<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission File No. 0-21600
ECCS, INC.
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2288911
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Sheila Drive, Tinton Falls, New Jersey 07724
(Address of Principal Executive Offices) (Zip Code)
(908) 747-6995
(Registrant's Telephone Number,
Including Area Code)
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 the number of shares outstanding of each of the Registrant's
classes of common stock, as of September 30, 1996:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 4,387,522
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ECCS, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION......................................... 1
Item 1. Financial Statements................................... 1
Consolidated Balance Sheets as of December 31, 1995 (audited)
and September 30, 1996 (unaudited)............................ 2
Consolidated Statements of Operations for the
three months ended September 30, 1995 and
September 30, 1996 and for the nine months
ended September 30, 1995 and
September 30, 1996 (unaudited)................................ 3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1995 and
September 30, 1996 (unaudited)................................ 4
Notes to Consolidated Financial Statements (unaudited)........ 5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition....... 12
Results of Operations......................................... 12
Liquidity and Capital Resources............................... 16
PART II. OTHER INFORMATION............................................ 19
Item 4. Submission of Matters to a Vote of Security Holders.... 19
Item 6. Exhibits and Reports on Form 8-K....................... 20
SIGNATURES............................................................ 21
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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ECCS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................................ $ 1,514 $ 4,692
Accounts receivable, less allowance for doubtful accounts of
$226 in 1995 and $184 at September 30, 1996 ......................... 2,767 2,760
Inventories .......................................................... 4,854 2,414
Prepaid expenses ..................................................... 269 336
Other receivables .................................................... 34 --
-------- --------
9,438 10,202
Property, plant and equipment (net) .................................... 1,311 1,202
Investment in real estate (net) ........................................ 714 --
Capitalized software (net) ............................................. 919 882
Other assets ........................................................... 53 54
-------- --------
Total Assets ....................................................... $ 12,435 $ 12,340
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Loans payable .................................................... $ 1,849 $ 1,298
Payable to AT&T Commercial ....................................... 1,254 62
Mortgage payable ................................................. 502 --
Current portion of capital lease obligations ..................... 78 109
Accounts payable and accrued liabilities ......................... 3,631 3,504
Customer deposits, advances and other credits .................... 990 866
-------- --------
8,304 5,839
Capital lease obligations, net of current portion .................. 50 19
Deferred rent ...................................................... 165 158
-------- --------
8,519 6,016
Series B cumulative redeemable convertible preferred stock, $.01 par
value per share, Authorized, 3,000,000 shares;
Issued and outstanding, 1,600,000 shares at December 31, 1995 .. 16 --
Capital in excess of par value ..................................... 1,778 --
-------- --------
1,794 --
-------- --------
Shareholders' Equity:
Preferred stock, $.01 par value per share
Authorized, 3,000,000 shares;
Series B cumulative convertible preferred stock, $.01 par value per
share, Issued and outstanding, 1,600,000 shares at
September 30, 1996 ............................................... -- 16
Series C cumulative convertible preferred stock, $.01 par value per
share, Issued and outstanding, 500,000 shares at
September 30, 1996 ................................................ -- 5
Common stock, $.01 par value per share
Authorized, 20,000,000 shares; Issued and outstanding,
4,277,975 shares at December 31, 1995 and 4,387,522 at
September 30, 1996 ............................................... 43 44
Capital in excess of par value - preferred ........................... -- 4,522
Capital in excess of par value - common .............................. 9,974 10,163
Retained earnings .................................................... (7,895) (8,426)
-------- --------
2,122 6,324
-------- --------
Total Liabilities and Shareholders' Equity ......................... $ 12,435 $ 12,340
======== ========
</TABLE>
See notes to consolidated financial statements.
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ECCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ------------------------
1995 1996 1995 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales ........................... $ 6,738 $ 5,230 $ 25,111 $ 18,068
Cost of sales ....................... 4,897 3,455 18,519 12,186
------- ------- -------- --------
Gross profit ...................... 1,841 1,775 6,592 5,882
Operating expenses:
Selling, general & administrative . 2,303 1,527 7,172 5,179
Research & development ............ 392 338 967 1,011
------- ------- -------- --------
Operating loss ...................... (854) (90) (1,547) (308)
Net interest expense .............. 128 65 393 222
------- ------- -------- --------
Loss before benefit for
income taxes ...................... (982) (155) (1,940) (530)
Provision (benefit) for income taxes -- -- -- --
------- ------- -------- --------
Net loss .......................... $ (982) $ (155) $ (1,940) $ (530)
======= ======= ======== ========
Preferred stock dividend ............ $ 32 $ 77 $ 47 $ 163
======= ======= ======== ========
Net loss per common share ........... $ (0.24) $ (0.05) $ (0.47) $ (0.16)
======= ======= ======== ========
Weighted average number of common and
common equivalent shares .......... 4,225 4,385 4,227 4,328
======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
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ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $ (1,940) $ (530)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................... 855 900
Gain on sale of Illinois property ............................... -- (83)
Decrease in accounts receivable ................................. 5,825 7
Decrease in inventories ......................................... 883 2,440
Decrease in income taxes receivable ............................. 854 --
Increase in prepaid expenses and other .......................... (144) (67)
Decrease in other receivables ................................... 600 26
(Decrease) in payable to AT&T Commercial ........................ (1,906) (1,192)
(Decrease) in accounts payable and accrued liabilities .......... (2,838) (127)
(Decrease) in customer deposits ................................. (624) (124)
-------- --------
Net cash provided by operating activities ........................... 1,565 1,250
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ........................ (120) (478)
Proceeds from sale of Illinois Property ........................... -- 855
Additions to capitalized software ................................. (134) (335)
-------- --------
Net cash (used in) provided by investing activities ................. (254) 42
