<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 1997
REGISTRATION NO. 333-32931
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ECCS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
NEW JERSEY 22-2288911
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
</TABLE>
ONE SHEILA DRIVE
TINTON FALLS, NEW JERSEY 07724
(908) 747-6995
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
GREGG M. AZCUY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ECCS, INC.
ONE SHEILA DRIVE
TINTON FALLS, NEW JERSEY 07724
(908) 747-6995
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
DAVID J. SORIN, ESQ. ROBERT ROSENMAN, ESQ.
WILLIAM J. THOMAS, ESQ. MARGO R. NEEDLEMAN, ESQ.
BUCHANAN INGERSOLL CRAVATH, SWAINE & MOORE
COLLEGE CENTRE 825 EIGHTH AVENUE
500 COLLEGE ROAD EAST NEW YORK, NEW YORK 10019-7475
PRINCETON, NEW JERSEY 08540 (212) 474-1000
(609) 987-6800
</TABLE>
------------------------
CALCULATION OF REGISTRATION FEE
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================================================================================================================
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED(3) REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value................ 575,000 $4.75 $2,731,250 $828
================================================================================================================
</TABLE>
(1) Includes 75,000 shares subject to the Underwriter's over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933 based on the
average of the high and low prices per share of Common Stock of the
Registrant as reported on the Nasdaq SmallCap Market on August 13, 1997.
(3) The Company has previously registered 2,300,000 shares, including 300,000
shares subject to the Underwriter's over-allotment option, for which a
registration fee of $3,398 was previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 18, 1997
PROSPECTUS
2,500,000 SHARES
[ECCS INC. LOGO]
COMMON STOCK
------------------------------
Of the 2,500,000 shares of Common Stock offered hereby, 2,254,018 shares
are being sold by ECCS, Inc. ("ECCS" or the "Company") and 245,982 shares are
being sold by the Selling Shareholders. The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholders. See "Principal and
Selling Shareholders." The Company's Common Stock is traded on the Nasdaq
SmallCap Market under the symbol "ECCS." On August 13, 1997, the last reported
sale price of the Common Stock on the Nasdaq SmallCap Market was $4.875 per
share. See "Price Range of Common Stock."
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE COMMON STOCK OFFERED HEREBY.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================
PRICE PROCEEDS PROCEEDS TO
TO TO SELLING
PUBLIC UNDERWRITING COMPANY(2) SHAREHOLDERS
DISCOUNTS AND
COMMISSIONS(1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
- ----------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $ $
====================================================================================================
</TABLE>
(1) Does not include a $50,000 non-accountable expense allowance to be received
by the Underwriter. The Company and the Selling Shareholders have agreed to
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $460,000, including the expense allowance referred to above.
(3) The Company has granted the Underwriter an option, exercisable within 30
days of the date hereof, to purchase up to 375,000 additional shares of
Common Stock solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriter, subject to
receipt and acceptance of such shares by them. The Underwriter reserves the
right to reject any order in whole or in part. It is expected that the shares of
Common Stock will be ready for delivery on or about [ ], 1997.
------------------------------
UNTERBERG HARRIS
, 1997
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF COMMON STOCK TO STABILIZE THE MARKET PRICE OF THE COMMON
STOCK, PURCHASES OF COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ
IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus 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. From time to time,
the Company or its representatives have made or may make forward-looking
statements, orally or in writing. Such forward-looking statements may be
included in various filings made by the Company with the Commission, or press
releases or oral statements made by or with the approval of an authorized
executive officer of the Company. 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. With respect to the mix of the
Company's revenues, there can be no assurances that the Company will have the
resources or personnel required for the development and marketing of proprietary
products. There also can be no assurances that proprietary product sales will
increase sufficiently, if at all, in order to lower product costs of sales.
Finally, there can be no assurances that any increase in the Company's sales of
Synchronix or Synchronection will result in improved gross margins or that other
factors, including but not limited to price pressures, will not negatively
impact gross margins. Potential risks and uncertainties that could affect the
Company's future operating results include, but are not limited to, the factors
set forth under "Risk Factors" herein, economic conditions, including economic
conditions related to the computer industry.
------------------------
"RAID 10 Performance Manager," "Intelligent Rebuild," "Split Mirror,"
"Examodule," "Synchronix," "Inverse Mirroring," "Synchronism," "Synchronection,"
"Split Volume" and "Easy Backup" are United States trademarks of the Company.
All other trade names, trademarks or service marks appearing in this Prospectus
are the property of their respective owners and are not the property of the
Company.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto included elsewhere in this Prospectus. Except as otherwise
specified, all information in this Prospectus: (i) assumes no exercise of the
Underwriter's over-allotment option; and (ii) assumes the conversion of all
outstanding shares of Series B and Series C Preferred Stock (the "Convertible
Preferred Stock") into an aggregate of 3,770,590 shares of Common Stock upon
consummation of this Offering. The issued and outstanding Convertible Preferred
Stock shall automatically and mandatorily convert into shares of Common Stock
upon the consummation of this Offering. See "Description of Capital Stock" and
"Underwriting."
THE COMPANY
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.
Networked computing environments that store large volumes of data, perform
intensive processing or involve frequent user access to data can be
characterized as "data-intensive." Organizations are increasingly deploying
mission critical applications and services as core business resources. In
addition, Internet and on-line server-related businesses have created a
significant need for greater storage capacity. The data-intensity of the
networked environment is expected to continue to increase substantially due to
the development of new applications and on-line services and the increasing use
of stored digital graphics, voice and video, requiring dramatically more data
capacity than equivalent alphanumeric information. Once the concern primarily of
financial institutions and government, the need for fault tolerant data
availability has expanded to include most commercial enterprises.
ECCS' core technology provides data intensive environments with protection
against the loss of critical data and provides performance and reliability
characteristics of a mainframe, at a fraction of the cost. The Company's
products offer users (i) fast data transfer rates by spreading and retrieving
data simultaneously among various disk drives, (ii) fault tolerance through the
use of redundant components that can be "hot swapped" during repair and (iii)
high storage capacity.
ECCS sells its data storage systems through alternate channel partners,
including Unisys Corporation ("Unisys") and Tandem Computers Incorporated
("Tandem"), and by direct sales to commercial end users and the Federal
government. The Company's products are used by companies in many industries,
including the financial services, retail, media and telecommunications
industries.
From its founding until 1994, the Company's principal business was the
value added resale of NCR products, primarily to AT&T business units. During
1994, as a result of AT&T's earlier 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. A number of products have resulted from these efforts including
Synchronix and Synchronection, a fault tolerant network file server. During the
six months ended June 30, 1997, approximately 94% of the Company's sales were
derived from sales of the Company's proprietary products.
ECCS' objective is to further establish and solidify its position in the
rapidly growing Open Systems data storage market. In particular, the Company's
strategic focus centers around serving users whose mission critical applications
require high performance and high reliability storage products. The Company's
strategy incorporates the following key elements: develop and broaden OEM
relationships with market leaders; establish first mover position in emerging
clustering technologies; continue direct sales to end users; and protect its
position as an innovative technology provider.
3
<PAGE> 5
THE OFFERING
Common Stock offered
By the Company..................... 2,254,018 shares
By the Selling Shareholders........ 245,982 shares
Common Stock to be outstanding after
the Offering....................... 10,515,640 shares(1)
Use of Proceeds...................... For the payment of accrued preferred
stock dividends and general corporate
purposes, including working capital,
marketing expenses associated with
alternate channel partner
development, the expansion of sales
and marketing activities, product
development, and the implementation
of an enterprise management system.
Nasdaq SmallCap Market Symbol........ ECCS
- ---------------
(1) Excludes an aggregate of 2,089,181 shares of Common Stock reserved for
issuance under the Company's stock option plans and other stock options and
warrants, of which 1,726,907 shares are issuable upon the exercise of stock
options and warrants outstanding as of June 30, 1997 at a weighted average
exercise price of $2.69. Such amount also excludes an aggregate of 55,344
shares of Common Stock reserved for issuance under the Company's 1995
Employee Stock Purchase Plan.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $43,483 $51,574 $42,738 $31,174 $22,604 $12,838 $17,840
Gross profit........................ 10,026 13,430 6,175 7,918 7,439 4,107 4,992
Operating income (loss)............. 2,739 2,228 (7,218) (3,172) (495) (218) 810
Net income (loss) applicable to
common shares..................... $ 1,411 $ 1,053 $(6,790) $(3,738) $(1,017) $ (461) $ 544
Primary net income (loss) per
share(1).......................... $ 0.64 $ 0.32 $ (1.63) $ (0.88) $ (0.23) $ (0.11) $ 0.10
Fully diluted net income per
share............................. $ 0.52 $ 0.30 -- -- -- -- $ 0.08
Shares used in computing primary net
income (loss) per share........... 2,189 3,313 4,160 4,232 4,346 4,322 5,236
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-------------------------
AS
ACTUAL ADJUSTED(2)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash........................................................................ $ 1,339 $11,098
Working capital............................................................. 5,096 14,855
Total assets................................................................ 16,393 26,152
Loans payable............................................................... 1,859 1,859
Total shareholders' equity.................................................. 7,045 16,804
</TABLE>
- ---------------
(1) See Note 2 to Consolidated Financial Statements for information concerning
the computation of net income (loss) per share.
(2) Reflects the conversion of all outstanding shares of Convertible Preferred
Stock into an aggregate of 3,770,590 shares of Common Stock upon
consummation of this Offering and the sale of 2,254,018 shares of Common
Stock offered hereby by the Company after deducting underwriting discounts
and estimated offering expenses payable by the Company. See "Use of
Proceeds," "Capitalization" and "Underwriting."
4
<PAGE> 6
RISK FACTORS
LIMITED HISTORY OF OPERATIONS AS A PROPRIETARY SELLER AND HISTORY OF LOSSES
From its founding until 1994, the Company's principal business was the sale
of NCR products to AT&T business units as a value added reseller ("VAR"). 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. Accordingly, the Company has a limited operating history within its
current line of business. The Company incurred net losses of $3,659,000 and
$769,000 for the years ended December 31, 1995 and December 31, 1996,
respectively. There can be no assurance that the Company will achieve profitable
levels of operations in the future. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Results of Operations."
SUBSTANTIAL RELIANCE ON CERTAIN KEY CUSTOMERS
The Company's customer base is highly concentrated, with its top 10
customers in 1995 and 1996 accounting in the aggregate for approximately 85% and
90%, respectively, of net sales. Sales to such customers comprised 91% of net
sales in the six-month period ended June 30, 1997. Sales to Unisys accounted for
approximately 30% and 12% of net sales in 1996 and the six-month period ended
June 30, 1997, respectively. Sales to the U. S. Air Force, through a Federal
integrator, accounted for 25% and 51% of net sales in 1996 and the six-month
period ended June 30, 1997, respectively. Sales to Tandem accounted for 11% of
net sales in the six-month period ended June 30, 1997. The Company believes that
a substantial portion of its net sales and gross profits will continue to be
derived from sales to a concentrated group of customers. In general, there are
no ongoing written commitments by customers to purchase products from the
Company. All product sales by the Company are made on a purchase order basis. A
significant reduction in orders from any of the Company's largest customers
could have material adverse effect on the Company's results of operations. There
can be no assurance that the Company's largest customers will continue to place
orders with the Company or that orders of its customers will continue at their
previous levels. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Results of Operations."
RAPID TECHNOLOGICAL CHANGE AND CONTINUED DEMAND FOR COMPANY'S PRODUCTS
The market for the Company's mass storage enhancement products, including
RAID, is characterized by innovation and rapid technological advances. Both the
needs of potential customers and the technologies available for meeting those
needs can change significantly within a short period of time. The Company's
future success will depend in part on its ability to enhance continually its
current mass storage products and to develop or acquire new mass storage
products that address the needs of its customers. There can be no assurance that
the Company will be successful in developing such new products that respond to
technological changes. Other companies may succeed in developing products that
are better, more efficient or less costly than any that may be developed by the
Company. Such development or rapid technological development by others may
result in the Company's products becoming obsolete before the Company recovers a
significant portion of the research, development and commercialization expenses
incurred with respect to those products or may adversely affect the Company's
competitive position. See "Business -- Competition."
Demand for the Company's services and mass storage enhancement products,
including RAID, depends principally upon the demand for Open Systems-based
networks based on NT, UNIX and LAN operating systems. Although the Company
expects the industry to continue to expand, the Company's business may be
adversely affected by a decline in the sales growth of Open Systems-based
networks targeted by the Company. If the Company fails to anticipate and
properly respond to shifts within the Open Systems marketplace that have or may
have an impact on the demand for Open Systems, the Company's business and
results of operations will be materially adversely effected. See
"Business -- Industry Background" and "-- Research and Development."
RISK OF MARKET ACCEPTANCE OF NEW PRODUCTS
Since 1995, the Company has focused substantial product development efforts
on its RAID products, and specifically, on the development of a new product
family, Synchronix, ECCS' next generation, high
5
<PAGE> 7
availability controller and subsystem. There can be no assurance that the
Company will be successful in continuing to commercialize its Synchronix family
of products.
The Company believes that its success depends, in part, on its ability to
enhance existing products and to develop new products that maintain
technological leadership, meet a wide range of changing customer needs and
achieve market acceptance. Lack of market acceptance for the Company's existing
or new products, the Company's failure to introduce new products in a timely or
cost-effective manner, or its failure to increase functionality of existing
products or remain price competitive, would materially adversely affect the
Company's operating results. There can be no assurance that the Company will be
successful in its product development efforts or, even if successful, whether
such products will achieve market acceptance. See "Business -- Products and
Technology."
The Company designs its RAID products to comply with standards adopted by
the industry and the RAID Advisory Board, which the Company believes are
industry-accepted standards, and the Company works closely with the RAID
Advisory Board to ensure that the Company's RAID standards are compatible with
industry standards. Although the Company knows of no other standard-setting body
currently in existence, there can be no assurance that other standards will not
become industry-accepted standards.
EXPANSION OF SALES AND DISTRIBUTION CHANNELS
The Company sells its products through alternate channel partners,
including OEMs, VARs and distributors, and directly to Federal and commercial
end users. The Company intends to increase both its product sales and
distribution by expanding its direct sales activities, engaging additional
alternate channel partners and developing strategic relationships with OEMs that
serve new vertical markets for the Company. Whether the Company can successfully
generate its own sales leads, introduce new products and enter new markets will
depend on its ability to expand its direct sales and support services, expand
its indirect distribution channel, and increase its relationships and alliances
with other companies. There can be no assurance that the Company will be able to
successfully expand its direct sales and support services force, expand its
indirect distribution channel, or establish or maintain successful third party
relationships. Any failure to do so could have a material adverse effect on the
Company's business, operating results and financial condition. See
"Business -- Sales and Marketing."
DEPENDENCE ON CERTAIN SOURCES OF SUPPLY
Manufacturing by the Company consists primarily of light assembly, systems
integration, testing and quality assurance. ECCS relies on outside manufacturers
to manufacture and produce the Company's products for use in the Company's
proprietary systems, as well as for the direct sale to end users, and relies on
outside suppliers to supply subassemblies, component parts and computer systems
for resale. Certain components used in the Company's business are available only
from a limited number of sources. Any delays in obtaining component parts could
adversely affect the Company's results of operations. The Company relies on
independent contractors and outside suppliers to manufacture subassemblies to
the Company's specifications. Each of the Company's products undergoes testing
and quality inspection at the final assembly stage. Although the Company has not
experienced material problems with its proprietary systems manufacturers or its
suppliers of subassemblies, there can be no assurance that material problems
will not arise in the future that could significantly impede or interrupt the
Company's business. Although the Company has not experienced significant
problems with its suppliers in the past, there can be no assurance that such
relationships will continue or that, in the event of a termination of its
relationship with its existing suppliers, it would be able to obtain alternative
sources of supply without a material disruption in the Company's ability to
provide products to its customers. Any material disruption in the Company's
supply of products would have a material adverse effect on the Company's results
of operations. See "Business -- Manufacturing and Suppliers."
COMPETITION
The Company is engaged in fields within the computer industry characterized
by a high level of competition. Many established computer manufacturers (such as
the Company's own suppliers, which include Unisys), systems integrators and
manufacturers of mass storage enhancement products and networking products
compete with the Company. To the extent that Unisys manufactures or markets
products or services
6
<PAGE> 8
similar to those offered by the Company, the Company's results of operations
would be adversely impacted. Many of the Company's competitors have financial,
technical, manufacturing, sales, marketing and other resources which are
substantially greater than those of the Company. There can be no assurance that
the Company will be able to continue to compete successfully with existing or
new competitors. With respect to mass storage enhancement products, there are
many competitors in each product category, none of which is dominant in any one
product category, but each of which addresses specific applications and/or
markets. With respect to RAID products and technology, EMC Corp., Data General,
Digital Equipment Corporation and Hyundai's Symbios Logic Division are
significant participants in the RAID market for IBM mainframe computers and have
acquired companies which have products that address the Open Systems market.
Most computer systems companies and companies that offer memory enhancement
products also offer RAID, mass storage and backup products and technologies, or
are undertaking development efforts, which compete or may compete with the
Company in the RAID marketplace for Open Systems-based network computers,
including companies considerably larger and with greater resources than those of
the Company. There can be no assurance that such companies will not enter or
expand their presence in the RAID marketplace for Open Systems-based computers.
See "Business -- Competition."
Competitive pricing pressures exist in the data storage market and have had
and may in the future have an adverse effect on the Company's revenues and
earnings. There also has been, and may continue to be, a willingness on the part
of certain competitors to reduce prices in order to preserve or gain market
share. The Company believes that pricing pressures are likely to continue.
INTELLECTUAL PROPERTY AND RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT
The Company's future success depends in part upon its intellectual
property, including patents, trade secrets, know-how and continuing
technological innovation. There can be no assurance that the steps taken by the
Company to protect its intellectual property will be adequate to prevent
misappropriation or that others will not develop competitive technologies or
products. The Company has filed numerous patent applications covering various
aspects of its Synchronix product family. There can be no assurance that patents
will issue from any application filed by the Company or that, if patents do
issue, the claims allowed will be sufficiently broad to prohibit others from
marketing similar products. In addition, there can be no assurance that any
patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights thereunder will provide a competitive advantage
to the Company. Although the Company believes that its products and technology
do not infringe upon proprietary rights of others, there can be no assurance
that third parties will not assert infringement claims in the future or that
such claims will not be successful. Although the Company continues to implement
protective measures and intends to defend its proprietary rights, policing
unauthorized use of the Company's technology or products is difficult and there
can be no assurance that these measures will be successful. See
"Business -- Intellectual Property and Other Proprietary Rights."
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results generally decline during the third and
fourth quarters, 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 September 30th. The Company does not expect such
spending patterns to be altered in the future. Over the past two years the
Company's net sales have also declined in the fourth quarter. There can be no
assurance that such decline will not continue.
DEPENDENCE UPON KEY PERSONNEL
The success of the Company's operations during the foreseeable future will
depend largely upon the continued services of the executive officers of the
Company, none of whom has entered into an employment agreement with the Company.
See "Management -- Executive Officers and Directors."
The Company's success also depends in part on its ability to manage,
attract and retain qualified professional, technical, manufacturing, managerial
and marketing personnel. Competition for such personnel is intense. There can be
no assurance that the Company will be successful in attracting and retaining the
7
<PAGE> 9
personnel it requires to develop new and enhanced products and to conduct its
operations successfully. The Company's results of operations could be adversely
affected if the Company were unable to attract, hire, assimilate, train and
manage these personnel, or if net sales fail to increase at a rate sufficient to
absorb the resulting increase in expenses. See "Business -- Sales and Marketing"
and "-- Employees."
CONTROL BY EXISTING SHAREHOLDERS
Upon completion of this Offering, certain officers and directors and their
affiliates will own or control approximately 21.2% of the Company's outstanding
Common Stock (20.5% if the Underwriter's over-allotment option is exercised in
full). The current shareholders will have the ability to continue to control the
election of all of the members of the Company's Board of Directors and corporate
actions requiring shareholder approval. Although the Company's certificate of
incorporation does not include any super majority shareholder approval
provisions, even as to corporate actions in which such super majority approval
may be required by law, such as fundamental corporate transactions including
mergers, the current shareholders will have the ability to continue to exert
significant influence. The Company is not aware of any agreement by or among any
of its shareholders to act in concert. See "Principal and Selling Shareholders."
