<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-13317
DOT HILL SYSTEMS CORP.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3460176
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6305 El Camino Real, Carlsbad, CA 92009
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(760) 931-5500
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 24,605,259 shares outstanding as of November 7,
2000.
================================================================================
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -September 30, 2000
(Unaudited) and December 31, 1999............................ 1
Condensed Consolidated Statements of Operations (Unaudited)
and Comprehensive Operations (Unaudited) -Three and nine
months ended September 30, 2000 and 1999..................... 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 2000 and 1999................ 4
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 19
Part II. Other Information
Item 1. Legal Proceedings.............................................. 19
Item 2. Changes in Securities and Use of Proceeds...................... 20
Item 3. Defaults Upon Senior Securities................................ 20
Item 4. Submission of Matters to a Vote of Security Holders............ 20
Item 5. Other Information.............................................. 20
Item 6. Exhibits and Reports on Form 8-K............................... 20
Signatures............................................................... 21
</TABLE>
<PAGE>
Part I. - Financial Information
Item 1. Financial Statements:
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ..................... $ 34,339 $ 44,451
Short-term investments ........................ -- 3,500
Accounts receivable, net of allowance of
$2,879 and $1,727 ........................... 22,682 20,403
Inventories, net .............................. 21,857 12,279
Prepaid expenses and other .................... 3,090 2,503
Deferred income taxes ......................... 5,879 5,879
-------- --------
Total current assets ......................... 87,847 89,015
Property and equipment, net .................... 3,355 2,675
Other assets ................................... 93 46
Goodwill, net .................................. 475 554
Other intangible assets, net ................... 69 258
Deferred income taxes .......................... 11,110 11,110
-------- --------
$102,949 $103,658
======== ========
</TABLE>
(continued)
-1-
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable ............................... $ 17,627 $ 15,094
Accrued expenses ............................... 5,165 6,644
Merger and restructuring accrual ............... 409 1,474
Customer deposits .............................. 616 1,692
Deferred revenue ............................... 3,072 3,626
Income taxes payable ........................... 1,445 1,539
-------- --------
Total current liabilities ..................... 28,334 30,069
Borrowings under line of credit ................. 213 272
Other long-term liabilities ..................... 212 448
Minority interest ............................... 58 46
-------- --------
Total liabilities .............................. 28,817 30,835
-------- --------
Shareholders' Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized, none issued ............. -- --
Common stock, $.01 par value, 40,000,000
shares authorized, 24,220,162 and
23,887,871 shares issued and
outstanding ................................ 242 239
Additional paid-in capital ..................... 98,337 97,137
Accumulated other comprehensive operations ..... (249) (215)
Accumulated deficit ............................ (24,198) (24,338)
-------- --------
Total shareholders' equity .................... 74,132 72,823
-------- --------
$102,949 $103,658
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
-2-
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE OPERATIONS
(unaudited)
(in thousands, except per share information)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue ................................................ $ 26,186 $ 28,333 $ 90,482 $ 94,082
Cost of goods sold ......................................... 17,765 19,020 57,966 62,364
Inventory write-downs ...................................... -- 5,033 -- 5,033
-------- -------- -------- --------
Total cost of goods sold .......................... 17,765 24,053 57,966 67,397
Gross margin ...................................... 8,421 4,280 32,516 26,685
Operating expenses:
Sales and marketing .................................... 7,854 4,904 22,288 17,866
Engineering and product development .................... 2,294 1,749 6,299 5,465
General and administrative ............................. 2,276 2,866 5,615 8,601
Impairment of intangible assets ........................ -- 937 -- 1,224
Restructuring and merger-related expenses .............. -- 7,392 -- 7,392
-------- -------- -------- --------
Total operating expenses .......................... 12,424 17,848 34,202 40,548
-------- -------- -------- --------
Operating loss .................................... (4,003) (13,568) (1,686) (13,863)
Other income (expenses):
Interest income ........................................ 582 451 1,652 1,365
Interest expense ....................................... (9) (140) (33) (651)
Other income (expense), net ............................ 15 (11) 239 385
Gain (loss) on foreign currency transactions, net ...... 106 (59) 1 (71)
-------- -------- -------- --------
694 241 1,859 1,028
-------- -------- -------- --------
(Loss) income before income taxes ................. (3,309) (13,327) 173 (12,835)
Income tax (benefit) provision ............................. (1,325) (2,494) 33 (2,338)
-------- -------- -------- --------
Net (loss) income .......................................... $ (1,984) $(10,833) $ 140 $(10,497)
======== ======== ======== ========
Basic and diluted net (loss) income per share .............. $ (0.08) $ (0.46) $ 0.01 $ (0.45)
======== ======== ======== ========
Weighted average shares used to calculate basic net (loss)
income per share ........................................ 24,197 23,566 24,138 23,221
======== ======== ======== ========