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit agreement ....................... 24,704 13,103
Repayments under revolving credit agreement ....................... (27,540) (13,654)
Repayment of long-term debt and capital lease obligations ......... (73) --
Repayment of mortgage payable ..................................... -- (502)
Net proceeds from issuance of preferred stock ..................... 1,794 2,749
Proceeds from exercise of employee stock options .................. 67 190
-------- --------
Net cash (used in) provided by financing activities ................ (1,048) 1,886
-------- --------
Net increase in cash and cash equivalents ........................... 263 3,178
Cash and cash equivalents at beginning of period .................... 1,670 1,514
-------- --------
Cash and cash equivalents at end of period .......................... $ 1,933 $ 4,692
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 328 $ 289
======== ========
</TABLE>
See notes to consolidated financial statements.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1995 and September 30, 1996 is unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The information presented for September 30, 1995 and September 30, 1996
and for the three and nine-month periods then ended, is unaudited, but, in the
opinion of the Company's management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for the fair
presentation of the Company's financial position as of September 30, 1996, the
results of its operations for the three and nine-month periods ended September
30, 1995 and September 30, 1996 and its cash flows for the nine-month periods
ended September 30, 1995 and September 30, 1996. The financial statements
included herein have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These consolidated financial statements should be read in conjunction
with the Company's audited financial statements for the year ended December 31,
1995, which were included as part of the Company's Annual Report on Form 10-K.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances have been
eliminated.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Business
ECCS, Inc. ("ECCS" or the "Company") is an innovative designer and
manufacturer of high-performance, user-definable, fault-tolerant storage
subsystems for open systems and proprietary systems needs. ECCS' prime focus is
on storage subsystem solutions. ECCS specializes in RAID and non-RAID
subsystems, controllers and software to meet today's high-availability mass
storage needs. As an example, ECCS' customers include, among others, some of the
largest banks and brokerage houses which rely on these products to ensure the
safe transfer of funds and investment information which is crucial to the
success of their businesses. ECCS' customers cross all industries, with the
common need for safety and high-performance for their mission-critical company
data.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1995 and September 30, 1996 is unaudited)
ECCS provides a wide range of RAID and non-RAID mass storage solutions to
meet the requirements from small departmental to large enterprise-wide
environments. The Company's products range from high-performance and widely
accepted RAID 0, 1 and 10 products to its recently introduced Synchronix family
of solutions, which also include RAID 3 and 5. The Synchronix family currently
includes varying offerings of the Synchronix Storage Management Subsystem, which
provide concurrent, user-definable implementations of RAID and non-RAID
configurations; and Synchronection, a high performance NFS file server. The
Synchronix family of products provides ECCS' customers with a Graphical User
Interface (GUI) which allows for the monitoring and management of virtually all
systems functions, including configuration, cache policies, data rebuild and
load balancing. Through the GUI, the system administrator can visually and
audibly detect system changes as subtle as a rise in temperature. All active
components including disk drives, power supplies, fans and system controllers
are fully redundant, hot-swappable and can be monitored on-line through the
GUI.
The Company conducts sales and marketing from its corporate headquarters
in New Jersey and from its offices in Aventura, Florida; Alpharetta, Georgia;
Arlington, Virginia; and Seattle, Washington.
(b) Cash and Cash Equivalents
The Company considers short-term investments with a maturity of three
months or less when purchased to be cash equivalents.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market. Cost includes invoiced amounts plus capitalized labor, freight and
overhead related to purchasing, distribution and manufacturing activities.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------ ------
(unaudited)
<S> <C> <C>
Purchased parts .................... $2,538 $1,992
Finished goods ..................... 3,129 1,321
------ ------
5,667 3,313
Less: inventory valuation reserve 813 899
------ ------
$4,854 $2,414
====== ======
</TABLE>
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1995 and September 30, 1996 is unaudited)
(d) Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation and
amortization are provided on a straight-line basis over the estimated useful
lives ranging from 3 to 5 years.
Equipment under capital leases is recorded at the lower of fair value or
present value of minimum lease payments at the inception of the lease.
Amortization of the leased property is computed using the straight-line method
over the term of the lease.
(e) Investment in Real Estate
In 1993, the Company made a $753,000 investment in real estate,
including building and land. Depreciation on the building is recognized on a
straight line basis over the estimated useful life of 31.5 years. On March 19,
1996, the Company sold its Romeoville, Illinois property for gross proceeds of
$855,000. These proceeds were used to pay off the mortgage in full. Net cash
proceeds to the Company were approximately $270,000.
(f) Software Development Costs
The Company capitalizes software development costs in accordance with
the Statement of Financial Accounting Standards Board ("SFAS") No. 86. Such
costs are capitalized after technological feasibility has been demonstrated.
Such capitalized amounts are amortized commencing with product introduction on a
straight-line basis utilizing the estimated economic life ranging from one to
three years. Amortization of capitalized software development is charged to cost
of sales and aggregated $253,000 and $372,000 for the periods ended September
30, 1995 and September 30, 1996, respectively. At December 31, 1995 and
September 30, 1996, the Company had capitalized $1,574,000 and $1,909,000
software development costs, respectively, of which $655,000 and $1,027,000 had
been amortized, respectively.
(g) Revenue Recognition
In general, revenue is recognized upon shipment of the product or system
or as services are provided. Revenues related to maintenance contracts are
recognized over the respective terms of the maintenance contracts. Revenue for
certain major product enhancements and major new product offerings, for which
the Company believes that significant product development risks may exist which
can realistically only be addressed during live beta testing at end-user sites,
generally is not recognized until successful completion of such end-user beta
testing.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1995 and September 30, 1996 is unaudited)
(h) Warranty
Estimated future warranty obligations related to ECCS products are
provided by charges to operations in the period the related revenue is
recognized.
(i) Research and Development Costs
Research and development costs are expensed as incurred, except for
software development costs which are accounted for as noted in (f) above.