VOLATILITY OF STOCK PRICE AND IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
The market price of the shares of Common Stock may be highly volatile.
Factors such as actual or anticipated quarterly fluctuation in financial
results, changes in recommendations or earnings estimates by securities
analysts, announcements of technological innovations or new commercial products
or services and the timing of announcements of acquisitions by the Company or
its competitors, as well as market conditions generally, may have a significant
effect on the market price of the Common Stock. Furthermore, the stock market
historically has experienced volatility which has particularly affected the
market prices of securities of many technology companies and which sometimes has
been unrelated to the operating performances of such companies. See "Price Range
of Common Stock."
Future sales of Common Stock in the public market following this Offering
could adversely affect the market price of the Common Stock. Upon completion of
this Offering, substantially all outstanding shares of Common Stock will be
freely tradable by persons other than "affiliates" of the Company without
restriction, including 750,000 shares issuable pursuant to an effective
Registration Statement on Form S-8 and 2,000,000 shares of Common Stock eligible
for resale in accordance with the provisions of Rule 144, including, without
limitation, the volume limitations thereunder. 4,128,783 shares beneficially
held by certain current shareholders of the Company are subject to "lock-up"
agreements under which the holders of such shares have agreed not to sell or
otherwise dispose of any shares of Common Stock without the prior written
consent of Unterberg Harris for a period of 90 days following the date of this
Prospectus. Unterberg Harris may, in its sole discretion, and at any time
without notice, release all or a portion of the shares subject to these lock-up
agreements. The holders of certain shares also have certain registration rights.
Sales of substantial amounts of the Common Stock in the public market, whether
by purchasers in the offering or other shareholders of the Company, or the
perception that such sales could occur, may adversely affect the market price of
the Common Stock.
ANTI-TAKEOVER CONSIDERATIONS
Subsequent to the consummation of the Offering, the Company will have 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. The issuance of additional shares of
preferred stock, depending upon the rights, preferences and designations
thereof, may have the effect of delaying, deterring or preventing a change in
control of the Company. See "Description of Capital Stock -- Preferred Stock"
and "-- Anti-takeover Provisions."
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
8
<PAGE> 10
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,254,018 shares of
Common Stock offered by the Company are estimated to be approximately $9.8
million, based on an assumed offering price of $4.875 per share and after
deducting the underwriting discounts and estimated offering expenses. The
Company will not receive any proceeds from the sale of shares of Common Stock by
the Selling Shareholders. See "Principal and Selling Shareholders."
The Company intends to use approximately $500,000 of the net proceeds to
pay to Convertible Preferred Shareholders dividends on the Convertible Preferred
Stock and the remainder for general corporate purposes, including marketing
expenses associated with alternate channel partner development, the expansion of
its sales and marketing activities, product development, the implementation of
an enterprise management system and the remainder for working capital and
possible acquisitions of businesses, services or technology complementary to the
Company's business. No specific acquisitions are being negotiated or planned as
of the date of this Prospectus.
Pending such uses, the Company intends to invest the net proceeds of this
Offering in short-term, investment-grade, interest-bearing instruments.
9
<PAGE> 11
PRICE RANGE OF COMMON STOCK
The Common Stock was listed on the Nasdaq National Market (the "National
Market") from June 14, 1993, when the Company effected its initial public
offering, until May 29, 1996, on which date the Nasdaq Stock Market, Inc.
("Nasdaq") delisted the Common Stock from the National Market due to the
Company's inability to obtain an exception to the shareholder approval
requirement in connection with the Company's issuance and sale of Series C
Preferred Stock in May 1996. Effective May 29, 1996, the Common Stock of the
Company was listed on the Nasdaq SmallCap Market (the "SmallCap Market"). The
Company's Common Stock is traded on the SmallCap Market under the symbol ECCS.
The following table sets forth, for each of the quarters listed below, the high
and low sales prices per share of Common Stock as reported by (i) the National
Market for each of the quarters ended March 31, 1995 through March 31, 1996 and
for the period from April 1, 1996 through May 28, 1996; and (ii) the SmallCap
Market for each of the quarters ended June 30, 1996 (commencing May 29, 1996)
through June 30, 1997.
<TABLE>
<CAPTION>
NATIONAL MARKET: QUARTER ENDED HIGH LOW
--------------------------------------------------------------------- ----- -----
<S> <C> <C>
March 1995........................................................... 2.625 0.69
June 1995............................................................ 3.25 1.63
September 1995....................................................... 5.50 2.25
December 1995........................................................ 4.50 1.50
March 1996........................................................... 3.25 1.75
June 1996 (through May 28, 1996)..................................... 3.875 1.875
</TABLE>
<TABLE>
<CAPTION>
SMALLCAP MARKET: QUARTER ENDED HIGH LOW
--------------------------------------------------------------------- ----- -----
<S> <C> <C>
June 1996 (commencing May 29, 1996).................................. 3.875 2.50
September 1996....................................................... 3.625 2.00
December 1996........................................................ 4.75 2.25
March 1997........................................................... 5.50 3.625
June 1997............................................................ 6.00 4.125
</TABLE>
The prices shown above represent quotations among securities dealers, do
not include retail markups, markdowns or commissions and may not represent
actual transactions.
On August 13, 1997, the last sales price of the Common Stock as reported by
the SmallCap Market was $4.875 per share. The approximate number of shareholders
of record on June 30, 1997 was 106.
DIVIDEND POLICY
The Company has never declared or paid any dividends on Common Stock. The
Company intends to retain any earnings to fund future growth and the operation
of its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future. The Company's factoring facility with NationsBanc
Commercial Corporation ("NCC") restricts the Company's ability to pay certain
dividends (not including dividends payable to the Convertible Preferred
Shareholders upon the consummation of this Offering) without NCC's prior written
consent. The Company's line of credit facility with AT&T Commercial Finance
Corporation ("AT&T-CFC") prohibits the payment of dividends. AT&T-CFC has waived
such prohibition in connection with the dividend payments to be made to the
Convertible Preferred Shareholders upon the consummation of this Offering.
10
<PAGE> 12
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as of
June 30, 1997; and (ii) on an as adjusted basis to give effect to the conversion
of all outstanding shares of Convertible Preferred Stock into 3,770,590 shares
of Common Stock and the sale by the Company of 2,254,018 shares of Common Stock
offered hereby (assuming an offering price of $4.875 per share), after deducting
the underwriting discounts and estimated offering expenses payable by the
Company, and the anticipated application of the estimated net proceeds
therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Preferred stock, $0.01 par value, 3,000,000 shares authorized;
1,600,000 shares Series B cumulative convertible preferred stock
and 500,000 shares Series C cumulative convertible preferred
stock, issued and outstanding; none issued and outstanding on an
as adjusted basis................................................. $ 21 $ --
Common stock, $0.01 par value, 20,000,000 shares authorized; issued
and outstanding on an actual and an as adjusted basis, of
4,491,032 and 10,515,640, respectively(1)......................... 45 105
Capital in excess of par value -- preferred.......................... 4,522 --
Capital in excess of par value -- common............................. 10,423 24,665
Retained earnings (deficit).......................................... (7,966) (7,966)
------- -------
Total shareholders' equity........................................ 7,045 16,804
------- -------
Total capitalization............................................ $ 7,045 $16,804
======= =======
</TABLE>
- ---------------
(1) Excludes an aggregate of 2,089,181 shares of Common Stock reserved for
issuance under the Company's stock option plans and other stock options and
warrants, of which 1,726,907 shares are issuable upon the exercise of stock
options and warrants outstanding as of June 30, 1997 at a weighted average
exercise price of $2.69. Such amount also excludes an aggregate of 55,344
shares reserved for issuance under the Company's 1995 Employee Stock
Purchase Plan.
11
<PAGE> 13
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
approximately $6.2 million, or $0.75 per share of Common Stock (assuming the
conversion of all outstanding shares of Convertible Preferred Stock). "Net
tangible book value per share" is equal to the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of 2,254,018 shares
of Common Stock in this Offering (at the offering price and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company), the as adjusted net tangible book value of the Company as of
June 30, 1997 would have been $16.0 million, or $1.52 per share of Common Stock.
This represents an immediate increase in net tangible book value per share of
$0.77 to existing shareholders and immediate dilution in net tangible book value
of $3.36 per share to new investors. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share...................................... $4.88
Net tangible book value per share at June 30, 1997................. $0.75
Increase per share attributable to new investors................... 0.77
------
-
As adjusted net tangible book value per share after the Offering..... 1.52
------
-
Net tangible book value dilution per share to new investors.......... $3.36
=======
</TABLE>
12
<PAGE> 14
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the five years ended December
31, 1996, are derived from the Company's audited financial statements. The
selected consolidated financial data for the six months ended June 30, 1996 and
1997 have been derived from the unaudited consolidated financial statements of
the Company. The unaudited financial data include all adjustments (consisting
only of normal, recurring adjustments) that the Company considers necessary for
fair presentation of the financial position and results of operations for these
periods. The results of operations for the six months ended June 30, 1997 are
not necessarily indicative of the results for any future period or for the full
year ending December 31, 1997. The following should be read in conjunction with
the consolidated financial statements and notes thereto and "Management's
Discussion and Analysis of Results of Operations and Financial Conditions"
appearing elsewhere in this Prospectus:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1992 1993 1994(1) 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $43,483 $51,574 $42,738 $31,174 $22,604 $12,838 $17,840
Cost of sales............... 33,457 38,144 36,563 23,256 15,165 8,731 12,848
------- ------- ------- ------- ------- ------- -------
Gross profit.................. 10,026 13,430 6,175 7,918 7,439 4,107 4,992
Selling, general and
administrative
expenses................. 6,735 10,444 12,415 9,967 6,907 3,652 3,486
Research and development
expenses................. 552 758 978 1,123 1,027 673 696
------- ------- ------- ------- ------- ------- -------
Operating income (loss)....... 2,739 2,228 (7,218) (3,172) (495) (218) 810
Net interest expense........ 236 586 764 487 274 157 112
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations
before provision for income
taxes....................... 2,503 1,642 (7,982) (3,659) (769) (375) 698
Provision (benefit) for
income taxes............. 972 531 (1,192) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)............. 1,531 1,111 (6,790) (3,659) (769) (375) 698
Preferred dividends......... 120 58 -- 79 248 86 154
------- ------- ------- ------- ------- ------- -------
Net income (loss) applicable
to common shares............ $ 1,411 $ 1,053 $(6,790) $(3,738) $(1,017) $ (461) $ 544
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share:
Primary..................... $ 0.64 $ 0.32 $ (1.63) $ (0.88) $ (0.23) $ (0.11) $ 0.10
Fully diluted............... $ 0.52 $ 0.30 $ -- $ -- $ -- $ -- $ 0.08
Shares used in computing
primary net income (loss)
per share................... 2,189 3,313 4,160 4,232 4,346 4,322 5,236
BALANCE SHEET DATA:
Cash.......................... $ 573 $ 134 $ 1,670 $ 1,514 $ 4,393 $ 4,800 $ 1,339
Working capital............... 3,281 10,115 2,932 1,134 4,280 4,428 5,096
Total assets.................. 20,095 33,948 21,507 12,435 14,552 16,621 16,393
Loans payable................. 3,693 4,803 4,089 1,849 1,762 3,388 1,859
Series B redeemable
convertible preferred
stock....................... -- -- -- 1,794 -- -- --
Shareholders' equity.......... 2,483 12,373 5,673 2,122 6,177 6,435 7,045
</TABLE>
- ---------------
(1) Includes $380,000 related to the write-down of certain capitalized software,
$374,000 related to employee termination costs and $3,500,000 of inventory
adjustments.
13
<PAGE> 15
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. 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.
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 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 following table sets forth, for the periods indicated, the percentage
of net sales derived from each of the product groupings the Company uses to
analyze sales and revenue:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER ENDED
31, JUNE 30,
---------------------- -------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ECCS mass storage enhancement products
(including all ECCS proprietary products and
certain third party component products)....... 36.0% 44.9% 80.0% 75.0% 93.5%
Value added resales............................. 51.7% 40.0% 8.3% 12.3% 1.3%
Services and other revenues..................... 12.3% 15.1% 11.7% 12.7% 5.2%
</TABLE>
The year to year percentage increases in sales by the Company of is
proprietary systems, as well as the year to year percentage decreases in sales
by the Company in its capacity as a VAR are due, primarily, to the Company's
repositioning as a provider of its own proprietary mass storage enhancement
systems including storage subsystems.
Most of the Company's proprietary products are manufactured under contract
by Unisys pursuant to the Company's specifications. In accordance with the
Company's instructions, Unisys ships the finished product directly to the
Company's customers. Product sales revenue is recognized upon product shipment.
The Company believes that by outsourcing certain manufacturing requirements, the
Company benefits from the greater purchasing power of the manufacturers,
reduction of inventory carrying costs and the avoidance of certain investments
in plant, property and equipment.
14
<PAGE> 16
The Company's cost of revenues relating to product sales consists primarily
of the costs of purchased material, direct labor and related overhead expenses,
and amortization of capitalized software. An increase in proprietary product
sales combined with the anticipated continued reduction in the sale of third
party product, which typically carries lower margins, is expected to lower cost
of revenues as a percentage of sales. Costs of revenues related to services are
comprised primarily of direct labor and related overhead expenses.
The Company's OEM sales to date have been primarily to Unisys. In March
1997, the Company commenced sales of products to Tandem for resale. In addition,
in January 1997, the Company and Tandem announced their intent to jointly
develop a RAID storage connectivity for a System Area Network for the Open
Systems market. The Company and Tandem are seeking to develop a native ServerNet
system connectivity for Synchronix for departmental and enterprise clusters. No
revenues are expected from this arrangement during 1997. There can be no
assurances that a definitive agreement will be reached with Tandem.
The profitability of any particular quarter is significantly affected by
the relative sales levels of each of the Company's primary sales channels: OEM,
Federal and commercial. Gross margins on products shipped to commercial
customers generally provide higher margins, followed by OEM and Federal. To the
extent that the Company is successful in increasing its sales of Synchronix and
Synchronection to the commercial market directly and through OEM arrangements,
the Company believes gross margins should improve accordingly.
Selling, general and administrative (SG&A) expenses consist of salaries,
commissions and travel costs for sales and marketing personnel, trade shows and
expenses associated with the Company's management, accounting, contract and
administrative functions. The Company anticipates that SG&A spending levels will
decrease as a percentage of sales to the extent sales to OEMs increase as a
percentage of sales. Sales to OEMs typically absorb much of the administrative
burden otherwise incurred by the Company.
Since 1994, the Company has increased its research and development activity
in connection with the development of Synchronix and Synchronection. Research
and development expenses consist primarily of salaries and related overhead
expenses paid to engineers and programmers. Research and development expenses
are anticipated to increase substantially to enable the Company to update and
expand upon its existing product offerings and to integrate its products into
systems of future OEMs.
This Management's Discussion and Analysis of Results of Operations and
Financial Condition contains forwardlooking statements that involve risks and
uncertainties, many of which may be beyond the Company's control. See "Forward
Looking Statements."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of net sales.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 85.6 74.6 67.1 68.0 72.0
----- ----- ----- ----- -----
Gross profit....................................... 14.4 25.4 32.9 32.0 28.0
Selling, general & administrative expenses....... 29.0 32.0 30.6 28.5 19.6
Research & development expenses.................. 2.3 3.6 4.5 5.2 3.9
----- ----- ----- ----- -----
Operating loss..................................... (16.9) (10.2) (2.2) (1.7) 4.5
Net interest expense............................. 1.8 1.5 1.2 1.2 0.6
----- ----- ----- ----- -----
Loss before benefit for income taxes............... (18.7) (11.7) (3.4) (2.9) 3.9
Benefit for income taxes......................... (2.8) -- -- -- --
----- ----- ----- ----- -----
Net loss........................................... (15.9)% (11.7)% (3.4)% (2.9)% 3.9%
===== ===== ===== ===== =====
</TABLE>
15
<PAGE> 17
Six Months Ended June 30, 1997 and June 30, 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 the U.S. Air Force through a Federal integrator during the first
six months of 1997, a large proportion of which consist 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 product.
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.
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.
16
<PAGE> 18
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.
Years 1996, 1995 and 1994
Net Sales
Net sales decreased by $8,570,000, or 28%, in 1996 and decreased by
$11,564,000, or 27%, in 1995 as compared to net sales in the respective
preceding years. The decrease in 1996 resulted primarily from a decrease of
value added resales to $1,865,000 or 8% of sales in 1996, from $12,487,000 or
40% of sales in 1995. Such decrease reflects the continued decline in sales to
AT&T business units and substantial reductions in system orders and shipments
which incorporated NCR products. The decline was, in part, offset by increases
in sales of the Company's proprietary mass storage systems, including sales to
both Federal customers and OEMs, such as Unisys. The decrease in 1995, from
1994, resulted primarily from decreased sales to multiple AT&T business units,
and a decrease in commercial sector sales of $1,174,000 offset, in part, by an
increase in Federal sector sales of $3,594,000.
Sales to the Federal government represented 30%, 21%, and 7% of net sales
in 1996, 1995, and 1994, respectively. The U.S. Air Force, an end user of the
Company's products, purchased $5.7 million of products through federal
integrators in 1996. Of such amount, sales pursuant to a contract with Hughes
Data Systems accounted for $3.7 million, or 16%, of net sales. There are no
minimum purchase requirements under this contract. There can be no assurance
that there will be additional sales under this contract.
Sales to alternate channel partners accounted for approximately 38%, 8% and
3% of net sales in 1996, 1995, and 1994, respectively. Sales to the Company's
primary alternate channel partner, Unisys, accounted for 30% of the Company's
net sales in 1996. All sales to Unisys, which began in 1996, were sales of mass
storage enhancement products. Effective May 1, 1995, the Company entered into an
OEM agreement with Unisys. For a description of the terms of such agreement, see
"Business -- Sales and Marketing."
In 1996, 1995 and 1994, purchases by multiple AT&T business units
represented 14%, 51% and 65%, respectively of all purchases from the Company.
All such sales by the Company to AT&T were made on an individual purchase order
basis and, therefore, there were and are no ongoing written commitments by AT&T
to purchase from the Company.
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
decreased by $479,000 or 6% in 1996, and increased by $1,743,000 or 28% in 1995
as compared to the gross profit earned in the respective preceding year. The
decrease in 1996 resulted from a decrease in net sales, offset by higher gross
margins due to a favorable change in product mix. The favorable change in
product mix was primarily due to increased sales of the Company's own
proprietary systems, which typically have higher gross margins. The increase in
1995 resulted from an increased gross margin percentage on a decreased sales
volume. The Company's gross margin percentage increased to 33% in 1996 as
compared to 25% in 1995 as a result of an increase in sales of the Company's
proprietary products and the higher gross margins associated with these
products.
Operating Expenses
Selling, general and administrative expenses decreased over $3 million from
1995 levels, and, as a percentage of net sales, to 31% in 1996, a decrease of 1%
from the prior year. This decrease was mainly attributable to a reduction in
commissions due to lower sales volume, in addition to management's efforts in
controlling these expenses. Salaries, commissions, bonuses and related employee
benefits and payroll taxes were the largest components of selling, general and
administrative expenses. During 1996 and 1995, the Company's staff was reduced
by 8% and 13%, respectively, largely through attrition.
17
<PAGE> 19
Selling, general and administrative expenses increased as a percentage of
net sales in 1995 to 32% from 29% in the prior year. The increase was due
principally to lower than expected sales that were not sufficient to support the
Company's sales and marketing structure.
In 1996, net research and development expenses (after capitalized costs
related to internally developed software in accordance with SFAS No. 86)
decreased by $96,000 or 9% from $1,123,000 in 1995. In 1995, research and
development expenses increased by $145,000 or 15% from $978,000 in 1994.
Research and development expenses represented 5%, 4% and 2% of net sales in
1996, 1995 and 1994, respectively. The year to year increase reflects the
Company's product development initiative to reposition the Company as a provider
of proprietary mass storage enhancement products.
Net Interest Expense
In 1996, net interest expense decreased by $213,000 or 44% from $487,000 in
1995. The decrease was due principally to a combination of decreased inventory
carrying levels offset by an increase in interest income. Net interest expense
decreased in 1995 by $277,000 or 36% from $764,000 in 1994. The decrease was due
principally to decreased inventory carrying levels.
