMENTS, UPON CHANGES IN CAPITALIZATION, DISSOLUTION,
LIQUIDATION, MERGER OR ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the shareholders of the Company, the Reserves, as well as the price per share
and the number of shares of Common Stock covered by each option under the Plan
which has not yet been exercised, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company, provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall effect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
(b) DISSOLUTION OR LIQUIDATION. In the event of a proposed
dissolution or liquidation of the Company, the Offering Period shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) MERGER OR ASSET SALE. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, any Offering Periods then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date") and
any Offering Periods then in progress shall end on the New Exercise Date. The
New Exercise Date shall be before the date of the Company's proposed sale or
merger. The Board shall notify each participant in writing, at least ten (10)
business days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
19. AMENDMENT OR TERMINATION.
(a) The Board may at any time and for any reason terminate or
amend the Plan. Except as provided in Section 18 hereof, no such termination can
affect options previously granted, provided that an Offering Period may be
terminated by the Board on any Exercise Date if the Board determines that the
termination of the Plan is in the best interests of the Company and its
shareholders. Except as provided in Section 18 hereof, no amendment may make any
change in any option theretofore granted which adversely affects the rights of
any participant To the extent necessary to comply with Section 423 of the Code
(or any successor rule or provision or any other applicable law or regulation),
the Company shall obtain shareholder approval in such a manner and to such a
degree as required.
(b) Without shareholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected," the
Board (or its
8.
<PAGE>
committee) shall be entitled to change the Offering Periods, limit the
frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes
in the Company's processing of properly completed withholding elections,
establish reasonable waiting and adjustment periods and/or accounting and
crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld
from the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
20. NOTICES. All notices or other communications by a participant
to the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
22. TERM OF PLAN. The Plan shall become effective upon the
earlier to occur of its adoption by the Board of Directors or its approval by
the shareholders of the Company. It shall continue in effect for a term of
ten (10) years unless sooner terminated under Section 19 hereof.
9.
<PAGE>
EXHIBIT A
BOX HILL SYSTEMS CORP.
EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary (ies)
1. _______________ hereby elects to participate in the Box Hill Systems
Corp. Employee Stock Purchase Plan (the "Employee Stock Purchase Plan")
and subscribes to purchase shares of the Company's Common Stock in
accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount
of % of my Compensation on each payday for the Offering Period on each
payday for subsequent Offering Periods (from 1 to 10%). Such amounts
shall be deducted each payday during the Offering Period in accordance
with the Employee Stock Purchase Plan. (Please note that no fractional
percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise
my option.
4. I have received a copy of the completed Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is
in all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is
subject to shareholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and spouse only):
____________________________
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within two (2) years after the Enrollment Date (the first day
of the Offering Period during which I purchased such shares) or one
(1)year after the Exercise Date, I will be treated for federal income
tax purposes as having received ordinary income at the time of such
disposition in an amount equal to the excess of the fair market value
of the shares at the time such shares were purchased by me over the
price which I paid for the shares. I hereby agree to notify the Company
in writing within 30 days after the date of any disposition of my
shares and I will make adequate provision for Federal, state or other
tax withholding obligations, if any, which arise upon the disposition
of the Common Stock.
10.
<PAGE>
The Company may, but will not be obligated to, withhold from my
compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make
available to the Company any tax deductions or benefits
attributable to sale or early disposition of Common Stock by me. If
I dispose of such shares at any time after the expiration of the
two year and one year holding periods, I understand that I will be
treated for federal income tax purposes as having received income
only at the time of such disposition, and that such income will be
taxed as ordinary income only to the extent of an amount equal to
the lesser of (1) the excess of the fair market value of the shares
at the time of such disposition over the purchase price which I
paid for the shares, or (2) 15% of the lesser of the fair market
value of the shares on the first day of the Offering Period or the
fair market value of the shares on the Purchase Date. The remainder
of the gain, if any, recognized on such disposition will be taxed
as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent
upon my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)________________________________________________________
(First) (Middle) (Last)
_______________________________________________________________________________
(Relationship) (Address)
Employee's Social
Security Number: _________________________________________________
Employee's Address:
_________________________________________________
_________________________________________________
_________________________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:___________ ____________________________________________________
Signature of Employee
____________________________________________________
Spouse's Signature (If beneficiary other than spouse)
11.
<PAGE>
EXHIBIT B
BOX HILL SYSTEMS CORP.
EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Box Hill
Systems Corp. Employee Stock Purchase Plan which began on _______________,19____
(the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purpose of shares in the
current Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
____________________________________________
____________________________________________
____________________________________________
Signature:
____________________________________________
Date:
______________________________________
12.
<PAGE>
EXHIBIT 10.11
[LETTERHEAD]
October 13, 1999
Elizabeth Strong
c/o Edward Kanowitz, Esq.
112 Prospect Street
Stamford, CT 06901
Re: Termination of Employment from Box Hill Systems Corp. (now
known as Dot Hill Systems Corp. ("the Company")).
Dear Ms. Strong:
This letter confirms previous written and verbal notice of your termination of
employment with the Company.
1. Effective Date: Effective the close of business on July 15, 1999, (the
"Effective Date"), your employment with the Company ended.
2. Group & Medical Benefits (COBRA) & Other Benefits: Your participation
in any and all current group and non-group benefit programs will end immediately
unless you elect to undertake individual participation in accordance with the
provisions of the applicable plan at your sole expense.
Commencing immediately, provided you are not covered under another
medical insurance plan which provides you with medical insurance coverage, you
may elect to continue coverage for yourself and any of your eligible dependents
under the Company's group insurance coverage as provided in the Consolidated
Omnibus Budget Reconciliation Act (COBRA). Provided you have made the required
contributions, this coverage will end 18 months after today's date or the date
on which you become covered under another plan which provides you with this
coverage, whichever date occurs first. You will receive further information
regarding your options directly from the Guardian Insurance Company.
3. 401 K: Your employee contributions to the Company's 401 (k) Plan ceased
as of your Effective Date. Please contact Lisa Brown, Director of Human
Resources, if you should have any questions regarding your account in the
Company's 401K plan. Ms. Brown will be available to help you with the form
process. All forms should be returned to Ms. Brown to submit to MFS Retirement
Services for distribution per your direction.
4. Company Stock & Stock Options: Any rights that you may have in any
Employee Stock Purchase Plan, Stock Option Plan or similar plan of the Company
are determined in accordance with the provisions of the applicable plan and any
agreements signed by you. Questions regarding the above should be directed to
Lisa Brown or Rob Rebmann, CFO.
<PAGE>
Page 2 of 4
5. Vacation, & Expenses: You will receive: payment for 15 days of accrued
and unused vacation; reimbursement in the total amount of $284.35 for remaining
authorized Company business expenses through the Effective Date, and;
reimbursement in the total amount of $2,352.94 for remaining relocation expenses
for your apartment move in New York City. These items in the total amount of
$17,060.39 shall be paid simultaneously with the execution of this agreement.
6. Salary, Commission and Bonus Compensation: You will be paid all
compensation at your current level for salary, commissions and bonus through
your Effective Date. All unpaid salary, commissions and/or bonus, except
commissions for 1998 unpaid shipments, shall be paid simultaneously with the
execution of this agreement. Any unpaid commissions for 1998 shipments will be
paid to you at the end of the month following cash collection from the customer
at the rate of 0.40% of net sales. You will be paid a total amount of $2,250.34
for all unpaid commissions for 1999. . The Company's EBIT-DA for the period of
June 30,1999 through the Effective was negative, and therefore you will not
receive any bonus compensation for that period.
6A. Severance Payments: You shall be paid a total of $529,824.75 (minus
applicable withholdings), which is equal to the sum of $250,000.00 plus an
amount equal to the commissions and EBIT-DA quarterly bonus earned by you during
the period July 15, 1998 through July 15, 1999. You shall also receive an
additional $15,000.00 which shall be paid simultaneously with the execution of
this agreement. The sum of these amounts is your severance compensation
("Severance Payments"). Severance Payments shall be made to you in consideration
for your non-competition, the terms of which are set forth in Paragraph 6B. At
your request, Severance Payments shall be made to you in two lump sums as
opposed to equal payments throughout the year of your non-competition. The first
payment will be paid simultaneously with the execution of this agreement, and
the second no later than January 15, 2000, each payment in the amount of one
half of the total. However, if at any time prior to July 15, 2000 you begin
employment for any of the Competitors set forth below in Paragraph 6B, you shall
remit to the Company the amounts that have been paid but to which you are not
entitled pursuant to Paragraph 6B.
6B. You acknowledge that the following companies are direct competitors of
the Company: Andataco, EMC, Eurologic, Data General-Clarilon, Ciprico, Data
Link, Cranel, Vanguard, Raid Power, Amdal, Network Appliance, MTI, SGI, Storage
Technologies (StorageTek) and the storage divisions of Compaq, Dell, IBM,
Hewlett Packard, Sun, Hitachi, LSI Logic and any successors thereto
("Competitors"). For purposes of this agreement, if a Competitor and your
then-employer are the subject of a merger, acquisition or other business
combination, you shall not be deemed to be employed by a Competitor. You agree
that if you become employed by any of the Competitors during the term of July
15, 1999 through July 15, 2000, you shall not be entitled to Severance Payments
for that period of time. You agree to remit to the Company any amount of
Severance Payment that you have received, but to which you are not entitled,
within fifteen business days of commencing employment for a Competitor. That
amount shall be calculated by dividing the total amount of Severance Payments by
365, and multiplying that amount by the number of calendar days between your
first day of Employment for a Competitor and July 15, 2000. It is your
obligation to notify the Company of your commencing employment for a Competitor.