(j) Income Taxes
The Company has adopted the provisions of SFAS No. 109 in accounting for
income taxes. This statement requires an asset and liability approach for
financial accounting and reporting for income taxes. At the end of 1995, the
Company had a net operating loss carryforward of approximately $7,300,000. The
Internal Revenue Service allows this loss to be carried forward to subsequent
periods in which the Company has taxable income. However, due to the recent
private placements (see Note 4), the Internal Revenue Service may limit the
Company's ability to offset taxable income in future periods against the loss
carryforward.
(k) Per Share Information
Net loss per share is computed using the weighted average number of
common shares and common share equivalents outstanding during the periods
presented. To the extent common share equivalents are anti-dilutive, they are
not included in the calculation. Common share equivalents result from
outstanding options and warrants to purchase common stock and from redeemable
convertible preferred stock. In determining net loss per share, aggregate
preferred stock dividends (see Note 4) of $77,000 and $163,000 for the three and
nine-month periods ended September 30, 1996, although not declared by the
Company's Board of Directors or paid by the Company, were used to derive the
Company's net loss per share. Such amount was $(0.05) and $(0.16) for both the
three and nine-month periods ended September 30, 1996, respectively.
NOTE 3 -- LITIGATION
On March 23, 1993, the Company was served with a complaint in which a
terminated employee of the Company alleges that the Company fraudulently induced
him to join the Company and negligently misrepresented the Company, its products
and markets and the position offered. The plaintiff seeks an unspecified amount
of damages, including punitive
-8-
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1995 and September 30, 1996 is unaudited)
damages and costs. The Company intends to deny the allegations made and to
defend vigorously the action. The Company does not believe that the outcome of
the action will be material.
On July 10, 1995, the Company filed a complaint against a customer for
non-payment of invoices relating to products shipped by the Company in the first
quarter of 1995. On August 11, 1995, such customer filed a counterclaim against
the Company alleging breach of contract. The Company intends to deny the
allegations made and to defend vigorously the action. The Company does not
believe that the outcome of the action will be material.
On or about April 27, 1996, the Company was served with a complaint
filed in the Superior Court of New Jersey, Law Division, Monmouth County. The
action arises out of a motor vehicle accident between an employee of the
Company, who was returning to his home from his job at the Company, and the
plaintiff in the action. The plaintiff seeks unspecified damages and alleges
negligence on the part of the Company arising from the Company's alleged actions
requiring such employee to work an excessive number of hours, allegedly causing
such employee to fall asleep while driving. The Company denies the allegations
and intends to defend vigorously the action. The Company does not believe that
the outcome of the action will have a material effect on the Company's business,
financial condition or results of operations. The Company believes that the
claim will be covered by its insurance.
NOTE 4 -- CONVERTIBLE PREFERRED STOCK
The Company has an authorized class of 3,000,000 shares of Preferred
Stock which may be issued by the Board of Directors on such terms and with such
rights, preferences and designations as the Board may determine. On May 19,
1995, 1,600,000 shares of the Company's Preferred Stock were designated as 6%
Cumulative Redeemable Convertible Preferred Stock, Series B ("Series B Preferred
Stock"). Such shares were issued on May 19, 1995. Dividends on the Series B
Preferred Stock are calculated at $0.02 per share per quarter and accumulate if
not declared and paid. Interest of 6% per annum accrues on any unpaid dividends.
At any time, the Series B Preferred Stockholders may convert their Series B
Preferred Stock into Common Stock, at the initial rate of one for one, as such
conversion ratio may be adjusted from time to time (see below).
On May 17, 1996, the Company's Series B Preferred Stock was amended to
delete the mandatory and optional redemption provisions contained therein. As a
result of the deletion of the mandatory and optional redemption provision, the
Series B Preferred Stock was reclassified to equity in the balance sheet.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1995 and September 30, 1996 is unaudited)
Also on May 17, 1996, 500,000 shares of the Company's Preferred Stock
were designated as Cumulative Convertible Preferred Stock, Series C ("Series C
Preferred Stock"). Of such shares, 462,512 were issued into escrow on May 17,
1996 at a price per share of $6.00. Dividends with respect to such shares are
calculated based on $0.09 per share per quarter and accumulate if not declared
and paid. Interest of 6% per annum accrues on any unpaid dividends. At any time,
the Series C Preferred Stockholders may convert their Series C Preferred Stock
into Common Stock, at the initial rate of four shares of Common Stock for each
share of Series C Preferred Stock, as such conversion ratio may be adjusted from
time to time (see below). However, upon the consummation of a public offering
that meets certain terms, as defined, the Series C Preferred Stock will
automatically convert. The Company has reserved 2,000,000 shares of Common Stock
for the conversion of the outstanding Series C Preferred Stock. The 462,512
shares of Series C Preferred Stock and the proceeds thereof were released from
escrow on May 25, 1996 upon satisfaction of all applicable conditions to
release, after denial by Nasdaq of an exception to the shareholder approval
requirement. The issuance of such shares of Series C Preferred Stock without
shareholder approval and without an exception to such requirement constitutes a
breach of the Company's listing agreement with Nasdaq. Consequently, the Company
has been delisted from the Nasdaq National Market and is now listed on the
Nasdaq SmallCap Market. The Company's Board of Directors had determined that the
issuance of the shares of Series C Preferred Stock without shareholder approval
was necessary for the continued financial viability of the Company.
On May 30, 1996, the Company issued directly to certain investors the
remaining 37,488 shares of Series C Preferred Stock at a price of $6.00 per
share.
In connection with the issuance of the Series C Preferred Stock and
pursuant to the anti-dilution provisions of the Series B Preferred Stock, the
conversion ratio of the Series B Preferred Stock was adjusted. As a result, the
Series B Preferred Stock is currently convertible into approximately 1,770,272
shares of Common Stock. The Company has reserved 1,770,272 shares of Common
Stock for the conversion of outstanding Series B Preferred Stock.