Provision (Benefit) for Income Taxes
The Company's effective tax rate (benefit) was (14.9%) in 1994. No benefit
was recorded for the losses incurred in 1995 or 1996.
QUARTERLY NET SALES
The following table summarizes for the quarters indicated the Company's
unaudited net sales (in thousands) derived from each of its primary sources of
revenue. The Company's quarterly net sales breakdown illustrates the improvement
in net sales of mass storage enhancement products each quarter as compared to
the same quarter of the prior year over the last ten quarters. Quarterly results
are affected by seasonal factors, particularly the spending pattern of the
Federal government. Historically, the Company experiences lower sales in the
Company's third quarter due to reduced orders by the Federal government during
the government's fourth quarter, which ends on September 30. In the last two
years, the decreased sales in the Company's fourth quarter were due to various
factors which included the timing of Federal government orders, delays in
product shipment and delayed product orders in anticipation of new product
introductions. If the Company is successful in its strategy to expand and
develop additional OEM relationships, the Company should experience less impact
from government spending patterns.
<TABLE>
<CAPTION>
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ECCS Mass Storage
Enhancement
Products...... $3,335 $4,703 $ 3,551 $2,401 $3,551 $6,074 $ 4,346 $4,115 $7,978 $8,700
Value Added
Resales......... 4,258 3,157 2,479 2,593 737 839 180 109 136 87
Services and Other
Revenues........ 1,490 1,431 707 1,069 817 819 705 312 623 316
</TABLE>
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 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
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<PAGE> 20
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'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 NationsBanc Commercial
Corporation ("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.
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 this Offering) 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.
The Company has a net operating loss carryover for Federal income tax
purposes of approximately $8,300,000, which will expire in 2009. The Company
also has research and development tax credit carryovers for Federal income tax
purposes of approximately $122,000 which will begin to expire in 2009. In
addition, the Company has alternative minimum tax credits of approximately
$53,000. These credits can be carried forward indefinitely. The Company
experienced a change in ownership in 1995 as defined by Section 382 of the
Internal Revenue Code. Accordingly, future use of these NOLs and income tax
credits may be limited.
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<PAGE> 21
Under SFAS No. 109, a valuation allowance is established, if based on the
weight of available evidence, it is more likely than not that a portion of the
deferred tax asset will not be realized. Accordingly, a full valuation allowance
has been provided to off-set the Company's net deferred tax assets.
For the six months ended June 30, 1997, the Company had invested $111,000
in capital equipment and leasehold improvements. The Company invested $603,000,
$318,000 and $642,000 in capital equipment and leasehold improvements in 1994,
1995 and 1996, respectively. Of such amounts, $114,000, $0 and $78,000 were
funded through capital leases in those respective years. 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 believes that its existing available cash, credit facilities
and the cash flow expected to be generated from operations, together with the
proceeds of this Offering, will be adequate to satisfy its current and planned
operations for at least the next 12 months.
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<PAGE> 22
BUSINESS
GENERAL
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.
ECCS' core technology provides data intensive environments with protection
against the loss of critical data and provides performance and reliability
characteristics of a mainframe, at a fraction of the cost. The Company's
products offer users (i) fast data transfer rates by spreading and retrieving
data simultaneously among various disk drives, (ii) fault tolerance through the
use of redundant components that can be "hot swapped" during repair and (iii)
high storage capacity.
From its founding until 1994, the Company's principal business was the
value added resale of NCR products, primarily to AT&T business units. Sales to
AT&T business units made up a large portion of such business. During 1994, as a
result of AT&T's earlier 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. A number of products have resulted from these efforts including
Synchronix and Synchronection, a fault tolerant network file server. During the
six months ended June 30, 1997, approximately 94% of the Company's sales were
derived from sales of the Company's proprietary products.
INDUSTRY BACKGROUND
In response to competitive pressures, businesses and other organizations
have become increasingly dependent on their computing resources which enable
these organizations to increase productivity through the distribution of
computing power across their enterprise, providing large numbers of users with
access to applications, information and data. In this environment, it has become
important for organizations to manage the storage of and access to large volumes
of data, which increasingly represent critical information resources.
These "data-intensive" computing environments require large volumes of
data, perform intensive processing and involve frequent user access to data.
Increasingly, organizations are deploying data-intensive applications and
services as core business resources. In addition, Internet and on-line server
related businesses have grown significantly. The data-intensity of the network
environment is expected to continue to increase substantially due to the
development of new applications and services and the more prevalent use of
stored digital graphic, voice and video, requiring dramatically more data
capacity than equivalent alphanumeric information. The increased data intensity
of computing environments has created demand for fault tolerant features which
are now being included in standard operating systems, including Windows NT.
In this context, data management has become increasingly complex and
challenging. For data-intensive environments, three significant requirements
have emerged: (i) data access performance, (ii) data administration and (iii)
data availability and reliability.
Data Access Performance. Traditionally, management information systems
("MIS") managers and network providers improved performance on a network by
increasing central processing unit ("CPU") performance or increasing the
underlying network bandwidth. In data-intensive network environments,
performance of applications and services is increasingly limited by the time to
read or write to hard disk drives. Improvements in performance for most
applications and services have been limited by disk I/O performance, which
because of the mechanical nature of disk drives, has not improved as rapidly as
CPU performance or network bandwidth.
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<PAGE> 23
Data Administration. A key requirement in data administration is the
management of hardware and software systems that store data. In the
data-intensive network environment, data management is difficult and complex due
to the large number of users accessing the data, the multiple servers storing
the data and the large volume of data. Furthermore, because data may be widely
distributed throughout the network, administrative functions such as back-up or
expansion of the file system become substantially more difficult. Finally, the
budgetary constraints of most organizations require that this increasingly
complex administration be accomplished cost-effectively, without increased
staffing.
Data Availability and Reliability. As the data-intensive network
environment grows, data availability becomes critical to the organization's
productivity, time-to-market and responsiveness to customers. Achieving a high
level of data availability is particularly difficult because hard disk drives
are mechanical devices, which are prone to failure over extended periods of
intensive use. An organization may experience costly down-time or loss of data
from the failure of a single low-cost, network-attached disk drive. This is
particularly important to network service providers whose business is providing
network-stored data to their user. Therefore, it is imperative that systems
which are repositories of network-based data and services have low failure
rates, rapid recovery times and the ability to provide uninterrupted service in
the event of failure of a disk drive. Organizations often improve data
reliability through the use of RAID technology, which consists of using parallel
disk drives that work together as a single unit. RAID technology provides data
intensive Open Systems with protection against the loss of critical data in
addition to the performance and reliability characteristics of a mainframe, at a
fraction of the cost.
THE ECCS APPROACH
ECCS designs, manufactures and markets a comprehensive range of high
performance, user-definable, fault-tolerant storage subsystems for Open Systems
and proprietary systems needs. The Company believes that its proprietary mass
storage enhancement products provide a level of performance or features not
generally available from competitors.
The following are the key attributes of the ECCS approach:
High Level of Data Access Performance. The Company's product offerings
address RAID's inherent performance limitations relating to the speed of data
access. The Company's products are designed to provide a high level of data
access performance through the utilization of (i) multiple RAID levels on a wide
variety of disks that possess varying performance characteristics, (ii) larger
and upgradeable cache size to improve speed by avoiding the need for mechanical
access to RAID, (iii) solid state disks for dedicated memory for frequently
accessed information and (iv) proprietary technology for different software
applications.
Improved Data Administration Capabilities. The Company's products utilize
an intuitive, customizable Graphical User Interface (GUI) which allows for the
monitoring and management of virtually all systems functions, including
configuration, cache policies and data rebuild. These features allow for the
management of data by both sophisticated and unsophisticated users.
Enhanced Data Availability. The Company's products enhance data
availability by offering array-based failover, complete fault tolerance,
multiple host connectivity across various Open Systems platforms, on-line
firmware upgrades, on-line systems maintenance and hot-swappable component
replacement. The Company's array-based failover enables failover protection at
the storage array without host intervention.
Scalability. The Company's products provide maximum scalability as a
customer's needs change by using a modular approach in designing and configuring
its storage solutions. Customers can purchase from 10 to 90 disk drives per
footprint. This scalability allows the Company to provide solutions for a broad
range of storage requirements, from low capacity users to enterprise-wide
environments.
STRATEGY
ECCS' objective is to further establish and solidify its position in the
rapidly growing Open Systems data storage market. In particular, the Company's
strategic focus centers around serving users whose mission critical applications
require high performance and high reliability storage products. The Company's
strategy
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incorporates the following key elements: develop and broaden OEM relationships
with market leaders; establish first mover position in emerging clustering
technologies; continue direct sales to end users; and protect its position as an
innovative technology provider.
Develop and Broaden OEM Relationships with Market Leaders. The Company
believes that OEMs represent the most effective path to the end user and are
therefore its most significant revenue opportunity. By establishing
relationships with key OEMs that command a leadership position in their markets,
the Company believes it can gain increased credibility as a leading data storage
solution provider as well as leverage a large sales organization and customer
base. The Company anticipates that potential OEM candidates will possess the
need for fault tolerant data storage solutions as a complement to their market
leading technology. The Company is actively seeking to enter into additional,
long-term OEM relationships and supply agreements with organizations that
possess the capability to extend the reach of ECCS technology. Until July 21,
1997, Unisys served as the Company's only OEM. On July 21, 1997, the Company
announced that it had signed a Memorandum of Understanding pursuant to which
Tandem was granted a non-exclusive worldwide right to sell and distribute
certain of the Company's proprietary products under private label.
Establish First Mover Position in Emerging Clustering Technologies. The
Company intends to establish itself as the data storage solution of choice for
emerging clustering technologies. ECCS' technology is compatible with products
offered by Microsoft NT. This includes Wolfpack, Microsoft's fault-tolerant
clustering technology, which is expected to be part of the next general release
of Windows NT for the enterprise during 1997. In addition, the Company is
developing controller board technology for Tandem's ServerNet product.
ServerNet, an interconnect clustering technology, allows all major components of
a system, including processors, disk drives and I/O devices, to interact with
each other without processor intervention. The ServerNet architecture is an Open
System design capable of managing data applications that incorporate voice,
image or video with traditional data. Other vendors who have announced their
product support of ServerNet are Compaq, NEC, Oracle, Dell and Unisys.
Continue Direct Sales to End Users. As part of its distribution activity,
ECCS also sells directly to commercial and government end users. The Company
believes that maintaining direct contact with end users provides direction to
its research and development effort and enables the Company to better respond to
market needs and expectations. In addition, direct sales to end users generally
carry higher gross margins.
Protect Technological Edge. ECCS intends to continue to improve upon its
current products as well as develop new products for data storage. The Company
believes that it possesses substantial technical expertise gained through years
of internal research and development. ECCS believes that its research and
development efforts have produced a product line with advanced features and
functionality that provide it with a competitive advantage in the marketplace.
The Company is actively pursuing each element of its strategy. No
assurances can be given, however, as to when or if these goals will be achieved.
PRODUCTS AND TECHNOLOGY
The Company's family of mass storage enhancement products includes RAID
products, external disk, optical and tape systems and internal disk and tape
storage devices and storage related software. The Company designs its RAID
products to comply with standards adopted by the industry and the RAID Advisory
Board.
All the Company's products are compatible with the SCSI (Small Computers
Systems Interface) protocol, an industry standard interface for peripheral
devices supported by the vast majority of computer manufacturers, as well as
with SCSI 2, an enhancement of the SCSI protocol and fiber protocol. The
Company's products operate with many major Open Systems hardware platforms and
operating systems environments.
Recent advances in the speed and capacity of servers in network
environments often have exceeded the growth in capability of traditional
off-the-shelf storage systems. In anticipation of and in response to these
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industry trends, the Company has focused its product development efforts on
advanced storage products including the following:
SYNCHRONIX is a full feature product family designed for use in UNIX and NT
environments, including Microsoft Wolfpack and clustered environments.
Synchronix features a high performance, fault tolerant architecture to satisfy
large-scale, mission critical applications for Open Systems environments,
redundant controllers, cross-platform and dual host support, cache management,
hot swappable components and array-based automatic server failover, and provides
a scalable, continuously available feature flexible data storage solution. The
Synchronix family, which supports RAID levels 0, 1, 3, 5 and 10, also includes
varying offerings of the Synchronix Storage Management Subsystem, which provide
concurrent, user-definable implementations of RAID fault tolerance and non-RAID
configurations. The Synchronix family of products provides ECCS' customers with
a GUI which allows for the monitoring and management of virtually all systems
functions, including configuration, cache policies, data rebuild and load
balancing. The Company has received the Fault Tolerant Disk System+ (FTDS+)
rating from the RAID Advisory Board for the Synchronix Storage System. ECCS'
product is one of only three products to have received this fault tolerant
rating at this time. Synchronix can be configured to provide capabilities
ranging from just an array of independent disks through multiple levels of RAID
and can incorporate advanced, easy to utilize storage management and system
administration capabilities. Synchronix became commercially available in the
first quarter of 1996.
SYNCHRONECTION-FT features a high performance, fault tolerant network file
server coupled with all of the continuous availability features of Synchronix,
and provides complete network access in a centralized storage repository for all
network storage requirements. All active components including disk drives, power
supplies, fans and system controllers are fully redundant, hot-swappable and can
be monitored on-line through the GUI. Synchronection combines the Company's
Synchronix product family with network software, offering storage capability up
to 1.6 terabytes. Synchronection, due to its software component, offers more
flexibility and a greater degree of compatibility with most network systems,
reducing the need for customized solutions and extensive testing periods.
Synchronection-FT became available during the second quarter of 1996.
RAVEN UX 410 is a powerful, flexible, all-in-one server for departmental,
Internet, and Intranet requirements. The Raven UX 410 offers high performance,
with a scalable server which provides for continuous availability server
application with integrated RAID protection. The storage offered on the Raven UX
410 includes disk, tape, CD-ROM and floppy devices and RAID with processor in
one small desktop, deskside or rackmount footprint. The Raven UX 410 can be
optionally configured with industry standard tape drives, CD-ROMs and floppy
disks. The Company sells Raven UX primarily to the U.S. Air Force.
SALES AND MARKETING
The Company markets its products through alternate channel partners,
including OEMs, VARs and distributors, and directly to Federal and commercial
end users through its internal sales force.
Of its current alternate channel partners, the Company believes that its
key strategic relationships with Unisys and Tandem represent the greatest
potential for growth.
Relationships with Unisys and Tandem. Sales under the Company's OEM
agreement with Unisys commenced in 1996. All sales to Unisys were sales of mass
storage enhancement products. Such agreement, as subsequently amended, grants to
Unisys exclusive world-wide rights to sell and distribute certain of the
Company's proprietary products and a non-exclusive world-wide right to sell and
distribute certain other products. The agreement provides that product pricing
shall remain in effect throughout the term of the agreement unless market
conditions dictate that the Company should provide more favorable pricing terms
to Unisys. The agreement is for an initial five year term beginning May 1, 1995,
and Unisys has the right to extend such term for successive one year periods
upon appropriate written notice. The agreement may be terminated under certain
conditions and Unisys may, subject to certain conditions, terminate the
agreement in the event that the Company fails to timely perform its delivery
obligations under the agreement. The Company's sales are made by purchase order.
Therefore, the Company has no long-term commitments from Unisys and Unisys
generally may cancel orders on 30 days notice. There can be no assurance that
orders from
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Unisys will continue at their historic levels or that the Company will be able
to obtain any new orders from Unisys.
The Company and Tandem have executed a Memorandum of Understanding pursuant
to which Tandem has been granted a non-exclusive worldwide right to sell and
distribute certain of the Company's proprietary products under private label.
Under this arrangement, Tandem has no minimum or long-term commitment to
purchase from the Company. Tandem may cancel orders on thirty days notice. The
Company and Tandem have executed a second Memorandum of Understanding for
development of a ServerNet-based, fault tolerant, high performance, network
storage system. Tandem's ServerNet architecture is a system area network
technology for high speed, high availability movement of data for servers
running Windows NT. Other vendors who have announced their product support of
ServerNet are Compaq, NEC, Oracle, Dell and Unisys. The Company does not expect
to generate revenues from ServerNet and related products in 1997. The Company
has not yet entered into any definitive agreement with Tandem. Accordingly, it
is too early to accurately determine the impact that such relationships will
have on the Company's revenue in the future.
Direct Sales. ECCS currently focuses its direct sales efforts on
commercial and government end user accounts. The Company's direct sales force
consists of ten people. The Company conducts sales and marketing from its
corporate headquarters in New Jersey and from its offices in Alpharetta,
Georgia; Herndon, Virginia; and San Jose, California. The Company believes that
direct sales and support can lead to better account penetration and control,
better communications and long-term relationships with end user customers,
opportunities for follow-on sales to the existing customer base and more
accurate identification of current and future end user customer requirements
with which to guide product specification and development efforts. The sales
activities of the Company's direct sales force includes cold calling, attending
trade shows and exhibitions and pursuing sales leads provided by current
customers.
During 1996 the Company became a subcontractor to a prime contractor,
Hughes Data Systems, which, along with Sun Microsystems, Inc., was awarded a
contract by the U.S. Air Force. The Company uses its direct sales force to
market to the U.S. Air Force. There are no minimum purchase requirements. There
can be no assurance that there will be additional sales under this contract.
CUSTOMER SUPPORT
The Company also provides technical support services to OEMs (third tier
support) and to end users. The Company's technical support specialists are
divided into three "tiers" or "levels" of support, and are thus able not only to
diagnose and solve technical problems but also to assist customers with systems
integration and use. Customers have toll-free telephone access (1-800-2-GET-HLP)
to technical specialists who respond to hardware, software and applications
questions. The Company tracks service reports through a customer database which
maintains current status reports as well as historical logs of customer
interaction.
The Company has also established a Professional Services organization that
provides, on a contract basis, a variety of services, including hardware and
software installation, training, configuration analysis, integration testing and
application development. The Professional Services organization also provides
pre- and post-sales support.
COMPETITION
ECCS is engaged in fields within the data processing industry characterized
by a high level of competition. Many established companies, including
manufacturers of computers, systems integrators and manufacturers of mass
storage enhancement products and networking products compete with the Company.
Many of such competitors have resources greater than those of the Company. There
can be no assurance that the Company will be able to continue to compete
successfully with existing or new competitors.
ECCS also believes it distinguishes itself from its competitors on the
basis of the combination of its technical expertise, its product uniqueness, its
systems integration services and its service and customer support. The Company
believes it distinguishes itself from competitors through the available
features, price and performance of its own mass storage enhancement products.
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The Company believes that the currently available alternative mass storage
devices are not adequate substitutes with respect to the particular applications
addressed by the Company's products. Such alternatives address different
requirements for characteristics such as storage capacity, data access speed,
reliability, fault tolerance and price/performance. Most computer systems
companies and companies that offer memory enhancement products also offer RAID,
mass storage and backup products and technologies, or are undertaking
development efforts, which compete or may compete with the Company in the mass
storage marketplace for Open Systems-based networked computers, including
companies considerably larger and with greater resources than those of the
Company. To the Company's best knowledge, current providers of RAID products and
technology in the Open Systems marketplace on an OEM basis and/or to end users
include, among others, EMC, Data General, Digital Equipment Corporation and
Hyundai's Symbios Logic Division. Many larger companies currently provide RAID
solutions for the mainframe and mini-computer market segments. There can be no
assurance that such companies will not enter the RAID marketplace for Open
Systems-based non-mainframe, non-mini-computer computers.
Competitive factors include relative price/performance; product features,
quality and reliability; adherence to industry standards; financial strength;
and service, support and reputation. For certain of the Company's products, an
important factor in competition may be the timing of market introduction of its
or its competitors' products, relative time to market of products and product
availability. Accordingly, the relative speed with which the Company can develop
products and bring them to market also are important competitive factors.
