<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 30, 1997
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 June 30, 1997:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 4,491,032
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ECCS, INC.
TABLE OF CONTENTS
<TABLE>
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Page
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PART I. FINANCIAL INFORMATION ............................................... 1
Item 1. Financial Statements ............................................. 1
Consolidated Balance Sheets as of June 30, 1997 (unaudited)
and December 31, 1996 (audited) ..................................... 2
Consolidated Statements of Operations for the three months ended June
30, 1997 and June 30, 1996 and for the six months ended June 30, 1997
and June 30, 1996 (unaudited) ....................................... 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and June 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 ............................... 11
Overview ............................................................ 11
Results of Operations ............................................... 11
Liquidity and Capital Resources ..................................... 15
PART II. OTHER INFORMATION .................................................. 18
Item 1. Legal Proceedings ................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders .............. 18
Item 5. Other Information ................................................ 19
Item 6. Exhibits and Reports on Form 8-K ................................. 19
SIGNATURES .................................................................. 20
</TABLE>
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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>
June 30, December 31,
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ....................................................... $ 1,339 $ 4,393
Accounts receivable, less allowance for doubtful accounts of $258 and $184
at June 30, 1997 and December 31, 1996, respectively ........................... 7,017 3,162
Inventories ..................................................................... 5,602 4,680
Prepaid expenses and other receivables .......................................... 336 257
-------- --------
14,294 12,492
Property, plant and equipment (net) ................................................ 987 1,190
Capitalized software (net) ......................................................... 816 814
Other assets ....................................................................... 296 56
-------- --------
$ 16,393 $ 14,552
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Loans payable ................................................................... $ 1,859 $ 1,762
Payable to AT&T Commercial ...................................................... 782 64
Current portion of capital lease obligations .................................... 44 91
Accounts payable ................................................................ 4,065 4,061
Accrued expenses and other ...................................................... 1,384 986
Warranty ........................................................................ 554 414
Customer deposits, advances and other credits ................................... 510 834
-------- --------
9,198 8,212
Capital lease obligations, net of current portion .................................. -- 8
Deferred rent ...................................................................... 150 155
-------- --------
9,348 8,375
-------- --------
Shareholders' Equity:
Preferred stock, $.01 par value per share, authorized, 3,000,000 shares;
Series B cumulative convertible preferred stock, issued and
outstanding, 1,600,000 shares at June 30, 1997 and at December 31, 1996 ... 16 16
Series C cumulative convertible preferred stock, issued and
outstanding, 500,000 shares at June 30, 1997 and at December 31, 1996 ..... 5 5
Common stock, $.01 par value per share, authorized, 20,000,000 shares; issued
and outstanding, 4,491,032 shares and 4,432,216 shares at June 30, 1997 and
December 31, 1996, respectively ................................................ 45 44
Capital in excess of par value - preferred ...................................... 4,522 4,522
Capital in excess of par value - common ......................................... 10,423 10,254
Retained earnings (deficit) ..................................................... (7,966) (8,664)
-------- --------
7,045 6,177
-------- --------
Total Liabilities and Shareholders' Equity .................................. $ 16,393 $ 14,552
======== ========
</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 For the Six
Months Ended June 30, Months Ended June 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ................................ $ 9,103 $ 7,733 $ 17,840 $ 12,838
Cost of sales ............................ 6,513 5,203 12,848 8,731
-------- -------- -------- --------
Gross profit ........................... 2,590 2,530 4,992 4,107
Operating expenses:
Selling, general & administrative ...... 1,864 2,130 3,486 3,652
Research & development ................. 319 402 696 673
-------- -------- -------- --------
Operating income (loss) .................. 407 (2) 810 (218)
Net interest expense ................... 54 60 112 157
-------- -------- -------- --------
Net income (loss) ...................... $ 353 (62) 698 (375)
-------- -------- -------- --------
Preferred dividends .................... 77 53 154 86
-------- -------- -------- --------
Net income (loss) applicable to
common shares .......................... $ 276 $ (115) $ 544 $ (461)
======== ======== ======== ========
Primary net income (loss) per share ...... $ 0.05 $ (0.03) $ 0.10 $ (0.11)
======== ======== ======== ========
Fully diluted net income per share ....... $ 0.04 $ -- $ 0.08 $ --
======== ======== ======== ========
Primary weighted average number of
common and common equivalent shares .... 5,253 4,319 5,236 4,322
======== ======== ======== ========
Fully diluted weighted average number of
common and common equivalent shares .... 9,023 -- 9,007 --
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
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] ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
-------- --------
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Cash flows from operating activities:
Net income (loss) ....................................................... $ 698 $ (375)
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ......................................... 595 714
Gain on sale of Illinois property ..................................... -- (145)
Increase in accounts receivable ....................................... (3,855) (3,595)
(Increase) decrease in inventories .................................... (922) 2,053
Increase in prepaid expenses, other receivables and other assets ...... (319) (146)
Increase (decrease) in payable to AT&T Commercial ..................... 718 (919)
Increase in accounts payable, accrued liabilities
deferred rent and other .............................................. 537 1,172
(Decrease) increase in customer deposits, advances and other credits... (324) 349
-------- --------
Net cash used in operating activities ...................................... (2,872) (892)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment .............................. (111) (307)
Gross proceeds from sale of Illinois property ........................... -- 855
Additions to capitalized software ....................................... (283) (248)
-------- --------
Net cash (used in) provided by investing activities ........................ (394) 300
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit agreement ............................. 10,157 9,694
Repayments under revolving credit agreement ............................. (10,060) (8,155)
Repayment of long-term debt and capital lease obligations ............... (55) (53)
Repayment of mortgage payable ........................................... -- (502)
Gross proceeds from issuance of preferred stock ......................... -- 3,000
Expenses for issuance of preferred stock ................................ -- (252)
Proceeds from exercise of employee stock options
and issuances of common stock ........................................... 170 146
-------- --------
Net cash provided by financing activities .................................. 212 3,878
-------- --------
Net (decrease) increase in cash and cash equivalents ....................... (3,054) 3,286
Cash and cash equivalents at beginning of period ........................... 4,393 1,514
-------- --------
Cash and cash equivalents at end of period ................................. $ 1,339 $ 4,800
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 112 $ 185
======== ========
</TABLE>
See notes to consolidated financial statements.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 1997 and
June 30, 1996 is unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The information presented for June 30, 1997 and June 30, 1996 and for
the three and six-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 June 30, 1997, the results of its
operations for the three and six-month periods ended June 30, 1997 and June 30,
1996 and its cash flows for the six-month periods ended June 30, 1997 and June
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, 1996, which were included as part of
the Company's Annual Report on Form 10-K/A.
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 provides intelligent solutions to store, protect and access
mission critical information for the Open Systems and related markets. The
Company designs, manufactures and sells high performance, fault tolerant data
storage solutions for a wide range of customer requirements. ECCS' flagship
product, Synchronix, which the Company began selling in 1996, is a full feature
RAID (redundant array of independent disks) product family designed for use in
NT and UNIX clustered environments, including Tandem's ServerNet. The Company's
products are compatible with most Open System computing platforms and enable
customers to store, protect and access data and to centralize data management
functions across an organization's disparate computer environments.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 1997 and
June 30, 1996 is unaudited)
(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.
Inventories consist of the following (in thousands):
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June 30, December 31,
1997 1996
------ ------
(unaudited)
<S> <C> <C>
Purchased parts .................................. $2,654 $2,181
Finished goods ................................... 3,846 3,280
------ ------
6,500 5,461
Less: inventory valuation reserve ............. 898 781
------ ------
$5,602 $4,680
====== ======
</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.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 1997 and
June 30, 1996 is unaudited)
(e) 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 $281,000 and $255,000 for the periods ending June 30,
1997 and June 30, 1996, respectively. At June 30, 1997 and December 31, 1996,
the Company had capitalized $2,296,000 and $2,013,000 of software development
costs, respectively, of which $1,480,000 and $1,199,000 had been amortized,
respectively.
(f) Impairment of Long-lived Assets
In 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which had no effect on its financial condition or results of operations. The
Company records impairment losses on long-lived assets used in operations or
expected to be disposed of when events and circumstances indicate that the cash
flows expected to be derived from those assets are less than the carrying
amounts of those assets. No such events and circumstances have occurred.
(g) Revenue Recognition
In general, revenue is recognized upon shipment of the product or
system or as services are provided. Periodically, revenue is recognized on
product which is being held at the customer's request. Revenue is only
recognized on such product when all risks of ownership have passed to the
customer and the Company has no specific performance obligations remaining.
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, 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.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 1997 and
June 30, 1996 is unaudited)
(i) Research and Development Costs
Research and development costs are expensed as incurred, except for
software development costs which are accounted for as noted above.
(j) Income Taxes
Income taxes are accounted for by the liability method in accordance
with the provisions of SFAS No. 109 "Accounting for Income Taxes."
(k) Stock Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages,
but does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
(l) Per Share Information
Primary net income (loss) per share is computed using the weighted
average number of common shares and common share equivalents outstanding during
the periods presented. Common share equivalents result from outstanding options
and warrants to purchase common stock. To the extent common share equivalents
are anti-dilutive, they are not included in the calculation. The fully diluted
net income per share computation reflects the dilutive effect of the common
share equivalents and the assumed conversion of the Convertible Preferred
Stock.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted for the
Company's year ending December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options and warrants will be
excluded. The impact upon adoption is expected to result in an increase in
primary earnings per share for the six months and second quarter ended June 30,
1997 of $.02 and $.01, respectively, and is expected to have no impact for the
six months and quarter ended June 30, 1996. The impact of Statement 128 on the
calculation of fully diluted earnings per share for all periods presented is not
expected to be material.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 1997 and
June 30, 1996 is unaudited)
NOTE 3 -- LITIGATION
There are no individual material litigation matters pending to which
the Company is a party or to which any of its property is subject.
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.
Dividends with respect to the Company's issued and outstanding Series B
Preferred Stock are calculated based on $0.02 per share per quarter and
accumulate if not declared and paid. As of June 30, 1997, an aggregate of
approximately $279,000 of the Series B Preferred Stock dividends had accumulated
and have not been declared or paid. In addition, interest of 6% per annum
accrues on any unpaid dividends.
Dividends with respect to the Company's issued and outstanding Series C
Preferred Stock are calculated based on $0.09 per share per quarter and
accumulate if not declared and paid. As of June 30, 1997, an aggregate of
approximately $202,000 of the Series C Preferred Stock dividends had accumulated
and had not been declared or paid. In addition, interest of 6% per annum accrues
on any unpaid dividends.
The Series B Preferred Stock is currently convertible into
approximately 1,770,590 shares of Common Stock. The Company has reserved
1,770,590 shares of Common Stock for the conversion of outstanding Series B
Preferred Stock.
At any time, the Series C Preferred shareholders 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. The Company has
reserved 2,000,000 shares of Common Stock for the conversion of the outstanding
Series C 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.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for June 30, 1997 and
June 30, 1996 is unaudited)
NOTE 5 -- RELATED PARTY TRANSACTION
On June 6, 1997, the Company entered into a loan transaction with its
President and Chief Executive Officer (the "Borrower") pursuant to a $250,000
promissory note in favor of the Company. Interest on the outstanding principal
balance of such promissory note is payable monthly at the prime lending rate.