In the event of liquidation, dissolution or winding up of the Company,
Series B Preferred Stockholders and Series C Preferred Stockholders, on a pro
rata basis, are entitled to receive prior and in preference to Common
Stockholders.
On May 9, 1996, as part of its reevaluation of its credit position,
AT&T-CFC agreed to provide a $750,000 general line of credit, and a direct pay
line of credit of $1,250,000, which requires a deposit of the proceeds of sales
directly into AT&T-CFC's lockbox. Such lines of credit have the same financial
covenants as the Company's previous line of credit with AT&T-
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1995 and September 30, 1996 is unaudited)
CFC. On May 17, 1996, simultaneously with the consummation of the sale into
escrow of 462,512 shares of Series C Preferred Stock, the direct pay line of
credit was terminated and the general line of credit was increased to $2
million. Such general line of credit expires on March 31, 1997 and may be
renewed on such date. The outstanding balance due AT&T-CFC at September 30, 1996
was $62,000.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS (IN THOUSANDS)
Three Months Ended September 30, 1996 and 1995
Net Sales
Net sales decreased by approximately $1,508, or 22.4%, in the three
months ended September 30, 1996, as compared to net sales in the three months
ended September 30, 1995. The decrease in 1996 resulted primarily from a $2,225
decrease in communications sector sales, a $1,154 decrease in federal sector
sales and a $666 decrease in commercial sector sales, offset, in part, by a
$2,537 increase in OEM sector sales.
In accordance with the Company's strategy, the increase in sales in the
OEM sector represents an increase in sales of the Company's own mass storage
enhancement products. In addition, the decrease in the Company's communications
sector reflects a continuing reduction in sales of NCR computer equipment.
Historically, a substantial portion of sales made to customers in the
communications sector were sales to multiple AT&T business units. However, the
percentage of net sales made to such multiple AT&T entities has declined
significantly from 49% in the three months ended September 30, 1995 to 11% in
the corresponding period in 1996. The Company continues to be a direct VAR for
NCR. However, due to the significant decline in the NCR server business, which
was the result primarily of a decrease in sales to AT&T customers following the
NCR divestiture, the Company anticipates that it will become an Associated VAR
at some point in the future. In the event that the Company does become an
Associated VAR, the Company's cost to acquire NCR products will increase and
will have a material adverse effect on the communications sector's gross
margins.
An integral part of the Company's strategy is to continue to seek to
diversify its customer base and proprietary storage product offerings as well as
to increase direct commercial and federal sector sales and sales through
alternate channel partners. During the third quarter of 1995, the Company had
taken steps toward broadening its potentially available market by expanding its
product and service offerings by becoming an IBM Industry Remarketer Affiliate
for the IBM RISC System/6000. In addition, the Company established a reseller
relationship with Computer Associates for its Unicenter product and entered into
a business partner agreement with CLAM Associates, which provides a software
product that would allow automatic server failover for IBM RS/6000s in clustered
environments. While all of the 1995 third quarter relationships are still in
place, the Company's primary emphasis is on selling its own mass storage
enhancement products through various channels of distribution including OEMs,
VARs, distributors and end-user accounts. In this regard, the Company, in the
first
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<PAGE> 15
quarter of 1996, introduced the Synchronix family of solutions, which focuses on
providing a wide range of RAID and non-RAID mass storage solutions to meet the
requirements from small departmental to large enterprise-wide storage needs. The
Synchronix family currently includes varying offerings of the Synchronix Storage
Management Subsystem, which provide concurrent, user-definable implementations
of RAID and non-RAID configurations, and Synchronection, a high performance NFS
file server. As previously announced, in the first quarter of 1996, the Company
had entered into an OEM agreement with Unisys to sell Synchronix. Sales to
Unisys of the Company's Synchronix product line during the three months ended
September 30, 1996 were $2,710, or 51.8% of total net sales. Also, as previously
announced, the Company entered into an agreement with Hughes Data Corporation
("Hughes") to sell mass storage RAID products through Hughes into the federal
government. Sales to Hughes of such products for the three-month period ended
September 30, 1996 were $478, or 9.1% of total net sales. There can be no
assurance that the Company will be able to successfully continue to implement
its strategy.
Gross Profit
The Company's cost of sales includes primarily the cost of the Company's
own and other vendors' products. The Company's gross profit decreased by
approximately $66 in the three months ended September 30, 1996 to gross profit
of approximately $1,775 in such period from $1,841 in the three months ended
September 30, 1995. The decrease in the 1996 period resulted from decreased
sales volume, offset, in part, by an increase in gross margin percentage. The
Company's gross margin percentage increased to 33.9% in the three months ended
September 30, 1996, as compared to 27.3% in the corresponding period of the
prior year. The increase in gross margin percentage is due primarily to a shift
in product mix and higher gross margins on sales of the Company's own mass
storage enhancement products, which generally have higher gross margins than
those realized in the sales of NCR based systems.
Operating Expenses
Selling, general and administrative expenses consist primarily of
salaries, commissions, bonuses and related employee benefits, payroll taxes and
other administrative and overhead costs. Selling, general and administrative
expenses decreased in absolute dollars by $776 from $2,303 in the three months
ended September 30, 1995 to $1,527 in the three months ended September 30, 1996.
As a percentage of net sales, selling, general and administrative expenses also
decreased in the three months ended September 30, 1996, representing 29.2% of
net sales, a decrease of 5.0 percentage points from the three months ended
September 30, 1995. The decrease was due principally to the decrease in selling,
general and administrative expenses, offset, in part, by lower sales volume in
the 1996 period as compared to the same period in 1995. Salaries, commissions,
bonuses, employee benefits and payroll taxes were the largest components of
selling, general and administrative expenses, accounting for 52.5% and 54% of
such expenses in the three months ended September 30, 1996 and the three months
ended September 30, 1995, respectively.