Weighted average shares used to calculate diluted net (loss)
income per share ........................................ 24,197 23,566 25,065 23,221
======== ======== ======== ========
Comprehensive operations:
Net (loss) income .......................................... $ (1,984) $(10,833) $ 140 $(10,497)
Foreign currency translation adjustments,
net of tax ........................................ (99) (6) (34) 12
-------- -------- -------- --------
Comprehensive (loss) income ................................ $ (2,083) $(10,839) $ 106 $(10,485)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements
-3-
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) ............................................... $ 140 $(10,497)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ............................. 1,106 1,151
Deferred income taxes ..................................... -- (2,320)
Inventory write-down ...................................... -- 5,033
Asset impairment charges .................................. -- 937
Provision for doubtful accounts ........................... 1,143 324
Changes in operating assets and liabilities:
Accounts receivable ................................... (3,422) 2,725
Inventories ........................................... (9,578) 1,609
Prepaid expenses and other ............................ (641) 831
Accounts payable ...................................... 2,533 (3,646)
Accrued expenses ...................................... (1,479) (629)
Merger and restructuring accrual ...................... (1,065) 3,011
Customer deposits ..................................... (1,076) (463)
Deferred revenue ...................................... (554) (434)
Long-term liabilities ................................. (236) 23
Income taxes payable .................................. (94) 1
Other ................................................. 12 --
-------- --------
Net cash used in operating activities ................ (13,211) (2,344)
-------- --------
Investing activities:
Sales (purchases) of short-term investments ..................... 3,500 (600)
Purchases of property and equipment ............................. (1,511) (211)
-------- --------
Net cash provided by (used in) investing activities .. 1,989 (811)
-------- --------
Financing activities:
Proceeds from exercise of stock options ......................... 1,023 51
Proceeds from sale of stock to employees ........................ 180 122
Proceeds from borrowings under line of credit ................... -- 23,139
Payments on bank and other borrowings ........................... (59) (35,252)
-------- --------
Net cash provided by (used in) financing activities .. 1,144 (11,940)
-------- --------
Effect of exchange rate changes on cash ............................. (34) (6)
Adjustment for change in Artecon year-end ........................... -- 1,700
-------- --------
Net decrease in cash and cash equivalents ........................... (10,112) (13,401)
Cash and cash equivalents, beginning of period ...................... 44,451 56,307
-------- --------
Cash and cash equivalents, end of period ............................ $ 34,339 $ 42,906
======== ========
Supplemental cash flow disclosure:
Cash paid for income taxes ...................................... $ 94 $ 39
======== ========
Cash paid for interest .......................................... $ 4 $ 642
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
-4-
<PAGE>
DOT HILL SYSTEMS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands except per share information)
1. Basis of Presentation:
On August 2, 1999, Box Hill Systems Corp. ("Box Hill") and Artecon,
Inc. ("Artecon") were merged in a tax-free, stock-for-stock transaction,
which was accounted for as a pooling of interests (the "Merger"). In
connection with the Merger, the combined company changed its name to Dot Hill
Systems Corp. ("Dot Hill" or the "Company"). The accompanying condensed
consolidated financial statements for the three and nine months ended
September 30, 1999 set forth a presentation of the Company's financial
statements retroactively restated to reflect the combination with Artecon.
The accompanying condensed consolidated financial statements have been
prepared by Dot Hill pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Accordingly, they do not include all of
the information and disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments and reclassifications considered necessary for a fair and
comparable presentation have been included and are of a normal recurring
nature. The unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999. Operating results for the nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
2. Recent Accounting Pronouncements:
In June 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 138, "Accounting for Certain Derivative Instruments- an amendment of
FASB Statement No. 133". This statement, which was effective for fiscal
quarters after June 15, 2000, 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 instruments and does not presently engage nor does it intend to
engage in hedging activities, but will continue to evaluate the effects of
adopting SFAS No. 138.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation." FIN 44 is
an interpretation of Accounting Principal Board's Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). Among other matters, FIN 44
clarifies the application of APB 25 regarding the definition of an employee
for purposes of applying APB 25, the criteria for determining whether a plan
qualifies as noncompensatory and the accounting consequences of modifications
to the terms of previously issued stock options or similar awards. The
Company adopted the provisions of FIN 44 in the third quarter of 2000. The
adoption of FIN 44 did not have a material impact on the Company's financial
condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes
-5-
<PAGE>
the staff's view in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 101 is effective for the fourth quarter
of fiscal year 2000. The Company is currently evaluating the impact SAB 101 and
does not expect SAB 101 to have a material impact on its financial statements
and results of operations.