The promissory note is payable over a five-year period beginning on May 31,
1999. In connection with such promissory note, the Borrower granted the Company
a security interest in the Borrower's interests in the Company's 1997 Executive
Compensation Plan and any and all future executive compensation bonuses or
similar compensation to be received by the Borrower. The Borrower also pledged
to the Company all of his right, title and interest to 25,000 restricted shares
of the Company's Common Stock and options to purchase 131,000 shares of the
Company's Common Stock as security for the promissory note.
NOTE 6 -- SUBSEQUENT EVENTS
On July 9, 1997, the Company entered into a full recourse factoring
facility with NationsBanc Commercial Corporation ("NCC") which provides for
aggregate advances not to exceed the lesser of $7 million or up to 85% of
Eligible Receivables (as defined in the agreement). Interest on such advances is
payable monthly in arrears at the prime lending rate and the Company is
obligated to pay certain annual fees. The factoring facility is for a period of
three years (unless terminated by NCC by providing the Company sixty days prior
written notice) beginning on July 30, 1997. The obligations of the Company under
such agreement are collateralized by substantially all of the assets of the
Company.
Until July 30, 1997, the Company had a financing facility with Fidelity
Funding of California, Inc. ("Fidelity"). In connection with the termination of
such financing facility, the Company paid Fidelity termination fees of $100,000.
On June 26, 1997, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission for the sale
of up to 3,450,000 shares of Common Stock, of which up to 1,500,000 shares may
be sold by certain selling shareholders. If such offering is consummated under
terms presently anticipated, all shares of Series B Preferred Stock and Series
C Preferred Stock outstanding as of the closing date of such offering will be
automatically converted into shares of Common Stock in accordance with the terms
of such series.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
OVERVIEW
ECCS provides intelligent solutions to store, protect and access
mission critical information for the Open Systems and related markets. The
Company designs, manufactures and sells high performance, fault tolerant data
storage solutions for a wide range of customer requirements.
From its founding until 1994, the Company's principal business was the
value added resale of NCR products. Sales to AT&T business units made up a large
portion of such business. During 1994, as a result of AT&T's acquisition of NCR
and subsequent change in its purchasing policies, the Company undertook a
product development initiative to reposition the Company as a provider of
proprietary mass storage enhancement products. In 1995, the Company's sales of
its proprietary products exceeded its sales as a value added reseller ("VAR")
due to both increasing sales of its own products and decreasing sales as a VAR.
Beginning in 1996, a substantial portion of the Company's revenues has been
generated from sales of its own products.
The Company's revenues are generated from three primary sources: (i)
revenues derived from sales of mass storage enhancement products, which include
sales of all ECCS mass storage enhancement products, including the Synchronix
family of products, and sales of certain third party component products that are
incorporated into such mass storage enhancement systems; (ii) revenues generated
by the Company as a VAR which include the Company's sales to AT&T business units
for non-storage related products; and (iii) revenues derived from services and
other revenue which include Professional Services and maintenance contracts. The
Company believes that revenues derived from maintenance contracts and value
added resales will decrease as more resources are deployed for the development
and marketing of proprietary products.
The statements contained in this Quarterly Report on Form 10-Q that are
not historical facts are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995). Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
These forward-looking statements, such as statements regarding anticipated
future revenues, capital expenditures, research and development expenditures and
other statements regarding matters that are not historical facts, involve
predictions. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements contained in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 and 1996
Net Sales
Net sales increased by approximately $1,370,000 or 18%, in the three
months ended June 30, 1997, as compared to net sales in the three months ended
June 30, 1996. Sales of the
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<PAGE> 14
Company's proprietary mass storage enhancement systems, including sales of
certain third party component products, accounted for 96% and 79% of net sales
in the quarters ended June 30, 1997 and 1996, respectively. Sales by the Company
in its capacity as a VAR accounted for 1% and 11% of net sales in the quarters
ended June 30, 1997 and 1996, respectively. Services and other revenues
accounted for 3% and 10% of net sales in the quarters ended June 30, 1997 and
1996, respectively. The increase in the 1997 period resulted primarily from an
increase in sales of the Company's mass storage enhancement systems, including
sales to Federal customers, as well as sales through relationships with OEMs,
and direct sales to Tandem Computers Incorporated ("Tandem"), offset, in part,
by a decrease in value added resales.
Sales to the U.S. Air Force through a Federal integrator accounted for
approximately 60% of net sales in the quarter ended June 30, 1997. The Company
expects that sales to the U.S. Air Force will continue to comprise a significant
portion of the Company's net sales for the next 12 to 18 months. There can be no
assurance that the U.S. Air Force will continue to purchase from the Company at
historical levels, if at all.
Sales to alternate channel partners accounted for approximately 23% of
net sales in the quarter ended June 30, 1997. Sales to the Company's primary
alternate channel partner, Unisys Corporation ("Unisys"), accounted for 5% of
the Company's net sales in the quarter ended June 30, 1997.
While the Company has an OEM agreement with Unisys that defines the
terms of the sales and support services provided thereunder, this agreement does
not include specific quantity commitments. The Company's sales are made by
purchase order and, therefore, the Company has no long-term commitments from
Unisys and such customer generally may cancel orders on 30 days notice.
Accordingly, there can be no assurance that orders from Unisys will continue at
their historic levels, or that the Company will be able to obtain any new orders
from Unisys. The loss of Unisys as a customer, or the cancellation or
rescheduling of orders already placed, would materially and adversely affect the
Company's business, financial condition and operating results.
Sales to Tandem accounted for 11% of the Company's net sales in the
quarter ended June 30, 1997. There can be no assurance that Tandem will continue
to purchase from the Company at second quarter levels, if at all.
The Company continues efforts to establish potential OEM relationships
for specialized and standard versions of its Synchronix product line, in
addition to its relationship with Unisys. The Company believes that additional
OEM relationships may decrease the Company's reliance on its OEM relationship
with Unisys. There can be no assurance, however, that such relationships will be
established, or if established, that they will decrease the Company's reliance
on its OEM relationship with Unisys.
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<PAGE> 15
Gross Profit
The Company's cost of sales includes primarily the cost of the
Company's own and other vendors' products and systems. The Company's gross
profit increased slightly by approximately $60,000 in the three months ended
June 30, 1997 to approximately $2,590,000, from $2,530,000 in the three months
ended June 30, 1996. The slight increase in the 1997 period resulted from
increased sales volume, offset by lower margins resulting from the higher level
of third party component products sold during the second quarter of 1997. The
Company's gross margin decreased to 28.5% in the three months ended June 30,
1997, as compared to 32.7% in the corresponding period of the prior year. Such
decrease in gross margin is due primarily to the numerous orders sold to the
U.S. Air Force through a Federal integrator during the second quarter of 1997
which consisted primarily of third party component products integrated with the
Company's proprietary mass storage enhancement products. Such third party
component products generally have lower gross margins than those realized by the
Company on the sales of its own products.
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 as a percentage of net sales representing 21% and 28% for the
three months ended June 30, 1997 and 1996, respectively. Such decrease was due
primarily to the higher sales levels in 1997 coupled with a decrease in such
expenditures in absolute dollars. Selling, general and administrative expenses
decreased by $266,000 to $1,864,000 in the three months ended June 30, 1997 from
$2,130,000 in the three months ended June 30, 1996. Such decrease was due
principally to certain one-time expenses incurred in 1996 from the Company's
on-going restructuring, including accrued bonuses, recruiting and relocation
expenses and legal and audit fees. Salaries, commissions, bonuses, employee
benefits and payroll taxes were the largest components of selling, general and
administrative expenses, accounting for 60% and 61% of such expenses in the
three months ended June 30, 1997 and June 30, 1996, respectively.
Research and development expenses consist primarily of the costs
associated with research and development personnel. These expenses decreased in
the three months ended June 30, 1997 by $83,000 or 21% from $402,000 in the
corresponding 1996 period. This decrease is due primarily to the Company's
completion in the first quarter of 1997 of the development work for
Synchronection. The Company incurred research and development expenditures for
Synchronection throughout 1996. Such expenditures for the second quarter of 1997
(combined with the amount capitalized during the second quarter of 1997 in
accordance with SFAS No. 86) represented approximately 5% of the Company's net
sales.
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Interest Expense
Interest expense for the three months ended June 30, 1997 decreased by
$6,000 as compared to the three months ended June 30, 1996, due principally to a
reduction in fees charged by the Company's primary lender.
Six Months Ended June 30, 1997 and 1996
Net Sales
Net sales increased by approximately $5,002,000 or 39%, in the six
months ended June 30, 1997, as compared to net sales in the six months ended
June 30, 1996. Sales of the Company's proprietary mass storage enhancement
systems, including sales of certain third party component products, accounted
for 94% and 75% of net sales in the six month period ended June 30, 1997 and
1996, respectively. Sales by the Company in its capacity as a VAR accounted for
1% and 12% of net sales in the six months ended June 30, 1997 and 1996,
respectively. Services and other revenues accounted for 5% and 13% of net sales
in the six months ended June 30, 1997 and 1996, respectively. The increase in
the 1997 period resulted primarily from an increase in sales of the Company's
mass storage enhancement systems, including sales to Federal customers, as well
as sales through relationships with OEMs, and direct sales to Tandem, offset, in
part, by a decrease in value added resales.
Sales to the U.S. Air Force through a Federal integrator accounted for
approximately 51% and 37% of net sales in the six months ended June 30, 1997 and
1996, respectively. The Company expects that sales to the U.S. Air Force will
continue to comprise a significant portion of the Company's net sales for the
next 12 to 18 months. There can be no assurance that the U.S. Air Force will
continue to purchase from the Company at historical levels, if at all.
Sales to alternate channel partners accounted for approximately 26%
and 18% of net sales in the six months ended June 30, 1997 and 1996,
respectively. Sales to the Company's primary alternate channel partner, Unisys,
accounted for 12% of the Company's net sales in the six months ended June 30,
1997.
During the first quarter of 1997, the Company commenced selling
products to Tandem. Sales to Tandem accounted for 11% of the Company's net sales
in the six months ended June 30, 1997.
Gross Profit
The Company's gross profit increased by approximately $885,000 in the
six months ended June 30, 1997 to approximately $4,992,000, from $4,107,000 in
the six months ended June 30, 1996. The increase in the 1997 period resulted
from increased sales volume. The Company's gross margin decreased to 28% in the
six months ended June 30, 1997, as compared to 32% in the corresponding period
of the prior year. The decrease in gross margin is due primarily to the numerous
orders sold to
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<PAGE> 17
the U. S. Air Force through a Federal integrator during the first six months of
1997, a large proportion of which consists of third party components integrated
with the Company's proprietary mass storage enhancement products. Third party
components generally have lower gross margins than the Company's proprietary
products.
Operating Expenses
Selling, general and administrative expenses decreased by $166,000 to
$3,486,000 in the six months ended June 30, 1997 from $3,652,000 in the six
months ended June 30, 1996. Selling, general and administrative expenses
decreased as a percentage of net sales representing 20% and 28% for the six
months ended June 30, 1997 and 1996, respectively. These decreases were
primarily due to certain one-time expenses incurred in 1996 from the Company's
on-going restructuring, including accrued bonuses, recruiting and relocation
expenses, and legal and audit fees. Salaries, commissions, bonuses, employee
benefits and payroll taxes were the largest components of selling, general and
administrative expenses, accounting for 62% and 61% of such expenses in the six
months ended June 30, 1997 and June 30, 1996, respectively.
Research and development expenses increased slightly in the first six
months of 1997 by $23,000 or 3% from $673,000 in the first six months of 1996.