MANUFACTURING AND SUPPLIERS
ECCS relies on outside manufacturers to manufacture and produce certain of
the Company's products for use in the Company's proprietary systems, as well as
for the direct sale to end users, and relies on outside suppliers to supply
subassemblies, component parts and computer systems for resale. Certain
components used in the Company's business are available only from a limited
number of sources. Any delays in obtaining component parts could adversely
affect the Company's results of operations. Manufacturing by the Company
consists primarily of light assembly, systems integration, testing and quality
assurance. The Company relies on independent contractors and outside suppliers
to manufacture subassemblies to the Company's specifications. Each of the
Company's products undergoes testing and quality inspection at the final
assembly stage. The Company has not experienced material problems with its
proprietary systems manufacturers or its suppliers of subassemblies. There can
be no assurance, however, that material problems will not arise in the future
that could significantly impede or interrupt the Company's business. Although no
assurances may be given, the Company anticipates that its current facilities
coupled with the Company's ability to hire contract manufacturers will
adequately satisfy its manufacturing requirements for the foreseeable future.
Significant vendors to the Company include Unisys, Bell Microproducts and
Anthem. During 1996, purchases from these vendors totaled $4.3 million or 26%,
$2.1 million or 13% and $1.2 million or 7%, respectively, of the Company's total
purchases and, for the six months ended June 30, 1997, 27%, 24% and 6%,
respectively, of the Company's total purchases.
On June 27, 1995, the Company entered into a Manufacturing Services
Agreement with Unisys, its primary manufacturer, that defines the terms of sales
and support services. Pursuant to such agreement, Unisys will manufacture
certain of the Company's products for use in the Company's proprietary systems
as well as for the direct sale to end-users. The agreement does not contain
specific quantity commitments and purchases are made on a purchase order basis.
The agreement does not include any long-term commitment by the Company to
Unisys. The contract had an initial term of one year and automatically renews
for successive one year periods. The contract was automatically renewed on June
27, 1997. Pricing and deliverables are to be negotiated each year. Either party
can terminate the agreement with written notice, provided, however, that if
Unisys cancels the agreement, it shall be obligated to continue accepting
manufacturing orders for a period of six months thereafter. In the event that
the Company terminates the agreement, the Company shall be liable for inventory
procured to fill the Company's orders. The Company primarily relies on regular
trade credit with open terms for the financing of purchases under this
agreement.
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<PAGE> 28
The Company has purchase order supply arrangements with Bell Microproducts
and Anthem pursuant to which the Company orders on terms negotiated at the time
of each such order. There are no minimum purchase requirements. These
arrangements are terminable by either party at any time.
RESEARCH AND DEVELOPMENT
The Company participates in an industry that is subject to rapid
technological changes, and its ability to remain competitive depends on, among
other things, its ability to anticipate such changes. As a result, the Company
has devoted substantial resources to product development. The Company's research
and development expenditures were $1,466,000 in 1996, $1,303,000 in 1995, and
$1,952,000 in 1994, of which $439,000, $180,000, and $974,000, respectively,
were capitalized in accordance with Financial Accounting Standards Board SFAS
No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed. Research and development expenses were $696,000 in the six
months ended June 30, 1997, net of $283,000 capitalized in accordance with SFAS
No. 86.
A substantial portion of the Company's research and development
expenditures in 1996 were devoted to the continued development of its Synchronix
family of products. To a lesser extent, research and development expenditures in
1996 related to feature upgrades and advanced engineering of ECCS' other current
product and planned product lines. Research and development expenditures in the
first half of 1997 related to the Company's continued enhancements to the
Company's mass storage enhancement products. Research and development projects
for which the Company expects to devote resources in the near future are a next
generation of the Synchronix family of products, new interface connectivities,
customized OEM products and the joint development of a ServerNet product with
Tandem.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Proprietary protection for the Company's technological know-how, products
and product candidates is important to its business. The Company relies upon
patents, trade secrets, know-how and continuing technological innovation to
develop and maintain its competitive position. The Company also relies on a
combination of copyright and trade secret protection and non-disclosure
agreements to establish and protect its proprietary rights. The Company has
filed numerous patent applications covering various aspects of its Synchronix
product family. There can be no assurance that patents will issue from any
applications or, if patents do issue, that any claims allowed will be
sufficiently broad to prohibit others from marketing similar products. In
addition, there can be no assurance that any patents that may be issued to the
Company, or which the Company may license from third parties, will not be
challenged, invalidated or circumvented, or that any rights granted thereunder
will provide proprietary protection to the Company. Although the Company
continues to implement protective measures and intends to defend its proprietary
rights, policing unauthorized use of the Company's technology or products is
difficult and there can be no assurance that these measures will be successful.
Although management believes that patents will provide some competitive
advantage, the Company's success is dependent to a great extent on its
proprietary knowledge, innovative skills, technical expertise and marketing
ability. Because of rapidly changing technology, the Company's present intention
is not to rely primarily on patents or other intellectual property rights to
protect or establish its market position.
The Company has registered trademarks for RAID 10 PERFORMANCE MANAGER,
INTELLIGENT REBUILD, SPLIT MIRROR, EXAMODULE, SYNCHRONIX, INVERSE MIRRORING,
SYNCHRONISM, SYNCHRONECTION, SPLIT VOLUME and EASY BACKUP.
Since 1989, the Company has required that all new employees, consultants
and contractors execute non-disclosure agreements as a condition of employment
or engagement by the Company. There can be no assurance, however, that the
Company can limit unauthorized or wrongful disclosures of unpatented trade
secret information.
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<PAGE> 29
EMPLOYEES
As of June 30, 1997, the Company employed 90 persons, of whom 19 were
engaged in marketing and sales; 25 in research and development; 22 in
operations, including customer and technical support, manufacturing and
fulfillment; 5 in Professional Services; and 19 in finance, administration and
management. None of the Company's employees are covered by collective bargaining
agreements. The Company believes that it has been successful in attracting
skilled and experienced personnel; however, competition for such personnel is
intensive. The Company's future success will depend in part on its ability to
continue to attract, retain and motivate highly qualified technical,
manufacturing, marketing and management personnel. The Company considers
relations with its employees to be good.
PROPERTIES
The Company leases facilities in Tinton Falls, New Jersey totaling 32,000
square feet. One lease covers 22,000 square feet and expires on December 31,
2000. Such lease contains a renewal option for an additional four-year term. A
second lease covers 10,000 square feet and expires on March 31, 1998, with an
option for an additional 33 months. The leased space in New Jersey is used for
research and development, manufacturing, quality assurance, a substantial
portion of sales and marketing and administration. The Company also leases sales
offices in Alpharetta, Georgia; Herndon, Virginia; and San Jose, California.
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<PAGE> 30
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- ---------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Michael E. Faherty...................... 62 Chairman of the Board and Director
Gregg M. Azcuy.......................... 38 President and Chief Executive Officer and Director
Louis J. Altieri........................ 38 Vice President, Finance and Administration
David J. Boyle.......................... 33 Vice President, Sales and Marketing
Priyan Guneratne........................ 41 Vice President, Operations
Gale R. Aguilar......................... 65 Director
James K. Dutton......................... 64 Director
Donald E. Fowler........................ 59 Director
Frank R. Triolo......................... 63 Director
Thomas I. Unterberg..................... 66 Director
</TABLE>
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified. All
directors hold office until the next annual meeting of shareholders and until
their successors shall have been duly elected and qualified.
Mr. Faherty has served as Chairman of the Board of the Company since
December 1994. From December 1994 to June 1996, he also served as Chief
Executive Officer of the Company. Prior to that, from August 1994 through
October 1994, he provided consulting services to the Company. Since February
1977, Mr. Faherty has been the principal of MICO, a general business consulting
firm. From January 1992 to January 1994, Mr. Faherty served as President and
Chief Executive Officer of Shared Financial Systems, Inc., a worldwide provider
of software and consulting services to data processing market segments that
utilize on-line transaction processing. From February 1989 to June 1992, Mr.
Faherty was employed by Intec Corp., a company engaged in the development and
sale of hardware and software systems designed to measure online defects,
serving as President of such company during such time and, from February 1990,
serving as its Chairman. In addition, from December 1992 to the present, Mr.
Faherty has been a general partner of Faherty Property Co., a family investment
partnership. Mr. Faherty serves as a director and is a member of the
compensation committee of BancTec, Inc. and Frontier Corporation, each a
publicly held company.
In August 1995, ALC Communications Corporation ("ALC") merged into
Frontier. Mr. Faherty was a director of ALC until the time of such merger and
became a director of Frontier upon the consummation of such merger. On April 10
and 11, 1995, three lawsuits were commenced against ALC as a result of its
announced merger with Frontier. The lawsuits purport to be class actions brought
on behalf of all ALC shareholders against ALC and its directors. Among other
things, the complaints sought to enjoin the merger or to obtain an award of
damages. On June 9, 1995, the Delaware court consolidated the three cases for
all purposes under Mayers v. Irwin, et al., C.A. No. 14196. On July 10, 1995,
ALC and its directors answered the consolidated complaint.
Mr. Azcuy has been a Director of the Company since June 1996. He joined the
Company in April 1994 as Executive Vice President, Products Division. In
September 1994, he became Acting Chief Operating Officer and, in February 1995,
became Vice President and Chief Operating Officer. In December 1995, he became
President and Chief Operating Officer. Since June 1996, he has served as
President and Chief Executive Officer. Prior to joining the Company, from 1993
to 1994, Mr. Azcuy was International Marketing Manager for Hitachi Data Systems
International, a manufacturer of mainframe storage products. From 1991 to 1993,
Mr. Azcuy was Vice President, Marketing and Sales, for Systems Industries, an
Open-Systems provider of storage solutions and, prior to that, from 1982, held
various managerial and sales positions within Systems Industries.
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<PAGE> 31
Mr. Altieri, C.P.A., joined the Company in September 1994 as Controller and
became Vice President, Finance and Administration in October 1995. Prior to
joining the Company, from September 1991 until September 1994, Mr. Altieri
served as corporate controller of Monroe Systems for Business, Inc., an
international manufacturer, distributor and service provider of business
equipment. Prior to that, from June 1985 until September 1991, he served as
corporate controller/treasurer of C.M. Ofray and Sons, Inc., and Lion Ribbon
Company, each a manufacturer of novelty ribbons to florists, wholesalers and
large retailers.
Mr. Boyle joined the Company in 1996 as Vice President, Sales and
Marketing. Prior to joining the Company, from April 1995, Mr. Boyle served as
Vice President, Sales of IPL Systems and from December 1991 to April 1995, he
served as District Manager of EMC Corp. Both companies are engaged in the data
storage business.
Mr. Guneratne joined the Company in 1992 as Director of Manufacturing for
the Company's Products Division and later served as Director of Engineering. He
became Vice President, Operations in 1995. Prior to joining the Company, from
1986, Mr. Guneratne served in various product and design positions for E-Systems
Garland Division, including Program Manager, Engineering Manager and Products
Manager. From 1976 through 1986, Mr. Guneratne held various positions in
engineering design and development at Unisys and Raytheon Company.
Mr. Aguilar has been a Director of the Company since March 1995. Mr.
Aguilar currently is President and a director of Mitem Corporation, a software
development company based in Menlo Park, California. Prior to that, from 1989 to
1992, Mr. Aguilar was Executive Vice President of SF2, a company which pioneered
RAID technology. From 1982 to 1988, Mr. Aguilar served as Senior Vice President
of Marketing and Corporate Development for Prime Computer. For 27 years, he held
various executive positions in sales, marketing and development with IBM
Corporation.
Mr. Dutton has been a Director of the Company since August 1994. He is
currently a consultant and private investor. From 1991 to May 1994, he was a
consultant to and President of Andor America Corporation, a distributor of high
end mainframe computer equipment and related software. He was a director of
System Industries, Inc. from 1985 to July 1993 and served as Chairman of the
Board from March 1992 to July 1993. He is currently a director of Caere
Corporation and Network Equipment Technologies, Inc., each a public company.
Mr. Fowler has been a Director of the Company since June 1996. He is
currently President, Chief Executive Officer and a Director of eT
Communications. Prior to that, from January 1996 to August 1996, Mr. Fowler
served as interim President and Chief Executive Officer of Worlds Inc., a
software company. From 1986 to January 1996, Mr. Fowler served as Senior Vice
President at Tandem Computers, and previously held executive positions at
Bechtel Group and IBM. He currently serves as Chairman of the President's
Cabinet at California Polytechnic State University.
Mr. Triolo has been a Director of the Company since June 1996. From
September 1995 to January 1997, Mr. Triolo was chairman of Knowledge Discovery
1, a software and services company. Prior to that, from June 1994 to June 1995,
Mr. Triolo was the chairman and chief executive officer of Datacache, a computer
hardware and software company. Prior to that, from 1992 to April 1994, Mr.
Triolo served as a senior officer with AT&T Global Information Solutions (now
NCR). From 1985 to 1992, he was a senior officer with Teradata Corporation.
Prior to that, he was a senior sales executive with Amdahl Corporation.
Currently he is a consultant to technology companies in sales and marketing.
Mr. Unterberg has been a Director of the Company since June 1996. Mr.
Unterberg is Managing Director of Unterberg Harris, an investment banking firm
which is the underwriter in this Offering. See "Underwriting." Unterberg Harris
was the lead manager in the Company's initial public offering in 1993 and acted
as placement agent in the Company's private offerings of preferred stock in 1995
and 1996. Prior to that, from 1987 to 1989, he was head of Technology Investment
Banking at Lehman Brothers. Mr. Unterberg is also presently the chairman and
president of C.E. Unterberg Inc. From 1977 to 1986, he was a General Partner,
Managing Director and Chairman of L.F. Rothschild, Unterberg, Towbin. He
currently serves on the Board of several public companies, including the AES
Corporation, Electronics for Imaging, Inc. and Systems and Computer Technology
Corporation.
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<PAGE> 32
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1997 (assuming the
conversion of all outstanding Convertible Preferred Stock), and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
person who is known to the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) the Selling Shareholders, (iii) each of
the Company's directors and Named Executives, and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) NUMBER OF AFTER OFFERING(1)
------------------------ SHARES BEING ------------------------
NAME NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
- -------------------------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Unterberg Harris Private Equity
Partners,
L.P. Swiss Bank Tower
10 East 50th Street
New York, New York 10022............ 1,040,626(3) 12.6 -- 1,040,626 9.9
E&M RP Trust
c/o Edmund Shea
655 Brea Canyon Road
Walnut, California 71789-3010....... 523,727(4) 6.3 -- 523,727 5.0
Monmouth University................... 66,668(5) * 66,668 -- --
Joseph M. Tucci....................... 50,000(6) * 50,000 -- --
John Dexheimer........................ 10,000(7) * 7,500 2,500 *
George Karfunkel...................... 121,814(8) 1.5 121,814 -- --
Gale R. Aguilar....................... 23,333(9) * -- 23,333(9) *
James K. Dutton....................... 30,000(10) * -- 30,000(10) *
Michael E. Faherty.................... 361,774(11) 4.2 -- 361,774(11) 3.3
Donald E. Fowler...................... 16,667(12) * -- 16,667(12) *
Frank R. Triolo....................... 16,667(12) * -- 16,667(12) *
Thomas I. Unterberg................... 1,676,627(13) 20.3 -- 1,676,627(14) 15.9
Gregg M. Azcuy........................ 151,235(15) 1.8 -- 151,235(15) 1.4
Louis J. Altieri...................... 33,693(16) * -- 33,693(16) *
David J. Boyle........................ 17,500(17) * -- 17,500(17) *
Priyan Guneratne...................... 28,534(18) * -- 28,534(18) *
All Directors and current executive
officers as a group (10 persons).... 2,356,030(19) 26.6 -- 2,356,030(19) 21.2
</TABLE>
- ---------------
* Less than one percent.
(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by such shareholder.
(2) Applicable percentage of ownership is based on 8,261,622 shares of Common
Stock outstanding on June 30, 1997 (assuming the conversion of all
outstanding Convertible Preferred Stock) and 10,515,640 shares of Common
Stock outstanding immediately after this Offering, plus, in each case, any
presently exercisable stock options or warrants or the conversion of other
convertible securities held by each such holder and options or warrants
which will become exercisable within 60 days after such date.
(3) Includes 765,958 and 274,668 shares of Common Stock issuable upon the
conversion of shares of Series B Preferred Stock and Series C Preferred
Stock, respectively.
(4) Includes 177,059 and 266,668 shares of Common Stock issuable upon the
conversion of shares of Series B Preferred Stock and Series C Preferred
Stock, respectively.
(5) Includes 66,668 shares of Common Stock issuable upon conversion of shares
of Series C Preferred Stock.
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<PAGE> 33
(6) Includes 50,000 shares of Common Stock issuable upon conversion of shares
of Series C Preferred Stock.
(7) Includes 10,000 shares of Common Stock issuable upon conversion of shares
of Series C Preferred Stock.
(8) Includes 88,530 and 33,284 shares of Common Stock issuable upon the
conversion of shares of Series B Preferred Stock and Series C Preferred
Stock, respectively.
(9) Includes 23,333 shares of Common Stock subject to options which are
exercisable at June 30, 1997 or which will become exercisable within 60
days of such date.
(10) Includes 30,000 shares of Common Stock subject to options which are
exercisable at June 30, 1997 or which will become exercisable within 60
days of such date.
(11) Includes 308,848 shares of Common Stock subject to warrants or options
which are exercisable at June 30, 1997 or which will become exercisable
within 60 days of such date.
(12) Includes 16,667 shares of Common Stock subject to options which are
exercisable at June 30, 1997 or which will become exercisable within 60
days of such date.
(13) Includes: 16,667 shares of Common Stock subject to options which are
exercisable at June 30, 1997 or which will become exercisable within 60
days of such date; 88,530 and 133,336 shares of Common Stock issuable upon
the conversion of shares of Series B Preferred Stock and Series C Preferred
Stock, respectively; 765,958 and 274,668 shares of Common Stock issuable
upon the conversion of shares of Series B Preferred Stock and Series C
Preferred Stock, respectively, held by Unterberg Harris Private Equity
Partners, L.P.; 163,602 and 58,668 shares of Common Stock issuable upon the
conversion of shares of Series B Preferred Stock and Series C Preferred
Stock, respectively, held by Unterberg Harris Private Equity Partners,
C.V.; 88,530 and 66,668 shares of Common Stock issuable upon the conversion
of shares of Series B Preferred Stock and Series C Preferred Stock,
respectively, held by Unterberg Harris LLC; and 20,000 shares of Common
Stock issuable upon the conversion of shares of Series C Preferred Stock
held by Unterberg Harris 401(k) Profit Sharing Plan Dated 10/26/90 FBO:
Robert Matluck, of which Mr. Unterberg is a trustee.
(14) Includes 16,667 shares of Common Stock subject to options which are
exercisable at June 30, 1997 or which will become exercisable within 60
days of such date.
(15) Includes 125,923 shares of Common Stock subject to options which are
exercisable at June 30, 1997 or which will become exercisable within 60
days of such date.
(16) Includes 27,750 shares of Common Stock subject to options which are
exercisable at June 30, 1997 or which will become exercisable within 60
days of such date.
(17) Includes 17,500 shares of Common Stock subject to options which are
exercisable at June 30, 1997 or which will become exercisable within 60
days of such date.
(18) Includes 24,500 shares of Common Stock subject to options which are
exercisable at June 30, 1997 or which will become exercisable within 60
days of such date.
(19) See Notes 9 through 18.
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<PAGE> 34
DESCRIPTION OF CAPITAL STOCK
As of June 30, 1997, the Company had authorized capital of 20,000,000
shares of Common Stock and 3,000,000 shares of Preferred Stock. At June 30,
1997, there were 4,491,032 shares of Common Stock outstanding (8,261,622 shares
as adjusted to give effect to the mandatory conversion of the Convertible
Preferred Stock upon completion of the Offering). Other than the Convertible
Preferred Stock, there are no other shares of Preferred Stock outstanding.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the shareholders of the Company.
Holders of shares of Common Stock will be entitled to receive dividends, subject
to the senior rights of preferred shareholders, when, as and if declared by the
Board of Directors (see "Dividend Policy") and to share ratably in the assets of
the Company legally available for distribution to its shareholders in the event
of the liquidation, dissolution or winding-up of the Company. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. All of
the issued and outstanding shares of Common Stock are, and all shares of Common
Stock to be sold in this Offering will be, duly authorized, validly issued,
fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors may without further action by the
Company's shareholders, from time to time, direct the issuance of shares of
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. The holders of Preferred
Stock would normally be entitled to receive a preference payment in the event of
any liquidation, dissolution or winding-up of the Company before any payment is
made to the holders of the Common Stock. The Company does not presently intend
to issue any new series of Preferred Stock.