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<PAGE> 16
Research and development expenses consist primarily of the costs
associated with research and development personnel. These expenses have
increased in the past three years as the Company continued to enhance its tape
backup devices and focused on the development of its RAID products and
technology. Although research and development expenses were a small percentage
of the Company's net sales in the third quarter of 1996, such expenses
represented approximately 9.5% of the net sales of the Company's mass storage
enhancement products (12.2% including the amount capitalized in the three month
period ended September 30, 1996 in accordance with SFAS No. 86). The Company
expects to continue to devote greater resources to product development in the
future.
Interest Expense
Interest expense for the three months ended September 30, 1996 decreased
by $63 as compared to the three months ended September 30, 1995, due principally
to decreased inventory carrying levels resulting in a decrease in borrowings.
Nine Months Ended September 30, 1996 and 1995
Net Sales
Net sales decreased by approximately $7,043, or 28.1%, in the nine
months ended September 30, 1996 as compared to net sales in the nine months
ended September 30, 1995. The decrease in 1996 resulted primarily from a $10,086
decrease in communications sector sales and a $815 decrease in commercial sector
sales, offset, in part, by an increase in OEM sector sales of $3,703 and a $155
increase in federal sector sales. The reductions in sales involved primarily
reductions in system orders and shipments which incorporated NCR products.
In accordance with the Company's strategy, the increase in sales in the
Company's federal and OEM sectors represents an increase in sales of the
Company's own mass storage enhancement products. In addition, the decrease in
the Company's communications sector reflects a reduction in sales of NCR
computer equipment.
Historically, a substantial portion of sales made to customers in the
communications sector were sales to multiple AT&T business units. However, the
percentage of net sales made to such multiple AT&T entities has declined
significantly from 53% in the nine months ended September 30, 1995 to 16% in the
corresponding period in 1996. The Company continues to be a direct VAR for NCR.
However, due to the significant decline in the NCR server business, which was
the result primarily of a decrease in sales to AT&T customers following the NCR
divestiture, the Company anticipates that it will become an Associated VAR at
some point in the future. In the event that the Company does become an
Associated VAR, the Company's cost to acquire NCR products will increase and
will have a material adverse effect on the communications sector's gross
margins.
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<PAGE> 17
An integral part of the Company's strategy is to continue to seek to
diversify its customer base and proprietary storage product offerings as well as
to increase direct commercial and federal sector sales and sales through
alternate channel partners. During the third quarter of 1995, the Company had
taken steps toward broadening its potentially available market by expanding its
product and service offerings by becoming an IBM Industry Remarketer Affiliate
for the IBM RISC System/6000. In addition, the Company established a reseller
relationship with Computer Associates for its Unicenter product and entered into
a business partner agreement with CLAM Associates, which provides a software
product that would allow automatic server failover for IBM RS/6000s in clustered
environments. While all of the 1995 third quarter relationships are still in
place, the Company's primary emphasis is on selling its own mass storage
enhancement products through various channels of distribution including OEMs,
VARs, distributors and end-user accounts. In this regard, the Company, in the
first quarter of 1996, introduced the Synchronix family of solutions, which
focuses on providing a wide range of RAID and non-RAID mass storage solutions to
meet the requirements from small departmental to large enterprise-wide storage
needs. The Synchronix family currently includes varying offerings of the
Synchronix Storage Management Subsystem, which provide concurrent,
user-definable implementations of RAID and non-RAID configurations, and
Synchronection, a high performance NFS file server. As previously announced, in
the first quarter of 1996, the Company had entered into an OEM agreement with
Unisys to sell Synchronix. Sales to Unisys of the Company's Synchronix product
line during the nine months ended September 30, 1996 were $3,555, or 19.7% of
total net sales. Also, as previously announced, the Company entered into an
agreement with Hughes to sell mass storage RAID products through Hughes into the
federal government. Sales to Hughes of such products for the nine-month period
ended September 30, 1996 were $3,389, or 18.8% of total net sales. There can be
no assurance that the Company will be able to successfully continue to implement
its strategy.
Gross Profit
The Company's gross profit decreased by approximately $710 or 10.8%, in
the nine months ended September 30, 1996 as compared to the gross profit earned
in the nine months ended September 30, 1995 of $6,592. The decrease in the 1996
period resulted from decreased sales volume, offset, in part, by an increase in
gross margin percentage from 26.3% in the nine months ended September 30, 1995
to 32.6% in the nine months ended September 30, 1996 and the absence of
non-recurring charges in 1996. The increase in gross margin percentage is due
primarily to a shift in product mix and higher gross margins on sales of the
Company's own mass storage enhancement products.
Operating Expenses
Selling, general and administrative expenses remained relatively flat as
a percentage of net sales in the nine months ended September 30, 1996,
representing 28.7% of net sales, as compared to 28.6% of net sales in the nine
months ended September 30, 1995. Selling, general and administrative expenses
decreased in absolute dollars by $1,993 from $7,172 in the nine
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<PAGE> 18
months ended September 30, 1995 to $5,179 in the nine months ended September 30,
1996. Salaries, commissions, bonuses and related employee benefits and payroll
taxes were the largest components of selling, general and administrative
expenses, accounting for 59% and 60% of such expenses in the nine months ended
September 30, 1995 and the nine months ended September 30, 1996, respectively.
Interest Expense
Interest expense for the nine months ended September 30, 1996 decreased
by $171 as compared to the nine months ended September 30, 1996, due principally
to decreased inventory carrying levels resulting in a decrease in borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $4.4 million and $1.1 million at
September 30, 1996 and December 31, 1995, respectively.
Since its inception, the Company has funded its operations primarily
from cash generated by operations augmented with funds from borrowings under a
line of credit and inventory financing and through both private sales and a
public offering of equity securities. However, during 1994 and continuing
through 1995, the Company's liquidity condition impaired its ability to fund
operations and the Company remains dependent on its ability to finance accounts
receivable and certain inventory.