This slight increase is due primarily to the Company's continued investment in
and enhancements to the Company's current mass storage enhancement products.
Such expenses for the six months ended June 30, 1997 and 1996 (combined with the
amount capitalized during the respective periods in accordance with SFAS No. 86)
represented approximately 6% and 7%, respectively, of the Company's net sales.
Research and development projects for which the Company expects to devote
resources in the near future relate to a next generation of the Synchronix
family of products, new interface connectivities, customized OEM products and
the development of a ServerNet product with Tandem.
Interest Expense
Interest expense for the six months ended June 30, 1997 decreased by
$45,000 as compared to the six months ended June 30, 1996, due principally to a
reduction in fees charged by the Company's primary lender.
LIQUIDITY AND CAPITAL RESOURCES
Since 1994, 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 private sales of equity securities.
The Company also remains dependent on its ability to finance accounts receivable
and certain inventory.
Net cash used in operations was $2,872,000 for the six months ended
June 30, 1997 and $892,000 for the six months ended June 30, 1996. Such use of
cash resulted primarily from a
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<PAGE> 18
substantial reduction in the borrowings against the accounts receivable line of
credit. Net cash used in investing activities was $394,000 for the six months
ended June 30, 1997, while net cash provided by investing activities was
$300,000 for the six months ended June 30, 1996. Such change resulted primarily
from the Company's sale of real estate in Romeoville, Illinois in March 1996.
Net cash provided by financing activities was $212,000 for the six months ended
June 30, 1997 and $3,878,000 for the six months ended June 30, 1996. The
decrease in net cash provided by financing activities resulted primarily from
the issuance of 500,000 shares of Series C Preferred Stock in May 1996.
The Company used $111,000 and $229,000 for the acquisition of equipment
by direct purchase during such respective periods. For the six months ended June
30, 1997 and 1996, the Company acquired equipment under capital leases of $0 and
$78,000, respectively, and made payments under capital leases of $59,000 and
$46,000, respectively. Capital expenditures for 1997 are expected to be
approximately $845,000, although such amounts are not subject to formal
commitments. There are no other material commitments for capital expenditures
currently outstanding. Net borrowings under the Company's accounts receivable
financing facility provided funds of $97,000 for the six months ended June 30,
1997 and $1,539,000 for the six months ended June 30, 1996.
The Company's working capital was $5.1 million and $4.3 million at June
30, 1997 and December 31, 1996, respectively.
Until July 30, 1997, the Company had a financing facility with Fidelity
Funding of California, Inc. ("Fidelity") which provided for maximum eligible (as
defined) 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 required a commitment fee of 0.5% of the total available financing
amount, payable annually on each anniversary date of the agreement. The
obligations under such agreement were collateralized by substantially all of the
assets of the Company. The agreement did not contain any cash withdrawal
restrictions, any requirements for maintenance of specific financial ratios or
minimum net worth or limitations on dividend payments. As of June 30, 1997, the
Company owed approximately $1.9 million under this financing facility. Such
financing facility was terminated in July, 1997 in connection with the
consummation of the Company's new financing facility with NCC and all
outstanding amounts have been repaid. In connection with the termination of such
financing facility, the Company paid Fidelity termination fees of $100,000 in
July 1997.
On July 9, 1997, the Company entered into a full recourse factoring
facility with NCC which provides for aggregate advances not to exceed the lesser
of $7 million or up to 85% of Eligible Receivables (as defined). Interest on
such advances is payable monthly in arrears at the prime lending rate and the
Company is obligated to pay certain annual fees. The factoring facility is for a
period of three years (unless terminated by NCC by providing the Company sixty
days prior written notice) beginning on July 30, 1997. The obligations of the
Company under such agreement are collateralized by substantially all of the
assets of the Company.
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<PAGE> 19
On May 17, 1996, the Company's direct pay line of credit with AT&T
Commercial Finance Corporation ("AT&T-CFC") was terminated and its general line
of credit with AT&T-CFC was increased to $2 million. The agreement with
AT&T-CFC contains covenants relating to net worth, total assets to debt and
total inventory to debt. Such general line of credit has been extended to March
31, 1998. The Company uses this line of credit to augment its purchasing ability
with various vendors. The Company relied on this line of credit for 16% of its
inventory acquisitions in the first six months of 1997, the majority of which
were purchases from Bell Microproducts and Tech Data Corporation. The Company's
obligations under the agreement with AT&T-CFC are collateralized by
substantially all of the assets of the Company. The maximum amount, during the
preceding twelve months, that the Company has drawn under such general line of
credit has been approximately $1.7 million. As of June 30, 1997, the Company
owed approximately $782,000 under this credit line, and available credit under
such line towards future inventory purchases was approximately $1,218,000.
AT&T-CFC and NCC have entered into an intercreditor subordination
agreement with respect to their relative interests in substantially all of the
Company's assets.
The Company's agreement with NCC restricts the Company's ability to pay
certain dividends (not including dividends payable to the Convertible Preferred
Shareholders upon the consummation of certain public offerings) without NCC's
prior written consent. The Company's agreement with AT&T-CFC prohibits the
payment of any dividends. AT&T-CFC has waived such prohibition in connection
with the dividend payments to be made to the Convertible Preferred Shareholders.
On June 6, 1997, the Company loaned its President and Chief Executive
Officer an aggregate amount of $250,000 on a secured basis. For a detailed
description of the terms of such loan, see Note 5 to Notes to Consolidated
Financial Statements contained in Item 1. Financial Statements.
On June 30, 1997, the Company's cash balance was approximately $1.3
million.
The Company believes that its existing available cash, credit
facilities and the cash flow expected to be generated from operations, together
with the proceeds from its proposed offering of Common Stock anticipated to be
consummated in September 1997, will be adequate to satisfy its current and
planned operations for at least the next 12 months. There can be no assurance,
however, that such offering will be consummated in this time frame, if at all.
If such offering is not consummated, the Company believes that its existing
available cash, credit facilities and the cash flow expected to be generated
from operations will be adequate to fund the Company's operations for at least
the next 12 months.
The Company's operating results generally decline during the third
quarter, and the Company expects that they will continue to do so. Due to the
relatively fixed nature of certain of the Company's costs, a decline in net
sales in any fiscal quarter typically results in lower profitability in that
quarter. The expected decline during the third quarter in the Company's net
sales is due primarily to reduced orders by the federal government during its
fourth quarter, which ends on September 30th. The Company does not expect such
spending patterns to be altered in the future.
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<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 23, 1993, the Company was served with a complaint in which a
terminated employee of the Company, alleged that the Company and its former
President and Chief Executive Officer, fraudulently induced such employee to
join the Company; negligently misrepresented the Company, its products and
markets and the position offered to such former employee; and breached a
covenant of good faith and fair dealing. The action was brought in Superior
Court of New Jersey, Monmouth County, Law Division. In the second quarter of
1997, such action was settled for an immaterial amount.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on June 26,
1997.
There were present at the meeting in person or by proxy: (i) Common
Stockholders holding an aggregate of 4,325,770 shares of Common Stock; (ii)
Series B Stockholders holding 1,400,000 shares of Series B Stock; and (iii)
Series C Stockholders holding 332,507 shares of Series C Stock. The results of
the vote taken at such meeting with respect to each nominee for director were as
follows:
<TABLE>
<CAPTION>
Common Stock Nominees For Withheld
- --------------------- --- --------
<S> <C> <C>
Michael E. Faherty 4,322,370 Shares 3,400 Shares
Gregg M. Azcuy 4,322,870 Shares 2,900 Shares
Gale R. Aguilar 4,322,870 Shares 2,900 Shares
James K. Dutton 4,322,870 Shares 2,900 Shares
Donald E. Fowler 4,322,870 Shares 2,900 Shares
Frank R. Triolo 4,322,870 Shares 2,900 Shares
<CAPTION>
Preferred Stock Nominee For Withheld
- ----------------------- --- --------
<S> <C> <C>
Thomas I. Unterberg
Series B Preferred Stock 1,400,000 Shares -0- Shares
Series C Preferred Stock 332,507 Shares -0- Shares
</TABLE>
In addition, a vote of the Common stockholders was taken at the
meeting on the proposal to ratify the appointment of Ernst & Young, LLP as the
independent auditors of the Company for the fiscal year ending December 31,
1997. Of the shares present at the meeting in person or by proxy, 4,315,420
shares of Common Stock were voted in favor of such proposal,
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<PAGE> 21
3,000 shares of Common Stock were voted against such proposal and 7,350 shares
of Common Stock abstained from voting.
ITEM 5. OTHER INFORMATION.
On July 9, 1997, the Company entered into a full recourse factoring
facility with NCC which provides for aggregate advances not to exceed the lesser
of $7 million or up to 85% of Eligible Receivables (as defined in the
agreement). Interest on such advances is payable monthly in arrears at the prime
lending rate and the Company is obligated to pay certain annual fees. The
factoring facility is for a period of three years (unless terminated by NCC by
providing the Company sixty days prior written notice) beginning on July 30,
1997. The obligations of the Company under such agreement are collateralized by
substantially all of the assets of the Company.
Until July 30, 1997, the Company had a financing facility with
Fidelity. In connection with the termination of such financing facility, the
Company paid Fidelity termination fees of $100,000.
AT&T - CFC and NCC have entered into an intercreditor subordination
agreement with respect to their relative interests in substantially all of the
Company's assets.
On June 26, 1997, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission for the sale
of up to 3,450,000 shares of Common Stock, of which up to 1,500,000 are to be
sold by certain selling shareholders. If such offering is consummated under
terms presently anticipated, all shares of Series B Preferred Stock and Series C
Preferred Stock outstanding as of the closing date of such offering will be
automatically converted into shares of Common Stock in accordance with the terms
of such series. Accrued dividends will be payable with respect to such Preferred
Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Factoring Agreement, dated July 9, 1997,
entered into between ECCS, Inc. and
NationsBanc Commercial Corporation.
11 Calculation of Earnings per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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<PAGE> 22
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: August 6, 1997 By: /s/ Gregg M. Azcuy
-------------------------------
Gregg M. Azcuy, President
and Chief Executive Officer
(Principal Executive Officer)
DATE: August 6, 1997 By: /s/ Louis J. Altieri
-------------------------------
Louis J. Altieri, Vice President,
Finance and Administration (Principal
Financial and Accounting Officer)
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<PAGE> 23
EXHIBIT INDEX
10.1 Factoring Agreement, dated July 9, 1997,
entered into between ECCS, Inc. and
NationsBanc Commercial Corporation.
11 Calculation of Earnings per Share.
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10.1
NationsBank
NationsBanc Commercial Corporation
Factoring Agreement
entered into between
ECCS, INC.
and
NationsBanc Commercial Corporation
NationsBanc Commercial Corporation
P.O. Box 4095
Atlanta, Georgia 30302
Gentlemen:
We are pleased to confirm the following agreement by which you are to
act as sole factor for sales made by us:
SECTION 1. DEFINITIONS
1.1 "Affiliate" shall mean, with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, Controls
or is Controlled by or under common Control with the Person specified.
1.2 "Approved Subordinated Debt" shall mean Indebtedness subordinated
to our Obligations under the Agreement and the other Transaction Documents on
terms approved in writing by you.
