<PAGE> 1
CONFORMED COPY
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 March 31, 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 March 31, 1996:
<TABLE>
<CAPTION>
Class Number of Shares
- - ----- ----------------
<S> <C>
Common Stock, $.01 par value 4,298,584
</TABLE>
Page 1 of 24 pages
<PAGE> 2
ECCS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
- - -----------------------------
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets as of December 31, 1995 (audited)
and March 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the
three months ended March 31, 1995 and March 31, 1996 (unaudited) . . . . . 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1995 and March 31, 1996 (unaudited) . . . . . 4
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition . . . . . . . . . . . 11
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
- - --------------------------
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
- - ----------
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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<PAGE> 4
ECCS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 1,514 $ 1,492
Accounts receivable, less allowance for doubtful accounts of
$226 in 1995 and $190 at March 31, 1996 . . . . . . . . . . . . . . . . 2,767 2,190
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,854 3,300
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 186
Other receivables, less allowance for doubtful accounts of
none in 1995 and none at March 31, 1996 . . . . . . . . . . . . . . . . 34 21
------- -------
9,438 7,189
Property, plant and equipment (net) . . . . . . . . . . . . . . . . . . . . 1,311 1,263
Investment in real estate (net) . . . . . . . . . . . . . . . . . . . . . . 714 --
Capitalized software (net) . . . . . . . . . . . . . . . . . . . . . . . . 919 911
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 57
------- -------
Total Assets $12,435 $ 9,420
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,849 $ 1,102
Payable to AT&T Commercial . . . . . . . . . . . . . . . . . . . . . . . 1,254 281
Current portion of mortgage payable . . . . . . . . . . . . . . . . . . . 502 --
Current portion of capital lease obligations . . . . . . . . . . . . . . 78 116
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 3,631 2,829
Customer deposits, advances and other credits . . . . . . . . . . . . . . 990 1,228
------- -------
8,304 5,556
Capital lease obligations, net of current portion . . . . . . . . . . . . . 50 62
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 163
------- -------
8,519 5,781
Cumulative redeemable convertible preferred stock, $.01 par value per share
Authorized, 3,000,000;
Issued and outstanding, 1,600,000 shares . . . . . . . . . . . . . . . . 16 16
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . 1,778 1,822
------- -------
1,794 1,838
------- -------
Shareholders' Equity:
Common stock, $.01 par value per share
Authorized, 20,000,000 shares;
Issued and outstanding, 4,277,975 shares at December 31, 1995
and 4,295,584 at March 31, 1996 . . . . . . . . . . . . . . . . . . . . 43 43
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . 9,974 10,011
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,895) (8,253)
------- -------
2,122 1,801
------- -------
Total Liabilities and Shareholders' Equity $12,435 $ 9,420
======= =======
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
ECCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
March 31, 1995 March 31, 1996
-------------- --------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . $ 9,083 $ 5,105
Cost of sales . . . . . . . . . . . . . 7,001 3,528
------------ -------------
Gross profit . . . . . . . . . . . . 2,082 1,577
Operating expenses:
Selling, general & administrative . . 2,375 1,522
Research & development . . . . . . . 203 271
------------ -------------
Operating loss . . . . . . . . . . . . (496) (216)
Net interest expense . . . . . . . . 147 97
------------ -------------
Net loss . . . . . . . . . . . . . . $ (643) $ (313)
============ =============
Net loss per share . . . . . . . . . . $ (0.15) $ (0.08)
============ =============
Weighted average number of common and
common equivalent shares . . . . . . 4,216 4,281
============ =============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (643) $ (313)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 275 322
Gain on sale of Illinois property . . . . . . . . . . . . . . . . . . -- (84)
Deferred rent expense . . . . . . . . . . . . . . . . . . . . . . . . (2) (2)
Decrease in accounts receivable . . . . . . . . . . . . . . . . . . . 3,843 577
Decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . 1,781 1,554
Decrease in income taxes refunded . . . . . . . . . . . . . . . . . . 854 --
(Increase) decrease in prepaid expenses and other . . . . . . . . . . (3) 83
Decrease in other receivables . . . . . . . . . . . . . . . . . . . . 469 13
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . 1 (4)
Increase in payable to AT&T Commercial . . . . . . . . . . . . . . . . (2,394) (973)
Increase in accounts payable and accrued liabilities . . . . . . . . . (1,767) (802)
(Decrease) increase in customer deposits, advances and other credits . (395) 238