During the nine months ended September 30, 1996, the Company relied on
extended payment terms from AT&T Commercial Finance Corporation for 11.4% of its
inventory acquisitions. The Company's obligations under the agreement with
AT&T-CFC are collateralized by substantially all of the assets of the Company.
In addition, the value of the inventory upon which AT&T-CFC has a first priority
lien must be at least equal to the amount of credit extended (not including
unbilled approvals) by AT&T-CFC. The Company's obligations under such agreement
include the obligation to pay one-half of any advance within 30 days from the
date of such advance and the remaining one-half within 60 days from the date of
such advance. As of September 30, 1996, the Company owed approximately $62,000
under this credit line. The Company's available credit line for inventory
acquisitions through AT&T-CFC was $5.5 million, including a $500,000 overline
amount. The agreement with AT&T-CFC contains a total assets to debt ratio
requirement, a total inventory to debt ratio requirement and a net worth
requirement. As a result of a then uncured default by the Company with respect
to its net worth requirement, AT&T-CFC re-evaluated its position with respect to
the Company in the early part of 1996. On May 9, 1996, as part of its
reevaluation of its credit position, AT&T-CFC agreed to provide a $750,000
general line of credit, and a direct pay line of credit of $1,250,000, which
requires a deposit of the proceeds of sales directly into AT&T-CFC's lockbox.
Such lines of credit have the same financial covenants as the Company's previous
line of credit with AT&T-CFC. On May 17, 1996, simultaneously with the
consummation of the sale into escrow of 462,512 shares of Series C Preferred
Stock, the direct pay line of credit was terminated and the
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<PAGE> 19
general line of credit was increased to $2 million. Such general line of credit
expires on March 31, 1997 and may be renewed on such date. The outstanding
balance due AT&T-CFC at September 30, 1996 was $62,000.
The Company also has a financing facility with Fidelity Funding of
California, Inc. ("Fidelity") which provides for a maximum accounts receivable
financing of $7 million at the prime lending rate with a 0.5% transaction fee
applied to each borrowing. In addition, the agreement requires a commitment fee
of 0.5% of the total available financing amount, payable annually on each
anniversary date of the agreement. The financing facility agreement is for a
period of three years and the obligations under such agreement are
collateralized by substantially all of the assets of the Company. The agreement
does not contain any cash withdrawal restrictions, any requirements for
maintenance of specific financial ratios or minimum net worth or limitations on
dividend payments. The balance for the line of credit at September 30, 1996 was
$1,298,000. Available borrowings from the Company's accounts receivable line of
credit were $1,048,000 at September 30, 1996.
AT&T-CFC and Fidelity have entered into an intercreditor subordination
agreement with respect to their relative interests in substantially all of the
Company's assets.
On May 17, 1996, 500,000 shares of the Company's Preferred Stock were
designated as Series C Preferred Stock and the Company consummated a private
placement of such Series C Preferred Stock, pursuant to which the Company issued
and sold into escrow, for the benefit of certain investors, 462,512 shares of
Series C Preferred Stock at a price per share of $6.00. Dividends with respect
to such shares are calculated based on $.09 per share per quarter and accumulate
if not declared and paid. Interest of 6% per annum accrues on any unpaid
dividends. The 462,512 shares of Series C Preferred Stock and the proceeds
thereof were released from escrow on May 25, 1996 upon satisfaction of all
applicable conditions to release, after denial by Nasdaq of an exception to the
shareholders approval requirement. The issuance of such shares of Series C
Preferred Stock without shareholder approval and without an exception to such
requirement constitutes a breach of the Company's listing agreement with Nasdaq.
Consequently, the Company has been delisted from the Nasdaq National Market and
is now listed on the Nasdaq SmallCap Market. The Company's Board of Directors
had determined that the issuance of the shares of Series C Preferred Stock
without shareholder approval was necessary for the continued financial viability
of the Company.
On May 30, 1996, the Company issued and sold directly to certain
investors the remaining 37,488 shares of Series C Preferred Stock at a price of
$6.00 per share.
On September 30, 1996, the Company's cash and cash equivalents balance
was approximately $4.7 million.
The Company had, as of September 30, 1996, invested $478,000 in capital
equipment and leasehold improvements. Capital expenditures for 1996 are expected
to be approximately $600,000, although such amounts are not subject to formal
commitments.
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<PAGE> 20
The Company believes that its existing available cash, credit facilities
and the cash flow expected to be generated from operations, will be adequate to
satisfy its current and planned operations for at least the next 12 months. The
net cash provided by operating activities for the first nine months of 1996 was
$1,250,000. This source of operating funds is the result primarily of a decrease
in inventories offset, in part, by a decrease in the amount payable to AT&T
Commercial.
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<PAGE> 21
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on August 22,
1996.
There were present at the meeting in person or by proxy: (i) Common
Stockholders holding an aggregate of 4,190,385 shares of Common Stock; (ii)
Series B Stockholders holding 1,600,000 shares of Series B Stock; and (iii)
Series C Stockholders holding 434,164 shares of Series C Stock. The results of
the vote taken at such meeting with respect to each nominee for director were as
follows:
Common Stock Nominees For Withheld
- --------------------- --- --------
Michael E. Faherty 4,149,385 Shares 41,000 Shares
Gregg M. Azcuy 4,149,385 Shares 41,000 Shares
Gale R. Aguilar 4,149,385 Shares 41,000 Shares
James K. Dutton 4,149,385 Shares 41,000 Shares
Donald E. Fowler 4,149,385 Shares 41,000 Shares
Frank R. Triolo 4,149,385 Shares 41,000 Shares
Preferred Stock Nominee For Withheld
- --------------------- --- --------
Thomas I. Unterberg
Series B Preferred Stock 1,600,000 Shares -0- Shares
Series C Preferred Stock 434,164 Shares -0- Shares
Also at the meeting, a vote of the Common and Preferred stockholders was
taken on the proposal to adopt the 1996 Non-Employee Directors Stock Option
Plan. Of the shares present at the meeting in person or by proxy, 2,302,837
shares of Common Stock, 1,600,000 shares of Series B Stock and 434,164 shares of
Series C Stock were voted in favor of such proposal, 117,665 shares of Common
Stock were voted against such proposal and 14,900 shares of Common Stock
abstained from voting.