The overall effect of the ability of the Company's Board of Directors to
issue Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change-in-control attempts. To the extent that this
ability has this effect, removal of the Company's incumbent Board of Directors
and management may be rendered more difficult. Further, this may have an adverse
impact on the ability of shareholders of the Company to participate in a tender
or exchange offer for the Common Stock and in so doing diminish the market value
of such stock. See "Risk Factors -- Control by Existing Shareholders; Anti-
takeover Considerations" and "Description of Capital Stock -- Anti-takeover
Provisions."
REGISTRATION RIGHTS OF CERTAIN HOLDERS
In May 1995 and May 1996, the Company and the holders of the Company's
Series B and Series C Preferred Stock, respectively, entered into stock purchase
agreements pursuant to which the Company has granted certain demand and
piggyback registration rights to such shareholders Other than the Selling
Shareholders, all such shareholders have waived their registration rights in
connection with this Offering. The shares of Common Stock issuable upon the
conversion of Series B Preferred Stock are tradable, without restriction, under
Rule 144(k) by holders other than affiliates of the Company. The shares of
Common Stock issuable upon conversion of the Series C Preferred Stock are
eligible for resale in accordance with the provisions of Rule 144, including the
volume limitations thereunder.
Pursuant to warrants issued to Michael E. Faherty, Chairman of the Board of
Directors, in December 1994, Mr. Faherty has unlimited piggyback registration
rights at the Company's expense, subject to certain restrictions set forth in
the warrants. Mr. Faherty has waived such registration rights in connection with
this Offering.
LIMITATION OF DIRECTOR LIABILITY
The Restated and Amended Certificate of Incorporation of the Company limits
the liability of the Company's directors and officers to the Company or its
shareholders to the fullest extent permitted by New
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<PAGE> 35
Jersey law. Specifically, directors and officers of the Company will not be
personally liable for money damages for breach of a duty as a director or an
officer, except for liability (i) for any breach of the director's or officer's
duty of loyalty to the Company or its shareholders, (ii) for acts or omissions
not in good faith or which involve a knowing violation of law, (iii) as to
directors only, under Section 14A:6-12(I)(a) of the New Jersey Business
Corporation Act, which relates to unlawful declarations of dividends or other
distributions of assets to shareholders or the unlawful purchase of shares of
the corporation, or (iv) for any transaction from which the director or officer
derived an improper personal benefit.
ANTI-TAKEOVER PROVISIONS
The Company is governed by the provisions of Section 14A:10A-1 et. seq.,
the New Jersey Shareholders Protection Act (the "New Jersey Act"), of the
Business Corporation Act of New Jersey, an anti-takeover law. In general, the
statute prohibits a publicly-held New Jersey corporation from engaging in a
"business combination" with an "interested shareholder" for a period of five
years after the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 10% or more of the corporation's voting stock.
After the five-year waiting period has elapsed, a business combination between a
corporation and an interested shareholder will be prohibited unless the business
combination is approved by the holders of at least two-thirds of the voting
stock not beneficially owned by the interested shareholder, or unless the
business combination satisfies the New Jersey Act's fair price provision
intended to provide that all shareholders (other than the interested
shareholders) receive a fair price for their shares.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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<PAGE> 36
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company and the Selling Shareholders have
agreed to sell to Unterberg Harris (the "Underwriter") and the Underwriter has
agreed to purchase the shares of Common Stock offered hereby.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the shares of Common
Stock offered hereby if any such shares are purchased.
The Underwriter proposes initially to offer the shares of Common Stock
offered hereby to the public at the public offering price per share set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriter may allow,
and such dealers may reallow, a discount not in excess of $ per share
on sales to certain other dealers. After the public offering, the offering
price, discount and reallowance may be changed.
The Company granted the Underwriter an option which may be exercised within
30 days after the date of this Prospectus, to purchase up to an additional
375,000 shares of Common Stock to cover over-allotments, if any, at the public
offering price, less the underwriting discounts.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriter (and in the case of the Company only, Burnham Securities Inc. in its
role as "qualified independent underwriter") against certain civil liabilities,
including liabilities under the Securities Act, or to contribute to payments the
Underwriter may be required to make in respect thereof.
The Company has agreed to pay the Underwriter upon the consummation of the
Offering a non-accountable expense allowance of $50,000.
On May 12, 1995, certain partners, employees, members of their families and
certain affiliates of Unterberg Harris, purchased, at a purchase price of
$1,340,000, 1,080,000 shares of the Company's Series B Preferred Stock, which
are convertible into an aggregate of 1,195,148 shares of Common Stock. On May
17, 1996, certain partners, employees and members of their families and certain
affiliates of Unterberg Harris, purchased, at a purchase price of $1,100,040,
183,340 shares of the Company's Series C Preferred Stock, which are convertible
into an aggregate of 733,360 shares of Common Stock. John Dexheimer, a managing
director of Unterberg Harris, has included 7,500 shares of Common Stock in this
Registration Statement, the proceeds of which are estimated to be $34,003.
Thomas I. Unterberg is Managing Director of Unterberg Harris, an investment
banking firm that is the sole underwriter in this Offering. Mr. Unterberg is a
member of the Board of Directors of the Company (as designee for the holders of
Convertible Preferred Stock prior to this Offering). Unterberg Harris was the
managing underwriter in the Company's initial public offering in 1993. In May
1995, Unterberg Harris acted as placement agent in connection with the private
placement of 1,600,000 shares of Series B Preferred Stock
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<PAGE> 37
of the Company, which shares convert into approximately 1,770,590 shares of
Common Stock. As compensation for its services, the Company paid to Unterberg
Harris $100,000. In May 1996, Unterberg Harris acted as placement agent in
connection with the private placement of 500,000 shares of Series C Preferred
Stock of the Company, which shares convert into approximately 2,000,000 shares
of Common Stock. As compensation for its services, the Company paid to Unterberg
Harris $150,000. Upon the consummation of this Offering, Mr. Unterberg will
beneficially own approximately 15.9% of the Common Stock of the Company.
John Rosenthal, a managing director of Burnham Securities Inc., owns 42,000
shares of Common Stock of the Company, 120,000 shares of Series B Preferred
Stock and 16,667 shares of Series C Preferred Stock. Such shares of Preferred
Stock convert into an aggregate of 199,462 shares of Common Stock.
Pursuant to provisions of Rule 2720 of the Conduct Rules of the National
Association of Securities Dealers, Inc. that are applicable because Unterberg
Harris and its associated persons or affiliates own more than 10% of the
preferred equity of the Company, Burnham Securities Inc. has served as a
"qualified independent underwriter" and has recommended a price for the Common
Stock. Burnham Securities Inc. has performed due diligence investigations and
reviewed and participated in the preparation of this Prospectus and the
Registration Statement.
Except for shares offered hereby, the Company, the Selling Shareholders and
certain other officers, directors and security holders of the Company have
agreed to a "lock-up" arrangement under which they will not offer, sell or
contract to sell, or otherwise dispose of, or announce an offering of, any
shares of Common Stock, or rights to acquire the same, without the prior written
consent of the Underwriter for a period of a maximum of 90 days after the date
of this Prospectus.
In connection with the Offering, the Underwriter may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M under the Exchange Act, pursuant to
which the Underwriter may bid for, or purchase, Common Stock for the purpose of
stabilizing the market price. The Underwriter also may create a short position
for their respective accounts by selling more Common Stock in connection with
the Offering than it is committed to purchase from the Company, and in such case
may purchase Common Stock in the open market following completion of this
Offering to cover all or a portion of such short position. In addition, the
Underwriter may impose "penalty bids" whereby it may reclaim from a dealer
participating in the offering, the selling concession with respect to Common
Stock that is distributed in this Offering, but subsequently purchased for the
account of the Underwriter in the open market. Any of the transactions described
in this paragraph may result in the maintenance of the price of the Common Stock
at a level above that which might otherwise prevail in the open market. None of
the transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
As permitted by Rule 103 under the Exchange Act, the Underwriter or a
market maker (a "passive market maker") in the Common Stock may make bids for or
purchases of Common Stock in the Nasdaq SmallCap Market until such time, if any,
when a stabilizing bid for such securities has been made. Rule 103 generally
provides that (1) a passive market maker's net daily purchases of the Common
Stock may not exceed 30% of its average daily trading volume in such securities
for the two full consecutive calendar months (or any 60 consecutive days ending
within the 10 days) immediately preceding the filing date of the registration
statement of which this Prospectus forms a part, (2) a passive market maker may
not effect transactions or display bids for the Common Stock at a price that
exceeds the highest independent bid for the Common Stock by persons who are not
passive market makers and (3) bids made by passive market makers must be
identified as such.
36
<PAGE> 38
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Buchanan Ingersoll, Princeton, New Jersey.
Certain legal matters will be passed upon for the Underwriter by Cravath, Swaine
& Moore, New York, New York.
EXPERTS
The consolidated financial statements of ECCS, Inc. at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates into this Prospectus by reference its
Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996, its
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and its
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 filed with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act of 1934.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any and all of the
documents incorporated herein by reference, other than exhibits to such
documents (except for exhibits that are specifically incorporated herein by
reference herein). Requests for such copies should be directed to Louis J.
Altieri, Vice President -- Finance and Administration, ECCS, Inc., One Sheila
Drive, Bldg. 6A, Tinton Falls, NJ 07724, telephone number (908) 747-6995.
37
<PAGE> 39
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") under the Securities Act, with respect to the
shares of Common Stock offered hereby. This Prospectus, which forms a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement and the exhibits and schedules filed therewith. For
further information with respect to the Company and the shares of Common Stock
offered hereby, reference is made to the Registration Statement and to such
exhibits and schedules filed therewith. Statements contained herein as to the
content of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, and each such statement shall
be deemed qualified in its entirety by such reference. The Registration
Statement and any amendments thereto, including exhibits filed or incorporated
by reference as a part thereof, are available for inspection and copying at the
Commission's offices as described in the following paragraph.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy and
information statements and other information with the Commission. Such reports,
proxy and information statements and other information can be inspected and
copied at the Public Reference Section of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
filed reports, proxy and information statements and other information can be
obtained from the Public Reference Section of the Commission, Washington D.C.
20549, upon payment of prescribed rates or in certain cases by accessing the
Commission's World Wide Web site at http://www.sec.gov. The Common Stock of the
Company is traded on the SmallCap Market under the symbol ECCS, and such
reports, proxy statements and other information concerning the Company also can
be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington D.C. 20006.
38
<PAGE> 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)... F-4
Consolidated Statements of Shareholders' Equity for each of the three years in the
period ended December 31, 1996 and for the six months ended June 30, 1996 and 1997
(unaudited)......................................................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 and for the six months ended June 30, 1996 and 1997 (unaudited)... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 41
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ECCS, Inc.
We have audited the accompanying consolidated balance sheets of ECCS, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ECCS, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Princeton, New Jersey
February 25, 1997
F-2
<PAGE> 42
ECCS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 1,514 $ 4,393 $ 1,339
Accounts receivable, less allowance for doubtful accounts of
$226 in 1995, $184 in 1996 and $258 at June 30, 1997....... 2,767 3,162 7,017
Inventories................................................... 4,854 4,680 5,602
Prepaid expenses and other receivables........................ 303 257 336
------- ------- -------
9,438 12,492 14,294
Property, plant and equipment (net)............................. 1,311 1,190 987
Investment in real estate (net)................................. 714 -- --
Capitalized software (net)...................................... 919 814 816
Other assets.................................................... 53 56 296
------- ------- -------
$12,435 $14,552 $16,393
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable................................................. $ 1,849 $ 1,762 $ 1,859
Payable to AT&T Commercial.................................... 1,254 64 782
Current portion of mortgage payable........................... 502 -- --
Current portion of capital lease obligations.................. 78 91 44
Accounts payable.............................................. 1,440 4,061 4,065
Accrued expenses and other.................................... 1,841 986 1,384
Warranty...................................................... 350 414 554
Customer deposits, advances and other credits................. 990 834 510
------- ------- -------
8,304 8,212 9,198
Capital lease obligations, net of current portion............... 50 8 --
Deferred rent................................................... 165 155 150
------- ------- -------
8,519 8,375 9,348
------- ------- -------
Series B cumulative redeemable convertible preferred stock, $.01
par value per share, authorized 3,000,000 shares; issued and
outstanding, 1,600,000 shares at December 31, 1995............ 16 -- --
Capital in excess of par value.................................. 1,778 -- --
------- ------- -------
1,794 -- --
------- ------- -------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value per share, authorized,
3,000,000 shares; Series B cumulative convertible preferred
stock, issued and outstanding, 1,600,000 shares at December
31, 1996 and June 30, 1997................................. -- 16 16
Series C cumulative convertible preferred stock, issued and
outstanding, 500,000 shares at December 31, 1996 and June
30, 1997................................................... -- 5 5
Common stock, $.01 par value per share, authorized, 20,000,000
shares; issued and outstanding, 4,277,975 shares, 4,432,216
shares and 4,491,032 shares at December 31, 1995, December
31, 1996 and June 30, 1997, respectively................... 43 44 45
Capital in excess of par value -- preferred................... -- 4,522 4,522
Capital in excess of par value -- common...................... 9,974 10,254 10,423
Deficit....................................................... (7,895) (8,664) (7,966)
------- ------- -------
2,122 6,177 7,045
------- ------- -------
Total Liabilities and Shareholders' Equity............ $12,435 $14,552 $16,393
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 43
ECCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. $42,738 $31,174 $22,604 $12,838 $17,840
Cost of sales............................. 36,563 23,256 15,165 8,731 12,848
------- ------- ------- ------- -------
Gross profit............................ 6,175 7,918 7,439 4,107 4,992
Operating expenses:
Sales, general & administrative......... 12,415 9,967 6,907 3,652 3,486
Research & development.................. 978 1,123 1,027 673 696
------- ------- ------- ------- -------
Operating income (loss)................... (7,218) (3,172) (495) (218) 810
Net interest expense.................... 764 487 274 157 112
------- ------- ------- ------- -------
Income (loss) before benefit for income
taxes................................... (7,982) (3,659) (769) (375) 698
Benefit for income taxes.................. (1,192) -- -- -- --
------- ------- ------- ------- -------
Net income (loss)....................... $(6,790) $(3,659) $ (769) $ (375) $ 698
======= ======= ======= ======= =======
Preferred dividends....................... -- 79 248 86 154
======= ======= ======= ======= =======
Income (loss) applicable to common
shares.................................. $(6,790) $(3,738) $(1,017) $ (461) $ 544
======= ======= ======= ======= =======
Primary net income (loss) per share....... $ (1.63) $ (0.88) $ (0.23) $ (0.11) $ 0.10
======= ======= ======= ======= =======
Fully diluted net income per share (note
2)...................................... $ -- $ -- $ -- $ -- $ 0.08
======= ======= ======= ======= =======
Primary weighted average number of common
and common equivalent shares............ 4,160 4,232 4,346 4,322 5,236
======= ======= ======= ======= =======
Fully diluted weighted average number of
common and common equivalent shares
(note 2)................................ -- -- -- -- 9,007
======= ======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 44
ECCS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------------ ------------------------------
CAPITAL CAPITAL
IN IN TOTAL
EXCESS OF EXCESS OF RETAINED SHAREHOLDERS'
SHARES AMOUNT PAR VALUE SHARES AMOUNT PAR VALUE EARNINGS EQUITY
--------- ------ --------- --------- ------ --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994....... 4,126,250 $ 41 $ 9,778 $ 2,554 $12,373
Stock option exercises......... 90,100 1 89 90
Net loss......................... (6,790) (6,790)
--------- --- ------- ------- -------
Balance at December 31, 1994..... 4,216,350 42 9,867 (4,236) 5,673
Issuance of stock and stock
option exercises............... 61,625 1 107 108
Net loss......................... (3,659) (3,659)
--------- --- ------- ------- -------
Balance at December 31, 1995..... 4,277,975 43 9,974 (7,895) 2,122
Reclassification of Series B
Convertible Preferred Stock.... 1,600,000 $ 16 $ 1,778 1,794
Issuance of Series C Convertible
Preferred Stock................ 500,000 5 2,744 2,749
Issuance of stock and stock
option exercises............... 154,241 1 280 281
Net loss......................... (769) (769)
--------- --- ------- --------- --- ------ ------- -------
Balance at December 31, 1996..... 4,432,216 44 10,254 2,100,000 21 4,522 (8,664) 6,177
Issuance of stock and stock
option exercises (unaudited)... 58,816 1 169 170
Net income (unaudited)........... 698 698
--------- --- ------- --------- --- ------ ------- -------
Balance at June 30, 1997
(unaudited).................... 4,491,032 $ 45 $10,423 2,100,000 $ 21 $ 4,522 $ (7,966) $ 7,045
========= === ======= ========= === ====== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 45
ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ ------------------
1994 1995 1996 1996 1997
-------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $ (6,790) $ (3,659) $ (769) $ (375) $ 698
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.............. 1,422 1,017 1,311 714 595
Gain on sale of Illinois property.......... -- -- (145) (145) --
(Increase) decrease in accounts
receivable.............................. 3,619 5,249 (395) (3,595) (3,855)
Decrease (increase) in inventories......... 9,657 1,734 174 2,053 (922)
(Increase) decrease in income taxes
refunded................................ (854) 854 -- -- --
Decrease (increase) in prepaid expenses and
other................................... 1,683 535 43 (146) (319)
(Decrease) increase in payable to AT&T
Commercial.............................. (4,730) (2,547) (1,190) (919) 718
Increase (decrease) in accounts payable,
accrued liabilities and other........... (765) (2,446) 1,820 1,172 537
Increase (decrease) in customer
deposits.............................. 537 49 (156) 349 (324)
-------- -------- -------- ------- --------
Net cash provided by (used in) operating
activities................................. 3,779 786 693 (892) (2,872)
-------- -------- -------- ------- --------
Cash flows from investing activities:
Additions to property, plant and
equipment............................... (603) (318) (642) (307) (111)
Gross proceeds from sale of Illinois
property................................ -- -- 855 855 --
Additions to capitalized software.......... (974) (180) (439) (248) (283)
-------- -------- -------- ------- --------
Net cash (used in) provided by investing
activities................................. (1,577) (498) (226) 300 (394)
-------- -------- -------- ------- --------
Cash flows from financing activities:
Borrowings under revolving credit
agreement............................... 43,459 28,006 15,379 9,694 10,157
Repayments under revolving credit
agreement............................... (44,173) (30,246) (15,466) (8,155) (10,060)
Repayment of capital lease obligations..... (30) (94) (29) (53) (55)
Repayment of mortgage payable.............. (12) (12) (502) (502) --
Gross proceeds from issuance of preferred
stock................................... -- 2,000 3,000 3,000 --
Expenses for issuance of preferred stock... -- (206) (251) (252) --
Proceeds from exercise of employee stock
options and issuance of common stock.... 90 108 281 146 170
-------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities................................. (666) (444) 2,412 3,878 212
-------- -------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................ 1,536 (156) 2,879 3,286 (3,054)
Cash and cash equivalents at beginning of
period..................................... 134 1,670 1,514 1,514 4,393
-------- -------- -------- ------- --------
Cash and cash equivalents at end of period... $ 1,670 $ 1,514 $ 4,393 $ 4,800 $ 1,339
======== ======== ======== ======= ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................................ $ 764 $ 461 $ 422 $ 185 $ 112
======== ======== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 46
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
NOTE 1 -- THE COMPANY
ECCS, Inc. ("ECCS" or the "Company") is a provider of 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.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Reclassification
Certain prior year balances have been reclassified to conform to the 1996
presentation.
June 30, 1996 and 1997 Financial Information
The information presented for June 30, 1997 and for the six-month periods
ended June 30, 1996 and 1997, 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 six-month
periods ended June 30, 1996 and June 30, 1997 and its cash flows for the
six-month periods ended June 30, 1996 and June 30, 1997.
Cash and Cash Equivalents
The Company considers short-term investments with a maturity of three
months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation and
amortization are provided on a straightline 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.
Investment in Real Estate
In 1993, the Company purchased real estate, including a building and land,
in Romeoville, Illinois for $753,000. Depreciation on the building has been
recognized on a straight line basis over the estimated useful life of 31.5
years. On March 19, 1996, the Company sold such property for gross proceeds of
$855,000. These proceeds were used, in part, to pay off the mortgage in full.