<PAGE>
Page 3 of 4
7. Withholding, Taxes and Interest: All payments required to be made by
the Company pursuant to this letter will be subject to any and all applicable
withholdings, including withholdings for any related federal, state or local
taxes. You shall be responsible for any and all income taxes or other taxes
incurred by you as a result of your receipt of any payments from the Company. In
the event that payments are not made when due, such payments shall bear interest
at the rate of 10% per annum. Should you incur attorney's fees in connection
with the collection of any unpaid amounts that are properly payable to you under
this agreement, the Company shall be responsible to pay the attorney's fees.
8. No Claims: Your acceptance of the money to be paid to you by the
Company, as set forth in this document, confirms that you do not have any claims
against the Company and that the Company does not owe you salary, commissions,
bonuses, vacation pay, severance pay, expenses, retirement benefits or other
compensation or payments of any kind or nature, other than as expressly provided
for herein. This representation shall not change upon your need to remit any
portion of Severance Payments to the Company due to your commencing employment
with a Competitor.
9. Company Information: You are reminded of any and all understandings and
agreements between you and Company regarding intellectual property and
confidentiality of Company information. You are obliged to keep confidential and
not use, directly or indirectly, any Company information, including, but not
limited to, Company proprietary information pertaining to Company's list of
customers and suppliers, and you are further obliged not to interfere with or
diminish any Company relationship with any Company customer or supplier. You are
further obliged not to interfere with or diminish any Company relationship with
any Company employee by engaging for employment or soliciting for employment,
directly or indirectly, any Company employee. You have assigned all right, title
and interest in and to your work for the Company, in all forms, whether or not
patentable or copyrightable, to the Company and you are obliged to keep
confidential and not use, directly or indirectly, such work for any purposes
after your Effective Date. Such obligations shall continue to apply to you after
the effective date and shall continue indefinitely.
10. Third Party Employment Inquiries: The Company shall make every
reasonable effort and shall be required to limit its response to any third party
inquiries regarding your employment with the Company to providing the dates of
your employment with the Company and verification of your job title.
<PAGE>
Page 4 of 4
11. Company property: You are required to return all equipment belonging to
the Company, including but not limited to the Company's products, computer
equipment and peripherals, phone equipment, keys to Company building s and/or
offices, corporate American Express cards and Spring phone cards, within 15
business days of today's date. The Company acknowledges that all such property
has been returned.
Sincerely,
/s/ Valerie Greenberg
Valerie Greenberg
Corporate Counsel
Signature: /s/ Elizabeth Strong Date:
---------------------------------- ---------------------
Elizabeth Strong
<PAGE>
EXHIBIT 10.12
BOX HILL SYSTEMS CORP.
August 2, 1999
161 Avenue of the Americas
New York, NY 10013
RE: EMPLOYMENT TERMS
Dear James Lambert:
Box Hill Systems Corp., a New York corporation, (the "Company"), is pleased to
offer you employment on the following terms.
You will serve as Co-Chief Executive Officer, Chief Operating Officer, President
and a member of the Board of Directors of the Company, and will be responsible
for such duties as are normally associated with such positions. You will not be
paid any additional compensation for your services as a Director of the Company.
During your service with the Company, you will devote substantially all of your
business time to the Company. You will report to the Board of Directors
("Board") and will be subject to the direction and policies from time to time
reasonably established by the Board.
You will work out of our principal offices located in Carlsbad. You will be
expected to travel as reasonably required by your duties. The Company will
reimburse you for your reasonable travel, entertainment, business and other
expenses incurred in the course of your employment in accordance with Company
policy.
You shall receive an initial base salary of $350,000 per year, payable in
regular periodic payments in accordance with Company policy, less required
payroll deductions and withholdings. The Compensation Committee of the Board
("Compensation Committee") shall determine any changes to your base salary. You
will be entitled to not less than 4 weeks of paid vacation per year, in addition
to all Company holidays.
Upon meeting all applicable eligibility requirements, the Company will provide
you with a competitive comprehensive benefits package including health and
dental insurance. The Company will also pay for health and dental insurance for
your spouse and children under the age of 21. You will be eligible to
participate in the Company's 401(k) plan and the Company's equity incentive
plans. In addition to the foregoing, you will receive all benefits the Company
may provide from time to time to other senior executive level employees.
You shall be eligible to receive a performance bonus. The award of any
performance bonus shall be at the discretion of the Compensation Committee.
Attached as Exhibit C are the bonus levels and criteria for the remainder of
fiscal year 1999, and the year 2000.
After December 31, 2000, your base salary and annual bonus levels will be
subject to changes as determined by the Committee.
<PAGE>
August 2, 1999
Page 2
Your employment with the Company will be at-will in that you may terminate your
employment with the Company at any time and for any reason whatsoever. Likewise,
the Company, by a written resolution duly adopted by a majority of the Board,
may terminate your employment at any time and for any reason whatsoever. This
at-will arrangement may not be changed except by a writing signed by you and a
duly authorized officer of the Company.
Upon termination of your employment with the Company, you will be paid your then
current accrued base salary to and including the date of termination, any
accrued vacation pay and other benefits through the date of termination and all
compensation previously deferred by you, if any (together with accrued interest
and earnings thereon).
In addition, if the Company terminates your employment without Cause (defined
below) or you resign for Good Reason (defined below), then so long as (i) you
(or your representative) shall have furnished to the Company an executed release
and waiver of claims in the form attached hereto as Exhibit A (the "Release")
and (ii) the Effective Date provided for in the Release shall have occurred, the
Company shall pay to you, in a single lump sum payment, an aggregate amount
equal to one hundred percent (100%) of your then current annual base salary,
with such payment to be made concurrently with the Effective Date provided for
in such executed Release (subject to required payroll deductions and
withholdings).
If your employment with the Company is terminated for Cause or you resign, other
than for Good Reason, you shall not be entitled to receive any compensation
following such termination other than salary and vacation accrued on or prior to
the termination date and any reimbursement expenses due to you for which you
shall not have been previously reimbursed.
For purposes of this letter agreement the following definitions shall apply.
(1) "Cause" shall be limited to the occurrence of any of the following
events, as set forth in a written resolution duly adopted by a majority of the
Board: (i) your personally continuing to engage in conduct which causes material
harm to the Company after having been given thirty (30) days written notice of
such determination by the Board (ii) your indictment for violation of any Law
constituting a felony (including the Foreign Corrupt Practices Act of 1977) or
the foreign equivalent thereof, (iii) your continuing failure to perform the
lawful directives of the Board (consistent with the terms of this letter) or
your duties and responsibilities hereunder, in each case in all material
respects and after having been given thirty (30) days written notice of such
determination by the Board which written notice shall specifically identify the
directive alleged not to have been followed or the provision of this letter
which it is alleged you have continually failed to substantially perform, the
bases for the Board's determination thereof and the specific corrective action
that the Board proposes that you take; and (iv) your incurable breach of any
material element of the Company's Confidential Information and Inventions
Agreement. In no event shall your death or disability constitute Cause or the
basis for any termination therefor;
(2) "Good Reason" shall mean (i) a reduction in your base salary, (ii)
the relocation of your full-time office to a location other than within sixty
miles of Carlsbad, (iii) a violation or breach by the Company, in any material
respect, of any of its obligations under this letter so long as you have given
the Company thirty (30) days notice of such breach, and the Company has not
cured the breach during that thirty (30) day period,
<PAGE>
August 2, 1999
Page 3
(3) "Disability" shall mean your failure or inability, for reasons of
health, to perform your usual and customary duties on behalf of the Company in
the usual and customary manner for a total of more then 90 consecutive business
days (excluding Saturdays, Sundays and Holidays (days during which the Company
is closed due to a recognized a holiday)).
In the event of any termination of your employment with the Company other than
for death or Disability, the Company shall have the right to retain you as a
consultant for a period of one (1) year from the date of such termination (the
"Consulting Period"). During the Consulting Period, the Company shall be
entitled to require you to be available to render consulting services for up to
twelve (12) days of consulting during such one (1) year period, it being
understood that the scheduling of such consulting services shall not interfere
with your work schedule for your principal employer. The Company shall schedule
such consulting for days, or portions thereof, and places reasonably
satisfactory to you, and unless you otherwise agree, all consulting services
shall be rendered in Carlsbad. In exchange for your availability during the
Consulting Period (whether or not the Company actually schedules consulting
activities), the Company shall pay you, in four (4) equal payments (the
"Consulting Payments"), an aggregate amount equal to twenty five percent (25%)
of your annual base salary in effect as of the date of your termination, with
the first such payment to be made within five (5) business days following
commencement of the Consulting Period and the next three (3) payments to be made
on the first day of each successive calendar quarter following the date of
termination. The Company shall also reimburse you for your reasonable expenses
incurred in carrying out your consulting duties hereunder.