1.3 "Banking Day" shall mean a day for dealings by and between banks,
excluding Saturday, Sunday and any day which shall be a legal holiday in the
City of Atlanta, Georgia, or the State of New Jersey and any other day on which
banking institutions are authorized to close in the City of Atlanta, Georgia or
the State of New Jersey.
1.4 "Borrowing Base Certificate" shall have the meaning set forth in
Section 6.3.
1.5 "Capital Lease Obligations" of any Person shall mean the
obligations of such Person to pay rent or other amounts under any lease of (or
other arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP and
the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.
1.6 "Certificate re Trademarks" shall mean the document entitled
Certificate re Trademarks executed by us on or about the date hereof.
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<PAGE> 2
1.7 "Change in Management" shall be deemed to have occurred on the date
on which the persons who were members of our Board of Directors as of
__________, 199_ (the "Original Directors") cease to constitute a majority of
our Board of Directors; provided, however, that any new director whose
nomination or selection has been approved by the affirmative vote of at least
three of the Original Directors then in office shall also be deemed an Original
Director.
1.8 "Collateral" shall mean (A) all Receivables; (B) all Inventory; (C)
all Equipment; (D) all General Intangibles; (E) all books, records, ledgercards,
files, correspondence, computer programs, tapes, disks and related data
processing software (owned by us or in which we have an interest) which at any
time evidence or contain information relating to (A), (B), (C) and (D) above or
are otherwise necessary or helpful in the collection thereof or realization
thereupon; (F) documents of title, policies and certificates of insurance,
securities, chattel paper, other documents or instruments evidencing or
pertaining to (A), (B), (C), (D) and (E); (G) all guaranties, liens on real or
personal property, leases, and other agreements and property which in any way
secure or relate to (A), (B), (C), (D), (E) and (F) above, or are acquired for
the purpose of securing and enforcing any item thereof; (H) (i) all cash held as
cash collateral to the extent not otherwise constituting Collateral, all other
cash or property at any time on deposit with or held by you for our account
(whether for safekeeping, custody, pledge, transmission or otherwise), (ii) all
of our present or future deposit accounts (whether time or demand or interest or
non-interest bearing) with you or any of your affiliates or any other person or
entity to which any such cash representing proceeds of the Collateral may at any
time and from time to time be credited, (iii) all investments and reinvestments
(however evidenced) of amounts from time to time credited to such accounts, and
(iv) all interest, dividends, distributions and other proceeds payable on or
with respect to (x) such investments and reinvestments and (y) such accounts;
and (I) all proceeds of (A), (B), (C), (D), (E), (F), (G) and (H) above
(including, but not limited to, all claims to items referred to in (A), (B),
(C), (D), (E), (F), (G) and (H) above) and all of our claims against third
parties (x) for (i) loss of, damage to, or destruction of, and (ii) payments due
or to become due under leases, rentals and hires of, any or all of (A), (B),
(C), (D), (E), (F), (G) and (H) above and (y) proceeds payable under, or
unearned premiums with respect to policies of insurance in whatever form.
1.9 "Consolidated Current Liabilities" shall mean, at the date of
determination, all of our liabilities and those of our consolidated Subsidiaries
that would, in accordance with GAAP, be classified on a consolidated balance
sheet of us and our Subsidiaries as current liabilities.
1.10 "Consolidated Funded Indebtedness" shall mean, as of the date of
determination, all of our Indebtedness and that of our consolidated
Subsidiaries, determined on a consolidated basis in accordance with GAAP, that
by its terms matures more than one year after the date of calculation, and any
such Indebtedness maturing within one year from such date that is renewable or
extendible at the option of the obligor to a date more than one year from such
date.
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<PAGE> 3
1.11 "Consolidated Net Worth" shall mean, as of the date of
determination, all items which in conformity with GAAP would be included under
shareholders' equity on a consolidated balance sheet of us and our Subsidiaries
at such date.
1.12 "Consolidated Tangible Net Worth" shall mean, as of the date of
determination, Consolidated Net Worth after deducting therefrom (a) any surplus
resulting from the write-up of assets subsequent to _____________, 1997, (b)
goodwill, including any amounts (however designated on the balance sheet)
representing the cost or acquisitions of our Subsidiaries in excess of
underlying tangible assets, (c) patents, trademarks, copyrights and other
intangible assets, (d) leasehold improvements not recoverable at the expiration
of a lease and (e) deferred charges (including, but not limited to, unamortized
debt discount and expense, organizational expenses, experimental and development
expenses, and capitalized software expenses but excluding prepaid expenses).
1.13 "Consolidated Total Liabilities" shall mean, as of the date of
determination, all of our liabilities and those of our consolidated
Subsidiaries, determined on a consolidated basis in conformity with GAAP,
including Consolidated Current Liabilities and Consolidated Funded Indebtedness.
1.14 "Contract Year" shall mean the twelve month period ending on the
anniversary of the Effective Date in each year.
1.15 "Control" shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or
otherwise. "Controlling" and "Controlled" have meanings correlative thereto.
1.16 "Credit Risk" shall mean the risk of loss resulting solely and
exclusively from the financial inability of a Customer to pay a Receivable at
maturity.
1.17 "Customer Dispute" shall mean any cause for nonpayment of any
Receivable, including, without limitation, any alleged defense, offset, defense
or counterclaim whether bona fide or not.
1.18 "Customers" shall mean the account debtors obligated on the
Receivables.
1.19 "Default" shall mean the occurrence of any of the following
events:
(a) nonpayment when due of any amount payable on any of the
Obligations or failure to perform any agreement or meet any obligation of ours
contained herein or in any agreement out of which any of the Obligations arose,
which failure to perform shall not be cured to your satisfaction within 10 days
following such breach or failure to perform;
3
<PAGE> 4
(b) default by us in repayment when due of any indebtedness aggregating
more than $50,000 now or hereafter owed for monies borrowed from any one other
than you;
(c) failure to pay any taxes when due unless such taxes are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been provided on our books;
(d) an attachment or levy is made upon any of our assets having an
aggregate value in excess of $100,000, or a judgment is rendered against us or
any of our property involving a liability of more than $100,000, which
attachment, levy or judgment shall not have been vacated, discharged, stayed or
bonded pending appeal within sixty (60) days from the entry thereof;
(e) any material adverse change in our condition or affairs (financial
or otherwise) after the date hereof;
(f) any lien created hereunder or under any related agreement for any
reason ceases to be or is not a valid and perfected lien having a first priority
interest;
(g) any material statement, representation, or warranty of ours made
orally or in writing herein or in any other writing or statement at any time
furnished or made by us to you is untrue in any material respect as of the date
furnished or made and the same is not cured to your satisfaction within 10 days
following such occurrence;
(h) we shall admit in writing our inability, or be generally unable to
pay our debts as they become due or the suspension of the operation of our
present business;
(i) any Obligor becomes insolvent or unable to pay debts as they
mature, makes an assignment for the benefit of creditors, or a proceeding is
instituted by or against any Obligor alleging that such Obligor is insolvent or
unable to pay debts as they mature, or a petition under any provision of Title
11 of the United States Code (entitled "Bankruptcy"), as amended is brought by
or against any Obligor;
(j) termination or withdrawal of any guaranty for the Obligations;
(k) there is a Change in Management;
(l) appointment of a receiver for any collateral pledged for the
Obligations or for any of our property and such appointment shall continue
undismissed for 30 days; or
(m) you in good faith deem the prospect of our payment or performance
of the Obligations to have been impaired.
1.20 "Effective Date" shall have the meaning set forth in Section 11
hereof.
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<PAGE> 5
1.21 "Electronic Transmission Letter" shall mean the Electronic
Transmission Letter executed by the parties hereto on or about the date hereof.
1.22 "Eligible Receivables" means and includes each Receivable which
conforms to the following criteria: (a) shipment of the merchandise or the
rendition of services has been completed; (b) no return, rejection or
repossession of the merchandise has occurred; (c) merchandise or services shall
not have been rejected or disputed by the Customer and there shall not have been
asserted any offset, defense, counterclaim, or Customer Dispute; (d) continues
to be in full conformity with the representations and warranties made by us to
you with respect thereto; (e) you are, and continue to be, satisfied with the
credit standing of the Customer in relation to the amount of credit extended;
(f) is documented by an invoice in a form approved by you and shall not be
unpaid more than ninety (90) days from invoice date; (g) less than 25% of the
unpaid amount of invoices due from such Customer remain unpaid more than sixty
(60) days from due date and no more than 50% of our total Eligible Receivables
are due from such Customer; (h) is not evidenced by chattel paper or an
instrument of any kind with respect to or in payment of the Receivable unless
such instrument is duly endorsed to and in your possession or represents a check
in payment of a Receivable; (i) if the Customer is located outside of the United
States, Puerto Rico or Canada, the goods which gave rise to such Receivable were
shipped after receipt by us from or on behalf of the Customer of an irrevocable
letter of credit, assigned and delivered to you and confirmed by a financial
institution acceptable to you and is in form and substance acceptable to you,
payable in the full amount of the Receivable in United States dollars at a place
of payment located within the United States or otherwise enhanced on terms
acceptable to you; (j) such Receivable is not subject to any lien, other than
Permitted Liens; (k) does not arise out of transactions with any employee,
officer, agent, director, stockholder or our affiliate; (l) does not arise out
of a bill and hold sale prior to shipment unless requested by a Customer and
with respect to which a DD250 has been delivered to you (it being understood
that we may sell to other Customers on bill and hold terms with your prior
written consent, which consent shall not be unreasonably withheld), and, if the
Receivable arises out of a sale to any person or entity to which we are
indebted, other than Receivables owing from Unisys Corp. which are the subject
of a no offset letter between you and Unisys Corp. dated April 29, 1997 the
amount of such indebtedness, and any anticipated indebtedness, is deducted in
determining the face amount of such Receivable; (m) is net of any returns,
discounts, claims, credits and allowances; (n) if the Receivable arises out of
contracts between us and the United States, any state, or any department,
agency, contractor or instrumentality of any of them, we have so notified you,
in writing, prior to the creation of such Receivable, the applicable DD250 form
has been delivered to you and, if you so requested, there has been compliance
with any governmental notice or approval requirements, including without
limitation, compliance with the Federal Assignment of Claims Act; (o) is a good
and valid account representing an undisputed bona fide indebtedness incurred by
the Customer therein named, for a fixed sum as set forth in the invoice relating
thereto with respect to an unconditional sale and delivery upon the stated terms
of goods sold by us, or work, labor and/or services rendered by us; and (p) is
otherwise satisfactory to you as determined in your discretion.
5
<PAGE> 6
1.23 "Equipment" shall mean and include all of our now owned or
hereafter acquired equipment, machinery and goods (excluding inventory), whether
or not constituting fixtures, including, without limitation: plant and office
equipment, tools, dies, parts, data processing equipment, furniture and trade
fixtures, trucks, trailers, loaders and other vehicles and all replacements and
substitutions therefore and all accessions thereto.
1.24 "Formula Amount" shall mean the lesser of (a)$7,000,000.00 or (b)
up to 85% of Eligible Receivables; less charges and reserves provided for in
accordance with Section 2.3.
1.25 "Funds Transfer Letter" shall mean the Funds Transfer Letter
executed by the parties hereto on or about the date hereof.
1.26 "GAAP" shall mean generally accepted accounting principles in the
United States of America.