3. Earnings 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 equivalents, including
stock options, in the weighted average number of common shares outstanding for a
period, if dilutive.
The following table sets forth the reconciliation of the denominator of
the earnings per share calculation for the three and nine-month periods ended
September 30:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares used in computing basic net income per share . 24,197 23,566 24,138 23,221
Dilutive effect of stock options .................... -- -- 927 --
------ ------ ------ ------
Shares used in computing diluted net income per share 24,197 23,566 25,065 23,221
====== ====== ====== ======
</TABLE>
For the three months ended September 30, 2000, all common stock
equivalents were excluded from the computation of diluted net loss per share
because a loss was incurred for this period and the effect would be
antidilutive. For the nine months ended September 30, 2000, options to purchase
372,148 shares of common stock at exercise prices ranging from $9.38 to $15.94
per share were outstanding but not included in the computation of diluted net
income per share because the exercise price was greater than the average market
price of the Company's common stock. At September 30, 2000, options to purchase
2,255,194 shares of the Company's common stock were outstanding at exercise
prices ranging from $.50 to $15.94 per share.
For the three and nine months ended September 30, 1999, all common stock
equivalents were excluded from the computation of diluted net loss per share
because a loss was incurred for the three and nine months periods and the effect
would be antidilutive. At September 30, 1999, options to purchase 1,269,800
shares of Company's common stock were outstanding at exercise prices ranging
from $.50 to $17.50 per share.
4. Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist principally of purchased components used as raw materials.
The following is a summary of inventories:
-6-
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Purchased parts and materials.......... $14,780 $ 9,093
Work-in-process........................ 778 438
Finished goods......................... 6,299 2,748
------- -------
$21,857 $12,279
======= =======
</TABLE>
5. Accrued Merger and Restructuring Costs and Impairment of Long-Lived Assets:
During the third quarter of 1999, and in connection with the 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>
<S> <C>
Inventory write-downs........................ $ 5,033
Professional fees............................ 4,029
License termination.......................... 1,102
Employee termination costs................... 1,100
Write-down of intangibles.................... 937
Facility closures and related costs.......... 647
Other integration costs...................... 514
---------
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
$1,102. Additionally, management's plan included 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,
facility closure costs of $647 and other integration costs of $514. The Company
completed the plan during the fourth quarter of 1999. The accrual balance as of
December 31, 1999, amounts utilized in the first nine months of 2000, and the
remaining accrual balance as of September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Accrued Accrued
Restructuring Restructuring
Costs at Costs at
December 31, Amounts September 30,
1999 Utilized 2000
---------------- ---------------- ---------------
<S> <C> <C> <C>
Employee termination costs.............. $ 480 $ (480) $ --
Facility closures and related costs .... 522 (429) 93
Other integration costs................. 90 (90) --
---------------- ---------------- ---------------
Total............................... $ 1,092 $ (999) $ 93
================ ================ ===============
</TABLE>
The Company anticipates that a majority of the remaining Merger costs
liability at September 30, 2000, which consists primarily of lease and contract
termination costs, will be utilized in 2000 and
-7-
<PAGE>
believes there are no unresolved issues or additional liabilities that may
result in an adjustment to the merger and restructuring charge.
During fiscal 1997, Artecon and Storage Dimensions, Inc. ("SDI") completed
a reverse merger accounted for as a purchase of SDI by Artecon. In connection
with the SDI merger, Artecon recorded a reserve for acquisition related costs
of $6,600, of which $382 was outstanding at December 31, 1999. All of the
acquisition-related costs were included in the purchase price allocation
performed at December 31, 1997. The following is a summary of the accrued merger
costs as of December 31, 1999, amounts utilized in the first nine months of
2000, and the balance at September 30, 2000.
<TABLE>
<CAPTION>
Balance at Balance at
December 31, Amounts September 30,
1999 Utilized 2000
------------ ------- -------------
<S> <C> <C> <C>
Professional service fees...................... $ 316 $ -- $ 316
Other costs.................................... 66 (66) --
-------- --------- --------
Total............................ $ 382 $ (66) $ 316
======== ========= ========
</TABLE>
The Company anticipates that the remaining merger costs liability at
September 30, 2000, which consists primarily of miscellaneous professional
service obligations, will be paid in 2000 and believes there are no unresolved
issues or additional liabilities that may result in an adjustment to the
purchase price allocation for the SDI merger.
6. 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 formal discovery phase of the lawsuit ended on March 31, 2000.