-------------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . 2,019 609
------------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment . . . . . . . . . . . . . . . (65) (61)
Increase in investment in real estate . . . . . . . . . . . . . . . . . 2 --
Proceeds from sale of Illinois property . . . . . . . . . . . . . . . . -- 798
Additions to capitalized software . . . . . . . . . . . . . . . . . . . (44) (128)
------------- ----------
Net cash (used in) provided by investing activities . . . . . . . . . . . . (107) 609
------------- ----------
Cash flows from financing activities:
Borrowings under revolving credit agreement . . . . . . . . . . . . . . 10,908 3,908
Repayments under revolving credit agreement . . . . . . . . . . . . . . (12,420) (4,655)
Repayment of mortgage payable . . . . . . . . . . . . . . . . . . . . . -- (502)
Issuance of common stock and exercise of employee stock options . . . . -- 37
Repayment of capital lease obligations . . . . . . . . . . . . . . . . . (31) (28)
------------- ----------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . (1,543) (1,240)
------------- ----------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . 369 (22)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 1,670 1,514
------------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 2,039 $ 1,492
============= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 170 $ 170
============= ==========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 7
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1995 and March 31, 1996 is unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The information presented for March 31, 1995 and March 31, 1996 and
for the three-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
accruals) which the Company considers necessary for the fair presentation of
the Company's financial position as of March 31, 1996, and the results of its
operations and cash flows for the three month periods ended March 31, 1995 and
March 31, 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") provides systems integration
solutions that feature high-availability mass storage enhancement products
including those designed and manufactured by the Company, as well as
value-added resales of UNIX-based computer systems, networking, connectivity,
peripheral products and enterprise management software. Notable features
related to ECCS' high-availability mass storage enhancement products include
RAID 10, Split Mirror (TM), Single Button Rebuild, and Status Monitor software.
ECCS provides CPU Systems from AT&T, SUN and IBM long with offering systems
integration services that feature custom design and support of high
availability operating environments which include such features as automatic
server failover, hot-swappable component replacement, and on-line system
maintenance. ECCS currently focuses its marketing and sales efforts on
corporate end-user accounts and organizations selling to federal government
customers. The Company conducts sales and marketing from its corporate
headquarters in New Jersey and from its offices in Alpharetta, Georgia and
Arlington, Virginia. ECCS' reseller
-5-
<PAGE> 8
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1995 and March 31, 1996 is unaudited)
relationship with Computer Associates provides ECCS' customers with a software
tool (CA-Unicenter), which allows a distributed open systems environment to be
managed from one central location, thereby integrating servers, the Company's
high-availability mass storage subsystems, system security and other critical
system administration functions all under one umbrella.
(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, March 31,
1995 1996
------------- -------------
(unaudited)
<S> <C> <C>
Purchased parts . . . . . . . . . . . . . . . . . . . . . . . . $ 2,538 $ 2,105
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . 3,129 1,996
----------- --------
5,667 4,101
Less: inventory valuation reserve . . . . . . . . . . . . . . 813 801
----------- --------
$ 4,854 $ 3,300
=========== ========
</TABLE>
(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.
-6-
<PAGE> 9
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1995 and March 31, 1996 is unaudited)
(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 $77,000 and $136,000 for the periods ending March
31, 1995 and March 31, 1996, respectively. At December 31, 1995 and March 31,
1996, the Company had capitalized $1,574,000 and $1,702,000 software
development costs, respectively, of which $655,000 and $791,000 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.
(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.
-7-
<PAGE> 10
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1995 and March 31, 1996 is unaudited)
(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 Notes 4 and 5), 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 $32,000, although not declared by the
Company's Board of Directors or paid by the Company, were used to derive the
Company's earnings per share for the three-month period ended March 31, 1996.
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 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.