1.27 "General Intangibles" shall mean and include all of our now owned
or hereafter acquired general intangibles as said term is defined in the Uniform
Commercial Code in effect in the State of New York including, without
limitation, trademarks, tradenames, tradestyles, trade secrets, equipment
formulation, manufacturing procedures, quality control procedures, product
specifications, patents, patent applications, copyrights, registrations,
contract rights, choses in action, causes of action, corporate or other business
records, inventions, designs, goodwill, claims under guarantees, licenses,
franchises, tax refunds, tax refund claims, computer programs, computer data
bases, computer program flow diagrams, source codes, object codes and all other
intangible property of every kind and nature.
1.28 "Guarantee" of or by any Person (the "guarantor") shall mean any
obligation, contingent or otherwise, of the guarantor guaranteeing or having the
economic effect of guaranteeing any Indebtedness or other obligation of any
other Person (the "primary obligor") in any manner, whether directly or
indirectly, and including any obligation of the guarantor, direct or indirect
(a) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation or to purchase (or to advance or
supply funds for the purchase of) any security for the payment thereof, (b) to
purchase or lease property, securities or services for the purpose of assuring
the owner of such Indebtedness or other obligation of the payment thereof, (c)
to maintain working capital, equity capital or any other financial statement
condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness or other obligation or (d) as an account party
in respect of any letter of credit or letter of guaranty issued to support such
Indebtedness or obligation; provided, that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business.
1.29 "Indebtedness" of any Person shall mean, without duplication, (a)
all obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such Person
upon which interest charges are customarily paid, (d) all obligations of such
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Person under conditional sale or other title retention agreements relating to
property acquired by such Person, (e) all obligations of such Person in respect
of the deferred purchase price of property or services (excluding current
accounts payable incurred in the ordinary course of business), (f) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
property owned or acquired by such Person, whether or not the Indebtedness
secured thereby has been assumed, (g) all Guarantees by such Person of
Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i)
all obligations, contingent or otherwise, of such Person as an account party in
respect of letters of credit and letters of guaranty and (j) all obligations,
contingent or otherwise, of such Person in respect of bankers' acceptances. The
Indebtedness of any Person shall include the Indebtedness of any other entity
(including any partnership in which such Person is a general partner) to the
extent such Person is liable therefor as a result of such Person's ownership
interest in or other relationship with such entity, except to the extent the
terms of such Indebtedness provide that such Person is not liable therefor.
1.30 "Interest Increase Event" shall mean the occurrence of any one or
more of the following: (i) we report operating losses in two consecutive
quarters; (ii) at the end of any fiscal year, we report a decline in our net
worth (as that term is defined by GAAP); or (iii) you, in your sole discretion,
permit the sum of advances plus other amounts charged or chargeable to our
account to exceed the Formula Amount.
1.31 "Inventory" shall mean and include all of our now owned or
hereafter acquired inventory, including all goods and merchandise now or
hereafter acquired, wherever located, to be furnished under any contract of
service or held for sale or lease, all raw materails, work in process, finished
goods and materials of any kind, nature or description which are used or
consumed in our business or used in selling or furnishing such goods and
merchandise, and all documents of title or other documents representing them.
1.32 "Lien" shall mean, with respect to any asset, (a) any mortgage,
deed of trust, lien, pledge, hypothecation, encumbrance, charge or security
interest in, on or of such asset, (b) the interest of a vendor or a lessor under
any conditional sale agreement, capital lease or title retention agreement (or
any financing lease having substantially the same economic effect as any of the
foregoing) relating to such asset and (c) in the case of securities, any
purchase option, call or similar right of a third party with respect to such
securities.
1.33 "Moody's" shall mean Moody's Investors Service, Inc.
1.34 "Net Amount" of Receivables shall mean the gross amount of
Receivables, less maximum discounts, less returns, less credits or allowances of
any nature at any time issued, owing, granted or outstanding.
1.35 "New Borrower" shall mean each entity which becomes a borrower
hereunder in accordance with the terms of Section 14 hereof from time to time.
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1.36 "Obligations" shall mean all of our obligations to you hereunder,
including without limitation advances of the purchase price of Receivables, all
obligations of ours to you under any note, contract of surety, guaranty, or
accommodation, or with respect to letters of credit or acceptances, sums owing
to you for goods and/or services purchased from any other firm factored or
financed by you, and all other obligations of ours to you, however and whenever
created, arising or evidenced, whether direct or indirect, through assignment
from third parties in the ordinary course of your business, absolute, contingent
or otherwise, now or hereafter existing or due or to become due.
1.37 "Obligor" shall mean: us and each other party primarily or
secondarily, directly or indirectly liable on any of the Obligations.
1.38 "Payment Date" shall mean the date of deposit of Customer payment
by you plus two (2) Banking Days for collection and clearance of checks. Payment
Date may be delayed to the next Banking Day following the day of application of
remittances to Receivables.
1.39 "Permitted Investments" shall mean:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America (or by any agency thereof to the extent such obligations are backed by
the full faith and credit of the United States of America), in each case
maturing within one year from the date of acquisition thereof:
(b) investments in commercial paper maturing within 270 days
from the date of acquisition thereof and having, at such date of acquisition,
the highest credit rating obtainable from S&P or from Moody's;
(c) investments in certificates of deposit, banker's
acceptances and time deposits maturing within 180 days from the date of
acquisition thereof issued or guaranteed by or placed with, and money market
deposit accounts issued or offered by, any domestic office of any commercial
bank organized under the laws of the United States of America or any State
thereof which has a combined capital and surplus and undivided profits of not
less than $500,000,000; and
(d) fully collateralized repurchase agreements with a term of
not more than 30 days for securities described in clause (a) above and entered
into with a financial institution satisfying the criteria described in clause
(c) above.
1.40 "Permitted Liens" shall mean (i) liens of carriers, warehousemen,
mechanics and materialmen incurred in the ordinary course of business securing
sums not overdue; (ii) liens incurred in the ordinary course of business in
connection with workmen's compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (a) not
overdue or (b) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on our books in conformity with
GAAP, (iii) liens in your favor, (iv) liens for taxes (a) not yet due or (b)
being diligently contested in good faith, provided that
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adequate reserves with respect thereto are maintained on our books in conformity
with GAAP and (v) liens in favor of AT&T Capital Corp. so long as such liens are
subject to an intercreditor agreement between you and AT&T Capital Corp. in form
and substance acceptable to you.
1.41 "Person" shall mean any natural person, corporation, limited
liability company, trust, joint venture, association, company, partnership or
other entity.
1.42 "Prime Rate" shall mean the rate of interest announced by
NationsBank, N.A., its successors and assigns from time to time as its Prime
Rate which may not be the lowest rate charged to its borrowers.
1.43 "Receivables" shall mean all accounts, instruments, contract
rights, chattel paper, documents, and general intangibles arising from our
Sales, and the proceeds thereof, and all security and guaranties therefor,
whether now existing or hereafter created.
1.44 "Restricted Payment" shall mean any dividend or other distribution
(whether in cash, securities or other property) with respect to any shares of
any class of our capital stock or that of any of our Subsidiaries, any payment
(whether in cash, securities or other property), including any sinking fund or
similar deposit, on account of the purchase, redemption, retirement,
acquisition, cancellation or termination of any such shares of our capital stock
or any option, warrant or other right to acquire any such shares of our capital
stock, except that any wholly-owned Subsidiary may declare and pay dividends to
us, or, in the case of any Subsidiary that is wholly-owned by any other
Subsidiary, to such Subsidiary.
1.45 "Reverse Event" shall mean the occurrence of any one or more of
the following, as measured on the last day of our fiscal year: (i) profits are
reported for two successive quarters and such profits are equal or greater than
the prior quarters' losses or (ii) our Consolidated Tangible Net Worth exceeds
$5,363,000.00 at the end of a fiscal year following a fiscal year in which such
Consolidated Tangible Net Worth suffered a decline, provided that in order for a
Reverse Event to occur, the sum of advances plus other amounts charged or
chargeable to our account may not exceed the Formula Amount.
1.46 "S&P" shall mean Standard & Poor's.
1.47 "Sales" shall mean the sale of goods and/or the rendition of
services by us in the ordinary course of our business to Customers in the United
States of America, Canada and Puerto Rico.
1.48 "Subsidiary" shall mean, with respect to any Person (the "parent")
at any date, any corporation, limited liability company, partnership,
association or other entity, whether domestic or foreign, the accounts of which
would be consolidated with those of the parent in the parent's consolidated
financial statements if such financial statements were prepared in accordance
with GAAP as of such date, as well as any other corporation, limited liability
company, partnership, association or other entity, whether domestic or foreign,
(a) of which securities or other ownership interests representing more than 50%
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of the equity or more than 50% of the ordinary voting power or, in the case of a
partnership, more than 50% of the general partnership interests are, as of such
date, owned, controlled or held, or (b) that is, as of such date, otherwise
Controlled, by the parent or one or more subsidiaries or the parent or by the
parent and one or more subsidiaries of the parent.
1.49 "Systems Integrator" shall mean a company that sells to its
customers a system consisting of hardware and software components, installed and
operating to its customer's specifications.
1.50 "Transaction Documents" shall mean this Factoring Agreement, the
Electronic Transmission Letter, the Funds Transfer Letter, and the Certificate
re Trademarks.
1.51 "us", "we" and "our" shall mean and include ECCS, Inc. and any New
Borrower which is a party hereto pursuant to Section 14 hereof.
SECTION 2. PURCHASE PRICE; COMMISSION; ADVANCES; RESERVE
2.1 We hereby assign and sell to you as absolute owner, our entire
interest in all of our present and future Receivables; provided however, that
each such sale is with full and complete recourse to us in the event any
Receivable is not paid in full in accordance with its terms. We understand that
you are assuming no Credit Risk under this Agreement, or otherwise, and we are
responsible for the nonpayment of any Receivable for any reason, whether as a
result of the financial inability of the Customer to pay, any Customer Dispute,
any act of God, war, civil strife, currency restrictions, foreign political
impediments, or otherwise. We will place one or more notations in our books and
records, in form and substance satisfactory to you, that our Receivables have
been purchased by and assigned to you.
2.2 We will provide you with listings of Receivables in form
satisfactory to you, together with Customers' invoices, shipping documents, and
such other documents and proof of delivery/rendition as you may at any time
require. Billing on invoices by whomever done shall be conclusive evidence of
assignment and sale hereunder of such Receivables whether or not we execute any
other instrument with regard thereto. All invoices to Customers shall state
plainly on the face thereof that payment thereof must be sent solely to P.O. Box
100367, Atlanta, GA 30348-0367, or to such other address as you may designate in
writing (the "Lockbox"). The Lockbox shall be under your exclusive control. All
remittances obtained by us against Receivables will be received in trust for
you, and we will turn over to you the identical remittances as speedily as
possible; provided, however, that nothing herein authorizes us to collect
Receivables.