On or around July 17, 2000, the Company entered into a Memorandum of
Understanding with plaintiffs' counsel in the lawsuit, which outlines a
settlement and release of all claims against all defendants in the action,
including Box Hill Systems Corp., its officers and its directors. The Company
expects the financial impact of the settlement arrangements on the Company (and
Box Hill) to be immaterial. While agreeing to the settlement arrangements, both
Box Hill and Dot Hill continue to assert that plaintiffs' claims are unfounded
and that none of the defendants engaged in any wrongdoing with respect to Box
Hill's initial public offering and plaintiffs' claims.
At this point, the settlement arrangements are not final and are subject
to a number of future events, including approval of the settlement by the Court.
Further, individual plaintiffs have the right to "opt out" of the settlement
arrangements. In the event that the settlement arrangements do
-8-
<PAGE>
not become final or plaintiffs "opt out" of the arrangements, the Company
expects it will incur significant legal expense defending this litigation. Such
defense costs, and other amounts incurred in connection with this litigation,
will be expensed as incurred and will adversely impact the Company's operating
results.
In addition to the complaint discussed above, the Company is subject to
various legal proceedings and claims, asserted or unasserted, which arise in the
ordinary course of business. The outcome of the claims against the Company
cannot be predicted with certainty, and management believes that such other
litigation and claims may have a material adverse effect on the Company's
financial position or results of operations.
7. 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-marker is its Chief Executive Officer. The operating segments
of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.
Historically, Artecon reported operating segments in certain market
divisions. Subsequent to the Merger, the Company operated in a single reporting
segment following the integration of Box Hill and Artecon. 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 SANnet,
Tape, Services, and Legacy and other products. The Company also identifies
operating segments by market segment, which consists of Internet Service
Providers ("ISP"), telecommunications and e-commerce; financial and banking; and
commercial, government, and other customers. The Company currently evaluates
performance based on stand-alone segment revenue and gross margin. Because the
Company does not currently evaluate performance based on segment operating
income or return on assets at the operating segment level, Company operating
expenses and total assets are not tracked internally by segment. Therefore, such
information is not presented.
Products and services revenue is as follows:
<TABLE>
<CAPTION>
Legacy &
SANnet Tape Services Other Consolidated
------ ---- -------- ----- ------------
<S> <C> <C> <C> <C> <C>
Three months ended
September 30, 2000
Net revenue............ $7,356 $3,672 $2,397 $12,761 $26,186
gross margin........... 3,390 753 1,256 3,022 8,421
Nine months ended
September 30, 2000
Net revenue............ $19,146 $9,627 $6,583 $55,126 $90,482
gross margin........... 8,790 1,827 3,601 18,298 32,516
</TABLE>
Reliable information for the three and nine months ended September 30,
1999 is not available and, accordingly, has not been provided.
-9-
<PAGE>
Information concerning revenue by market segment is as follows:
<TABLE>
<CAPTION>
E-Commerce, Commercial,
Telecommunications, Financial & Government &
and ISP Banking Other Consolidated
------------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Three months ended
September 30, 2000
Net revenue ... $11,243 $ 2,581 $12,362 $26,186
gross margin .. 4,205 911 3,305 8,421
Nine months ended
September 30, 2000
Net revenue ... $33,566 $11,436 $45,480 $90,482
gross margin .. 12,458 4,124 15,934 32,516
</TABLE>
Reliable information for the three and nine months ended September 30,
1999 is not available and, accordingly, has not been provided
Information concerning principal geographic areas in which the Company
operates is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
United States $20,260 $23,696 $70,512 $82,398
Europe ...... 3,854 3,227 13,057 8,129
Japan ....... 2,072 1,410 6,913 3,555
------- ------- ------- -------
$26,186 $28,333 $90,482 $94,082
======= ======= ======= =======
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
Cautionary Statement for Forward-Looking Information
Certain statements contained in this report, including statements
regarding the anticipated development, growth and expansion of the Company's
business, the successful integration of the operations and businesses of Box
Hill and 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 from
those expressed or implied by such forward-looking statements can be found in
the
-10-
<PAGE>
following discussion. However, the Company urges you to read the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, particularly
the section entitled "Certain Risk Factors Related to the Company's Business,"
to learn more about the risks and uncertainties that the Company faces.
All forward-looking statements speak only as of the date on which they are
made. Except as required by law, the Company undertakes no obligation to update
such statements to reflect events that occur or circumstances that exist after
the date on which they are made.
Overview
Dot Hill 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, internet generation businesses, multimedia,
healthcare, government/defense and academia. The Company's international
strategy is to sell directly to end users in certain regions, and to use
distributors in others. The Company focuses on providing storage solutions to
high-end customers primarily in the UNIX, NT, Windows, Linux and Novell
environments. The Company's strategy is to leverage its expertise as a company
focused exclusively on storage solutions.