During the time that you are employed by the Company pursuant hereto, and during
the Consulting Period, but (without limitation of your rights and remedies under
this letter agreement) only for so long as the Company continues to employ you
in accordance with the terms hereof or make Consulting Payments in accordance
with the immediately preceding paragraph, as the case may be, you will not,
without the Company's prior written consent, directly or indirectly, (i) own,
manage, operate, control or participate in any material way in the ownership,
management, operation or control of, whether as an officer, employee, partner or
otherwise, any business which directly competes with the business of the Company
or (ii) solicit or induce any employee of the Company to leave the employ of the
Company (it being understood that placing "help-wanted" or similar ads in
newspapers or other media of general circulation or distribution shall not
constitute such a solicitation or inducement); provided that nothing in this
letter agreement shall restrict you from at any time (A) engaging in any
business where your primary focus is not computer storage, whether as an owner,
manager, operator, officer, employee, partner, control person or otherwise or
(B) beneficially owning less than two percent (2%) of the outstanding equity
interests in any publicly traded Company.
The Company will indemnify you for all damages and costs that may be incurred by
you in connection with claims arising out of or relating to your acts or
omissions within the authorized scope of your employment. The Company shall
provide such indemnification, and shall advance your expenses incurred in
connection with any such claims as reasonably requested by you and as duly
approved by the Board from time to time, to the fullest extent permissible under
applicable law.
As a Company employee, you will be expected to abide by Company rules and
regulations. As a condition of employment, you will be required to sign and
comply with a Confidential
<PAGE>
August 2, 1999
Page 4
Information and Inventions Agreement, a copy of which is attached hereto as
Exhibit B, which, among other things, prohibits unauthorized use or
disclosure of Company proprietary information.
The employment terms in this letter supersede any other agreements or promises
made to you by anyone, whether oral or written, and compromise the final,
complete and exclusive agreement between you and the Company. As required by
law, this offer is subject to satisfactory proof of your right to work in the
United States.
Please sign and date this letter, and return it to me as soon as possible if you
wish to accept employment at the Company under the terms described above.
We look forward to your favorable reply and to a productive and enjoyable work
relationship.
Sincerely,
BOX HILL SYSTEMS CORP.
By: /s/ Philip Black
----------------------
Name: Philip Black
Title: CEO
ACCEPTED BY:
/s/ James L. Lambert
- -----------------------------
James Lambert
August 2, 1999
- ------------------------------
Date
<PAGE>
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In consideration of the payments and other benefits set forth in my
employment offer letter, to which this form is attached, I hereby furnish Box
Hill Systems Corp. (the "Company") with the following release and waiver.
I hereby release, and forever discharge the Company, its officers,
directors, agents, employees, stockholders, successors, assigns and affiliates,
of and from any and all claims, liabilities, demands, causes of action, costs,
expenses, attorneys' fees, damages, indemnities and obligations of every kind
and nature, in law, equity, or otherwise, known and unknown, suspected and
unsuspected, disclosed and undisclosed, arising at any time prior to and
including my employment termination date with respect to any claims relating to
my employment and the termination of my employment, including but not limited
to, claims pursuant to any federal, state or local law relating to employment,
including, but not limited to, discrimination claims, claims under the
California Fair Employment and Housing Act, and the Federal Age Discrimination
in Employment Act of 1967, as amended ("ADEA"), the Federal Americans with
Disabilities Act ("AD") or claims for wrongful termination, breach of the
covenant of good faith, contract claims, tort claims, and wage or benefit
claims, including but not limited to, claims for salary, bonuses, commissions,
stock, stock options, vacation pay, fringe benefits, severance pay or any form
of compensation.
I also acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A general release does not extend
to claims which the creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him must have materially
affected his settlement with the debtor." I hereby expressly waive and
relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to any claims I may have against the
Company.
I acknowledge that, among other rights, I am waiving and releasing any
rights I may have under ADEA, that this waiver and release is knowing and
voluntary, and that the consideration given for this waiver and release is in
addition to anything of value to which I was already entitled as an employee of
the Company. I further acknowledge that I have been advised, as required by the
Older Workers Benefit Protection Act, that: (a) the waiver and release granted
herein does not relate to claims which may arise after this release and waiver
is executed; (b) I have the right to consult with an attorney prior to executing
this release and waiver (although I may choose voluntarily not to do so); and
(c) if on the date of execution of this release and waiver I am age 40 or older,
then (I) I have twenty-one (21) days from the date I receive this release and
waiver, in which to consider this release and waiver (although I may choose
voluntarily to execute this release and waiver earlier); and (II) I have seven
(7) days following the execution of this release and waiver to revoke my consent
to this release and waiver. This release and waiver shall be effective as of the
date of execution hereof; provided that if on the date of execution of this
release and waiver I am age 40 or older, then this release and waiver shall not
be effective until the foregoing seven (7) day revocation period has expired.
The date as of which this release and waiver is effective as aforesaid shall be
deemed the "Effective Date" hereof.
Date: __________________ By: _____________________
<PAGE>
EXHIBIT B
CONFIDENTIAL INFORMATION AND INVENTIONS AGREEMENTS
For purposes of this Agreement, "Box Hill" shall include Box Hill Systems,
Corp., Artecon, Falcon, Storage Dimensions and any past, present or future
subsidiaries of those companies.
In consideration for my employment by Box Hill:
1. I will not disclose to anyone outside of Box Hill, or use in other than
Box Hill's business for the benefit of Box Hill any Box Hill
Confidential Information or material relating to the business of Box
Hill either during or after my employment at Box Hill, except with Box
Hill's written permission. I also understand that information and
materials received in confidence from third parties by Box Hill and its
subsidiaries is included within the meaning of this paragraph.
2. I will not disclose to Box Hill, or induce Box Hill to use, any
confidential information or material belonging to others.
3. I will comply, and do all things necessary for Box Hill to comply, with
United States Government regulations and with provisions of contracts
between the agencies of the United States Government of their
contractors and Box Hill, which relate either to patent rights or to
the safeguarding of information pertaining to the defense of the United
States.
4. I hereby assign to Box Hill my entire right, title and interest in any
invention or idea, patentable or not, hereafter made or conceived
solely or jointly by me:
(a) While working at Box Hill in an executive,
managerial, planning, technical, research or
engineering capacity (including development,
manufacturing, systems, applied science, sales or
customer engineering); and
(b) That relates in any manner to the actual or
anticipated business of Box Hill or to Box Hill's
actual or anticipated research and development, or is
suggested by or results from any task assigned to me
or work performed by me or on behalf of Box Hill;
except any invention or idea which I cannot assign to
Box Hill because of prior invention agreement with
____________________ which is effective until
____________________ (give name and date or write
"none")
5. I agree that in connection with any invention or idea covered by
paragraph 4
(a) I will disclose it promptly to the Box Hill
Management; and
(b) I will, at Box Hill's request, promptly execute a
specific assignment of title to Box Hill, and do
anything else reasonably necessary to enable Box Hill
to secure patent therefor in the United States and in
foreign countries.
<PAGE>
6. I represent that I have indicated on the back of this form any
inventions or ideas, not covered in paragraph 4, in which I have any
right, title or interest, and which were previously conceived either
wholly or in part by me, but neither published nor filed in the United
States Patent Office, and identified all of these.
7. I agree to comply with Box Hill's Database Policy. The policy states
that all information in databases, whether centrally located (e.g. Minx
or Informix) or locally (e.g. Act!) are the property of Box Hill
Systems and are considered confidential. This information includes but
is not limited to customer contacts, customer lists, pricing,
inventory, vendors, billing, shipping and customer service data. I will
not transfer, reproduce or duplicate this confidential information
outside of the Box Hill. This includes, but is not limited to,
transmitting database information by email, transferring the
information verbally or by hardcopy, or any other means. Additionally,
I will not intentionally destroy any information in central or local
databases.
8. I understand and acknowledge that any breach of my obligations under
this agreement will result in irreparable harm to Box Hill and hereby
consent to the entry of injunctive relief to prevent or restrain any
further violation of or harm to Box Hill's rights.
9. I acknowledge receipt of a copy of this agreement, and agree that with
respect to the subject matter hereof, it is my entire agreement with
Box Hill, superceding any previous oral or written communications,
representations, understanding or agreements with Box Hill or any
official or representative thereof.
Signed: /s/ James L. Lambert
--------------------------
Employee's Full Name: James L. Lambert
Witness: Valerie Greenberg
(Employee's Manager or other appropriate Box Hill
representative)
Date: 5 Aug. 1999
<PAGE>
EXHIBIT C
QUARTERLY PERFORMANCE BONUS
Each quarter, you shall be eligible for a performance bonus of up to 50% of your
base salary for such quarter (Quarterly Bonus). The Quarterly Bonus shall be
based on the following formula, and on the Company's Business Plan, as approved
by the Board of Directors, for such quarter:
FORMULA
1. REVENUE-BASED BONUS: Half of the Quarterly Bonus shall be based on
revenue. If the Company meets the Business Plan revenue goals for any given
quarter, you shall be entitled to half of the Quarterly Bonus (25% of your base
salary for such quarter) for performance during the quarter. If the Company
fails to meet the Business Plan revenue goals for a given quarter, then the
revenue-based bonus shall be paid as follows:
if the Company attains less than 75% of the Business Plan revenue
goals, you shall not receive any revenue-based bonus for that quarter.