2.3 The purchase price of Receivables is to be the Net Amount thereof
less your commissions earned thereon, which, less any charges and reserves, will
be due and payable on the Payment Date. We shall pay you a commission in an
amount equal to one-quarter of one percent (.25%) of the first $20,000,000 of
the gross amount of such Receivables (less discounts granted to Customers on the
face of the underlying invoices) assigned to you hereunder during each
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Contract Year; two-tenths of one percent (.20%) of the next $10,000,000 of the
gross amount of such Receivables (less discounts granted to Customers on the
face of the underlying invoices) assigned to you hereunder during such Contract
Year and one-tenth of one percent (.10%) of the gross amount of such Receivables
(less discounts granted to Customers on the face of the underlying invoices)
assigned to you hereunder in excess of $30,000,000 during such Contract Year,
provided, however, that the minimum commissions to be paid by us during each
Contract Year during which this Agreement is in effect or the part of the last
Contract Year during which this Agreement is in effect if it is terminated
before the end of a Contract Year shall be $75,000. Any deficiency between such
minimum commission and the commissions actually assigned hereunder shall be
computed on a monthly basis and charged to our account each month or in the
month following the effective date of termination of this Agreement if it is
terminated before the end of a Contract Year. You may retain from sums payable
to us a reserve, which reserve may be revised from time to time at your
discretion, in order to provide for Customer Disputes, possible credit losses,
and the Obligations. A discount, credit, or allowance after issuance or granting
may not be claimed by us, but may be claimed solely by the Customer; no third
party beneficiary rights are created hereby.
2.4 Prior to Payment Date, upon our request and at your sole
discretion, you may advance to us up to the Formula Amount. Any additional
amounts advanced to us shall also be subject to this Agreement. We agree to use
all such advances and the proceeds thereof, only for working capital purposes in
the ordinary course of business.
2.5 We shall pay to you on demand or you may charge to our account at
any time any advances or charges which constitute Obligations hereunder.
2.6 You will render a statement of account monthly, and such statement
shall be binding upon us except as to specific matters for which you are
notified in writing to the contrary within sixty (60) days after the date of
such statement.
SECTION 3. INTEREST, FEES
3.1 Interest shall be charged for the number of days that advances of
the purchase price are made prior to Payment Date and for the number of days
that advances or other charges to our account remain outstanding at the Prime
Rate; provided, however, if an Interest Increase Event has occurred, interest
shall be charged at the rate of one percent (1%) per annum plus the Prime Rate
until such time as a Reverse Event has occurred, provided further, however, that
the interest rate shall in no event be less than six percent (6%) per annum and
shall in no event be higher than the highest interest rate permitted by Georgia
law. Interest shall be computed on the basis of a year of three hundred sixty
(360) days, for actual days elapsed. Changes in the rate shall be effected
monthly to reflect changes in the Prime Rate, as follows: The rate shall be
adjusted on the first day of each month based on the Prime Rate in effect at the
close of business on the last Banking Day of the immediately preceding month.
After termination of the Agreement or upon a Default hereunder, we shall pay
interest on our obligations hereunder at the rate of three percent (3%) per
annum plus the Prime Rate, with changes to such rate of
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interest to take effect as hereinbefore provided. For the purpose of interest
calculation, commissions earned during each month shall be deemed charged to our
account on the fifteenth (15th) day of each month.
3.2 Upon execution of this Agreement, we shall pay to you a closing fee
in the amount of $25,000, which fee is payable on and shall be fully earned as
of the date hereof and shall constitute an Obligation hereunder.
3.3 You shall charge to our account all bank charges, including without
limitation, charges for wire transfers and lock box fees.
SECTION 4. POWER OF ATTORNEY
We hereby appoint you as our attorney-in-fact to receive, open, and
dispose of all mail addressed to us pertaining to Receivables; to endorse our
name upon any notes, acceptances, checks, drafts, money orders, and other
evidences of payment of Receivables that may come into your possession and to
deposit or otherwise collect the same; and to do all other acts and things
necessary to carry out the terms of this Agreement. This power, being coupled
with an interest, is irrevocable while any Receivable shall remain unpaid. You,
as attorney-in-fact, shall not be liable for any errors of judgment or mistake
of fact, other than resulting from your gross negligence or willful misconduct.
SECTION 5. SECURITY INTEREST
We hereby grant you a security interest in the Collateral. We further
sell and assign to you all our title and/or interest in the goods (unless
released by you) represented by Receivables as well as goods returned by or
repossessed from Customers, all of our rights as an unpaid vendor or lienor, all
or our rights of stoppage in transit, replevin and reclamation relating thereto,
and all of our rights thereto; we will cooperate with you in exercising any
rights with respect to the goods. In addition, we hereby grant you a security
interest in the reserve established pursuant to Section 2.3 hereof, to secure
all of the Obligations.
SECTION 6. REPRESENTATIONS, WARRANTIES AND COVENANTS
6.1 Representations Concerning the Collateral. We represent and warrant
(each of which such representations and warranties shall be deemed repeated upon
the making of each request for an advance and made as of the time of each and
every advance hereunder):
(a) all the Collateral (i) is owned by us free and clear of
all claims, liens, security interests and encumbrances (including without
limitation any claims of infringement) except (A) those in your favor and as
otherwise consented to in writing by you and (B) Permitted Liens and (ii) is not
subject to any agreement prohibiting the granting of a security interest or
requiring notice of or consent to the granting of a security interest; and
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(b) all Receivables (i) represent complete bona fide
transactions which require no further act under any circumstances on our part to
make such Receivables payable by Customers (it being understood that from time
to time we are required to make further performance if we, as a Systems
Integrator, fail to satisfy our obligations to a Customer), (ii) to the best of
our knowledge, are not subject to any present, future or contingent Customer
Disputes; (iii) do not represent bill and hold sales unless requested by a
Customer and with respect to which a DD250 has been delivered to you (it being
understood that we may sell to other Customers on bill and hold terms with your
prior written consent, which consent shall not be unreasonably withheld),
consignment sales, guaranteed sales, sale or return or other similar
understandings or obligations of any of our affiliates or subsidiaries; (iv)
included in any Borrowing Base Certificate as an Eligible Receivable meets all
criteria specified in the definition of Eligible Receivables, except as may
otherwise be specifically disclosed in such Borrowing Base Certificate or as
otherwise theretofore disclosed in writing to you; and (v) we have no knowledge
of any fact or circumstance not disclosed to you in the pertinent Borrowing Base
Certificate or otherwise in writing, which would impair the validity or
collectibility of any Receivable and that all documents in connection with each
Receivable are genuine.
6.2 Covenants Concerning the Collateral. During the term hereof, we
covenant that we shall:
(a) in the event any amounts due and owing from any Customer
to us on any Eligible Receivable shall become subject to any Customer Dispute,
or to any other adjustment otherwise permitted to be made in accordance with the
terms and provisions hereof in the ordinary course of business and prior to the
occurrence of an Default hereunder, we agree that we shall, at the time of the
submission of the next Borrowing Base Certificate required to be delivered to
you immediately following the date on which we learn thereof, provide you with
notice thereof. We further agree that we shall also notify you promptly of all
returns and credits in respect of any Receivables included within a Borrowing
Base Certificate, which notice shall specify the Receivables affected.;
(b) place notations upon our books of account and any
financial statement prepared by us to disclose your security interest in the
Collateral;
(c) defend the Collateral against the claims and demands of
all parties;
(d) keep and maintain the Equipment in good operating
condition, except for ordinary wear and tear, and shall make all necessary
repairs and replacements thereof so that the value and operating efficiency
shall at all times be maintained and preserved. We shall not permit any such
items to become a fixture to real estate or accessions to other personal
property;
(e) not extend the payment terms of any Receivable without
prompt notice thereof to you;
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(f) perform all other steps reasonable and necessary to create
and maintain in your favor a valid perfected first security interest in all
Collateral; and
(g) we shall promptly provide you with duplicate originals of
all credits which we issue to our Customers and immediately notify you of any
merchandise returns or Customer Disputes. We shall settle all Customer Disputes
at no cost or expense to you. Should you so elect, upon the occurrence and
continuance of any Default, you may at any time in your discretion (i) withdraw
our authority to issue credits to our Customers without your prior written
consent; (ii) litigate Customer Disputes or settle them directly with Customers
on terms acceptable to you; or (iii) direct us to set aside and identify as your
property any returned or repossessed merchandise or other goods which by sale
resulted in Receivables theretofore assigned to you. All such goods (and the
proceeds thereof) shall be (A) held by us in trust for you as your property, (B)
subject to your security interest hereunder and (C) disposed of only in
accordance with your express written instructions.
6.3 Collection and Maintenance of Collateral and Records. You may at
any time verify our Receivables utilizing an audit control company or any other
agent. You or your designee may notify Customers, at any time at your sole
discretion, of your security interest in Receivables, collect them directly and
charge the collection costs and expenses to our account, but, unless and until
you do so or give us other instructions, we shall instruct all of our Customers
to make payments on account of Receivables to an account under your dominion and
control at such bank as you may designate, as provided by the terms of Section
2.2. To the extent we receive any payments on account of Receivables, we shall
hold such payments for your benefit in trust as your trustee and immediately
deliver them to you in their original form with all necessary endorsements or,
as directed by you, deposit such payments as directed by you. You will credit
(conditional upon final collection) all such payments to our account on the
Payment Date. Promptly after the creation of any Receivables, we shall provide
you with schedules describing all Receivables created or acquired by us and
shall execute and deliver confirmatory written assignments of such Receivables
to you, but our failure to execute and deliver such schedules or written
confirmatory assignments of such Receivables shall not affect or limit your
security interest or other rights in and to the Receivables. We shall furnish,
at your request, copies of contracts, invoices or the equivalent, and any
original shipping and delivery receipts for all merchandise sold or services
rendered and such other documents and information as you may require. All of our
invoices shall bear the terms stated on the applicable customer order, and no
change from the original terms of such customer order shall be made without your
prior written consent. We shall provide you on a monthly (within ten (10) days
after the end of each month), or more frequent basis, as requested by you, a
summary report of our current inventory, certified as true and accurate by our
President or Chief Financial Officer, as well as an aged trial balance of our
existing accounts payable. We shall provide you, as requested by you, such other
schedules, documents and/or information regarding the Collateral as you may
require. Without limiting the foregoing, we shall provide to you a
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borrowing base certificate each time we request an advance hereunder ("Borrowing
Base Certificate"), which must be in form and substance acceptable to you and
which Borrowing Base Certificate shall certify to you, and shall contain
sufficient information and calculations as you may deem necessary or desirable,
in order to verify the applicable Formula Amount and whether or not Receivables
included therein are Eligible Receivables. Without limiting the foregoing, a
Borrowing Base Certificate must be executed and delivered by us to you at the
time of or prior to each request for advances pursuant to Section 2.4. Each such
Borrowing Base Certificate shall be delivered to you at your office, on each
relevant Banking Day.
6.4 Additional Representations, Warranties and Covenants. We represent
and warrant (each of which such representations and warranties shall be deemed
repeated upon the making of a request for an advance and made as of the time of
each advance made hereunder), and covenant that:
(a) (i) we are a corporation duly organized and validly
existing under the laws of the State of New Jersey and, and except where the
failure to do so could not reasonably be expected to result in a material
adverse effect on us, are duly qualified and in good standing in every other
state or jurisdiction where such qualification is required;
(ii) we have no Subsidiaries other than those listed on
Schedule 6.4(a) hereto and such Subsidiaries are dormant as of the date hereof.
(b) the execution, delivery and performance of this Agreement
and any related agreements (i) have been duly authorized, (ii) are not in
contravention of our certificate of incorporation, by-laws or of any material
indenture, agreement or undertaking to which we are a party or by which we are
bound and (iii) are within our corporate powers;
(c) this Agreement and any Transaction Documents are our
legal, valid and binding obligations, enforceable in accordance with their
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights generally and subject to general
principles of equity, regardless of whether considered in a proceeding in equity
or at law;
(d) we keep and will continue to keep all of our books and
records concerning the Collateral at our executive offices located at the
address set forth at the end of this Agreement and will not move such books and
records without giving you at least thirty (30) days prior written notice;
(e) the operation of our business is and will continue to be
in compliance in all material respects with all applicable federal, state and
local laws, including but not limited to all applicable environmental laws and
regulations.