-8-
<PAGE> 11
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1995 and March 31, 1996 is unaudited)
NOTE 4 -- CUMULATIVE REDEEMABLE 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 was designated as 6%
Cumulative Redeemable Convertible Preferred Stock, Series B ("Series B
Preferred Stock"). Such shares were issued on May 19, 1995. The Series B
Preferred Stock is redeemable by the Company, at its option, after one year at
$1.25 per share, or $2 million in the aggregate, plus any accrued and unpaid
dividends. In addition, it is mandatorily redeemable four years from the date
of issuance at the same amounts. At any time, the Series B Preferred
Stockholders may convert their Series B Preferred Stock into Common Stock, at
the rate of one for one. The Company has reserved 1,600,000 shares of Common
Stock for the conversion of the outstanding Series B Preferred Stock (See also
Note 5).
Dividends 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.
In the event of liquidation, dissolution or winding up of the Company,
Series B Preferred Stockholders shall be entitled to receive prior and in
preference to Common Stockholders (See also Note 5).
NOTE 5 -- SUBSEQUENT EVENT
On May 17, 1996, the Company's Series B Preferred Stock was amended to
delete the mandatory and optional redemption provisions contained therein.
On May 17, 1996, 500,000 shares of the Company's Preferred Stock was
designated as Series C Preferred Stock. 462,512 of such shares 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 $.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 rate of four shares of
Common Stock for each share of Series C Preferred Stock. 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 outstanding Series C Preferred Stock
would convert into 1,850,048 shares of Common Stock. The shares of Series C
Preferred Stock and the proceeds thereof will be released from escrow: (a)
assuming an exception from shareholder approval is granted by Nasdaq, not
earlier than ten days after the Company has distributed the
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<PAGE> 12
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1995 and March 31, 1996 is unaudited)
notice to shareholders required in connection with such an exception; or (b)
assuming the shareholder approval exception is not granted, not later than two
business days after such denial. In the event the Company does not receive an
exception from shareholder approval from Nasdaq and the Company issues the
shares of Series C Preferred Stock without shareholder approval, such issuance
would be a breach of the listing agreement with Nasdaq and the Company could be
delisted from the Nasdaq National Market. The Company's Board of Directors has
determined that the issuance of the shares of Series C Preferred Stock without
shareholder approval is neccessary for the continued financial viability of the
Company.
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, shall be 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 direct 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 line of credit has the same financial
covenants as the Company's previous line of credit with AT&T-CFC. Upon the
consummation of the sale into escrow of 462,512 shares of 6% Cumulative
Convertible Preferred Stock, Series C at a price per share of $6.00, the direct
pay line of credit was terminated and the general line of credit was increased
to $2 million.
-10-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995 and March 31, 1996
Net Sales
Net sales decreased by approximately $3,978,000, or 43.8%, in the
three months ended March 31, 1996, as compared to net sales in the three months
ended March 31, 1995. The decrease in 1996 resulted primarily from a
$4,373,000 decrease in communications sector sales, and a $250,000 decrease in
commercial sector sales, offset, in part by an increase in federal sector sales
of $380,000 and an increase in sales to alternate channel partners of $265,000.
The reductions in sales involved primarily reductions in system orders and
shipments which incorporated NCR products.
A substantial portion of sales made to customers in the communications
sector were sales to multiple AT&T business units. In the three months ended
March 31, 1996 and March 31, 1995, 19% and 55% of net sales, respectively, were
made to these multiple AT&T entities. The Company believes that much of the
downward pressure on sales to the multiple AT&T business units is attributable
to intense increased competition from the NCR sales force. The Company earlier
reported that, in October 1993, NCR announced a major company restructuring.
At that time, the Company stated that although it was unable to determine the
impact, if any, that would result from such announced restructuring, there
could be no assurance that such restructuring by the Company's leading vendor
would not have an adverse impact on the Company's results of operations in
ensuing quarters. Also, in its Annual Report for the year ended December 31,
1994, the Company reported that NCR revised its policies related to sales of
NCR products to other AT&T business units. At that time, the Company announced
that it believed that such restructuring and policy changes created intense
additional competition for the Company, particularly with respect to sales into
AT&T business units, and that such AT&T business units have begun purchasing a
greater portion of NCR computer equipment directly from NCR. Accordingly, the
Company has, in general, experienced declining sales to multiple AT&T business
units, increased downward price pressure on such sales and declining
profitability on its sales of NCR computer equipment into AT&T business units.