For attaining levels of revenue between 75% and 100% of plan, you shall
receive 2% of the total Quarterly Bonus for every 1% of revenue above
75%.
2. INCOME-BASED BONUS: Half of the Quarterly Bonus is to be based on net
income. If the Company meets the Business Plan net income goals for any given
quarter, then you shall be entitled to half of the Quarterly Bonus (25% of your
salary for such quarter) for performance during that quarter. If the Company
fails to meet the Business Plan net income goals for a given quarter, then the
net income-based bonus shall be paid as follows:
0.5% of the Quarterly Bonus, payable for each 1% achieved of the net
income line of the Business Plan, up to a maximum of 100%.
BUSINESS PLAN DETERMINATIONS
Third Quarter, 1999: You shall be granted full bonus (50% of base salary).
Fourth Quarter, 1999: You shall be granted a bonus pursuant to the formula set
forth above, based on the Business Plan for the Fourth Quarter, to be approved
by the Board during the Fourth Quarter.
Fiscal Year 2000: You shall be granted bonus pursuant to the formula set forth
above, based on the Business Plan for the Year 2000, to be approved by Board
during the First Quarter of 2000.
<PAGE>
EXHIBIT 10.13
BOX HILL SYSTEMS CORP.
August 2, 1999
161 Avenue of the Americas
New York, NY 10013
RE: EMPLOYMENT TERMS
Dear Dana Kammersgard:
Box Hill Systems Corp., a New York corporation (the "Company"), is pleased to
offer you employment on the following terms.
You will serve as Chief Technical Officer and will be responsible for such
duties as are normally associated with such positions. During your service
with the Company, you will devote substantially all of your business time to
the Company. You will report to the Chief Executive Officer(s) and will be
subject to the direction and policies from time to time reasonably
established by the Chief Executive Officer(s).
You will work out of our principal offices located in Carlsbad. You will be
expected to travel as reasonably required by your duties. The Company will
reimburse you for your reasonable travel, entertainment, business and other
expenses incurred in the course of your employment in accordance with Company
policy.
You shall receive an initial base salary of $250,000 per year, payable in
regular periodic payments in accordance with Company policy, less required
payroll deductions and withholdings. The Compensation Committee of the Board
("Compensation Committee") shall determine any changes to your base salary.
You will be entitled to not less than 4 weeks of paid vacation per year, in
addition to all Company holidays.
Upon meeting all applicable eligibility requirements, the Company will
provide you with a competitive comprehensive benefits package including
health and dental insurance. The Company will also pay for health and dental
insurance for your spouse and children under the age of 21. You will be
eligible to participate in the Company's 401(k) plan and the Company's equity
incentive plans. In addition to the foregoing, you will receive all benefits
the Company may provide from time to time to other senior executive level
employees.
You shall be eligible to receive a performance bonus. The award of any
performance bonus shall be at the discretion of the Compensation Committee.
Attached as Exhibit C are the bonus levels and criteria for the remainder of
fiscal year 1999, and the year 2000.
After December 31, 2000, your base salary and annual bonus levels will be
subject to changes as determined by the Committee.
Your employment with the Company will be at-will in that you may terminate
your employment with the Company at any time and for any reason whatsoever.
Likewise, the Company, by a
<PAGE>
August 2, 1999
Page 2
written resolution duly adopted by a majority of the Board, may terminate
your employment at any time and for any reason whatsoever. This at-will
arrangement may not be changed except by a writing signed by you and a duly
authorized officer of the Company.
Upon termination of your employment with the Company, you will be paid your
then current accrued base salary to and including the date of termination,
any accrued vacation pay and other benefits through the date of termination
and all compensation previously deferred by you, if any (together with
accrued interest and earnings thereon).
In addition, if the Company terminates your employment without Cause (defined
below) or you resign for Good Reason (defined below), then so long as (i) you
(or your representative) shall have furnished to the Company an executed
release and waiver of claims in the form attached hereto as Exhibit A (the
"Release") and (ii) the Effective Date provided for in the Release shall have
occurred, the Company shall pay to you, in a single lump sum payment, an
aggregate amount equal to one hundred percent (100%) of your then current
annual base salary, with such payment to be made concurrently with the
Effective Date provided for in such executed Release (subject to required
payroll deductions and withholdings).
If your employment with the Company is terminated for Cause or you resign,
other than for Good Reason, you shall not be entitled to receive any
compensation following such termination other than salary and vacation
accrued on or prior to the termination date and any reimbursement expenses
due to you for which you shall not have been previously reimbursed.
For the purposes of this letter agreement the following definitions shall
apply:
(1) "Cause" shall be limited to the occurrence of any of the following
events, as set forth in a written resolution duly adopted by a majority of
the Board: (i) your personally continuing to engage in conduct which causes
material harm to the Company after having been given thirty (30) days written
notice of such determination by the Board (ii) your indictment for violation
of any Law constituting a felony (including the Foreign Corrupt Practices Act
of 1977) or the foreign equivalent thereof, (iii) your continuing failure to
perform the lawful directives of the Board (consistent with the terms of this
letter) or your duties and responsibilities hereunder, in each case in all
material respects and after having been given thirty (30) days written notice
of such determination by the Board which written notice shall specifically
identify the directive alleged not to have been followed or the provision of
this letter which it is alleged you have continually failed to substantially
perform, the basis for the Board's determination thereof and the specific
corrective action that the Board proposes that you take; and (iv) your
incurable breach of any material element of the Company's Confidential
Information and Inventions Agreement. In no event shall your death or
disability constitute Cause or the basis for any termination therefor;
(2) "Good Reason" shall mean (i) a reduction in your base salary, (ii)
the relocation of your full-time office to a location other than within sixty
miles of Carlsbad, (iii) a violation or breach by the Company, in any
material respect, of any of its obligations under this letter so long as you
have given the Company thirty (30) days notice of such breach, and the
Company has not cured the breach during that thirty (30) day period.
(3) "Disability" shall mean your failure or inability, for reasons of
health, to perform your usual and customary duties on behalf of the Company
in the usual and customary manner
<PAGE>
August 2, 1999
Page 3
for a total of more than 90 consecutive business days (excluding Saturdays,
Sundays and Holidays (days during which the Company is closed due to a
recognized a holiday)).
In the event of any termination of your employment with the Company other
than for death or Disability, the Company shall have the right to retain you
as a consultant for a period of one (1) year from the date of such
termination (the "Consulting Period"). During the Consulting Period, the
Company shall be entitled to require you to be available to render consulting
services for up to twelve (12) days of consulting during such one (1) year
period, it being understood that the scheduling of such consulting services
shall not interfere with your work schedule for your principal employer. The
Company shall schedule such consulting for days, or portions thereof, and
places reasonably satisfactory to you, and unless you otherwise agree, all
consulting services shall be rendered in Carlsbad. In exchange for your
availability during the Consulting Period (whether or not the Company
actually schedules consulting activities), the Company shall pay you, in four
(4) equal payments (the "Consulting Payments"), an aggregate amount equal to
twenty-five percent (25%) of your annual base salary in effect as of the date
of your termination, with the first such payment to be made within five (5)
business days following commencement of the Consulting Period and the next
three (3) payments to be made on the first day of each successive calendar
quarter following the date of termination. The Company shall also reimburse
you for your reasonable expenses incurred in carrying out your consulting
duties hereunder.
During the time that you are employed by the Company pursuant hereto, and
during the Consulting Period, but (without limitation of your rights and
remedies under this letter agreement) only for so long as the Company
continues to employ you in accordance with the terms hereof or make
Consulting Payments in accordance with the immediately preceding paragraph,
as the case may be, you will not, without the Company's prior written
consent, directly or indirectly, (i) own, manage, operate, control or
participate in any material way in the ownership, management, operation or
control of, whether as an officer, employee, partner or otherwise, any
business which directly competes with the business of the Company or (ii)
solicit or induce any employee of the Company to leave the employ of the
Company (it being understood that placing "help-wanted" or similar ads in
newspapers or other media of general circulation or distribution shall not
constitute such a solicitation or inducement); provided that nothing in this
letter agreement shall restrict you from at any time (A) engaging in any
business where your primary focus is not computer storage, whether as an
owner, manager, operator, officer, employee, partner, control person or
otherwise or (B) beneficially owning less than two percent (2%) of the
outstanding equity interests in any publicly traded company.
The Company will indemnify you for all damages and costs that may be incurred
by you in connection with claims arising out of or relating to your acts or
omissions within the authorized scope of your employment. The Company shall
provide such indemnification, and shall advance your expenses incurred in
connection with any such claims as reasonably requested by you and as duly
approved by the Board from time to time, to the fullest extent permissible
under applicable law.
As a Company employee, you will be expected to abide by Company rules and
regulations. As a condition of employment, you will be required to sign and
comply with a Confidential Information and Inventions Agreement, a copy of
which is attached hereto as Exhibit B, which, among other things, prohibits
unauthorized use or disclosure of Company proprietary information.
<PAGE>
August 2, 1999
Page 4
The employment terms in this letter supersede any other agreements or
promises made to you by anyone, whether oral or written, and comprise the
final, complete and exclusive agreement between you and the Company. As
required by law, this offer is subject to satisfactory proof of your right to
work in the United States.
Please sign and date this letter, and return it to me as soon as possible if
you wish to accept employment at the Company under the terms described above.