(f) based upon the Employee Retirement Income Security Act of
1974 ("ERISA"), and the regulations and published interpretations thereunder:
(i) we have not engaged in any Prohibited Transactions as defined in paragraph
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406 of ERISA and paragraph 4975 of the Internal Revenue Code, as amended; (ii)
We have met all applicable minimum funding requirements under paragraph 302 of
ERISA in respect of its plans; (iii) we have no knowledge of any event or
occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any employee benefit
plan(s); (iv) we have no fiduciary responsibility for investments with respect
to any plan existing for the benefit of persons other than our employees; and
(v) we have not withdrawn, completely or partially, from any multiemployer
pension plan so as to incur liability under the Multiemployer Pension Plan
Amendments Act of 1980;
(g) we are solvent, able to pay our debts as they mature, have
capital sufficient to carry on our business and all businesses in which we are
about to engage and the fair saleable value of our assets (calculated on a going
concern basis) is in excess of the amount of our liabilities;
(h) there is no pending or threatened litigation, actions or
proceedings which involve the possibility of materially and adversely affecting
our business, assets, operations, condition or prospects, financial or
otherwise, or the Collateral or our ability to perform this Agreement;
(i) all balance sheets and income statements which have been
delivered to you fairly, accurately and properly state our financial condition
on a basis consistent with that of previous financial statements and there has
been no material adverse change in our financial condition as reflected in such
statements since the date thereof and such statements do not fail to disclose
any fact or facts which might materially and adversely affect our financial
condition;
(j) (x) we possess all of the licenses, patents, copyrights,
trademarks, tradenames and permits necessary to conduct our business, and (y)
there has been no assertion or claim of violation or infringement with respect
thereof;
(k) we will pay or discharge when due all taxes, assessments
and governmental charges or levies imposed upon us except taxes, assessments and
governmental charges or levies that are being contested in good faith by
appropriate proceedings and for which we have set aside on our books adequate
reserves in accordance with GAAP;
(l) we will promptly inform you in writing of: (i) the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental or nongovernmental body and all
actions and proceedings in any court or before any arbitrator against or in any
way concerning any of our properties, assets or business, which might singly or
in the aggregate, have a material adverse effect on us; (ii) any amendment of
our certificate of incorporation or by-laws; (iii) any change in our business,
assets, liabilities, condition (financial or otherwise), results of operations
or business prospects which has had or might have a material adverse effect on
us; (iv) any Default; (v) any default or any event which with the passage of
time or giving of notice or both would constitute a default under any agreement
for the payment of money to which we are a party
16
<PAGE> 17
or by which we or any of our properties may be bound which would have a material
adverse effect on our business, operations, property or condition (financial or
otherwise) or the Collateral; (vi) any change in the location of our executive
offices; (vii) any change in our corporate name; (viii) any material delay in
our performance of any of our obligations to any Customer and of any assertion
of any material claims, offsets, counterclaims or Customer Disputes by any
Customer and of any allowances, credits and/or other monies granted by us to any
Customer; (ix) all material adverse information relating to the financial
condition of any Customer; and (x) any material return of goods;
(m) We will not create, incur, assume or permit to exist any
Indebtedness (exclusive of trade debt), except
(i) Indebtedness created hereunder or under the other
Transaction Documents, and other Indebtedness to you:
(ii) Indebtedness existing on the date hereof and set
forth in Schedule 6.4(m), and any extensions, renewals, refinancing or
replacements of any such Indebtedness;
(iii) Indebtedness of us to any New Borrower and of
any New Borrower to us or any other New Borrower;
(iv) Indebtedness of us or any New Borrower incurred
to finance the acquisition, construction or improvement of any fixed or capital
assets, including Capital Lease Obligations and any Indebtedness assumed in
connection with the acquisition of such assets and extensions, renewals and
replacements of any such Indebtedness, provided that (A) such Indebtedness is
incurred prior to or within 90 days after such acquisition or the completion of
such construction or improvement and (B) the aggregate principal amount of
Indebtedness incurred as permitted by this clause (iv) shall not exceed
$250,000.00 in the aggregate for any of our fiscal years.
(v) liabilities under operating leases of equipment
not in excess of $250,000.00 in the aggregate for any of our fiscal years;
(vi) Approved Subordinated Debt;
(vii) Indebtedness of a corporation which is acquired
and becomes a New Borrower after the date hereof, provided that such
Indebtedness existed at the time such corporation became a New Borrower and was
not created in anticipation of the acquisition; and
(viii) additional Indebtedness not exceeding
$250,000.00 in aggregate principal amount at any one time outstanding.
(n) all financial projections of our performance prepared by
us or at our direction and delivered to you have been prepared by us on the
basis of sound financial planning practice and we have no reason to believe they
are incorrect or misleading in any material respect;
17
<PAGE> 18
(o) none of the proceeds of the advances hereunder will be
used directly or indirectly to "purchase" or "carry" "margin stock" or to repay
indebtedness incurred to "purchase" or "carry" "margin stock" within the
respective meanings of each of the quoted terms under Regulation G of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect;
(p) we will bear the full risk of loss from any loss of any
nature whatsoever with respect to the Collateral. At our own cost and expense in
amounts and with carriers acceptable to you, we shall (i) keep all our insurable
properties and properties in which we have an interest insured against the
hazards of fire, flood, sprinkler leakage, those hazards covered by extended
coverage insurance and such other hazards, and for such amounts, as is customary
in the case of companies engaged in businesses similar to ours including,
without limitation, business interruption insurance; (ii) maintain a bond in
such amounts as is customary in the case of companies engaged in businesses
similar to ours insuring against larceny, embezzlement or other criminal
misappropriation of insured's officers and employees who may either singly or
jointly with others at any time have access to our assets or funds either
directly or through authority to draw upon such funds or to direct generally the
disposition of such assets; (iii) maintain public and product liability
insurance against claims for personal injury, death or property damage suffered
by others; (iv) maintain all such workmen's compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which we are
engaged in business; (v) furnish you with (x) copies of all policies and
evidence of the maintenance of such policies at least thirty (30) days before
any expiration date, and (y) appropriate loss payable endorsements in form and
substance satisfactory to you, naming you as loss payee and providing that as to
you the insurance coverage shall not be impaired or invalidated by any act or
neglect of ours and the insurer will provide you with at least thirty (30) days
notice prior to cancellation. We shall instruct the insurance carriers that in
the event of any loss thereunder, the carriers shall make payment for such loss
to you and not to us and you jointly. If any insurance losses are paid by check,
draft or other instrument payable to us and you jointly, you may endorse our
name thereon and do such other things as you may deem advisable to reduce the
same to cash. You are hereby authorized to adjust and compromise claims. All
loss recoveries received by you upon any such insurance may be applied to the
Obligations, in such order as you in your sole discretion shall determine. Any
surplus shall be paid by you to us or applied as may be otherwise required by
law. Any deficiency thereon shall be paid by us to you, on demand.
(q) we will not (i) liquidate or dissolve, or merge into or
consolidate with any other Person, or permit any other Person to merge into or
consolidate with us, or (ii) sell, transfer, lease or otherwise dispose of (x)
assets in an amount such that after giving effect thereto the aggregate of all
such sales, transfers, leases, or other dispositions by us in any of our fiscal
years (A) shall have equaled or exceeded 10% of Consolidated Tangible Net Worth
(as of the most recent quarterly financial statements furnished hereunder), or
(B) involve assets that generated 10% or more of the consolidated revenues of us
and our Subsidiaries (during such fiscal period); or (y) any stock of any of our
Subsidiaries; provided that (a) any Subsidiary
18
<PAGE> 19
of ours may be merged or consolidated with or into us or with or into any one or
more of our wholly owned Subsidiaries and (b) any wholly-owned Subsidiary may
sell, lease, transfer or otherwise dispose of any or all of its assets (upon
voluntary liquidation or otherwise) to us or any other of our wholly-owned
Subsidiaries;
(r) we will not (i) change our accounting policies in any way
that could have a material effect on the presentation of financial reports, (ii)
alter in any material respect the nature of our business from that conducted on
the date hereof, or (iii) change our fiscal year from the fiscal year in effect
on the date hereof; provided that such accounting policies may change to accord
with a change in GAAP;
(s) we will not purchase, hold or acquire any capital stock,
evidences of indebtedness or other securities of, make or permit to exist any
loans or advances to, Guarantee any obligations of, or make or permit to exist
any investment or any other interest in, any other Person or purchase or
otherwise acquire any assets of any other Person constituting a business unit,
except:
(i) extensions of trade credit to customers in the
ordinary course of business;
(ii) loans to our officers in an aggregate principal
amount outstanding at any time not to exceed $350,000.00;
(iii) loans and advances to our employees or
employees of our Subsidiaries for travel, entertainment and relocation expenses
in the ordinary course of business;
(iv) loans and advances by us to our wholly-owned
Subsidiaries, provided that the aggregate principal amount outstanding at any
time shall not exceed $100,000.00;
(v) Permitted Investments;
(vi) investments existing on the date hereof in the
capital stock of any New Borrower;
(vii) acquisitions of the assets, business or capital
stock (or other equity interests) of other Persons, provided that our President
or Chief Financial Officer certifies to you that the fair market value of the
acquired stock, assets, or business is equal to or greater than the investment
therein, and provided further, if such acquisition is done in connection with a
secondary offering of our capital stock, no such certification will be required;
(viii) the loans and investments listed on Schedule
6.4(s); and
(ix) loans and investments incurred after the date
hereof in an aggregate amount not to exceed $100,000.00 at any one time
outstanding.
19
<PAGE> 20
(t) we will not pay, declare or make, or agree to pay or make,
directly or indirectly, any Restricted Payment, other than (i) cash dividends,
from our indirect Subsidiaries to one of our Subsidiaries or from one of our
Subsidiaries to us or (ii) dividends payable in respect of our Series B and C
preferred stock, provided that such dividends paid pursuant hereto shall not
exceed 35% of our net after tax profits in any fiscal quarter, or (iii) in the
event that we complete a public offering after the Effective Date, the gross
proceeds of which are in excess of $5,000,000.00, accrued dividends payable in
respect of our Series B and C preferred stock, so long as such dividends do not
exceed the net proceeds of the public offering received by us;
(u) we will not sell, lease or otherwise transfer any property
or assets to, or purchase, lease or otherwise acquire any property or assets
from, or otherwise engage in any other transactions with, any of our Affiliates,
except (a) as may otherwise be expressly permitted in this Agreement or (b) in
the ordinary course of business at prices and on terms and conditions not less
favorable to us or such Subsidiary than could be obtained on an arm's-length
basis from unrelated third parties; and
(v) we will not make any optional payment or prepayment on or
redemption, defeasance or purchase of any Indebtedness (other than Indebtedness
under this Agreement) including, without limitation, the Approved Subordinated
Debt, or amend, modify or change, or consent or agree to any amendment,
modification or change to any of the terms relating to the payment or prepayment
of principal of or interest on, any such Indebtedness, other than any amendment,
modification or change which would extend the maturity or reduce the amount of
any payment of principal thereof or which would reduce the rate or extend the
date for payment of interest thereon.