In August 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. Subsequent to the Merger,
the combined company changed its name to Dot Hill Systems Corp. Under the
terms of the Merger agreement, Box Hill issued an aggregate of 8,734,523
shares of its common stock to the former Artecon shareholders, representing
0.4 shares of Box Hill common stock in exchange for each share of Artecon
common stock outstanding. Additionally, Artecon's convertible Series "A"
preferred shares were converted into an aggregate of 719,037 shares of Box
Hill's common stock.
In March 1998, 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.
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 manufacturing operations are primarily conducted from its facilities
in Carlsbad, California. 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.
-11-
<PAGE>
Results of Operations
The following table sets forth certain items from the Company's statements of
operations as a percentage of net revenue for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenue .................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ........................... 67.8 67.1 64.1 66.3
Inventory write-downs ........................ -- 17.8 -- 5.3
----- ----- ----- -----
Gross margin ........................ 32.2 15.1 35.9 28.4
----- ----- ----- -----
Operating expenses:
Sales and marketing ..................... 30.0 17.3 24.6 19.0
Engineering and product development ..... 8.8 6.2 7.0 5.8
General and administrative .............. 8.7 10.1 6.2 9.1
Impairment of intangible assets ......... -- 3.3 -- 1.3
Restructuring and merger-related expenses -- 26.1 -- 7.9
----- ----- ----- -----
Total operating expenses ............ 47.5 63.0 37.8 43.1
----- ----- ----- -----
Operating loss .......................... (15.3)% (47.9)% (1.9)% (14.7)%
Net (loss) income ....................... (7.6)% (38.2)% 0.2% (11.2)%
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999:
Net revenue
Net revenue reflects the invoiced amounts of products shipped, less
reserves for estimated returns and revenues from service contracts. Net revenue
decreased 7.6% to $26.2 million for the three months ended September 30, 2000
from $28.3 million for the three months ended September 30, 1999. Comparisons of
the Company's results for the three months ended September 30, 1999 and 2000 are
difficult due to the significant corporate restructurings that the individual
companies have undergone over the last year and that Dot Hill has undergone in
connection with the Merger. The decrease in revenue is primarily attributable to
a decrease in sales of legacy products and an overall slowness in sales of other
product lines. During the third quarter of 2000, sales of the Company's SANnet
product line accounted for approximately 28% of net revenue, tape backup for
approximately 14% of net revenue, and service for approximately 9% of net
revenue; the remaining 49% of net revenue was comprised of legacy disk and RAID
solutions and other. For the three months ended September 30, 2000, sales to
Internet service providers ("ISP"), telecommunications, and e-commerce customers
accounted for approximately 43% of net revenue, sales to financial and banking
customers represented approximately 10% of net revenue, and the remaining 47% of
net revenue was comprised of sales to commercial, government and other.
-12-
<PAGE>
Gross margin
Gross margin increased 96.8% to $8.4 million for the three months ended
September 30, 2000, from $4.3 million for the comparable period of 1999. As a
percentage of net revenue, gross margin increased to 32.2% for the three
months ended September 30, 2000, from 15.1% for the comparable period of
1999. The increase in gross margin as a percentage of net revenue is
primarily attributable to a $5.0 million inventory write-down associated with
the Company's product line consolidation recorded in the third quarter of
1999. Excluding this inventory write down for 1999, gross margin was 32.9% of
net revenues for the three months ended September 30, 1999 compared to 32.2%
for the comparable period of 2000. Gross margin decreased from 36.1% for the
second quarter of 2000. This decrease in gross margin was primarily
attributable to less efficient absorption of fixed manufacturing costs due to
the decrease in revenue.
Sales and marketing expenses
Sales and marketing expenses consist primarily of salaries and
commissions, advertising and promotional costs and travel expenses. Sales and
marketing expenses increased 60.2% to $7.9 million for the three months ended
September 30, 2000 from $4.9 million for the three months ended September 30,
1999. The increase in selling and marketing expenses is primarily attributable
to increased sales compensation expenses. As a percentage of net revenue, sales
and marketing expenses increased to 30.0% for the three months ended September
30, 2000 from 17.3% for the comparable period of 1999 as a result of the
increase in expenses stated above and lower revenue.
Engineering and product development expenses
Engineering and product development expenses consist primarily of
prototype expenses and salaries for employees directly engaged in research and
development. Engineering and product development expenses increased 31.2% to
$2.3 million for the three months ended September 30, 2000, from $1.7 million
for the same period in 1999. The increase in engineering and product development
expenses is primarily attributable to an increase in prototype and test
equipment expenses. As a percentage of net revenue, engineering and product
development expenses increased to 8.8% for the three months ended September 30,
2000 from 6.2% for the comparable period of 1999 as a result of the increase in
expenses stated above and lower revenue.