Net cash proceeds to the Company, after repayment of the mortgage, were
approximately $270,000.
Software Development Costs
The Company capitalizes software development costs in accordance with the
Statement of Financial Accounting Standards ("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
F-7
<PAGE> 47
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
software development is charged to cost of sales and aggregated $615,000,
$307,000 and $544,000 for 1994, 1995 and 1996, respectively, and $281,000 and
$255,000 for June 30, 1996 and 1997, respectively. Amortization of capitalized
software development costs in 1995 includes approximately $13,000 related to the
writedown of certain of such costs to net realizable value. At December 31,
1996, the Company has capitalized $2,013,000 of software development costs, of
which $1,199,000 has been amortized. At June 30, 1997, the Company has
capitalized $2,296,000 of software development costs, of which $1,480,000 has
been amortized.
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.
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.
Warranty
Estimated future warranty obligations related to ECCS products are provided
by charges to operations in the period the related revenue is recognized.
Research and Development Costs
Research and development costs are expensed as incurred, except for
software development costs which are accounted for as noted above.
Income Taxes
Income taxes are accounted for by the liability method in accordance with
the provisions of SFAS No. 109 "Accounting for Income Taxes".
Stock Based Compensation
Statement of Financial Accounting Standards 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.
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.
F-8
<PAGE> 48
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statement and
accompanying notes. Actual results could differ from those estimates.
NOTE 3 -- TRANSACTIONS WITH SIGNIFICANT VENDORS AND CUSTOMERS
On June 27, 1995, the Company entered into a Manufacturing Services
Agreement with Unisys, its primary manufacturer, that defines the terms of sales
and support services. Pursuant to such agreement, Unisys will manufacture
certain of the Company's products for use in the Company's proprietary systems
as well as for the direct sale to endusers. The agreement does not contain
specific quantity commitments and purchases are made on a purchase order basis.
The agreement does not include any long-term commitment by the Company to
Unisys. The contract had an initial term of one year, and automatically renews
for successive one year periods. The contract was automatically renewed on June
27, 1996. Pricing and deliverables are to be negotiated each year. Either party
can terminate the agreement with written notice, provided, however, that if
Unisys cancels the agreement, it shall be obligated to continue accepting
manufacturing orders for a period of six months thereafter. In the event that
the Company terminates the agreement, the Company shall be liable for inventory
procured to fill the Company's orders. The Company primarily relies on regular
trade credit with open terms for the financing of purchases under this
agreement. The Company's purchases under this agreement totaled $4.3 million in
1996.
Sales to the Company's primary alternate channel partner, Unisys, accounted
for 30% of the Company's net sales in 1996. All sales to Unisys, which began in
1996, were sales of mass storage enhancement products. Effective May 1, 1995,
the Company entered into an OEM agreement with Unisys.
Such agreement, as subsequently amended, grants to Unisys exclusive
world-wide rights to sell and distribute certain of the Company's proprietary
products, and a non-exclusive world-wide right to sell and distribute certain
other products. The agreement provides that product pricing shall remain in
effect throughout the term of the agreement unless market conditions dictate
that the Company should provide more favorable pricing terms to Unisys. The
agreement is for an initial five year term beginning May 1, 1995 and Unisys has
the right to extend such term for successive one year periods upon appropriate
written notice. The agreement may be terminated under certain conditions and
Unisys may, subject to certain conditions, terminate the agreement in the event
that the Company fails to timely perform its delivery obligations under the
agreement. 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.
Sales to the Federal government represented 30%, 21%, and 7% of net sales
in 1996, 1995, and 1994, respectively. The U.S. Air Force, an end user of the
Company's products, purchased $5.7 million of products through federal
integrators in 1996. Of such amount, sales pursuant to a contract with Hughes
Data Systems accounted for $3.7 million, or 16%, of net sales. There are no
minimum purchase requirements under this contract. There can be no assurance
that there will be additional sales under this contract.
F-9
<PAGE> 49
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1994, 1995 and 1996, purchases by multiple AT&T business units
represented 65%, 51% and 14%, respectively of all purchases from the Company.
All such sales by the Company to AT&T were made on an individual purchase order
basis and, therefore, there were and are no ongoing written commitments by AT&T
to purchase from the Company. The Company historically sold its mass storage
enhancement systems and provided systems integration services to AT&T, and,
acting as a value added reseller ("VAR") of NCR products, sold NCR computer
hardware systems to multiple AT&T business units for either their own use as an
end user or for resale by such business units to third parties. In 1996, the
Company purchased 7.5% of its inventory acquisitions from NCR. In 1995 and 1994,
purchases from such vendor represented 37% and 45%, respectively, of the
Company's inventory purchases.
The Company has supply arrangements with Bell Microproducts and Anthem
Electronics, Inc. ("Anthem") pursuant to which the Company orders on terms
negotiated at the time of each such order. There are no minimum purchase
requirements. These arrangements are terminable by either party at any time.
1996 purchases from Bell Microproducts totaled approximately $2.1 million or
12.7% of all purchases. The Company's purchases from Anthem totaled $1.2
million, or 7.3% of the Company's total purchases and $3.1 million or 12% of the
Company's total purchases in 1996 and 1995, respectively.
NOTE 4 -- INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------ ----------------
1995 1996 1997 (UNAUDITED)
------- ------- ----------------
<S> <C> <C> <C>
Purchased parts.................................... $ 2,538 $ 2,181 $2,654
Finished goods..................................... 3,129 3,280 3,846
------ ------ ------
5,667 5,461 6,500
Less: inventory valuation reserve............. 813 781 898
------ ------ ------
$ 4,854 $ 4,680 $5,602
====== ====== ======
</TABLE>
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------- ----------------
1995 1996 1997 (UNAUDITED)
------ ------ ----------------
<S> <C> <C> <C>
Property....................................................... $ 498 $ 490 $ 464
Computer equipment............................................. 2,409 3,018 3,126
Vehicles....................................................... 47 47 47
Leasehold improvements......................................... 350 350 356
Equipment under capital leases................................. 368 367 368
------ ------ ------
3,672 4,272 4,361
Less accumulated depreciation and amortization, including $331,
$346 and $354 relating to equipment under capital leases for
the periods ended December 31, 1995, December 31, 1996, and
June 30, 1997 respectively................................... 2,361 3,082 3,374
------ ------ ------
$1,311 $1,190 $ 987
====== ====== ======
</TABLE>
NOTE 6 -- LOANS PAYABLE AND PAYABLE TO AT&T COMMERCIAL
On May 17, 1996, simultaneously with the consummation of the sale of
462,512 shares of Series C Preferred Stock, 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 agreement also restricts the payment
of dividends. Such general line of credit expires on 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 37% and 7.5% of its inventory
acquisitions in 1995 and
F-10
<PAGE> 50
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996, respectively, the majority of which were purchases from NCR. In 1994 and
1995, purchases from such vendor represented 45% and 37%, respectively, of the
Company's inventory purchases. The Company's obligations under the agreement
with AT&T-CFC are collateralized by substantially all of the assets of the
Company. As of December 31, 1995, the Company was in default with respect to its
net worth covenant of $5.5 million. On May 6, 1996, AT&T-CFC waived such default
through June 30, 1996. Effective with the Series C Preferred Stock placement,
the Company's net worth satisfied such net worth covenant. As of December 31,
1995 and 1996, the Company owed approximately $1.3 million and $64,000,
respectively, under this credit line, and available credit under such line
towards future inventory purchases of floor plan products was $1.9 million at
December 31, 1996.
The Company has a financing facility with Fidelity Funding of California,
Inc. ("Fidelity") which provides for maximum eligible (as defined) accounts
receivable financing of $7 million at the prime lending rate (8.25% at December
31, 1996) with a 0.5% transaction fee applied to each borrowing. The weighted
average interest rate on such line in 1996 was 11.54%. In addition, the
agreement requires a commitment fee of 0.5% of the total available financing
amount, payable annually on each anniversary date of the agreement. The
financing facility agreement is for a period of three years beginning March 28,
1995 and the obligations under such agreement are collateralized by
substantially all of the assets of the Company. The outstanding balance for the
line of credit at December 31, 1995, December 31, 1996 and at June 30, 1997 was
approximately $1,800,000. Available borrowings from the Company's accounts
receivable line of credit were $926,000 at December 31, 1996. Such financing
facility was terminated in July 1997 (see Note 15).
NOTE 7 -- MORTGAGE PAYABLE
On July 20, 1993, the Company entered into a mortgage agreement bearing 8%
interest with a bank for the principal amount of $529,250, collateralized by
property located in Romeoville, Illinois. On March 19, 1996, the Company sold
such property for gross proceeds of $855,000 and used a portion of such proceeds
to repay the mortgage, in full.
NOTE 8 -- LEASES
The Company has capitalized leases for certain equipment. The capitalized
lease obligations are payable through July 1997 and bear interest at rates
ranging from 7.2% to 19.45%. In addition, the Company is obligated through the
year 2000 under non-cancelable operating leases for office and warehouse space.
The leases provide for all real estate taxes and operating expenses to be paid
by the Company. Under certain leases, the Company has the option to renew for
additional terms at specified rentals. Rental expense for such leases
approximated $581,000, $571,000 and $501,000 for the years ended December 31,
1994, 1995 and 1996, respectively, and $245,000 and $256,000 for the periods
ended June 30, 1996 and 1997, respectively.
Deferred rent on the accompanying consolidated balance sheet represents the
excess of rents to be paid in the future over rent expense recognized on a
straight-line basis.
F-11
<PAGE> 51
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of future minimum lease payments for capital
and non-cancelable operating leases, together with the present value of the net
minimum lease payments, as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
CAPITALIZED OPERATING
LEASES LEASES
------------------ ----------------
<S> <C> <C>
1997........................................................... $100 $ 440
1998........................................................... 8 320
1999........................................................... -- 306
2000........................................................... -- 306
Thereafter..................................................... -- --
---- ------
Total minimum lease payments................................... 108 $1,372
======
----
Less amount representing interest.............................. 9
----
Present value of net minimum lease payments.................... $ 99
====
</TABLE>
NOTE 9 -- CONVERTIBLE PREFERRED STOCK
The Company has an authorized class of 3,000,000 shares of Preferred Stock
which may be issued by the Board of Directors on such terms and with such
rights, preferences and designations as the Board may determine. On May 19,
1995, the Company consummated a private placement of 6% Cumulative Redeemable
Convertible Preferred Stock, Series B (the "Series B Preferred Stock") pursuant
to which the Company issued and sold to certain investors 1,600,000 shares of
Series B Preferred Stock at a price per share of $1.25. The Series B Preferred
Stock was redeemable by the Company, at its option, after one year at $1.25 per
share, or $2 million in the aggregate, plus any accrued and unpaid dividends. In
addition, it was mandatorily redeemable four years from the date of issuance at
the same amounts. On May 17, 1996, the Series B Preferred Stock was amended to
delete the mandatory and optional redemption provisions contained therein. As a
result of the deletion of the mandatory and optional redemption provisions, the
Series B Preferred Stock was reclassified to equity in the Balance Sheet.
Dividends with respect to such shares are calculated based on $0.02 per
share per quarter and accumulate if not declared and paid. As of December 31,
1996, an aggregate of $215,000 ($79,000 of which accrued in 1995 and $136,000 of
which accrued in 1996) 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. As of June 30, 1997, such accumulated dividends
totaled $279,000.
Also on May 17, 1996, 500,000 shares of the Company's Preferred Stock were
designated as Cumulative Convertible Preferred Stock, Series C ("Series C
Preferred Stock"). Of such shares, 462,512 were issued into escrow on May 17,
1996 at a price per share of $6.00. Dividends with respect to such shares are
calculated based on $0.09 per share per quarter and accumulate if not declared
and paid. Interest of 6% per annum accrues on any unpaid dividends. At any time,
the Series C Preferred 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. The
462,512 shares of Series C Preferred Stock and the proceeds thereof were
released from escrow on May 25, 1996 upon satisfaction of all applicable
conditions to release, after denial by Nasdaq of an exception to the shareholder
approval requirement. The issuance of such shares of Series C Preferred Stock
without shareholder approval and without an exception to such requirement
constitutes a breach of the Company's listing agreement with Nasdaq.
Consequently, the Company has been delisted from the National Market and is now
listed on the SmallCap Market. The Company's Board of Directors had determined
that the issuance of the shares of Series C Preferred Stock without shareholder
approval was necessary for the continued financial viability of the Company.
On May 30, 1996, the Company issued directly to certain investors the
remaining 37,488 shares of Series C Preferred Stock at a price of $6.00 per
share.
F-12
<PAGE> 52
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the issuance of the Series C Preferred Stock and
pursuant to the anti-dilution provisions of the Series B Preferred Stock, the
conversion ratio of the Series B Preferred Stock was adjusted. As a result, the
Series B Preferred Stock is currently convertible into approximately 1,770,590
shares of Common Stock. The Company has reserved 1,770,590 shares of Common
Stock for the conversion of outstanding Series B Preferred Stock.
As of December 31, 1996, an aggregate of $112,000 of the Series C Preferred
Stock dividends had accumulated and had not been declared or paid. As of June
30, 1997, such accumulated dividends totaled $202,000. In the event of
liquidation, dissolution or winding up of the Company, Series B Preferred
Shareholders and Series C Preferred Shareholders, on a pro rata basis, are
entitled to receive prior and in preference to Common Shareholders.
NOTE 10 -- STOCK OPTION PLANS
Statement of Financial Accounting Standards 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.
The 1989 Stock Option Plan
Under the Company's 1989 Stock Option Plan, as amended, 900,000 shares of
common stock can be issued through incentive stock options and non-statutory
stock options. The incentive stock options allow designated full-time employees,
including officers, to purchase shares of common stock at prices equal to fair
market value at the date of grant. For individuals who own more than 10% of the
stock of the Company, the option price of the shares may not be less than 110%
of the fair market value on the date of grant. The incentive stock options
expire five years from the date of the grant for shareholders owning more than
10% of the voting rights (as defined). The non-statutory stock options may be
granted to full-time employees, including officers and non-employee directors or
consultants at prices as determined by the Board of Directors. The stock options
are exercisable over a period determined by the Board of Directors. To date, no
options have been granted with a vesting period of more than five years.
F-13
<PAGE> 53
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the changes in outstanding common stock options under the 1989
Stock Option Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Balance at January 1, 1994.......................................... 308,400 $ 2.01
-------
Options granted................................................... 367,017 $ 3.10
Options exercised................................................. (90,120) $ 1.00
Options canceled.................................................. (144,380) $ 2.47
-------
Balance at December 31, 1994........................................ 440,917 $ 3.03
-------
Options granted................................................... 270,000 $ 2.21
Options exercised................................................. (16,375) $ 1.16
Options canceled.................................................. (99,625) $ 2.93
-------
Balance at December 31, 1995........................................ 594,917 $ 2.73
-------
Options granted................................................... 310,559 $ 2.76
Options exercised................................................. (15,225) $ 3.31
Options canceled.................................................. (126,075) $ 3.22
-------
Balance at December 31, 1996........................................ 764,176 $ 2.65
-------
Options exercisable at December 31, 1996.......................... 217,987 $ 2.62
</TABLE>
The weighted average remaining contractual life for the balance at December
31, 1996 in the 1989 Stock Option Plan is nine years and the exercise price
range is $1.00 - $4.25.
On October 6, 1994, the Board of Directors offered to reduce the exercise
price of certain options to the fair market value of the Company's Common Stock
on such date. Upon acceptance by the option holders, the vesting period began
from the date of the offer and the options become exercisable ratably over a
period of four years and expire ten years from the date of issuance.
1996 Stock Option Plan
In June 1996, the Board of Directors of the Company adopted, subject to
shareholder approval, such approval being granted in July of 1996, the 1996
Stock Plan. Under the 1996 Stock Plan, 600,000 shares of common stock can be
issued through incentive stock options and non-statutory stock options and/or
stock purchase rights. The incentive stock options allow designated employees,
non-employee directors and consultants to purchase shares of common stock at
prices equal to fair market value at the date of grant. For individuals who own
more than 10% of the stock of the Company, the option price of the shares may
not be less than 110% of the fair market value on the date of grant. The
incentive stock options expire five years from the date of grant for
shareholders owning more than 10% of the voting rights (as defined). The
non-statutory stock options may be granted to employees, non-employee directors
and consultants at prices as determined by the Board of Directors. The stock
options are exercisable over a period determined by the Board of Directors. To
date, no options have been granted with a vesting period of more than five
years.
A summary of the changes in outstanding common stock options under the 1996
Stock Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Balance at January 1, 1995........................................... -- --
-------
Options granted.................................................... 212,000 $ 4.06
Options exercised.................................................. -- --
Options canceled................................................... -- --
-------
Balance at December 31, 1996......................................... 212,000 $ 4.06
Options exercisable at December 31, 1996........................... -- --
</TABLE>
F-14
<PAGE> 54
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average remaining contractual life for the balance at December
31, 1996 in the 1996 Stock Option Plan is ten (10) years and the exercise price
range is $3.38 - $4.50.
Non-Qualified Stock Options
On February 1, 1995, 306,000 common stock purchase options were granted by
the Board to full-time employees, including officers, and a non-employee
consultant. The exercise prices is $2.13, the fair market value of the Company's
Common Stock at the date of grant. These options are exercisable over a period
of four years and expire ten years from the date of issuance. These options were
granted outside the Company's 1989 Stock Option Plan pursuant to non-qualified
stock option agreements (the "Non-Qualified Agreements"). On May 19, 1995, in
connection with the sale by the Company of 1,600,000 shares of Series B 6%
Cumulative Redeemable Convertible Preferred Stock (see Note 9), and pursuant to
an anti-dilution provision contained in certain of such options granted to an
officer of the Company, the number of options granted to such officer was
increased to 113,691. The exercise price of the 113,691 options granted to such
officer was adjusted to $1.25, the purchase price of the Series B 6% Cumulative
Redeemable Convertible Preferred Stock. The anti-dilution provision expired on
December 31, 1995. No anti-dilution provision was included in connection with
the issuance of the Series C Convertible Preferred Stock.
A summary of the changes in outstanding common stock options under the
Non-Qualified Agreements is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Balance at January 1, 1995........................................... 20,000 $ 2.38
-------
Options granted.................................................... 339,691 $ 1.83
Options exercised.................................................. (20,000) $ 2.38
Options canceled................................................... (29,500) $ 2.13
-------
Balance at December 31, 1995......................................... 310,191 $ 1.80
-------
Options granted.................................................... 100,000 $ 3.04
Options exercised.................................................. (10,250) $ 2.13
Options canceled................................................... (57,750) $ 2.13
-------
Balance at December 31, 1996......................................... 342,191 $ 2.53
-------
Options exercisable at December 31, 1996............................. 90,548 $ 2.10
</TABLE>
The weighted average remaining contractual life for the balance at December
31, 1996 under the Non-Qualified Agreements is 9.3 years and the exercise price
range is $1.25 - $4.50.
In February of 1996, the Board of Directors of the Company adopted, subject
to shareholder approval, such approval being granted in July of 1996, the 1996
Non-Employee Directors Stock Option Plan (the "1996 Non-Employee Directors
Plan"). 150,000 shares of Common Stock can be issued under such plan through
non-statutory stock options. Under the terms of the 1996 Non-Employee Directors
Plan, each non-employee director who first becomes a member of the Board after
approval of such plan by the shareholders of the Company, shall be automatically
granted, on the date such person becomes a member of the Board, an option to
purchase 30,000 shares of Common Stock. In addition, each non-employee director
who is a member of the Board on the first trading day of each year shall be
automatically granted on such date, without further action by the Board, an
option to purchase 5,000 shares of Common Stock. Messrs. Faherty and Azcuy are
ineligible to receive options under the 1996 Non-Employee Directors Plan. The
exercise price per share under the 1996 Non-Employee Directors Plan shall be
equal to the fair market value (as defined) of a share of Common Stock on the
applicable grant date, and options granted under the 1996 Non-Employee Directors
Plan shall vest over a four year period. No stock options were issued under this
plan during 1996.