We look forward to your favorable reply and to a productive and enjoyable
work relationship.
Sincerely,
BOX HILL SYSTEMS CORP.
By: /s/ Philip Black
-------------------------
Name: Philip Black
Title: CEO
ACCEPTED BY:
/s/ Dana Kammersgard
- ----------------------------
Dana Kammersgard
- ----------------------------
Date
<PAGE>
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In consideration of the payments and other benefits set forth in my
employment offer letter, to which this form is attached, I hereby furnish Box
Hill Systems Corp. (the "Company") with the following release and waiver.
I hereby release, and forever discharge the Company, its officers,
directors, agents, employees, stockholders, successors, assigns and
affiliates, of and from any and all claims, liabilities, demands, causes of
action, costs, expenses, attorneys' fees, damages, indemnities and
obligations of every kind and nature, in law, equity, or otherwise, known and
unknown, suspected and unsuspected, disclosed and undisclosed, arising at any
time prior to and including my employment termination date with respect to
any claims relating to my employment and the termination of my employment,
including but not limited to, claims pursuant to any federal, state or local
law relating to employment, including, but not limited to, discrimination
claims, claims under the California Fair Employment and Housing Act, and the
Federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"),
the Federal Americans with Disabilities Act ("AD") or claims for wrongful
termination, breach of the covenant of good faith, contract claims, tort
claims, and wage or benefit claims, including but not limited to, claims for
salary, bonuses, commissions, stock, stock options, vacation pay, fringe
benefits, severance pay or any form of compensation.
I also acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A general release does not
extend to claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known by him must have
materially affected his settlement with the debtor." I hereby expressly waive
and relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to any claims I may have against
the Company.
I acknowledge that, among other rights, I am waiving and releasing any
rights I may have under ADEA, that this waiver and release is knowing and
voluntary, and that the consideration given for this waiver and release is in
addition to anything of value to which I was already entitled as an employee
of the Company. I further acknowledge that I have been advised, as required
by the Older Workers Benefit Protection Act, that: (a) the waiver and release
granted herein does not relate to claims which may arise after this release
and waiver is executed; (b) I have the right to consult with an attorney
prior to executing this release and waiver (although I may choose voluntarily
not to do so); and (c) if on the date of execution of this release and waiver
I am age 40 or older, then (I) I have twenty-one (21) days from the date I
receive this release and waiver, in which to consider this release and waiver
(although I may choose voluntarily to execute this release and waiver
earlier); and (II) I have seven (7) days following the execution of this
release and waiver to revoke my consent to this release and waiver. This
release and waiver shall be effective as of the date of execution hereof;
provided that if on the date of execution of this release and waiver I am age
40 or older, then this release and waiver shall not be effective until the
foregoing seven (7) day revocation period has expired. The date as of which
this release and waiver is effective as aforesaid shall be deemed the
"Effective Date" hereof.
Date: By:
------------------ ------------------------------------
<PAGE>
EXHIBIT B
CONFIDENTIAL INFORMATION AND INVENTIONS AGREEMENTS
For purposes of this Agreement, "Box Hill" shall include Box Hill Systems,
Corp., Artecon, Falcon, Storage Dimensions and any past, present or future
subsidiaries of those companies.
In consideration for my employment by Box Hill:
1. I will not disclose to anyone outside of Box Hill, or use in other than
Box Hill's business for the benefit of Box Hill any Box Hill
Confidential Information or material relating to the business of Box
Hill either during or after my employment at Box Hill, except with Box
Hill's written permission. I also understand that information and
materials received in confidence from third parties by Box Hill and its
subsidiaries is included within the meaning of this paragraph.
2. I will not disclose to Box Hill, or induce Box Hill to use, any
confidential information or material belonging to others.
3. I will comply, and do all things necessary for Box Hill to comply, with
United States Government regulations and with provisions of contracts
between the agencies of the United States Government of their
contractors and Box Hill, which relate either to patent rights or to the
safeguarding of information pertaining to the defense of the United
States.
4. I hereby assign to Box Hill my entire right, title and interest in any
invention or idea, patentable or not, hereafter made or conceived solely
or jointly by me:
a. While working at Box Hill in an executive, managerial, planning,
technical, research or engineering capacity (including development,
manufacturing, systems, applied science, sales or customer engineering); and
b. That relates in any manner to the actual or anticipated business of
Box Hill or to Box Hill's actual or anticipated research and development, or
is suggested by or results from any task assigned to me or work performed by
me or on behalf of Box Hill; except any invention or idea which I cannot
assign to Box Hill because of prior invention agreement with
____________________ which is effective until ____________________ (give name
and date or write "none")
5. I agree that in connection with any invention or idea covered by
paragraph 4
a. I will disclose it promptly to the Box Hill Management; and
b. I will, at Box Hill's request, promptly execute a specific
assignment of title to Box Hill, and do anything else reasonably necessary to
enable Box Hill to secure patent therefor in the United States and in foreign
countries.
6. I represent that I have indicated on the back of this form any
inventions or ideas, not covered in paragraph 4, in which I have any
right, title or interest, and which were previously conceived either
wholly or in part by me, but neither published nor filed in the United
States Patent Office, and identified all of these.
<PAGE>
7. I agree to comply with Box Hill's Database Policy. The policy states
that all information in databases, whether centrally located (e.g. Minx
or Informix) or locally (e.g. Act!) are the property of Box Hill Systems
and are considered confidential. This information includes but is not
limited to customer contacts, customer lists, pricing, inventory,
vendors, billing, shipping and customer service data. I will not
transfer, reproduce or duplicate this confidential information outside
of the Box Hill. This includes, but is not limited to, transmitting
database information by email, transferring the information verbally or
by hardcopy, or any other means. Additionally, I will not intentionally
destroy any information in central or local databases.
8. I understand and acknowledge that any breach of my obligations under
this agreement will result in irreparable harm to Box Hill and hereby
consent to the entry of injunctive relief to prevent or restrain any
further violation of or harm to Box Hill's rights.
9. I acknowledge receipt of a copy of this agreement, and agree that with
respect to the subject matter hereof, it is my entire agreement with Box
Hill, superceding any previous oral or written communications,
representations, understanding or agreements with Box Hill or any
official or representative thereof.
Signed:
-------------------------------------------------------
Employee's Full Name:
-------------------------------------------------------
Witness:
-------------------------------------------------------
(Employee's Manager or other appropriate Box Hill representative)
Date:
-------------------------------------------------------
<PAGE>
EXHIBIT C
QUARTERLY PERFORMANCE BONUS
Each quarter, you shall be eligible for a performance bonus of up to 50% of
your base salary for such quarter (Quarterly Bonus). The Quarterly Bonus
shall be based on the following formula, and on the Company's Business Plan,
as approved by the Board of Directors, for such quarter:
FORMULA
1. REVENUE-BASED BONUS: Half of the Quarterly Bonus shall be based on
revenue. If the Company meets the Business Plan revenue goals for any given
quarter, you shall be entitled to half of the Quarterly Bonus (25% of your
base salary for such quarter) for performance during the quarter. If the
Company fails to meet the Business Plan revenue goals for a given quarter,
then the revenue-based bonus shall be paid as follows:
if the Company attains less than 75% of the Business Plan revenue goals,
you shall not receive any revenue-based bonus for that quarter. For
attaining levels of revenue between 75% and 100% of plan, you shall
receive 2% of the total Quarterly Bonus for every 1% of revenue above
75%.
2. INCOME-BASED BONUS: Half of the Quarterly Bonus is to be based on net
income. If the Company meets the Business Plan net income goals for any given
quarter, then you shall be entitled to half of the Quarterly Bonus (25% of
your salary for such quarter) for performance during that quarter. If the
Company fails to meet the Business Plan net income goals for a given quarter,
then the net income-based bonus shall be paid as follows:
0.5% of the Quarterly Bonus, payable for each 1% achieved of the net
income line of the Business Plan, up to a maximum of 100%.
BUSINESS PLAN DETERMINATIONS
Third Quarter, 1999: You shall be granted full bonus (50% of base salary).
Fourth Quarter, 1999: You shall be granted a bonus pursuant to the formula
set forth above, based on the Business Plan for the Fourth Quarter, to be
approved by the Board during the Fourth Quarter.
Fiscal Year 2000: You shall be granted bonus pursuant to the formula set
forth above, based on the Business Plan for the Year 2000, to be approved by
Board during the First Quarter of 2000.
<PAGE>
EXHIBIT 10.14
[Dot Hill Letterhead]
November 12, 1999
Preston Romm
20 Narbonne
Laguna Niguel, CA 92677
Dear Preston:
We are pleased to offer you a position with Dot Hill Systems Corp., and look
forward to you joining our group of outstanding professionals. We are sure that
you will find your new position rewarding and challenging. If you accept our
offer, this letter, our employee handbook and the Proprietary Rights and
Confidentiality agreement will constitute the entire agreement between you and
Dot Hill regarding your employment. The following outlines your employment
offer:
Title: Vice President, Finance, Chief Financial Officer
Reporting To: Jim Lambert and Philip Black, Co-CEOs
Location: Carlsbad, California
Base Salary: $14,583.34 per month, pro-rated and paid biweekly
Incentive Compensation: In addition to your base salary, you will be
eligible for a performance bonus of up to $61,250
per year. This shall be based on a formula, which
is attached as Exhibit A, and on the Company's
Business Plan, as approved by the Board of
Directors.