In September 1995, NCR announced another major corporate restructuring
including significant layoffs and the elimination of certain products; and AT&T
announced a major restructuring plan which includes the spin-off to its
shareholders of NCR and AT&T's Network Systems Communications Products group.
The Company believes that disruption and uncertainties resulting from these
AT&T and NCR restructurings resulted in a materially adverse impact on the
Company's new orders and shipments during the first quarter of 1996. Although
the Company cannot predict the impact, if any, of these same influences in the
second quarter of 1996 and beyond, the Company's results of operations may be
adversely affected.
-11-
<PAGE> 14
The Company's value added reseller agreement with NCR is terminable by
either party upon 90 days prior written notice. To date, the Company has
received no indication from NCR that it intends to terminate such agreement.
There can be no assurance, however, that the agreement will not be terminated
in the future, particularly in light of the AT&T restructuring and the
uncertainties that result therefrom. In such event, the Company's business
would be materially adversely affected.
An integral part of the Company's strategy is to continue to seek to
diversify its customer base and to increase direct commercial and federal
sector sales and sales through alternate channel partners. As part of the
Company's strategic turnaround plans, the Company, in addition to striving to
expand sales of its own mass storage enhancement products, has been endeavoring
to broaden its markets and expand its product and service offerings. During
the third quarter of 1995, the Company took additional steps toward these goals
of broadening its potentially available market and expanding its product and
service offerings by becoming an IBM Industry Remarketer Affiliate for the IBM
RISC System/6000, establishing a reseller relationship with Computer Associates
for its Unicenter product which allows centralized management of distributed
open systems computing environments and entering into a business partner
agreement with CLAM Associates, which provides a software product that allows
automatic server failover for IBM RS/6000s in clustered environments. In
addition, the Company announced a high-performing, easy-to-administer,
mid-range RAID subsystem targeted to address the high-availability requirements
of Sun Microsystems customers. There can be no assurance that the Company will
be able to successfully implement this 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 $505,000 in the three months ended March 31, 1996 to
gross profit of approximately $1,577,000 in the three months ended March 31,
1996 from $2,082,000 in the three months ended March 31, 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 30.9% in the three months ended March 31, 1996, as compared to
22.9% in the corresponding period of the prior year. The increase in gross
margin percentage is due primarily to a shift in product mix toward sales of
the Company's own mass storage enhancement products, which generally have
higher gross margins than those realized on 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 increased as a percentage of net sales in the three months ended March
31, 1996, representing 29.8% of net sales, an increase of 3.7 percentage points
from the three months ended March 31, 1995. The increase was due principally
to lower sales volume in the 1996 period as compared to the same period in
1995. Selling, general and administrative expenses decreased in absolute
dollars by $853,000 from
-12-
<PAGE> 15
$2,375,000 in the three months ended March 31, 1995 to $1,522,000 in the three
months ended March 31, 1996 due to management efforts to control such costs and
lower sales commissions due to reduced sales volume. Salaries, commissions,
bonuses, employee benefits and payroll taxes were the largest components of
selling, general and administrative expenses, accounting for 66.0% and 67.7% of
such expenses in the three months ended March 31, 1996 and March 31, 1995,
respectively.
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 first quarter of 1996, such expenses
represented approximately 6.1% of the net sales of the Company's mass storage
enhancement products (8.6% including the amount capitalized in the three month
period ended March 31, 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 March 31, 1996 decreased
by $50,000 as compared to the three months ended March 31, 1995, due
principally to decreased inventory carrying levels resulting in a decrease in
borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $1.6 million at March 31, 1996 and
$1.1 million at 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 three months ended March 31, 1996, the Company relied on
extended payment terms from AT&T Commercial Finance Corporation for 27.9% 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 March 31, 1996, the Company owed
approximately $281,000 under this credit line. The Company's available credit
line for inventory acquisitions through AT&T-CFC was
-13-
<PAGE> 16
$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 of December 31, 1995
and March 31, 1996, the Company was in default with respect to its net worth
requirement. On May 6, 1996, AT&T-CFC waived such default through June 30,
1996. On May 9, 1996, as part of its reevaluation of its position, AT&T-CFC
agreed to provide a $750,000 direct line of credit, and a direct pay line of
credit of $1,250,000, which requires the deposit of the proceeds of sales
directly into AT&T-CFC's lockbox. Such line of credit has 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 of shares of 6%
Cumulative Convertible Preferred Stock, Series C, the direct pay line of credit
was terminated, the general line of credit was increased to $2 million and the
Company was in compliance with the net worth covenant. Such agreement expires
on March 31, 1997 and may be renewed on such date.