General and administrative expenses
General and administrative expenses consist primarily of compensation to
the officers and employees performing the Company's administrative functions and
expenditures for its administrative facilities. General and administrative
expenses decreased to $2.3 million for the three months ended September 30, 2000
from $2.9 million for the three months ended September 30, 1999. General and
administrative expense for the third quarter of 2000 includes a one-time
severance and compensation payment of approximately $560,000. As a percentage of
net revenue, general and administrative expenses decreased to 8.7% for the three
months ended September 30, 2000 from 10.1% for the comparable period of 1999
primarily as a result of the efficiencies gained from consolidating Box Hill and
Artecon's administrative operations, partially offset by the severance and
compensation expense recorded in the third quarter of 2000.
-13-
<PAGE>
Accrued merger and restructuring costs and impairment of long-lived 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.
Management's restructuring and integration plan related 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 $1.1 million. Additionally, management's plan included 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, facility closure costs of $647,000 and other
integration costs of $514,000. The Company also paid legal, accounting and other
professional service fees totaling $4.0 million associated with the Merger.
Other income
Other income is comprised of interest expense and interest income from
income earned on the Company's cash and cash equivalents and short-term
investments and other income and expense items. Other income increased to
$694,000 for the three months ended September 30, 2000 from $241,000 for the
same period in 1999. The increase in other income is attributable to three
factors: reduction in interest expense associated with repayment of Artecon's
previously outstanding line of credit in the third quarter of 1999, cash being
invested in taxable securities yielding a higher interest rate than the
tax-exempt securities where the majority of the cash balance was previously
invested, and gain on foreign currency transactions.
Income tax benefit
The Company's effective income tax rate was (40)% for the three months
ended September 30, 2000 reflecting federal and state income tax benefits,
partially offset by permanent items. The Company's effective income tax rate
was (18.7)% for the three months ended September 30, 1999, reflecting federal
and state income tax benefits, partially offset by permanent items, primarily
non-deductible merger-related costs and amortization of intangible assets.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999:
Net revenue
Net revenue decreased 3.8% to $90.5 million for the nine months ended
September 30, 2000 from $94.1 million for the nine months ended September 30,
1999. Comparisons of the Company's results for the nine months ended September
30, 1999 and 2000 are difficult due to the significant corporate restructurings
that the individual companies have undergone over the last year and that Dot
Hill has undergone in connection with the Merger. The decrease in revenue was
due in part to the overall slowness in sales and a decrease in sales of legacy
products during the third quarter of 2000. During the first nine months of 2000,
sales of the Company's SANnet product line accounted for approximately 21% of
net revenue, tape backup for approximately 11% of net revenue, and service for
approximately 7% of net revenue; the remaining 61% of net revenue was comprised
of legacy disk and RAID solutions and other. For the nine months ended September
30, 2000, sales to
-14-
<PAGE>
ISP, telecommunications, and e-commerce customers accounted for approximately
37% of net revenue, sales to financial and banking customers represented
approximately 13% of net revenue, and the remaining 50% of net revenue was
comprised of sales to commercial, government and other.
Gross margin
Gross margin increased 21.9% to $32.5 million for the nine months ended
September 30, 2000, from $26.7 million for the comparable period of 1999. As a
percentage of net revenue, gross margin increased to 35.9% for the nine months
ended September 30, 2000, from 28.4% for the comparable period of 1999. The
increase in gross margin as a percentage of net revenue is primarily
attributable to a $5.0 million inventory write-down associated with the
Company's product line consolidation that was recorded in the third quarter of
1999. Excluding this inventory write-down, the gross margin was 33.7% of net
revenues for the nine months ended September 30, 1999 compared to 35.9% for the
same period of 2000.
Sales and marketing expenses
Sales and marketing expenses increased 24.8% to $22.3 million for the nine
months ended September 30, 2000 from $17.9 million for the nine months ended
September 30, 1999. The increase in selling and marketing expenses is primarily
attributable to increased sales compensation expenses, increased marketing and
advertising expenses, and additional inventory reserves for sales and service
evaluation and demonstration equipment. As a percentage of net revenue, sales
and marketing expenses increased to 24.6% for the nine months ended September
30, 2000 from 19.0% for the comparable period of 1999.
Engineering and product development expenses
Engineering and product development expenses increased 15.3% to $6.3
million for the nine months ended September 30, 2000, from $5.5 million for the
same period in 1999. The increase in engineering and product development is
primarily attributable to an increase in prototype and engineering test
equipment expenses. As a percentage of net revenue, engineering and product
development expenses increased to 7.0% for the nine months ended September 30,
2000 from 5.8% for the comparable period of 1999 as a result of lower sales and
the increased expenses mentioned above.