Stock Options: It will be recommended to the Board of Directors
that 100,000 stock options be issued, pending their
approval at the next Board of Directors meeting,
and in accordance with the Dot Hill Systems Stock
Option Plan.
Starting Bonus: You will also receive a starting bonus of $20,000,
payable with your first paycheck.
Start Date: November 29, 1999, or another agreed upon date
Employment Status: Full-time, Exempt
Benefits: Dot Hill provides a very competitive benefit
package, which is continually under review, and
therefore subject to change. Included in this
package is employee medical insurance, employee
dental insurance and a 401(k) Savings Plan. If you
choose to add dependents to the health and dental
plan, there will be a monthly deduction. To initiate
your insurance benefits, you must complete the
appropriate forms within 31 days of your eligibility
date. If
1.
<PAGE>
you have any specific questions, please contact
Human Resources.
Health Benefits Eligibility Date of hire
Date:
Confidentiality: As a member of the Dot Hill team, you will access to
the trade secrets, strategic plans, and other
confidential and proprietary information of the
company. Included in your new hire packet will be a
Proprietary Rights and Confidentiality Agreement
which we require you to sign.
Drug Free Workplace: It is our desire to provide a safe and healthy work
environment for our employees and to provide quality
products to our customers. In keeping with these
concerns, and in compliance with the Federal Drug
Workplace Act, Dot Hill has incorporated a Drug-Free
workplace policy.
In light of this policy, all prospective employees
of Dot Hill are required to submit to drug testing.
Results of this screen must be negative of any
controlled substance, with the exception of
medications at a level prescribed by a licensed
physician. All offers of employment are contingent
upon these results.
At-Will Employer: Employment with Dot Hill is based on the mutual
consent of you and the company. As an at-will
employer, both you and Dot Hill reserve the right
to end the employment relationship at any time.
Although other aspects of your employment may
change, the at-will nature of your employment may
only be changed through a written notice signed by
a Co-CEO of Dot Hill.
Preston, we are excited about the opportunity to work with you in the building
of this enterprise and believe that you will be a valuable member of our team.
We look forward to a mutually beneficial and rewarding association with you. If
you agree to the terms outlined in this letter, please sign below.
Sincerely,
/s/ James Lambert
James Lambert
President and Co-CEO
- -------------------------------------------------------------------------------
I agree to accept the position of Vice-President, Finance, Chief Financial
Officer under the terms and conditions described herein.
/s/ Preston Romm 11/16/99
- ---------------------------------- ------------------------
Preston Romm Date
2.
<PAGE>
[Dot Hill Letterhead]
1999-2000 Bonus Plan
Name: PRESTON ROMM Effective Date: 12/1/99-12/31/00
Title: Vice President, Finance, Chief Financial Officer
- -------------------------------------------------------------------------------
EXHIBIT A - CONFIDENTIAL
QUARTLERY PERFORMANCE BONUS
Each quarter, you shall be eligible for a performance bonus of up to $15,312.50
for such quarter (pro-rated for Q4) (Quarterly Bonus). The Quarterly Bonus shall
be based on the following formula, and on the Company's Business Plan, as
approved by the Board of Directors, for such quarter.
FORMULA
1. REVENUE-BASED BONUS: Half of the Quarterly Bonus shall be based on
revenue. If the Company meets the Business Plan revenue goals for any
given quarter, you shall be entitled to half of the Quarterly Bonus
($7,656.25 for such quarter) for performance during that quarter. If
the Company fails to meet the Business Plan revenue goals for a given
quarter, then the revenue-based bonus shall be paid as follows:
If the Company attains less than 75% of the Business Plan revenue
goals, you shall not receive any revenue-based bonus for that quarter.
For attaining levels of revenue between 75% and 100% of plan, you shall
receive 2% of the total Quarterly Bonus for every 1% of revenue above
75%.
2. INCOME-BASED BONUS: Half of the Quarterly Bonus is to be based on net
income. If the Company meets the Business Plan net income goals for any
given quarter, then you shall be entitled to half of the Quarterly
Bonus ($7,656.25 for such quarter) for performance during that quarter.
If the Company fails to meet the Business Plan net income goals for a
given quarter, then the net income-based bonus shall be paid as
follows:
0.5% of the Quarterly Bonus, payable for each 1% achieved of the net
income line of the Business Plan, up to a maximum of 100%.
BUSINESS PLAN DETERMINATIONS
FOURTH QUARTER, 1999: You shall be granted a bonus pursuant to the formula set
forth above, based on the Business Plan for the Fourth Quarter, to be approved
by the Board during the Fourth Quarter. (see attached copy)
FISCAL YEAR 2000: You shall be granted bonus pursuant to the formula set forth
above, based on the Business Plan for the Year 2000, to be approved by Board
during the First Quarter of 2000. (see attached copy)
3.
<PAGE>
EXHIBIT 10.16
AMENDMENT
This Amendment Agreement dated as of the 2nd day of August, 1999, by
and between Box Hill Systems Corp., a New York corporation (the "Company"), and
Philip Black, residing at 15 Cornel Drive, Goldens Bridge, New York 10526
("Executive").
WHEREAS, the parties hereto entered into a compensation plan and
agreement dated January 1, 1999 (the "Employment Agreement"), whereby the
Company agreed to retain Executive's services, and Executive agreed to serve, as
Chief Executive Officer of the Company;
WHEREAS, as of August __, 1999, the Company consummated the
transactions contemplated by the Agreement and Plan of Merger dated April 29,
1999, by and among the Company, BH Acquisition Corp., a Delaware corporation,
and Artecon, Inc., a Delaware corporation (the "Merger"); and
WHEREAS, the Company and Executive have agreed to amend the Employment
Agreement in connection with the Merger.
NOW THEREFORE, in consideration of the mutual promises and agreements
set forth herein, the receipt and sufficiency of which the parties hereby
acknowledge, the parties hereby agree as follows:
1. TITLES. From and after the date hereof, Executive's titles
shall be (i) Co-Chief Executive Officer, and/or (ii) Executive Vice
President, International Sales and Operations.
2. LOCATION. Executive shall relocate his residence to Santa
Barbara, California, and will perform his duties at any of the Company's
offices (both domestic and internationally) or from his home as he feels
appropriate.
3. COMPENSATION. (a) Executive's base salary, on an annualized
basis, for the remainder of Calendar Year 1999 shall be $300,000.
(b) The provisions for bonus payments and
commissions earned for the remainder of Calendar Year 1999 and Calendar Year
2000, if any, contained in Attachment A to the Employment Agreement are
hereby replaced by the terms contained on Schedule 1 attached hereto.
4. NO OTHER AMENDMENTS. All terms of the Employment Agreement, including
Attachment A, shall continue in full force and effect as of the date hereof,
except as specifically stated herein.
1.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
Agreement as of the date first set forth above.
BOX HILL SYSTEMS CORP PHILIP BLACK
By: /s/ Benjamin Monderer By: /s/ Philip Black
--------------------------------- ------------------------------
Name: Benjamin Monderer Name: Philip Black
Title: President Title: CEO
2.
<PAGE>
SCHEDULE 1
QUARTERLY PERFORMANCE BONUS
Each quarter, you shall be eligible for a performance bonus of up to 50% of your
base salary for such quarter (Quarterly Bonus). The Quarterly Bonus shall be
based on the following formula, and on the Company's Business Plan, as approved
by the Board of Directors, for such quarter:
FORMULA
1. REVENUE-BASED BONUS: Half of the Quarterly Bonus shall be based on
revenue. If the Company meets the Business Plan revenue goals for any given
quarter, you shall be entitled to half of the Quarterly Bonus (25% of your base
salary for such quarter) for performance during the quarter. If the Company
fails to meet the Business Plan revenue goals for a given quarter, then the
revenue-based bonus shall be paid as follows:
if the Company attains less than 75% of the Business Plan revenue
goals, you shall not receive any revenue-based bonus for that quarter.
For attaining levels of revenue between 75% and 100% of plan, you shall
receive 2% of the total Quarterly Bonus for every 1% of revenue above
75%.
2. INCOME-BASED BONUS: Half of the Quarterly Bonus is to be based on net
income. If the Company meets the Business Plan net income goals for any given
quarter, then you shall be entitled to half of the Quarterly Bonus (25% of your
salary for such quarter) for performance during that quarter. If the Company
fails to meet the Business Plan net income goals for a given quarter, then the
net income-based bonus shall be paid as follows:
0.5% of the Quarterly Bonus, payable for each 1% achieved of the net
income line of the Business Plan, up to a maximum of 100%.
BUSINESS PLAN DETERMINATIONS
Third Quarter, 1999: You shall be granted full bonus (50% of base salary).
Fourth Quarter, 1999: You shall be granted a bonus pursuant to the formula set
forth above, based on the Business Plan for the Fourth Quarter, to be approved
by the Board during the Fourth Quarter.
Fiscal Year 2000: You shall be granted bonus pursuant to the formula set forth
above, based on the Business Plan for the Year 2000, to be approved by Board
during the First Quarter of 2000.
3.
<PAGE>
EXHIBIT 10.17
BOX HILL SYSTEMS CORP.