In addition, pursuant to an agreement with AT&T GIS, AT&T GIS has
agreed to supply product directly to the Company under either a consignment or
agency relationship, at the discretion of AT&T GIS, if AT&T-CFC ceases to
provide inventory financing to the Company for any reason other than the
failure of the Company to make timely payments. Under a consignment
relationship, AT&T GIS will provide product to ECCS to cover ECCS' delivery
schedule, as defined by signed purchase orders received by the Company to
fulfill product deliveries within 30 days. Consigned inventory must be kept
separate from the Company's inventory. The consignment arrangement is
available until May 1996, but may be terminated earlier by AT&T GIS if payment
is not made by ECCS within 30 days of the sale of the consigned inventory, or
if there is a material shortage discovered in the consignment inventory that is
not cured within 15 days. Under an agency relationship, AT&T GIS would provide
equipment directly to customers of the Company and would remit payment to the
Company after deducting equipment costs, freight and taxes. The agency
relationship is available until May 1996. The Company does not expect to renew
these arrangements in 1996. The Company does not believe the loss of these
arrangements will have a material adverse effect on the Company's ability to
obtain inventory.
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.
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.
-14-
<PAGE> 17
On May 19, 1995, the Company consummated a private placement of 6%
Cumulative Convertible Redeemable Preferred Stock, Series B (the "Series B
Stock") pursuant to which the Company issued and sold to certain investors
1,600,000 shares of Series B Stock at a price per share of $1.25. On May 17,
1996, the Company's Series B Preferred Stock was amended to delete the
mandatory and optional redemption provisions contained therein.
On May 17, 1996, the Company consummated a private placement of Series
C Preferred Stock, pursuant to which the Company issued and sold to 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. At any time, the Series C Preferred
Stockholders may convert their Series C Preferred Stock into Common Stock, at
the rate of four shares of Common Stock for each share of Series C Preferred
Stock. However, upon the consummation of a public offering that meets certain
terms, as defined, the Series C Preferred Stock will automatically convert.
The shares of Series C Preferred Stock and the proceeds thereof will be
released from escrow: (a) assuming an exception from shareholder approval is
granted by Nasdaq, not earlier than ten days after the Company has distributed
the notice to shareholders required in connection with such an exception; or
(b) assuming the shareholder approval exception is not granted, not later than
two business days after such denial. In the event the Company does not receive
an exception from shareholder approval from Nasdaq and the Company issues the
shares of Series C Preferred Stock without shareholder approval, such issuance
would be a breach of the listing agreement with Nasdaq and the Company could be
delisted from the Nasdaq National Market. The Company's Board of Directors has
determined that the issuance of the shares of Series C Preferred Stock without
shareholder approval is neccessary for the continued financial viability of the
Company.
On March 31, 1996, the Company's cash balance was approximately $1.5
million.
The Company had, as of March 31, 1996, invested $139,000 in capital
equipment and leasehold improvements. Capital expenditures for 1996 are
expected to be approximately $288,000, although such amounts are not subject to
formal commitments. There are no other material commitments for capital
expenditures currently outstanding.
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. However, the Company is not able, at this time, to assess the impact
on the Company, if any, as a result of the AT&T restructurings announced by
AT&T and NCR during the third quarter of 1995. Such restructurings have
created added uncertainty for the Company and there can be no assurance that
the Company's business will not be materially adversely affected by such
restructurings.
-15-
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On May 17, 1996, the Company consummated a private placement of Series
C Preferred Stock through Unterberg Harris ("Unterberg"), pursuant to which the
Company issued and sold to 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.