General and administrative expenses
General and administrative expenses decreased to $5.6 million for the nine
months ended September 30, 2000 from $8.6 million for the nine months ended
September 30, 1999. As a percentage of net revenue, general and administrative
expenses decreased to 6.2% for the nine months ended September 30, 2000 from
9.1% for the comparable period of 1999 primarily as a result of the efficiencies
gained from consolidating Box Hill and Artecon's administrative operations,
partially offset by the severance and compensation expense recorded in the third
quarter of 2000.
-15-
<PAGE>
Other income
Other income increased to $1.9 million for the nine months ended September
30, 2000 from $1.0 million for the same period in 1999. The increase in other
income is primarily attributable to two factors: reduction in interest expense
associated with repayment of Artecon's previously outstanding line of credit in
the third quarter of 1999 and cash being invested in taxable securities yielding
a higher interest rate than the tax-exempt securities where the majority of the
cash balance was previously invested.
Income tax provision (benefit)
The Company's effective income tax rate was 19% for the nine months
ended September 30, 2000, reflecting federal and state income taxes partially
offset by permanent items. The Company's effective income tax rate was
(18.2)% for the nine months ended September 30, 1999, reflecting federal and
state income tax benefits, partially offset by permanent items, primarily
non-deductible merger related costs and amortization of intangible assets.
Liquidity and Capital Resources
As of September 30, 2000, the Company had $34.3 million of cash and cash
equivalents compared to $44.5 million at December 31, 1999. As of September 30,
2000, working capital was $59.5 million.
For the nine months ended September 30, 2000, cash used by operating
activities was $13.2 million. Net cash used by operating activities is primarily
attributable to a $9.6 million increase in inventories, the majority of which is
inventory required to support the SANnet product line, an increase in accounts
receivable of $3.4 million primarily attributable to an increase in the Day
Sales Outstanding to 78 days, and payment of $1.0 million of merger and
restructuring costs.
Cash provided by investing activities was $2.0 million for the nine months
ended September 30, 2000. The increase in net cash provided by investing
activities is primarily attributable to the sale of short-term investments
during the first quarter of 2000. Short-term investments generally consist of
variable rate securities that provide for early redemption within twelve months.
During the first quarter of 2000, short-term investments were reinvested in
investments classified as cash equivalents.
Cash provided by financing activities was $1.1 million for the nine months
ended September 30, 2000, as a result of $1.2 million from the exercise of stock
options under the Company's Stock Incentive Plan and from purchases under the
Company's Employee Stock Purchase Plan.
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
$325,000 at September 30, 2000) 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 September 30, 2000, the total amount outstanding under the two
credit lines was 23 million Yen (approximately US $213,000 at September 30,
2000).
-16-
<PAGE>
The Company presently expects that cash and cash equivalents, together
with cash generated from operations will 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 the Company 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.
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. The Company believes that pricing pressures are likely to continue as
competitors of the Company develop more competitive product offerings and as
larger all-purpose computer vendors continue to focus on their storage
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 and may in the future establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Increased competition is likely to result in price 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.
The open systems storage market in which the Company operates is
characterized by rapid technological change, frequent new product introductions,
increasing competition and evolving industry standards. Customer preferences in
that market are difficult to predict. The introduction of products embodying new
technologies and the emergence of new industry standards could render the
Company's existing products, as well as its new products, including SANnet(TM),
SANpath(TM) and SANscape(TM), obsolete. The Company is encouraging customers to
move from legacy products to its new products, which could delay orders, result
in unknown or unforeseen defects or bugs, make it difficult to predict future
financial performance and generally disturb current customers. Also, 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 market predictions difficult. In the past, the
Company's revenue and earnings results have fallen short of market projections,
and such shortfalls could occur again in the future.
The Company generally does not enter into long-term contracts with its
customers and sales cycles can be lengthy, particularly since the introduction
of the Company's new product line. Customers generally have certain rights to
delay or cancel orders, which could materially and adversely affect Dot Hill's
operating results.
-17-
<PAGE>
The Company relies on other companies to supply components for its
products and certain products that it resells, which are available only from
limited sources in the quantities and quality demanded by the Company. The loss
of one or more suppliers could adversely affect Dot Hill's ability to
manufacture and sell products. The Company has historically targeted industries
requiring high-end storage products, and a material portion of the Company's net
revenue to date has been derived from sales to ISPs and customers in the
financial services industry and the telecommunications industry. Historically, a
majority of the Company's net revenue in each year has been derived from a
limited number of customers. The Merger and the Company's growth and expansion
may place a significant strain on its administrative, operational and financial
resources and increased demands on its manufacturing, sales and customer service
functions, especially as the Company attempts to expand its customer base. The
Company's international business activities represented approximately 12% of net
revenues in 1999 and 22% of net revenues for the nine months ended September 30.