In addition, a vote of the Common and Preferred stockholders was taken
at the meeting on the proposal to adopt the 1996 Stock Plan. Of the shares
present at the meeting in person or by proxy, 1,496,086 shares of Common Stock,
1,600,000 shares of Series B Stock and 434,164 shares of Series C Stock were
voted in favor of such proposal, 137,565 shares of Common Stock were voted
against such proposal and 15,535 shares of Common Stock abstained from voting.
Finally, a vote of the Common stockholders vote was taken at the meeting
on the proposal to ratify the appointment of Ernst & Young, LLP as the
independent auditors
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<PAGE> 22
of the Company for the fiscal year ending December 30, 1996. Of the shares
present at the meeting in person or by proxy, 4,177,034 shares of Common Stock
were voted in favor of such proposal, 6,800 shares of Common Stock were voted
against such proposal and 6,551 shares of common Stock abstained from voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Indemnification Agreement dated July 8, 1996 by and
between the Company and David J. Boyle.
(b) Reports on Form 8-K.
None.
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<PAGE> 23
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.
ECCS, Inc.
DATE: November 14, 1996 By: /s/ Gregg M. Azcuy
--------------------------------------
Gregg M. Azcuy, President and Chief
Executive Officer
(Principal Executive Officer)
DATE: November 14, 1996 By: /s/ Louis J. Altieri
--------------------------------------
Louis J. Altieri, Vice President, Finance
and Administration (Principal Financial
and Accounting Officer)
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<PAGE> 1
ECCS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of July 8, 1996,
by and between ECCS, Inc. a New Jersey corporation (the "Company"), and David J.
Boyle ("Indemnitee").
WHEREAS, Indemnitee is an officer of the Company and performs a valuable
service in such capacity for the Company;
WHEREAS, the Company and Indemnitee recognize the difficulty in obtaining
liability insurance for its directors, officers, employees, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited;
WHEREAS, Indemnitee does not regard the current protection available,
including the Company's current insurance policies, if any, as adequate under
the present circumstances, and the Indemnitee and other directors, officers,
employees, agents and fiduciaries of the Company may not be willing to continue
to serve in such capacities without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company as an
officer, wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Indemnification of Expenses. The Company shall indemnify
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry or investigation that Indemnitee in good faith believes
might lead to the institution of any such action, suit, proceeding or
alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee, agent or fiduciary of the
Company, or any subsidiary of the Company, or is or was serving at the request
of the Company as a director, officer, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action or inaction
<PAGE> 2
on the part of Indemnitee while serving in such capacity (hereinafter an
"Indemnifiable Event") against any and all expenses (including attorneys' fees
and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in, any such
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter "Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than thirty (30) days after written demand by Indemnitee therefor is
presented to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
obligations of the Company under Section l(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any
Expense Advance shall be unsecured and no interest shall be charged thereon. If
there has not been a Change in Control (as defined in Section 10(c) hereof), the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section l(c) hereof. If the Reviewing
Party determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have the
right to commence litigation seeking an initial determination by the court or
challenging any such determination by the Reviewing Party or any aspect thereof,
including the legal or factual bases therefor, and the Company hereby consents
to service of process and to appear in any such proceeding. Any determination by
the Reviewing Party otherwise shall be conclusive and binding on the Company and
Indemnitee.
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<PAGE> 3
(c) Change in Control. The Company agrees that if there is a Change
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
the Company shall seek legal advice only from Independent Legal Counsel (as
defined in Section 10(d) hereof) selected by Indemnitee and approved by the
Company (which approval shall not be unreasonably withheld). Such counsel, among
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent Indemnitee would be permitted to be indemnified
under applicable law. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to fully indemnify such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section (1)(a)
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all Expenses
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than
thirty (30) days after written demand by Indemnitee therefor to the Company.
(b) Notice; Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as reasonably practicable
of Indemnitee's receipt of notice of any Claim (for purposes of this Section
2(b) and the notice required by the Indemnitee to the Company under this section
the term "Claim" shall not include a threatened Claim) made against Indemnitee
for which indemnification will or could be sought under this Agreement. Notice
to the Company shall be directed to the Chief Executive Officer of the Company
at the address shown on the signature page of this Agreement (or such other
address as the Company shall designate in writing to Indemnitee). In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
(c) No Presumptions; Burden of Proof. For purposes of this
Agreement, the termination of any claim, action, suit or proceeding, by
judgment, order, settlement (whether with or without court approval) or
conviction, or upon a plea of nolo contendere, or its equivalent, shall not
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<PAGE> 4
create a presumption that Indemnitee did not meet any particular standard of
conduct or have any particular belief or that a court has determined that
indemnification is not permitted by applicable law. In addition, neither the
failure of the Reviewing Party to have made a determination as to whether
Indemnitee has met any particular standard of conduct or had any particular
belief, nor an actual determination by the Reviewing Party that Indemnitee has
not met such standard of conduct or did not have such belief, prior to the
commencement of legal proceedings by Indemnitee to secure a judicial
determination that Indemnitee should be indemnified under applicable law, shall
be a defense to Indemnitee's claim or create a presumption that Indemnitee has
not met any particular standard of conduct or did not have any particular
belief. In connection with any determination by the Reviewing Party or otherwise
as to whether the Indemnitee is entitled to be indemnified hereunder, the burden
of proof shall be on the Company to establish that Indemnitee is not so
entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies.