At any time, the Series C Preferred Stockholders may convert their Series C
Preferred Stock into Common Stock, at the rate of four shares of Common Stock
for each share of Series C Preferred Stock. However, upon the consummation of
a public offering that meets certain terms, as defined, the Series C Preferred
Stock will automatically convert. The shares of Series C Preferred Stock and
the proceeds thereof will be released from escrow: (a) assuming an exception
from shareholder approval is granted by Nasdaq, not earlier than ten days after
the Company has distributed the notice to shareholders required in connection
with such an exception; or (b) assuming the shareholder approval exception is
not granted, not later than two business days after such denial. In the event
the Company does not receive an exception from shareholder approval from Nasdaq
and the Company issues the shares of Series C Preferred Stock without
shareholder approval, such issuance would be a breach of the listing agreement
with Nasdaq and the Company could be delisted from the Nasdaq National Market.
The Company's Board of Directors has determined that the issuance of the shares
of Series C Preferred Stock without shareholder approval is neccessary for the
continued financial viability of the Company.
To the Company's knowledge, the investors used their own funds to
purchase the Series C Preferred Stock. The investors and number of shares of
Series C Preferred Stock purchased by each are as follows:
<TABLE>
<CAPTION>
Number of Shares of
Name Series C Preferred Stock Purchased
- - ---- ----------------------------------
<S> <C>
Unterberg Harris 68,667
Private Equity Partners, L.P. ("UHLP")
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Unterberg Harris
Private Equity Partners, C.V. ("UHCV") 14,667
c/o Administrator N.V.
NV FIDES
PO Box 4905
PIETERMAAI # 15
Curacao, NV
</TABLE>
-16-
<PAGE> 19
<TABLE>
<CAPTION>
Number of Shares of
Name Series C Preferred Stock Purchased
- - ---- ----------------------------------
<S> <C>
Unterberg Harris LLC ("UHLLC") 16,667
Swiss Bank Tower
10 East 5Oth Street
22nd Floor
New York, NY 10022
Emily Unterberg Satloff 8,334
c/o Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Ellen Unterberg Celli 8,334
c/o Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Thomas I. Unterberg 33,334
c/o Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Bella and Israel Unterberg 16,667
Foundation 2
c/o Thomas I. Unterberg
Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
John Rosenthal 16,667
c/o Burnham Securities
1325 Avenue of the Americas
New York, NY 10019
E&M RP Trust 66,667
c/o Edmund Shea
655 Brea Canyon Road
Walnut, CA 71789
</TABLE>
-17-
<PAGE> 20
<TABLE>
<CAPTION>
Number of Shares of
Name Series C Preferred Stock Purchased
- - ---- ----------------------------------
<S> <C>
Solar Group S.A. 16,667
Wind N Sea
14 Camden North
Paget
Bermuda DV-03
IRA Stephen Von Bargen 2,500
c/o Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
IRA Andrew Arno 4,167
c/o Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
401K Andrew Arno 4,167
c/o Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Jesse Arno UGMA 1,667
c/o Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Matthew Arno UGMA 1,667
c/o Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Elizabeth Arno 3,334
c/o Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor New York, NY 10022
</TABLE>
-18-
<PAGE> 21
<TABLE>
<CAPTION>
Number of Shares of
Name Series C Preferred Stock Purchased
- - ---- ----------------------------------
<S> <C>
George Hiscock UGMA 1,667
c/o Unterberg Harris
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Gail Rineberg Trust 8,334
7475-9 East Gainey Ranch Road
Scottsdale, AZ 85258
Bernard Rineberg 4,167
31 Governoris Lane
Princeton, NJ 08540
M.S.I. Investments Limited 16,667
c/o Inveco International, Inc.
Mr. Hillel Peled, President
505 Park Avenue
New York, NY 10022
IRA Lewis Rabinowitz 12,500
c/o R. Lewis Securities
950 Third Avenue
22nd Floor
New York, NY 10022
Unterberg Harris 401(K) Profit Sharing Plan 5,000
dated 10/26/90 FBO: Robert Matluck,
R. Harris and T. Unterberg TTEE
188 Chichester Road
New Canaan, CT 06840
Dr. Gershon A. Stern 16,667
1171 East Landis Avenue
Vineland, NJ 08360
Dr. Robert Stern 8,334
4 Dorset Drive
Voorhees, NJ 08043
Genesis Capital Mgmt. 33,334
120 Broadway
Suite 7001
New York, NY 10271
Estelle E. Konviser 1,667
8701 Bergenline Avenue
North Bergen, NJ 07047
</TABLE>
-19-
<PAGE> 22
<TABLE>
<CAPTION>
Number of Shares of
Name Series C Preferred Stock Purchased
- - ---- ----------------------------------
<S> <C>
Matthew Matluck 3,334
254 East 68th Street
Apt. 23D
New York, NY 10021
Edward Moses 3,334
141 West Palmer Avenue
West Long Branch, NJ 07764
S. Marcus Finkle 25,000
117 AABC
Suite 311
Aspen, CO 81611
John Dexheimer 2,500
Private Equity Partners, L.P.