F-15
<PAGE> 55
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Warrants
On December 6, 1994, common stock purchase warrants for 266,601 shares
exercisable at $1.75 per share, the fair market value of the Company's Common
Stock on such date, were granted to a consultant of the Company. These warrants
become exercisable at various dates during the first year and expire ten years
from the date of issuance. On May 19, 1995, in connection with the sale by the
Company of 1,600,000 shares of the Series B Preferred Stock (see Note 9),
pursuant to an anti-dilution provision contained in such common stock purchase
warrants, the number of warrants granted was increased to 298,848 and the
exercise price was adjusted to $1.25, the purchase price of the Series B
Preferred Stock. At December 31, 1996, 298,848 of such warrants were
exercisable.
The Company has reserved 2,130,589 shares of Common Stock for the exercise
of stock options and warrants as described above.
FAS 123 Pro Forma Information
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996: risk-free interest rates of between 5.45% - 6.69%
in 1995 and 5.48% - 7.58% in 1996; dividend yields of zero; volatility factors
of the expected market price of the Company's common stock of 1.02; and a
weighted-average expected life of four (4) years. The weighted average fair
market value of stock options issued in 1995 and 1996 was $1.48 and $2.35 per
share, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net loss as reported............................................. $(3,659) $ (769)
Pro forma net loss............................................... $(3,793) $(1,093)
Loss per share as reported
Primary........................................................ $ (.88) $ (.23)
Pro forma loss per share
Primary........................................................ $ (.91) $ (.25)
</TABLE>
NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN
In June 1995, the Company adopted a 1995 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved for issuance an aggregate of 150,000 shares of
Common Stock. The Purchase Plan allows eligible employees to purchase Common
Stock, through payroll deductions during a Purchase Period, at a purchase price
that shall be the lesser of (a) 85% of the Fair Market Value of a share of
Common Stock on the first day of such Purchase Period, or (b) 85% of the Fair
Market Value of a share of Common Stock on the Exercise Date of such Purchase
Period, as each of such terms are defined in the 1995 Employee Stock Purchase
Plan. The option to purchase stock under the Purchase Plan will terminate
December 31, 1999. At December 31, 1996, 77,247 shares were issued under the
Purchase Plan, of which 51,997 were issued in 1996.
F-16
<PAGE> 56
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- INCOME TAXES
The provision for income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995 1995
-------- ---- ----
<S> <C> <C> <C>
Federal:
Current.................................................... $ (1,007) $-- $--
Deferred................................................... (117) -- --
State:
Current.................................................... (32) -- --
Deferred................................................... (36) -- --
-- --
-------
Total........................................................ $ (1,192) $0 $0
======= == ==
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. Significant components of the
Company's deferred tax balances as of December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Tax credits...................................................... $ 225 $ 268
Net operating losses............................................. 2,977 3,384
Capitalized software............................................. (358) (317)
Deferred rent.................................................... 810 737
Valuation allowance.............................................. (3,654) (4,072)
------- -------
Total............................................................ 0 0
Current.......................................................... 0 0
------- -------
Non-current...................................................... $ 0 $ 0
======= =======
</TABLE>
At December 31, 1996, the Company had a net operating loss carryover for
Federal income tax purposes of approximately $8,300,000, which will expire in
2009. The Company also has research and development tax credit carryovers for
Federal income tax purposes of approximately $122,000 which will begin to expire
in 2009. In addition, the Company has alternative minimum tax credits of
approximately $53,000. These credits can be carried forward indefinitely. The
Company has experienced a change in ownership in 1995 as defined by Section 382
of the Internal Revenue Code. Accordingly, future use of these NOLs and income
tax credits may be limited.
Under SFAS No. 109, a valuation allowance is established, if based on the
weight of available evidence, it is more likely than not that a portion of the
deferred tax asset will not be realized. Accordingly, a full valuation allowance
has been provided to off-set the Company's net deferred tax assets.
The differences between the provision for income taxes and income taxes
computed using the Federal income tax rate were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -----
<S> <C> <C> <C>
Computed "expected" tax benefit......................... $(2,715) $(1,210) $(261)
State income taxes, net of federal income tax benefit
and state valuation allowance......................... (45) -- --
Increase in federal valuation allowance................. 1,588 1,312 418
Research and development tax credits.................... (56) (119) (183)
Other................................................... 36 17 26
------- ------- -----
Actual tax benefit...................................... $(1,192) $ -- $--
======= ======= =====
</TABLE>
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
In both 1995 and 1996, the Company adopted a plan whereby senior management
will be entitled to six months severance payments in the event of certain
terminations after a change-in-control of the Company,
F-17
<PAGE> 57
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and an incentive bonus will be paid if such persons are still in the employ of
the Company at the completion of a change-in-control.
There are no individual material litigation matters pending to which the
Company is party or to which any of its property is subject.
NOTE 14 -- RELATED PARTY TRANSACTION (UNAUDITED)
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 15 -- SUBSEQUENT EVENTS (UNAUDITED)
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.
In connection with the termination of the Company's financing facility with
Fidelity (see Note 6), the Company paid Fidelity a termination fee of $100,000.
In August, 1997, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission for the sale
of Common Stock to be comprised of (i) a maximum of 2,500,000 shares to be
issued and sold by the Company; (ii) such number of shares of Common Stock as
shall be sold in the public offering by certain shareholders in the exercise of
their registration rights; and (iii) an underwriter's over-allotment of an
additional 15% of the above shares. 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
automatically convert into shares of Common Stock in accordance with the terms
of such series. Accrued dividends will be payable with respect to such Preferred
Stock.
F-18
<PAGE> 58
=======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, ANY SELLING SHAREHOLDER OR THE UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, COMMON
STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 5
Use of Proceeds........................ 9
Price Range of Common Stock............ 10
Dividend Policy........................ 10
Capitalization......................... 11
Dilution............................... 12
Selected Consolidated Financial Data... 13
Management's Discussion and Analysis of
Results of Operations and Financial
Condition............................ 14
Business............................... 21
Management............................. 29
Principal and Selling Shareholders..... 31
Description of Capital Stock........... 33
Underwriting........................... 35
Legal Matters.......................... 37
Experts................................ 37
Incorporation of Certain Documents by
Reference............................ 37
Available Information.................. 38
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
=======================================================
=======================================================
2,500,000 SHARES
[ECCS, INC. LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
UNTERBERG HARRIS
, 1997
=======================================================
<PAGE> 59
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized estimate of fees and expenses
payable by the registrant in connection with the offering described in this
registration statement, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee..................................................... $ 4,226
NASD filing fee.......................................................... 1,894
Nasdaq additional listing fee............................................ 7,500
Counsel fees and expenses................................................ 160,000
Accounting fees and expenses............................................. 125,000
Blue sky fees and expenses............................................... 25,000
Printing expenses........................................................ 70,000
Transfer agent and registrar fees........................................ 3,500
Non-accountable expense allowance for the Underwriter.................... 50,000
Miscellaneous............................................................ 12,880
---------
Total.......................................................... $ 460,000
=========
</TABLE>
All of the above expenses will be paid by the registrant.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 14A:3-5 of the New Jersey Business Corporation Act permits each New
Jersey business corporation to indemnify its directors, officers, employees and
agents against expenses and liabilities in connection with any proceeding
involving such persons by reason of his serving or having served in such
capacities or for each such person's acts taken in his capacity as a director,
officer, employee or agent of the corporation if such actions were taken in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal
proceeding, if he had no reasonable cause to believe his conduct was unlawful,
provided that any such proceeding is not by or in the right of the corporation.
Section 14A:2-7(3) of the New Jersey Business Corporation Act enables a
corporation in its certificate of incorporation to limit the liability of
directors and officers of the corporation to the corporation or its
shareholders. Specifically, the certificate of incorporation may provide that
directors and officers of the corporation will not be personally liable for
money damages for breach of a duty as a director or an officer, except for
liability (i) for any breach of the director's or officer's duty of loyalty to
the corporation or its shareholders, (ii) for acts or omissions not in good
faith or which involve a knowing violation of law, (iii) as to directors only,
under Section 14A:6-12(1) of the New Jersey Business Corporation Act, which
relates to unlawful declarations of dividends or other distributions of assets
to shareholders or the unlawful purchase of shares of the corporation, or (iv)
for any transaction from which the director or officer derived an improper
personal benefit.
The registrant's Amended and Restated Certificate of Incorporation limits
the liability of its directors and officers as authorized by Section 14A:2-7(3).
Article 11 of the registrant's Amended and Restated By-laws specifies that
the registrant shall indemnify its directors, officers, employees and agents to
the extent such parties are a party to any action because he was a director,
officer, employee or agent of the Company. The Company has agreed to indemnify
such parties for their actual and reasonable expenses if such party acted in
good faith and in a manner he reasonably believed to be in the best interests of
the Company and such party had no reasonable cause to believe his conduct was
unlawful. This provision of the By-laws is deemed to be a contract between the
registrant and each director and officer who serves in such capacity at any time
while such provision and the relevant provisions of the New Jersey Business
Corporation Act are in effect, and any repeal or modification thereof shall not
offset any
II-1
<PAGE> 60
action, suit or proceeding theretofore or thereafter brought or threatened based
in whole or in part upon any such state of facts.
The registrant has executed indemnification agreements with each of its
officers and Directors pursuant to which the registrant has agreed to indemnify
such parties to the full extent permitted by law, subject to certain exceptions,
if such party becomes subject to an action because such party is a director,
officer, employee, agent of fiduciary of the Company.
The registrant has obtained liability insurance for the benefit of its
directors and officers which provides coverage for losses of directors and
officers for liabilities arising out of claims against such persons acting as
directors or officers of the registrant (or any subsidiary thereof) due to any
breach of duty, neglect, error, misstatement, misleading statement, omission or
act done by such directors and officers, except as prohibited by law.
At present, there is no pending litigation or proceeding involving a
Director or officer of the registrant as to which indemnification is being
sought nor is the registrant aware of any threatened litigation that may result
in claims for indemnification by any Director or officer.
Reference is made to Section 8 of the Underwriting Agreement, the proposed
form of which is filed as Exhibit One, in which the Underwriter agrees to
indemnify the directors and officers of the registrant and certain other
persons, against civil liabilities, including certain liabilities under the Act.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
1* Form of Underwriting Agreement.
3.1 Certificate of Amendment to the Restated and Amended Certificate of Incorporation, as
amended. (Incorporated by reference to the Company's Annual Report on Form 10-K for
the annual period ended December 31, 1995 filed on May 17, 1996.)
3.2 By-Laws of the Company, as amended. (Incorporated by reference to the Company's
Registration Statement on Form S-1 (File Number 33-60986) which became effective on
June 14, 1993.)
4.1 1989 Stock Option Plan of the Company. (Incorporated by reference to the Company's
Registration Statement on Form S-1 (File Number 33-60986) which became effective on
June 14, 1993.)
4.2 Warrant issued to Michael E. Faherty to purchase 266,601 shares of Common Stock of the
Company. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1995 filed on May 15, 1995.)
4.3 Form of Option Agreement, pursuant to which the Company granted non-qualified stock
options outside the Company's Stock Option Plan. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995
filed on May 15, 1995.)
4.4 Option issued to Gregg M. Azcuy to purchase 80,000 shares of Common Stock of the
Company. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1995 filed on May 15, 1995.)
4.5 1996 Stock Plan of the Company. (Incorporated by reference to the Company's Form S-8,
Registration Statement under the Securities Act of 1933 (File No. 333-15529) which
became effective on November 5, 1996.)
4.6 1996 Non-Employee Directors Stock Option Plan of the Company. (Incorporated by
reference to the Company's Form S-8, Registration Statement under the Securities Act
of 1933 (File No. 333-15529) which became effective on November 5, 1996.)
5* Opinion of Buchanan Ingersoll.
10.1 Form of Non-Competition and Non-Disclosure Agreement executed by substantially all
optionholders. (Incorporated by reference to the Company's Registration Statement on
Form S-1 (File Number 33-60986) which became effective on June 14, 1993.)
</TABLE>
II-2
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
10.2 Form of Employee's Invention Assignment and Confidential Information Agreement.
(Incorporated by reference to the Company's Registration Statement on Form S-1 (File
Number 33-60986) which became effective on June 14, 1993.)
10.3 Lease Agreements between the Company and Philip J. Bowers & Company dated September
20, 1988 and May 13, 1991 and modified June 10, 1992 for the Company's Tinton Falls,
New Jersey Facilities. (Incorporated by reference to the Company's Registration
Statement on Form S-1 (File Number 33-60986) which became effective on June 14, 1993.)
10.4 Indemnification Agreement as of August 22, 1994 by and between the Company and K.
Dutton. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended October 1, 1994 filed on November 8, 1994.)
10.5 Lease Agreement, dated May 15, 1994 between the Company and John Donato, Jr., d/b/a
Mid Atlantic Industrial Co., with Security Amendment and Subordination, Attornment and
Non Disturbance Agreement dated May 25, 1994 executed by the Company, as lessee, John
Donato, Jr., as mortgagor, and Starbase II Partners, L.P., as mortgagee. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the year ended December
31, 1994 filed on April 13, 1995.)
10.6 Indemnification Agreement as of March 1, 1995 by and between the Company and Gale R.
Aguilar. (Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 filed on April 13, 1995.)
10.7 Indemnification Agreement as of April 5, 1994 by and between the Company and Gregg M.
Azcuy. (Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 filed on April 13, 1995.)
10.8 Indemnification Agreement as of September 12, 1994 by and between the Company and
Louis J. Altieri. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1994 filed on April 13, 1995.)
10.9 Indemnification Agreement as of December 6, 1994 by and between the Company and
Michael E. Faherty. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1994 filed on April 13, 1995.)
10.10 Purchase and Sale Agreement dated March 27, 1995 between the Company and Fidelity
Funding of California, Inc. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 filed on April 13, 1995).
10.11 Change in Control Severance Pay Agreement made as of February 1, 1995 by and between
the Company and Gregg M. Azcuy. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1995 filed on May 15,
1995.)
10.12 Change in Control Severance Pay Agreement made as of February 1, 1995 by and between
the Company and Louis J. Altieri. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 filed on
May 15, 1995.)
10.13 Change in Control Severance Pay Agreement made as of February 1, 1995 by and between
the Company and Priyan Guneratne. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 filed on
May 15, 1995.)
10.14 Change in Control Severance Pay Agreement made as of February 1, 1995 by and between
the Company and Mark Ish. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 1995 filed on May 15, 1995.)
10.15 Change in Control Severance Pay Agreement made as of February 1, 1995 by and between
the Company and Thomas Ricca. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1995 filed on May 15,
1995.)
10.16 Series B Convertible Preferred Stock Purchase Agreement made as of May 12, 1995 by and
between the Company and the investors set forth on the Schedule of Purchasers attached
thereto as Exhibit A, and related letter agreement dated as of May 12, 1995.
(Incorporated by reference to the Company's Current Report on Form 8-K filed June 2,
1995.)
</TABLE>
II-3
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<C> <S>
10.17 Series C Convertible Preferred Stock Purchase Agreement made as of May 17, 1996 by and
between the Company and the investors set forth on the Schedule of Purchasers attached
thereto as Exhibit A. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the annual period ended December 31, 1995 filed on May 17, 1996.)
10.18 Indemnification Agreement as of June 20, 1996 by and between the Company and Thomas I.
Unterberg. (Incorporated by reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1996, filed on August 14, 1996.)
10.19 Indemnification Agreement as of June 20, 1996 by and between the Company and Frank R.
Triolo. (Incorporated by reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1996, filed on August 14, 1996.)
10.20 Indemnification Agreement as of June 20, 1996 by and between the Company and Donald E.
Fowler. (Incorporated by reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1996, filed on August 14, 1996.)
10.21 Indemnification Agreement as of July 8, 1996 by and between the Company and David J.
Boyle. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1996, filed on November 14, 1996.)
10.22 Indemnification Agreement as of August 22, 1996 by and between the Company and Priyan
Guneratne. (Incorporated by reference to the Company's Annual Report on Form 10-K/A
for the annual period ended December 31, 1996 filed on March 28, 1997.)
10.23 1995 Employee Stock Purchase Plan of the Company. (Incorporated by reference to the
Company's Form S-8, Registration Statement under the Securities Act of 1933 (File No.
33-93480) which became effective on June 14, 1995.)
10.24 Manufacturing Services Agreement, dated June 15, 1995, by and between the Company and
Unisys Corporation (Incorporated by reference to the Company's Annual Report on Form
10-K/A for the annual period ended December 31, 1996 filed on March 28, 1997.)
10.25 Agreement dated August 13, 1996 by and between the Company and AT&T Capital
Corporation (Incorporated by reference to the Company's Annual Report on Form 10-K/A
for the annual period ended December 31, 1996 filed on March 28, 1997).
10.26 Factoring Agreement dated July 9, 1997 between the Company and NationsBanc Commercial
Corporation. (Incorporated by reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1997, filed on August 6, 1997).
21 Listing of Subsidiaries (Incorporated by reference to the Company's Annual Report on
Form 10-K/A for the annual period ended December 31, 1996 filed on March 28, 1997.)
23.1* Consent of Ernst & Young LLP.
23.2 Consent of Buchanan Ingersoll (contained in the opinion filed as Exhibit 5 to the
Registration).
24 Power of Attorney of certain officers and directors of the Company (contained on the
signature page of this Registration Statement).
</TABLE>
- ---------------
* Filed herewith. All other exhibits previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
in Item 15, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will,
II-4
<PAGE> 63
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(2) For purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 64
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWNSHIP OF TINTON
FALLS, STATE OF NEW JERSEY, ON AUGUST 18, 1997.
ECCS, INC.
By /s/ GREGG M. AZCUY
------------------------------------
GREGG M. AZCUY, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
/s/ GREGG M. AZCUY President, Chief Executive August 18, 1997
- --------------------------------------------- Officer
GREGG M. AZCUY and Director (Principal
Executive Officer)
* Vice President, Finance and August 18, 1997
- --------------------------------------------- Administration (Principal
LOUIS J. ALTIERI Financial and Accounting
Officer)
* Chairman of the Board and August 18, 1997
- --------------------------------------------- Director
MICHAEL E. FAHERTY
* Director August 18, 1997
- ---------------------------------------------
GALE R. AGUILAR
* Director August 18, 1997
- ---------------------------------------------
JAMES K. DUTTON
* Director August 18, 1997
- ---------------------------------------------
DONALD E. FOWLER
* Director August 18, 1997
- ---------------------------------------------
FRANK R. TRIOLO
* Director August 18, 1997
- ---------------------------------------------
THOMAS I. UNTERBERG
</TABLE>
- ---------------
* By his signature set forth below the undersigned, pursuant to duly authorized
powers of attorney filed with the Securities and Exchange Commission, has
signed this Amendment to the Registration Statement on behalf of the persons
indicated.
By /s/ GREGG M. AZCUY
-----------------------------------
GREGG M. AZCUY
(ATTORNEY-IN-FACT)
II-6
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<S> <C>
1* Form of Underwriting Agreement.
3.1 Certificate of Amendment to the Restated and Amended Certificate of Incorporation,
as amended. (Incorporated by reference to the Company's Annual Report on Form 10-K
for the annual period ended December 31, 1995 filed on May 17, 1996.)
3.2 By-Laws of the Company, as amended. (Incorporated by reference to the Company's
Registration Statement on Form S-1 (File Number 33-60986) which became effective on
June 14, 1993.)
4.1 1989 Stock Option Plan of the Company. (Incorporated by reference to the Company's
Registration Statement on Form S-1 (File Number 33-60986) which became effective on
June 14, 1993.)
4.2 Warrant issued to Michael E. Faherty to purchase 266,601 shares of Common Stock of
the Company. (Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1995 filed on May 15, 1995.)
4.3 Form of Option Agreement, pursuant to which the Company granted non-qualified stock
options outside the Company's Stock Option Plan. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1995 filed on May 15, 1995.)
4.4 Option issued to Gregg M. Azcuy to purchase 80,000 shares of Common Stock of the
Company. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1995 filed on May 15, 1995.)
4.5 1996 Stock Plan of the Company. (Incorporated by reference to the Company's Form
S-8, Registration Statement under the Securities Act of 1933 (File No. 333-15529)
which became effective on November 5, 1996.)
4.6 1996 Non-Employee Directors Stock Option Plan of the Company. (Incorporated by
reference to the Company's Form S-8, Registration Statement under the Securities Act
of 1933 (File No. 333-15529) which became effective on November 5, 1996.)
5* Opinion of Buchanan Ingersoll.