August 2, 1999
161 Avenue of the Americas
New York, NY 10013
RE: EMPLOYMENT TERMS
Dear Dr. Benjamin Monderer:
Box Hill Systems Corp., a New York corporation, (the "Company") is pleased to
offer you employment on the following terms.
You will serve as Executive Vice President, Applications
Engineering/Professional Services and a member of the Board of Directors of
the Company, and will be responsible for such duties as are normally
associated with such positions. You will not be paid any additional
compensation for your services as a Director of the Company. During your
service with the Company, you will devote substantially all of your business
time to the Company. You will report to the Chief Executive Officer(s) and
will be subject to the direction and policies from time to time reasonably
established by the Chief Executive Officer(s).
You will work out of our principal offices located in New York. You will be
expected to travel as reasonably required by your duties. The Company will
reimburse you for your reasonable travel, entertainment, business and other
expenses incurred in the course of your employment in accordance with Company
policy.
You shall receive an initial base salary of $300,000 per year, payable in
regular periodic payments in accordance with Company policy, less required
payroll deductions and withholdings. The Compensation Committee of the Board
("Compensation Committee") shall determine any changes to your base salary.
You will be entitled to not less than 4 weeks of paid vacation per year, in
addition to all Company holidays.
Upon meeting all applicable eligibility requirements, the Company will
provide you with a competitive comprehensive benefits package including
health and dental insurance. The Company will also pay for health and dental
insurance for your spouse and children under the age of 21. You will be
eligible to participate in the Company's 401(k) plan and the Company's equity
incentive plans. In addition to the foregoing, you will receive all benefits
the Company may provide from time to time to other senior executive level
employees.
<PAGE>
August 2, 1999
Page 2
You shall be eligible to receive a performance bonus. The award of any
performance bonus shall be at the discretion of the Compensation Committee.
Attached as Exhibit C are the bonus levels and criteria for the remainder of
fiscal year 1999, and the year 2000.
After December 31, 2000, your base salary and annual bonus levels will be
subject to changes as determined by the Committee.
Your employment with the Company will be at-will in that you may terminate
your employment with the Company at any time and for any reason whatsoever.
Likewise, the Company, by a written resolution duly adopted by a majority of
the Board, may terminate your employment at any time and for any reason
whatsoever. This at-will arrangement may not be changed except by a writing
signed by you and a duly authorized officer of the Company.
Upon termination of your employment with the Company, you will be paid your
then current accrued base salary to and including the date of termination,
any accrued vacation pay and other benefits through the date of termination
and all compensation previously deferred by you, if any (together with
accrued interest and earnings thereon).
In addition, if the Company terminates your employment without Cause (defined
below) or you resign for Good Reason (defined below), then so long as (i) you
(or your representative) shall have furnished to the Company an executed
release and waiver of claims in the form attached hereto as Exhibit A (the
"Release") and (ii) the Effective Date provided for in the Release shall have
occurred, the Company shall pay to you, in a single lump sum payment, an
aggregate amount equal to one hundred percent (100%) of your then current
annual base salary, with such payment to be made concurrently with the
Effective Date provided for in such executed Release (subject to required
payroll deductions and withholdings.
If your employment with the Company is terminated for Cause or you resign,
other than for Good Reason, you shall not be entitled to receive any
compensation following such termination other than salary and vacation
accrued on or prior to the termination date and any reimbursement expenses
due to you for which you shall not have been previously reimbursed.
For purposes of this letter agreement the following definitions shall apply:
(1) "Cause" shall be limited to the occurrence of any of the
following events, as set forth in a written resolution duly adopted by a
majority of the Board: (i) your personally continuing to engage in conduct
which causes material harm to the Company after having been given thirty (30)
days written notice of such determination by the Board (ii) your
<PAGE>
August 2, 1999
Page 3
indictment for violation of any Law constituting a felony (including the
Foreign Corrupt Practices Act of 1977) or the foreign equivalent thereof,
(iii) your continuing failure to perform the lawful directives of the Board
(consistent with the terms of this letter) or your duties and
responsibilities hereunder, in each case in all material respects and after
having been given thirty (30) days written notice of such determination by
the Board which written notice shall specifically identify the directive
alleged not to have been followed or the provision of this letter which it is
alleged you have continually failed to substantially perform, the bases for
the Board's determination thereof and the specific corrective action that the
Board proposes that you take; and (iv) your incurable breach of any material
element of the Company's Confidential Information and Inventions Agreement.
In no event shall your death or disability constitute Cause or the basis for
any termination therefor;
(2) "Good Reason" shall mean (i) a reduction in your base salary,
(ii) the relocation of your full-time office to a location other than sixty
miles of New York City, (iii) a violation or breach by the Company, in any
material respect, of any of its obligations under this letter so long as you
have given the Company thirty (30) days notice of such breach, and the
Company has not cured the breach during that thirty (30) day period,
(3) "Disability" shall mean your failure or inability, for reasons
of health, to perform your usual and customary duties on behalf of the
Company in the usual and customary manner for a total of more than 90
consecutive business days (excluding Saturdays, Sundays and Holidays (days
during which the Company is closed due to a recognized a holiday)).
In the event of any termination of your employment with the Company other
than for death or Disability, the Company shall have the right to retain you
as a consultant for a period of one (1) year from the date of such
termination (the "Consulting Period"). During the Consulting Period, the
Company shall be entitled to require you to be available to render consulting
services for up to twelve (12) days of consulting during such one (1) year
period, it being understood that the scheduling of such consulting services
shall not interfere with your work schedule for your principal employer. The
Company shall schedule such consulting for days, or portions thereof, and
places reasonably satisfactory to you, and unless you otherwise agree, all
consulting services shall be rendered in New York. In exchange for your
availability during the Consulting Period (whether or not the Company
actually schedules consulting activities), the Company shall pay you, in four
(4) equal payments (the "Consulting Payments"), an aggregate amount equal to
twenty five percent (25%) of your annual base salary in effect as of the date
of your termination, with the first such payment to be made within five (5)
business days following commencement of the Consulting Period and the next
three (3) payments to be made on the first day of each successive calendar
quarter following the date of termination. The Company shall
<PAGE>
August 2, 1999
Page 4
also reimburse you for your reasonable expenses incurred in carrying out your
consulting duties hereunder.
During the time that you are employed by the Company pursuant hereto, and
during the Consulting Period, but (without limitation of your rights and
remedies under this letter agreement) only for so long as the Company
continues to employ you in accordance with the terms hereof or make
Consulting Payments in accordance with the immediately preceding paragraph,
as the case may be, you will not, without the Company's prior written
consent, directly or indirectly, (i) own, manage, operate, control or
participate in any material way in the ownership, management, operation or
control of, whether as an officer, employee, partner or otherwise, any
business which directly competes with the business of the Company or (ii)
solicit or induce any employee of the Company to leave the employ of the
Company (it being understood that placing "help-wanted" or similar ads in
newspapers or other media of general circulation or distribution shall not
constitute such a solicitation or inducement); provided that nothing in this
letter agreement shall restrict you from at any time (A) engaging in any
business where your primary focus is not computer storage, whether as an
owner, manager, operator, officer, employee, partner, control person or
otherwise or (B) beneficially owning less than two percent (2%) of the
outstanding equity interests in any publicly traded company.
The Company will indemnify you for all damages and costs that may be incurred
by you in connection with claims arising out of or relating to your acts or
omissions within the authorized scope of your employment. The Company shall
provide such indemnification, and shall advance your expenses incurred in
connection with any such claims as reasonably requested by you and as duly
approved by the Board from time to time, to the fullest extent permissible
under applicable law.
As a Company employee, you will be expected to abide by Company rules and
regulations. As a condition of employment, you will be required to sign and
comply with a Confidential Information and Inventions Agreement, a copy of
which is attached hereto as Exhibit B, which, among other things, prohibits
unauthorized use or disclosure of Company proprietary information.
The employment terms in this letter supersede any other agreements or
promises made to you by anyone, whether oral or written, and comprise the
final, complete and exclusive agreement between you and the Company. As
required by law, this offer is subject to satisfactory proof of your right to
work in the United States.
Please sign and date this letter, and return it to me as soon as possible if
you wish to accept employment at the Company under the terms described above.
<PAGE>
August 2, 1999
Page 5
We look forward to your favorable reply and to a productive and enjoyable
work relationship.
Sincerely,
BOX HILL SYSTEMS CORP.
By: /s/ Philip Black
------------------------
Name: /s/ Philip Black
------------------------
Title: CEO
------------------------
ACCEPTED BY:
/s/ Benjamin Monderer
- ------------------------
Dr. Benjamin Monderer
August 2, 1999
- ------------------------
Date
<PAGE>
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In consideration of the payments and other benefits set forth in my
employment offer letter, to which this form is attached, I hereby furnish Box
Hill Systems Corp., (the "Company") with the following release and waiver.