(w) we will not activate any of the Subsidiaries listed on
Schedule 6.4(a) hereto unless such Subsidiary becomes a New Borrower in
accordance with Section 14 hereof.
SECTION 7. CUSTOMER DISPUTES, CHARGEBACKS AND RETURNS
We will notify you promptly (but not less frequently than weekly) and
will settle all Customer Disputes. Upon a Default, you have the right at all
times to do so directly and to compromise, adjust, or litigate all such Customer
Disputes. If a Customer Dispute exists or is asserted with regard to any
Receivable, or if we breach any representation, warranty or covenant with
respect to any Receivable, you may charge back to our account the Net Amount of
such Receivable. A chargeback shall not be deemed a reassignment of the
Receivable, and title thereto and to the goods represented thereby shall remain
in you until you execute a reassignment. All returned, replevied, and reclaimed
goods coming into our possession shall be held in trust by us for you.
SECTION 8. BOOKS AND RECORDS; FINANCIAL STATEMENTS
8.1 Inspections. You and your representatives shall at all reasonable
times have the right to (a) visit and inspect our properties and the
20
<PAGE> 21
Collateral, (b) inspect, audit and make extracts from our relevant books and
records, including, but not limited to, management letters prepared by
independent accountants, and (c) discuss with our principal officers, and
independent accountants, our business, assets, liabilities, financial condition,
results of operations and business prospects, provided however, that absent a
Default such inspections shall be limited to one per calendar quarter. We will
deliver to you any instrument necessary for you to obtain records from any
service bureau maintaining records for us.
8.1 Financial Information We shall provide you (a) as soon as
available, but in any event within ninety (90) days after the end of each of our
fiscal years, our balance sheet as at the end of such fiscal year and the
related statements of income, retained earnings and statement of cash flow for
such fiscal year, setting forth in comparative form the figures as at the end of
and for the previous fiscal year, which shall have been reported on by
independent certified public accountants who shall be satisfactory to you and
shall be accompanied by an unqualified audit report issued by such independent
certified public accountants; (b) as soon as available, drafts of our balance
sheet as at the end of each of our fiscal years and the related statements of
income, retained earnings and statement of cash flow for such fiscal year, which
have been internally prepared by us; (c) as soon as available, but in any event
within sixty (60) days after the close of each quarter, the balance sheet as at
the end of such quarter and the related statements of income, retained earnings
and changes in statement of cash flow for such quarter, which have been
internally prepared by us. All financial statements required under (a), (b) and
(c) above shall be prepared in accordance with GAAP, subject to year end
adjustments in the case of quarterly statements. Together with the financial
statements furnished pursuant to (a) above, we shall deliver a certificate of
our certified public accountants addressed to you stating that (i) they have
caused this Agreement and the Transaction Documents to be reviewed and (ii) in
making the examination necessary for the issuance of such financial statements,
nothing has come to their attention to lead them to believe that any Default
exists and, in particular, they have no knowledge of any Default or, if such is
not the case, specifying such Default and its nature, when it occurred and
whether it is continuing. At the times the financial statements are furnished
pursuant to (a), (b) and (c) above, a certificate of our President or Chief
Financial Officer shall be delivered to you stating that, based on an
examination sufficient to enable him to make an informed statement, no Default
exists, or, if such is not the case, specifying such Default and its nature,
when it occurred, whether it is continuing and the steps being taken by us with
respect to such event. If any internally prepared financial information,
including that required under this paragraph, is unsatisfactory in any manner to
you, you may request that our independent certified public accountants review
same.
In addition to the foregoing financial statements, we shall
furnish to you commencing with fiscal year 1998, a month by month projected
operating budget and cash flow for such fiscal year (including an income
statement for each month and a balance sheet as at the end of the last month in
each fiscal quarter) by January 31st of such fiscal year and a draft of such
projections by December 15th of the prior fiscal year, such projections to be
accompanied by a certificate signed by our President or Chief Financial
21
<PAGE> 22
Officer to the effect that such projections have been prepared on the basis of
sound financial planning practice consistent with past budgets and financial
statements and that such officer has no reason to question the reasonableness of
any material assumptions on which such projections were prepared.
SECTION 9. INDEMNITY
We shall indemnify you for all losses, costs and expenses incurred by
you in connection with Receivables which are unpaid at maturity. Further, we
shall indemnify you for any liability for duties, forwarder's fees, storage,
shipping charges, sales or excise taxes or other expenses in connection with the
Receivables and for any losses occasioned by claims of Customers under
Receivables. Notwithstanding anything to the contrary contained herein or in any
other Transaction Document, such indemnity shall not be available to you to the
extent such losses, costs, expenses or liabilities or related expenses result
from your gross negligence or willful misconduct. This indemnity shall survive
the termination of this Agreement.
SECTION 10. APPLICABLE LAW
This Agreement shall be governed by, construed and enforced according
to the laws of the State of New York.
SECTION 11. EFFECTIVE DATE; TERMINATION; BINDING EFFECT
If accepted by you, this Agreement shall be effective on the day of ,
19 (the "Effective Date"), and shall continue in full force and effect until:
(a) three (3) years from the Effective Date (the "Initial Term") and from year
to year thereafter until terminated by us at any time by our giving to you not
less than sixty (60) days prior written notice; or (b) terminated by you at any
time by giving to us not less than sixty (60) days prior written notice. This
Agreement may be terminated at any time by you without notice to us should any
Default occur. Upon termination, we will pay all of our Obligations to you, and
in any event we will remain liable to you for any deficiency remaining after
determination of our liability hereunder and liquidation of any collateral.
Also, upon termination you may withhold any payment to us unless supplied with
an indemnity satisfactory to you. This Agreement shall bind us, our successors
and assigns and shall inure to the benefit of you, your successors and assigns;
we agree that you may delegate your duties hereunder.
SECTION 12. EXPENSES; ATTORNEYS' FEES; NO WAIVER; SEVERABILITY; NOTICES;
HEADINGS
We shall pay all reasonable expenses incurred by you in connection with
the negotiation and execution of this Agreement and any legal documentation now
or hereafter required by you or requested by us in connection with this
Agreement or any amendment or supplement thereto, including expenses incurred in
connection with the filing of financing statements, continuation statements,
record searches and reasonable attorneys' fees. We shall also pay you such wire
transfer and similar fees as you charge from time to time and, in connection
with your examinations of our books and records, such examination fees as you
charge from time to time, which shall not exceed $750.00 per day
22
<PAGE> 23
per person plus reasonable out-of-pocket expenses. Upon liquidation of any
collateral, settlement or prosecution of Customer Disputes, or enforcement of
any obligation of ours hereunder, you may charge to our account all costs and
expenses incurred including reasonable attorneys' fees, if collection is by or
through an attorney and such costs, expenses and fees shall constitute
obligations hereunder. No delay or failure on your part in exercising any right,
privilege, or option hereunder shall operate as a waiver of such or of any other
right, privilege, or option, and no waiver, amendment, or modification of any
provision of this Agreement shall be valid, unless in writing signed by you and
then only to the extent therein stated. Should any provision of this Agreement
be prohibited by or invalid under applicable law, the validity of the remaining
provisions shall not be affected thereby. All notices hereunder shall be deemed
to have been given when deposited in the mails (sent by registered or certified
mail) addressed to either party hereto at its address provided herein or at any
other address of which it shall have notified in writing the party giving such
notice. The headings used herein are intended to be for convenience of reference
only and shall not define or limit the scope, extent or intent or otherwise
affect the meaning of any portion hereof.
SECTION 13. ENTIRE AGREEMENT; WAIVER OF JURY TRIAL
This Agreement and the Transaction Documents embody our entire
agreement as to the subject matter and supersede all prior agreements as to the
subject matter. EACH OF US HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY IN ANY
ACTION OR PROCEEDING RELATING TO TRANSACTIONS UNDER THIS AGREEMENT.
SECTION 14. JOINDER OF SUBSIDIARIES
(a) We may, from time to time, after the Effective Date form or acquire
Subsidiaries or reactivate dormant Subsidiaries, and those Subsidiaries shall
become a New Borrower hereunder, provided that such Subsidiary has satisfied or
obtained a waiver from you of the following conditions precedent:
(i) execution and delivery to you of a Joinder and Assumption
Agreement in substantially the form attached hereto as Schedule 14(a), pursuant
to which it shall join as a New Borrower each of the documents to which we are a
party;
(ii) delivery to you of its Articles of Incorporation, if it
is a corporation, its certificate of limited partnership if it is a limited
partnership, its articles of organization if it is a limited liability company
or any other relevant organizational documents if it is an entity other than a
corporation, a limited partnership or a limited liability company; together with
resolutions or similar authorization documentation authorizing the execution,
delivery and performance of the Joinder and Assumption Agreement and the
granting by such New Borrower of the security interests and liens upon the
Collateral;
(iii) delivery to you of an opinion of counsel to the effect
that such the Joinder and Assumption Agreement has been duly authorized,
executed
23
<PAGE> 24
and delivered by us and such new Subsidiary and constitutes a valid and binding
obligation enforceable in accordance with its terms, except as limited by
applicable fraudulent conveyance statutes, bankruptcy laws, insolvency laws and
other laws and equitable principles affecting creditors rights generally; and
(iv) at such time as we use the proceeds available to us
hereunder to finance the purchase of such Subsidiary or the ongoing financial
needs of such Subsidiary, you shall have completed Collateral examinations and
received any appraisals required by you, the results of which shall be
reasonably satisfactory in form and substance to you and shall be made available
to us upon our request, of the Receivables, Inventory, Equipment and General
Intangibles of the new Subsidiary, and all books and records in connection
therewith.
ECCS, INC.
By: /s/ Louis J. Altieri
---------------------------
Louis J. Altieri
Vice President Finance and Administration
(Title)
One Sheila Drive
Tinton Falls, NJ 07724
ACCEPTANCE
The foregoing Factoring Agreement is accepted in Atlanta, Georgia as of
the 9th day of July, 1997.
NationsBanc Commercial Corporation
By:
-------------------------
(Title)
<PAGE> 1
Exhibit 11
Calculation of Earnings per Share
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ 353 $ (62) $ 698 $ (375)
Preferred Dividends 77 53 154 86
Net income (loss) applicable to common shares 276 (115) 544 (461)
Primary net income (loss) per share $ 0.05 $ (0.03) $ 0.10 $ (0.11)
Fully diluted net income per share $ 0.04 $ -- $ 0.08 $ --
Primary weighted average number of
common and common equivalent shares 5,253 4,319 5,236 4,322
Fully diluted average number of common
and common equivalent shares 9,023 -- 9,007 --
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THIS
FORM 10-Q FOR THE PERIOD ENDING JUNE 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,339
<SECURITIES> 0
<RECEIVABLES> 7,275
<ALLOWANCES> 258
<INVENTORY> 5,602
<CURRENT-ASSETS> 14,294
<PP&E> 4,361
<DEPRECIATION> 3,374
<TOTAL-ASSETS> 16,393
<CURRENT-LIABILITIES> 9,198
<BONDS> 0
0
21
<COMMON> 45
<OTHER-SE> 6,979
<TOTAL-LIABILITY-AND-EQUITY> 16,393
<SALES> 17,840
<TOTAL-REVENUES> 17,840
<CGS> 12,848
<TOTAL-COSTS> 3,486
<OTHER-EXPENSES> 696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112
<INCOME-PRETAX> 698
<INCOME-TAX> 0
<INCOME-CONTINUING> 698
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 698
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.08
</TABLE>