2000. The Company currently has sales offices in Japan, France, England, China
and the Netherlands. These international operations are subject to a variety of
risks associated with conducting business internationally.
The Company's future operating results depend in part upon its ability to
attract, train, retain and motivate qualified management, technical,
manufacturing, sales and support personnel for its operations, which, have been
more difficult recently due, in part, to the Merger-related restructuring
activities, the enhanced recruiting efforts of competitors, and relatively low
unemployment rates.
At this time, the Company has no significant patent protection for its
products and has attempted to protect its proprietary software and other
intellectual property rights through copyrights, trade secrets and other
measures, which measures may prove to be inadequate. Further, the patents of
others may affect the Company's ability to do business. The Company expects that
providers of storage will increasingly be subject to infringement claims as the
number of products and competitors grow. There can be no assurance that third
parties will not assert infringement claims against the Company in the future,
which could result in significant legal expenses, significant monetary payments
or even the need to discontinue the manufacturing and marketing of certain
products. 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.
For a more detailed list of some of the risks and uncertainties related to
the Company's business and industry, please see the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
In the course of business, the Company is subject to legal proceedings and
claims, both asserted or unasserted. The Company and four of its principal
officers and directors were named defendants in shareholder lawsuits filed on
and after December 4, 1998, which allege various securities law violations and
seek monetary damages. See "Part II - Item 1. Legal Proceedings."
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 agreed to adopt the euro as their
common legal currency on that date. The euro now trades on
-18-
<PAGE>
currency exchanges and is available for non-cash transactions. These countries
issue sovereign debt exclusively in euro and re-denominate outstanding sovereign
debt. Effective on this date, these countries 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, is exercised by the new
European Central Bank.
Following introduction of the euro, the legacy currencies will 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 are computed directly from one legacy
currency to another. Instead a "triangulation" process is applied whereby an
amount denominated in one legacy currency first is converted into an amount
denominated in euro, and the resultant euro-denominated amount is converted into
the second legacy currency.
Two countries that have converted to the euro, the Netherlands and France,
generated revenue of approximately $6.9 million and $521,000, respectively, or
8.3% of Dot Hill's total revenue for the nine months ended September 30, 2000.
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 condition and results of operations. The Company is
continuing to evaluate the impact this conversion will have on its financial
condition and results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk:
There have been no significant changes to the quantitative and qualitative
information disclosed in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999. However, the average interest rate earned on the
Company's cash equivalents and short-term investments increased from 3.3% for
the year 1999 to 4.3% during the nine months ended September 30, 2000, resulting
in an increase in interest income of approximately $287,000 for the nine months
ended September 30, 2000 compared to the same period in 1999. The Company does
not believe these changes will have a significant impact on its liquidity and
capital resources.
Part II - Other Information
Item 1. 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 public offering (the "Offering"). The lawsuit
is proceeding in the United States District Court 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 formal discovery phase concluded on March 31, 2000.
-19-
<PAGE>
On or around July 17, 2000, the Company entered into a Memorandum of
Understanding with plaintiffs' counsel in the lawsuit, which outlines a
settlement and release of all claims against all defendants in the action,
including Box Hill Systems Corp., its officers and its directors. The Company
expects the financial impact of the settlement arrangements on the Company (and
Box Hill) to be immaterial. While agreeing to the settlement arrangements, both
Box Hill and Dot Hill continue to assert that plaintiffs' claims are unfounded
and that none of the defendants engaged in any wrongdoing with respect to Box
Hill's initial public offering and plaintiffs' claims.
At this point, the settlement arrangements are not final and are subject
to a number of future events, including approval of the settlement by the Court.
Further, individual plaintiffs have the right to "opt out" of the settlement
arrangements. In the event that the settlement arrangements do not become final
or plaintiffs "opt out" of the arrangements, the Company expects it will incur
significant legal expense defending this litigation. Such defense costs, and
other amounts incurred in connection with this litigation, will be expensed as
incurred and will adversely impact the Company's operating results.
In addition to the complaint discussed above, the Company is subject to
various legal proceedings and claims, asserted or unasserted, which arise in the
ordinary course of business. The outcome of the claims against the Company
cannot be predicted with certainty, and management believes that such other
litigation and claims may have a material adverse effect on the Company's
financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds:
None.
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submission of Matters to a Vote of Security Holders:
None.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Date: November 13, 2000 By /s/ James L. Lambert
-------------------------------------
James L. Lambert
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2000 By /s/ Preston Romm
-------------------------------------
Preston Romm
Chief Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
-21-