I hereby release, and forever discharge the Company, its officers,
directors, agents, employees, stockholders, successors, assigns and
affiliates, of and from any and all claims, liabilities, demands, causes of
action, costs, expenses, attorneys' fees, damages, indemnities and
obligations of every kind and nature, in law, equity, or otherwise, known and
unknown, suspected and unsuspected, disclosed and undisclosed, arising at any
time prior to and including my employment termination date with respect to
any claims relating to my employment and the termination of my employment,
including but not limited to, claims pursuant to any federal, state or local
law relating to employment, including, but not limited to, discrimination
claims, claims under the California Fair Employment and Housing Act, and the
Federal Age Discrimination in Employment Act of 1967, as amended ("ADEA"),
the Federal Americans with Disabilities Act ("AD") or claims for wrongful
termination, breach of the covenant of good faith, contract claims, tort
claims, and wage or benefit claims, including but not limited to, claims for
salary, bonuses, commissions, stock, stock options, vacation pay, fringe
benefits, severance pay or any form of compensation.
I also acknowledge that I have read and understand Section 1542 of
the California Civil Code which reads as follows: "A general release does not
extend to claims which the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if known by him must have
materially affected his settlement with the debtor." I hereby expressly waive
and relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to any claims I may have against
the Company.
I acknowledge that, among other rights, I am waiving and releasing any
rights I may have under ADEA, that this waiver and release is knowing and
voluntary, and that the consideration given for this waiver and release is in
addition to anything of value to which I was already entitled as an employee of
the Company. I further acknowledge that I have been advised, as required by the
Older Workers Benefit Protection Act, that: (a) the waiver and release granted
herein does not relate to claims which may arise after this release and waiver
is executed; (b) I have the right to consult with an attorney prior to executing
this release and waiver (although I may choose voluntarily not to do so); and
(c) if on the date of execution of this release and waiver I am age 40 or older,
then (I) I have twenty-one (21) days from the date I receive this release and
waiver, in which to consider this release and waiver (although I may choose
voluntarily to execute this release and waiver earlier); and (II) I have seven
(7) days following the execution of this release and waiver to revoke my consent
to this release and waiver. This release and waiver shall be effective as of the
date of execution hereof; provided that if on the date of execution of this
release and waiver I am age 40 or older, then this release and waiver shall not
be effective until the foregoing seven (7) day revocation period has expired.
The date as of which this release and waiver is effective as aforesaid shall be
deemed the "Effective Date" hereof.
<PAGE>
Date: __________________ By:______________________
<PAGE>
EXHIBIT B
CONFIDENTIAL INFORMATION AND INVENTIONS AGREEMENT
For purposes of this Agreement, "Box Hill" shall include Box Hill Systems
Corp., Artecon, Falcon, Storage Dimensions and any past, present or future
subsidiaries of those companies.
In consideration for my employment by Box Hill:
1. I will not disclose to anyone outside of Box Hill, or use in other than Box
Hill's business for the benefit of Box Hill any Box Hill Confidential
Information or material relating to the business of Box Hill either during
or after my employment at Box Hill, except with Box Hill's written
permission. I also understand that information and materials received in
confidence from third parties by Box Hill and its subsidiaries is included
within the meaning of this paragraph.
2. I will not disclose to Box Hill, or induce Box Hill to use, any
confidential information or material belonging to others.
3. I will comply, and do all things necessary for Box Hill to comply, with
United States Government regulations and with provisions of contracts
between the agencies of the United States Government of their contractors
and Box Hill, which relate either to patent rights or to the safeguarding
of information pertaining to the defense of the United States.
4. I hereby assign to Box Hill my entire right, title and interest in any
invention or idea, patentable or not, hereafter made or conceived solely or
jointly by me:
a. while working at Box Hill in an executive, managerial, planning,
technical, research or engineering capacity (including development,
manufacturing, systems, applied science, sales or customer
engineering); and
b. that relates in any manner to the actual or anticipated business of Box
Hill or to Box Hill's actual or anticipated research and development,
or is suggested by or results from any task assigned to me or work
performed by me or on behalf of Box Hill; except any invention or idea
which I cannot assign to Box Hill because of prior invention agreement
with ____________________________ which is effective until
__________________________. (give name and date or write "none")
5. I agree that in connection with any invention or idea covered by paragraph
4:
a. I will disclose it promptly to the Box Hill Management; and
b. I will, at Box Hill's request, promptly execute a specific assignment
of title to Box Hill, and do anything else reasonably necessary to
enable Box Hill to secure patent therefor in the United States and in
foreign countries.
6. I represent that I have indicated on the back of this form any inventions
or ideas, not covered in paragraph 4, in which I have any right, title or
interest, and which were previously
1.
<PAGE>
conceived either wholly or in part by me, but neither published nor
filed in the United States Patent Office, and identified all of these.
7. I agree to comply with Box Hill's Database Policy. The policy states that
all information in databases, whether centrally located (e.g. Minx or
Informix) or locally (e.g. Act!) are the property of Box Hill Systems and
are considered confidential. This information includes but is not limited
to customer contacts, customer lists, pricing, inventory, vendors, billing,
shipping and customer service data. I will not transfer, reproduce or
duplicate this confidential information outside of the Box Hill. This
includes, but is not limited to, transmitting database information by
email, transferring the information verbally or by hardcopy, or any other
means. Additionally, I will not intentionally destroy any information in
central or local databases.
8. I understand and acknowledge that any breach of my obligations under this
agreement will result in irreparable harm to Box Hill and hereby consent to
the entry of injunctive relief to prevent or restrain any further violation
of or harm to Box Hill's rights.
9. I acknowledge receipt of a copy of this agreement, and agree that with
respect to the subject matter hereof, it is my entire agreement with Box
Hill, superceding any previous oral or written communications,
representations, understanding or agreements with Box Hill or any official
or representative thereof.
Signed: ____________________________________________________
Employee's Full Name: ____________________________________________________
Witness: ________________________________________________________________
(Employee's Manager or other appropriate Box Hill representative)
Date: ________________________________________________________________
<PAGE>
EXHIBIT C
QUARTERLY PERFORMANCE BONUS
Each quarter, you shall be eligible for a performance bonus of up to 50% of your
base salary for such quarter (Quarterly Bonus). The Quarterly Bonus shall be
based on the following formula, and on the Company's Business Plan, as approved
by the Board of Directors, for such quarter:
FORMULA
1. REVENUE-BASED BONUS: Half of the Quarterly Bonus shall be based on revenue.
If the Company meets the Business Plan revenue goals for any given quarter, you
shall be entitled to half of the Quarterly Bonus (25% of the your base salary
for such quarter) for performance during that quarter. If the Company fails to
meet the Business Plan revenue goals for a given quarter, then the revenue-based
bonus shall be paid as follows:
if the Company attains less than 75% of the Business Plan revenue
goals, you shall not receive any revenue-based bonus for that quarter.
For attaining levels of revenue between 75% and 100% of plan, you shall
receive 2% of the total Quarterly Bonus for every 1% of revenue above
75%.
2. INCOME-BASED BONUS: Half of the Quarterly Bonus is to be based on net income.
If the Company meets the Business Plan net income goals for any given quarter,
then you shall be entitled to half of the Quarterly Bonus (25% of the your
salary for such quarter) for performance during that quarter. If the Company
fails to meet the Business Plan net income goals for a given quarter, then the
net income-based bonus shall be paid as follows:
0.5% of the Quarterly Bonus, payable for each 1% achieved of the net
income line of the Business Plan, up to a maximum of 100%.
BUSINESS PLAN DETERMINATIONS
Third Quarter, 1999: You shall be granted full bonus (50% of base salary).
Fourth Quarter, 1999: You shall be granted a bonus pursuant to the formula set
forth above, based on the Business Plan for the Fourth Quarter, to be approved
by the Board during the Fourth Quarter.
Fiscal Year 2000: You shall be granted bonus pursuant to the formula set forth
above, based on the Business Plan for the Year 2000, to be approved by Board
during the First Quarter of 2000.
<PAGE>
Exhibit 23.1
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statement No.
333-88635 of Dot Hill Systems Corp. on Form S-8 of our reports dated (1)
January 25, 2000 related to the consolidated financial statements of Dot Hill
Systems Corp. and its subsidiaries as of December 31, 1999 and for the year
then ended, and (2) May 6, 1999 related to the consolidated financial
statements of Artecon, Inc. and its subsidiaries as of March 31, 1999 and for
each of the two years in the period ended March 31, 1999 (not presented
separately herein), appearing in this Annual Report on Form 10-K of Dot Hill
Systems Corp. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
March 29, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated August 2, 1999 into the
Company's previously filed Form S-8 Registration Statement File No.
333-88635. It should be noted that we have not audited any financial
statements of the Company subsequent to December 31, 1998.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
March 29, 2000
<TABLE> <S> <C>
<PAGE>
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<S> <C> <C> <C>
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<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<CASH> 48,889 56,307 44,451
<SECURITIES> 9,305 3,500 3,500
<RECEIVABLES> 33,441 27,489 22,130
<ALLOWANCES> 1,160 1,657 1,727
<INVENTORY> 19,705 19,764 12,279
<CURRENT-ASSETS> 116,409 113,553 89,015
<PP&E> 8,460 7,959 8,803
<DEPRECIATION> 3,535 4,992 6,128
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0 0 0
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<CGS> 96,473 109,764 86,612
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<OTHER-EXPENSES> 56,431 58,312 51,058
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<INTEREST-EXPENSE> 139 (906) (1,136)
<INCOME-PRETAX> (16,624) 1,566 (12,031)
<INCOME-TAX> (2,394) 982 (2,984)
<INCOME-CONTINUING> (14,230) 584 (9,047)
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