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Brian Goldman 2,500
Private Equity Partners, L.P.
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
Tiedemann McCabe Global Telecom L.P. 33,334
c/o Jay McCabe
Tiedemann Boltress
535 Madison Avenue
New York, NY 10022
</TABLE>
Upon consummation of the transaction, the investors own 36.9% of the
capital stock of the Company on an as-converted to Common Stock basis. Of such
investors, UHLP, UHCV and UHLLC are controlled by Unterberg. As a result of
the transaction, Unterberg beneficially owns approximately 1,400,000 shares, or
15.0% of the capital stock of the Company on an as-converted to Common Stock
basis.
Holders of Series C Preferred Stock and Series B Stock, voting as a
class, have the right to elect two members of the Board of Directors of the
Company, who may not be removed except by the affirmative vote of the holders
of such classes of stock.
The vote of 66 2/3% of the holders of Series C Preferred Stock is
required in order for the Company to: (i) amend the Certificate (other than an
amendment which changes the dividend
-20-
<PAGE> 23
payable on or the liquidation preference of the Series C Preferred Stock, for
which the vote of 80% of the holders of Series C Preferred Stock is required);
(ii) create a class of stock ranking senior or equal to the Series C Preferred
Stock; (iii) redeem or acquire shares of its capital stock or issue any capital
stock or securities exchangeable into capital stock (with certain exceptions);
(iv) cancel any material indebtedness (with certain exceptions); (v) permit or
allow any liens, encumbrances or other restrictions with respect to its assets,
except in the ordinary course of business; and (vi) sell or transfer all or
substantially all of its assets or merge or consolidate with another
corporation, or undertake any reclassification or recapitalization with respect
to its capital stock.
The Series C Preferred Stock is: (i) convertible to Common Stock at
the option of the holders thereof at any time on a four-for-one basis (subject
to change if the Conversion Price changes); and (ii) automatically convertible
(on the same basis as set forth in the preceding section (i)) to Common Stock
upon the consummation of a public offering of Common Stock at a per share price
of not less than $4.00 and resulting in aggregate gross proceeds to the Company
of at least $5,000,000.
Subject to certain conditions, Holders of Series C Preferred Stock
have a right of first offer with respect to the issuance of any new securities
which would reduce such holder's holdings by 10% or more. Also, subject to
certain conditions, the holders of Series C Preferred Stock have certain demand
and piggyback registration rights.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
-21-
<PAGE> 24
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: May 20, 1995 By: /s/ Michael E. Faherty
------------------------
Michael E. Faherty, Chairman of
the Board and Chief Executive Officer
(Principal Executive Officer)
DATE: May 20, 1996 By: /s/ Louis J. Altieri
------------------------------------------
Louis J. Altieri, Vice President, Finance
and Administration (Principal Financial
and Accounting Officer)
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited interim financial statements included in the Registrant's Form 10-Q
for the quarter ended March 31, 1996 and is qualified in its entirety by
reference to such Form 10-Q for the quarter ended March 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,492
<SECURITIES> 0
<RECEIVABLES> 2,380
<ALLOWANCES> 190
<INVENTORY> 3,300
<CURRENT-ASSETS> 7,189
<PP&E> 3,781
<DEPRECIATION> 2,518
<TOTAL-ASSETS> 9,420
<CURRENT-LIABILITIES> 5,556
<BONDS> 62
16
0
<COMMON> 43
<OTHER-SE> 1,758
<TOTAL-LIABILITY-AND-EQUITY> 9,420
<SALES> 5,105
<TOTAL-REVENUES> 5,105
<CGS> 3,528
<TOTAL-COSTS> 3,528
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (114)
<INCOME-PRETAX> (313)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (313)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> 0
</TABLE>