(e) Selection of Counsel; Right to Defend. In the event the Company
shall be obligated hereunder to pay the Expenses of any claim, action, suit,
proceeding, inquiry or investigation, the Company, if appropriate, shall be
entitled to assume the defense of such action, suit, proceeding, inquiry or
investigation with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same action, suit, proceeding, inquiry or investigation; provided
that, (i) Indemnitee shall have the right to employ Indemnitee's counsel in any
such action, suit, proceeding, inquiry or investigation at Indemnitee's expense
and (ii) if (A) the employment of counsel by Indemnitee has been previously
authorized by the Company, (B) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and Indemnitee in the
conduct of any such defense, or (C) the Company shall not continue to retain
such counsel to defend such action, suit, proceeding, inquiry or investigation,
then the fees and expenses of Indemnitee's counsel shall be at the expense of
the Company. Notwithstanding the foregoing, with respect to the subject matter
of this Section 2(e), the provisions of any liability insurance applicable to
directors and/or officers shall govern.
3. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the
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<PAGE> 5
Company's Bylaws or by statute. In the event of any change after the date of
this Agreement in any applicable law, statute or rule which expands the right of
a New Jersey corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, it is the intent of the parties hereto
that Indemnitee shall enjoy by this Agreement the greater benefits afforded by
such change. In the event of any change in any applicable law, statute or rule
which narrows the right of a New Jersey corporation to indemnify a member of its
board of directors or an officer, employee, agent or fiduciary, such change, to
the extent not otherwise required by such law, statute or rule to be applied to
this Agreement, shall have no effect on this Agreement or the parties' rights
and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall be in addition to any rights to which Indemnitee may be entitled under the
Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of
stockholders or disinterested directors, the Business Corporation Act of the
State of New Jersey, or otherwise. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though Indemnitee may have ceased
to serve in such capacity.
4. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any action, suit, proceeding,
inquiry or investigation made against Indemnitee to the extent Indemnitee has
otherwise actually received payment (under any insurance policy, or pursuant to
the Certificate of Incorporation, Bylaws or otherwise) of the amounts otherwise
indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of
Expenses in the investigation, defense, appeal or settlement of any civil or
criminal action, suit, proceeding, inquiry or investigation, but not, however,
for all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that
in certain instances, federal law or applicable public policy may prohibit the
Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Liability Insurance. To the extent the Company maintains liability
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the
-5-
<PAGE> 6
Company's key employees, agents or fiduciaries, if Indemnitee is not an officer
or director but is a key employee, agent or fiduciary.
8. Exceptions. Any other provision herein to the contrary notwithstanding,
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law.
(b) Claims Initiated by Indemnitee. To indemnify or advance Expenses
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except (1) with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such suit, or (iii) as
otherwise required under Section 14A:3-5 of the New Jersey Business Corporation
Act, regardless of whether Indemnitee ultimately is determined to be entitled to
such indemnification, advance Expense payment or insurance recovery, as the case
may be.
(c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for Expenses
or the payment of profits arising from the purchase and sale, or sale and
purchase, by Indemnitee of securities in violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, or any similar successor statute.
9. Period of Limitations. No legal action shall be brought and no cause of
action shall be asserted by or in the right of the Company against Indemnitee,
Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
10. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Company"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
agents or
-6-
<PAGE> 7
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee, agent or fiduciary of the
Company which imposes duties on, or involves services by, such director,
officer, employee, agent or fiduciary with respect to an employee benefit plan,
its participants or its beneficiaries; and if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing more than 20% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders 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 a majority thereof, or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation other than 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) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all of the
Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel"
shall mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three
-7-
<PAGE> 8
years (other than with respect to matters concerning the rights of Indemnitee
under this Agreement, or of other indemnitees under similar indemnity
agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean
any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean
any securities of the Company that vote generally in the election of directors.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director of the Company or of any other enterprise at the Company's request.
13. Actions by Indemnitee. In the event that any action is instituted by
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action, unless as a part of such action the
court of competent jurisdiction over such action determines that each of the
material assertions made by Indemnitee as a basis for such action were not made
in good faith or were frivolous. In the event of an action instituted by or in
the name of the Company under this Agreement to enforce or interpret any of the
terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses
incurred by Indemnitee in defense of such action (including costs and expenses
incurred with respect to Indemnitee's counterclaims and cross-claims made in
such action), and shall be entitled to the advancement Expenses with respect to
such action, unless as a part of such action the court having jurisdiction over
such action determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
14. Notice. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted
-8-
<PAGE> 9
for by the party addressee, on the date of such receipt, or (ii) if mailed by
domestic certified or registered mail with postage prepaid, on the third
business day after the date postmarked. Addresses for notice to either party are
as shown on the signature page of this Agreement, or as subsequently modified by
written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of New Jersey
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the State of New
Jersey, which shall be the exclusive and only proper forum for adjudicating such
a claim.
16. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
construed and enforced in accordance with the laws of the State of New Jersey,
as applied to contracts between New Jersey residents, entered into and to be
performed entirely within the State of New Jersey, without regard to the
conflict of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement by the
Company, the Company shall be subrogated to the extent of such payment to all of
the rights of recovery of Indemnitee, who shall execute all documents required
and shall do all acts that may be necessary to secure such rights and to enable
the Company effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the entire
understanding between the parties hereto and supersedes and merges all previous
written and oral negotiations, commitments, understandings and agreements
relating to the subject matter hereof between the parties hereto.
-9-
<PAGE> 10
21. No Construction as Employment Agreement. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
* * * * * *
-10-
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
ECCS, INC.
By:__________________________________
Gregg M. Azcuy, President
and Chief Executive Officer
AGREED TO AND ACCEPTED
INDEMNITEE:
- ------------------------
(signature)
David J. Boyle
- ------------------------
(name of Indemnitee)
16 Westminster Avenue
- ------------------------
Middletown, NJ 07748
- ------------------------
(address)
-11-
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