10.1 Form of Non-Competition and Non-Disclosure Agreement executed by substantially all
optionholders. (Incorporated by reference to the Company's Registration Statement on
Form S-1 (File Number 33-60986) which became effective on June 14, 1993.)
10.2 Form of Employee's Invention Assignment and Confidential Information Agreement.
(Incorporated by reference to the Company's Registration Statement on Form S-1 (File
Number 33-60986) which became effective on June 14, 1993.)
10.3 Lease Agreements between the Company and Philip J. Bowers & Company dated September
20, 1988 and May 13, 1991 and modified June 10, 1992 for the Company's Tinton Falls,
New Jersey Facilities. (Incorporated by reference to the Company's Registration
Statement on Form S-1 (File Number 33-60986) which became effective on June 14,
1993.)
10.4 Indemnification Agreement as of August 22, 1994 by and between the Company and James
K. Dutton. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended October 1, 1994 filed on November 8, 1994.)
10.5 Lease Agreement, dated May 15, 1994 between the Company and John Donato, Jr., d/b/a
Mid Atlantic Industrial Co., with Security Amendment and Subordination, Attornment
and Non Disturbance Agreement dated May 25, 1994 executed by the Company, as lessee,
John Donato, Jr., as mortgagor, and Starbase II Partners, L.P., as mortgagee.
(Incorporated by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 filed on April 13, 1995.)
10.6 Indemnification Agreement as of March 1, 1995 by and between the Company and Gale R.
Aguilar. (Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 filed on April 13, 1995.)
10.7 Indemnification Agreement as of April 5, 1994 by and between the Company and Gregg
M. Azcuy. (Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 filed on April 13, 1995.)
10.8 Indemnification Agreement as of September 12, 1994 by and between the Company and
Louis J. Altieri. (Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1994 filed on April 13, 1995.)
</TABLE>
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<S> <C>
10.9 Indemnification Agreement as of December 6, 1994 by and between the Company and
Michael E. Faherty. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994 filed on April 13, 1995.)
10.10 Purchase and Sale Agreement dated March 27, 1995 between the Company and Fidelity
Funding of California, Inc. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994 filed on April 13, 1995).
10.11 Change in Control Severance Pay Agreement made as of February 1, 1995 by and between
the Company and Gregg M. Azcuy. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 filed on
May 15, 1995.)
10.12 Change in Control Severance Pay Agreement made as of February 1, 1995 by and between
the Company and Louis J. Altieri. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 filed on
May 15, 1995.)
10.13 Change in Control Severance Pay Agreement made as of February 1, 1995 by and between
the Company and Priyan Guneratne. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 filed on
May 15, 1995.)
10.14 Change in Control Severance Pay Agreement made as of February 1, 1995 by and between
the Company and Mark Ish. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1995 filed on May 15,
1995.)
10.15 Change in Control Severance Pay Agreement made as of February 1, 1995 by and between
the Company and Thomas Ricca. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1995 filed on May 15,
1995.)
10.16 Series B Convertible Preferred Stock Purchase Agreement made as of May 12, 1995 by
and between the Company and the investors set forth on the Schedule of Purchasers
attached thereto as Exhibit A, and related letter agreement dated as of May 12,
1995. (Incorporated by reference to the Company's Current Report on Form 8-K filed
June 2, 1995.)
10.17 Series C Convertible Preferred Stock Purchase Agreement made as of May 17, 1996 by
and between the Company and the investors set forth on the Schedule of Purchasers
attached thereto as Exhibit A. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the annual period ended December 31, 1995 filed on May 17,
1996.)
10.18 Indemnification Agreement as of June 20, 1996 by and between the Company and Thomas
I. Unterberg. (Incorporated by reference to the Company's Report on Form 10-Q for
the quarterly period ended June 30, 1996, filed on August 14, 1996.)
10.19 Indemnification Agreement as of June 20, 1996 by and between the Company and Frank
R. Triolo. (Incorporated by reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1996, filed on August 14, 1996.)
10.20 Indemnification Agreement as of June 20, 1996 by and between the Company and Donald
E. Fowler. (Incorporated by reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1996, filed on August 14, 1996.)
10.21 Indemnification Agreement as of July 8, 1996 by and between the Company and David J.
Boyle. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1996, filed on November 14, 1996.)
10.22 Indemnification Agreement as of August 22, 1996 by and between the Company and
Priyan Guneratne. (Incorporated by reference to the Company's Annual Report on Form
10-K/A for the annual period ended December 31, 1996 filed on March 28, 1997.)
10.23 1995 Employee Stock Purchase Plan of the Company. (Incorporated by reference to the
Company's Form S-8, Registration Statement under the Securities Act of 1933 (File
No. 33-93480) which became effective on June 14, 1995.)
10.24 Manufacturing Services Agreement, dated June 15, 1995, by and between the Company
and Unisys Corporation (Incorporated by reference to the Company's Annual Report on
Form 10-K/A for the annual period ended December 31, 1996 filed on March 28, 1997.)
10.25 Agreement dated August 13, 1996 by and between the Company and AT&T Capital
Corporation (Incorporated by reference to the Company's Annual Report on Form 10-K/A
for the annual period ended December 31, 1996 filed on March 28, 1997).
10.26 Factoring Agreement dated July 9, 1997 between the Company and NationsBanc
Commercial Corporation. (Incorporated by reference to the Company's Report on Form
10-Q for the quarterly period ended June 30, 1997, filed on August 6, 1997).
</TABLE>
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<S> <C>
21 Listing of Subsidiaries (Incorporated by reference to the Company's Annual Report on
Form 10-K/A for the annual period ended December 31, 1996 filed on March 28, 1997.)
23.1* Consent of Ernst & Young LLP.
23.2 Consent of Buchanan Ingersoll (contained in the opinion filed as Exhibit 5 to the
Registration).
24 Power of Attorney of certain officers and directors of the Company (contained on the
signature page of this Registration Statement).
</TABLE>
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* Filed herewith. All other exhibits previously filed.
<PAGE> 1
ECCS, Inc.
2,500,000 Shares(1)
Common Stock
($.0l par value)
Underwriting Agreement
Tinton Falls, New Jersey
August 19, 1997
Unterberg Harris
10 East 50th Street
22nd Floor
New York, N.Y. 10022
Dear Sirs:
ECCS, Inc., a New Jersey corporation (the "Company"), proposes to
issue and sell to Unterberg Harris (the "Underwriter"), 2,254,018 shares of
Common Stock, $.0l par value ("Common Stock") of the Company, and the persons
named in Schedule I hereto (the "Selling Shareholders") propose to sell to the
Underwriter 245,982 shares of Common Stock (said shares to be issued and sold by
the Company and shares to be sold by the Selling Shareholders collectively being
hereinafter called the "Underwritten Securities"). The Company also proposes to
grant to the Underwriter an option to purchase up to 375,000 additional shares
of Common Stock (the "Option Securities"; the Option Securities, together with
the Underwritten Securities, being hereinafter called the "Securities").
The terms which follow, when used in this Agreement, shall have the
meanings indicated.
"Effective Date" shall mean each date that the Registration
Statement and any post-effective amendment or amendments thereto became or
become effective.
"Execution Time" shall mean the date and time
- ----------
(1) Plus an option to purchase from ECCS, Inc. up to 375,000 additional
shares to cover over-allotments.
<PAGE> 2
2
that this Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph (i) above and any preliminary prospectus included
in the Registration Statement at the Effective Date that omits Rule 430A
Information.
"Prospectus" shall mean the prospectus relating to the Securities
that is first filed pursuant to Rule 424(b) after the Execution Time or,
if no filing pursuant to Rule 424(b) is required, shall mean the form of
final prospectus relating to the Securities included in the Registration
Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph (i) above, exhibits and financial statements, as
amended at the Execution Time (or, if not effective at the Execution Time,
in the form in which it shall become effective) and, in the event any
post-effective amendment thereto becomes effective prior to the Closing
Date (as hereinafter defined including any documents incorporated by
reference), and shall also mean such registration statement as so amended.
Such term shall include Rule 430A Information deemed to be included
therein at the Effective Date as provided by Rule 430A.
"Rule 424" and "Rule 430A" refer to such rules under the Act.
"Rule 430A Information" means information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
1. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees with,
the Underwriter as set forth below in this Section 1. Certain terms used in
this Section I are defined in subparagraph (iv) of this paragraph (a).
<PAGE> 3
3
(i) The Company meets the requirements for the use of Form S-2 under
the Act and has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (file number 333-32931) on Form S-2
including a related preliminary prospectus, for the registration under the
Securities Act of 1933 (the "Act") of the offering and sale of the
Securities. The Company may have filed one or more amendments thereto,
including the related preliminary prospectus, each of which has previously
been furnished to you. The Company will next file with the Commission
either (A) prior to effectiveness of such registration statement, a
further amendment to such registration statement (including the form of
final prospectus) or (B) after effectiveness of such registration
statement, a final prospectus in accordance with Rules 430A and 424(b)(1)
or (4). In the case of clause (B), the Company has included in such
registration statement, as amended at the Effective Date, all information
(other than Rule 430A Information) required by the Act and the rules
thereunder to be included in the Prospectus with respect to the Securities
and the offering thereof. As filed, such amendment and form of final
prospectus, or such final prospectus, shall contain all Rule 430A
Information, together with all other such required information, with
respect to the Securities and the offering thereof and, except to the
extent the Underwriter shall agree in writing to a modification, shall be
in all substantive respects in the form furnished to you prior to the
Execution Time or, to the extent not completed at the Execution Time,
shall contain only such specific additional information and other changes
(beyond that contained in the latest Preliminary Prospectus) as the
Company has advised you, prior to the Execution Time, will be included or
made therein.
(ii) On the Effective Date, the Registration Statement did or will,
and when the Prospectus is first filed (if required) in accordance with
Rule 424(b) and on the Closing Date, the Prospectus (and any supplements
thereto) will, comply in all material respects with the applicable
requirements of the Act and the rules thereunder; on the Effective Date,
the Registration Statement did not or will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein
not misleading; and, on the Effective Date, the Prospectus,
<PAGE> 4
4
if not filed pursuant to Rule 424(b), did not or will not, and on the date
of any filing pursuant to Rule 424(b) and on the Closing Date, the
Prospectus (together with any supplement thereto) will not, include any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company and the Selling Shareholders make no
representations or warranties as to the information contained in or
omitted from the Registration Statement, or the Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished in writing to the Company by the Underwriter specifically for
inclusion in the Registration Statement or the Prospectus (or any
supplement thereto).
(iii) The Company has not and will not in connection with the filing
of the Registration Statement or any other registration statement being
filed by the Company violate any provision of any contracts, agreements or
understandings between the Company and any person granting such person the
right to require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement
being filed by the Company.
(iv) The Company's authorized equity capitalization is as set forth
in the Prospectus. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or organized
with full power and authority to own its properties and conduct its
business as described in the Registration Statement and the Prospectus,
and the Company has full power and authority to execute and deliver this
Agreement and to issue and sell the Securities as herein contemplated.
(v) Each of the Company and its subsidiaries is duly qualified or
licensed by and are in good standing in each jurisdiction in which they
conduct their
<PAGE> 5
5
respective businesses and in which the failure, individually or in the
aggregate, to be so licensed or qualified and in good standing would have
a material adverse effect on the operations, business, condition or
property of the Company and the subsidiaries, taken as a whole; and the
Company and each of the subsidiaries are in compliance in all material
respects with the laws, orders, rules, regulations and directives issued
or administered by such jurisdictions and where the failure so to comply
would have a material adverse effect on the operations, business,
condition or property of the Company and the subsidiaries, taken as a
whole.
(vi) Neither the Company nor any of the subsidiaries is in breach
of, or in default under (nor has any event occurred which with notice,
lapse of time, or both would constitute a breach of, or default under),
its respective charter or by-laws or in the performance or observance of
any obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, bank loan or credit agreement or other
agreement or instrument to which the Company or any of the subsidiaries is
a party or by which any of them is bound, the effect of which would have a
material adverse effect on the Company and the subsidiaries, taken as a
whole, and the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby will not conflict
with, or result in any breach of or constitute a default under (nor
constitute any event which with notice, lapse of time, or both would
constitute a breach of, or default under), any provisions of the charter
or by-laws, of the Company or any of the subsidiaries or under any
provision of any license, indenture, mortgage, deed of trust, bank loan or
credit agreement or other agreement or instrument to which the Company or
any of the subsidiaries is a party or by which any of them or their
respective properties may be bound or affected, or under any Federal,
state, local or foreign law, regulation or rule or any decree, judgment or
order applicable to the Company or any of the subsidiaries.
(vii) This Agreement has been duly authorized, executed and
delivered by the Company and is a legal, valid and binding agreement of
the Company enforceable in accordance with its terms (subject to
applicable
<PAGE> 6
6
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and other similar laws affecting creditors' rights generally from time to
time in effect, and subject, as to enforceability, to general principles
of equity, regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(viii) The capital stock of the Company, including the Securities,
conforms in all material respects to the description thereof contained in
the Registration Statement and Prospectus and the certificates for the
Securities are in due and proper form and the holders of the Securities
will not be subject to personal liability solely by reason of being such
holders.
(ix) No approval, authorization, consent or order of or filing with
any national, state or local governmental or regulatory commission, board,
body, authority or agency is required in connection with the issuance and
sale of the Securities as contemplated hereby other than registration of
the Securities under the Act and any necessary qualification under the
securities or blue sky laws of the various jurisdictions in which the
Securities are being offered by the Underwriter.
(x) Other than (x) such shares of Common Stock that may be issuable
pursuant to outstanding options and warrants, (y) as set forth under the
captions "Description of Capital Stock--Common Stock" and "--Registration
Rights" in the Registration Statement and Prospectus or (y) to the extent
such rights to include any shares of Common Stock in this Registration
Statement have been satisfied or waived, no person has the right,
contractual or otherwise, to cause the Company to issue to it, or register
pursuant to the Act, any shares of capital stock of the Company upon the
issue and sale of the Securities to the Underwriter hereunder, nor does
any person have preemptive rights, rights of first refusal or other rights
to purchase any of the Securities.
(xi) Ernst & Young LLP, whose reports on the consolidated financial
statements of the Company and the subsidiaries are filed with the
Commission as part of the Registration Statement and Prospectus, to the
best of the Company's knowledge, are independent
<PAGE> 7
7
accountants within the meaning of the Act and the applicable published
rules and regulations thereunder.
(xii) Each of the Company and the subsidiaries has all necessary
licenses, authorizations, consents and approvals and has made all
necessary filings required under any Federal, state, local or foreign law,
regulation or rule, and has obtained all necessary authorizations,
consents and approvals from other persons, in order to conduct their
respective businesses and where the failure to obtain such licenses,
authorizations, consents and approvals or make such filings would have a
material adverse effect on the Company and the subsidiaries, taken as a
whole. Neither the Company nor any of the subsidiaries is in violation of,
or in default under, any such license, authorization, consent or approval
or any Federal, state, local or foreign law, regulation or rule or any
decree, order or judgment applicable to the Company or any of the
subsidiaries the effect of which would have a material adverse effect on
the Company and the subsidiaries taken as a whole.
(xiii) There are no actions, suits or proceedings pending or
threatened against the Company or any of the subsidiaries or any of their
respective properties, at law or in equity, or before or by any Federal,
state, local or foreign governmental or regulatory commission, board,
body, authority or agency which are reasonably likely to result in a
judgment, decree or order having a material adverse effect on the
operations, business, condition, prospects or property of the Company and
the subsidiaries taken as a whole.
(xiv) The audited financial statements included in the Registration
Statement and the Prospectus present fairly thp consolidated financial
position of the Company and the subsidiaries as of the dates indicated and
the consolidated results of operations and changes in financial position
of the Company and the subsidiaries for the periods specified; such
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis during the
periods involved.
(xv) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as may be
<PAGE> 8
8
otherwise stated in the Registration Statement or Prospectus, there has
not been (i) any material and unfavorable change, financial or otherwise,
in the business, properties, prospects, regulatory environment, results of
operations or condition (financial or otherwise), present or prospective,
of the Company and the subsidiaries taken as a whole, (ii) any
transaction, which is material to the Company and the subsidiaries taken
as a whole, contemplated or entered into by the Company or any of the
subsidiaries or (iii) any obligation, contingent or otherwise, directly or
indirectly incurred by the Company or any of the subsidiaries which is
material to the Company and the subsidiaries taken as a whole.
(xvi) The Securities have been approved for inclusion on the Nasdaq
Small Cap Market, subject to official notice of issuance.
(b) Each Selling Shareholder represents and warrants to, and agrees
with, the Underwriter that:
(i) Such Selling Shareholder is the lawful owner of the Securities
to be sold by such Selling Shareholder hereunder and upon sale and
delivery of, and payment for, such Securities, as provided herein, such
Selling Shareholder will convey good and marketable title to such
Securities, free and clear of all liens, encumbrances, equities and claims
whatsoever.
(ii) Certificates in negotiable form for such Selling Shareholder's
Series B Convertible Preferred Stock or Series C Convertible Preferred
Stock, as the case may be (collectively, the "Preferred Stock"), which
Preferred Stock is automatically convertible into Common Stock of the
Company, have been placed in custody for delivery pursuant to the terms of
this Agreement, under a Power of Attorney and Custody Agreement duly
authorized, executed and delivered by such Selling Shareholder, in the
form heretofore furnished to you (the "Power of Attorney and Custody
Agreement") with Buchanan Ingersoll, as Custodian (the "Custodian"); the
Securities represented by the certificates so held in custody for each
Selling Shareholder are subject to the interests hereunder of the
Underwriter, the Company and the other Selling Shareholders; the
arrangements for custody and delivery
<PAGE> 9
9
of such certificates, made by such Selling Shareholder hereunder and under
the Power of Attorney and Custody Agreement, are not subject to
termination by any acts of such Selling Shareholder, or by operation of
law, whether by the death or incapacity of such Selling Shareholder or the
occurrence of any other event; and if any such death, incapacity or any
other such event shall occur before the delivery of such Securities
hereunder, certificates for the Securities will be delivered by the
Custodian in accordance with the terms and conditions of this Agreement
and the Power of Attorney and Custody Agreement as if such death,
incapacity or other event had not occurred, regardless of whether or not
the Custodian shall have received notice of such death, incapacity or
other event.
(iii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by such
Selling Shareholder of the transactions contemplated herein, except such
as may have been obtained under the Act and such as may be required under
the blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriter and such other
approvals as have been obtained.
(iv) Neither the sale of the Securities being sold by such Selling
Shareholder nor the consummation of any other of the transactions herein
contemplated by such Selling Shareholder or the fulfillment of the terms
hereof by such Selling Shareholder will conflict with, result in a breach
or violation of, or constitute a default under any law or certificate of
limited partnership or limited partnership agreement of such Selling
Shareholder or the terms of any indenture or other agreement or instrument
to which such Selling Shareholder is a party or bound, or any judgment,
order or decree applicable to such Selling Shareholder of any court,
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over such Selling Shareholder.
(v) This Agreement has been duly executed and delivered by or on
behalf of such Selling Shareholder and is a legal, valid and binding
agreement of such Selling Shareholder enforceable in accordance with its
terms (subject in each case to applicable
<PAGE> 10
10
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and other similar laws affecting creditors' rights generally from time to
time in effect, and subject, as to enforceability, to general principles
of equity, regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(vi) When the Registration Statement becomes effective and at all
times subsequent thereto through the latest of the time of purchase,
additional time of purchase or the termination of the offering of the
Securities, the Registration Statement and Prospectus, and any supplements
or amendments thereto as relate to such Selling Shareholder will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading.
2. Purchase and Sale. (a) Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, the Company
and the Selling Shareholders agree, severally and not jointly, to sell to the
Underwriter, and the Underwriter agrees, to purchase from the Company and the
Selling Shareholders, at a purchase price of [ ] per share, the Underwritten
Securities.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Underwriter to purchase, up
to the total number of Option Securities at the same purchase price per share as
the Underwriter shall pay for the Underwritten Securities. Said option may be
exercised only to cover over-allotments in the sale of the Underwritten
Securities by the Underwriter. Said option may be exercised in whole or in part
at any time (but not more than once) on or before the 30th day after the date of
the Prospectus upon written or telegraphic notice by the Underwriter to the
Company setting forth the number of shares of the Option Securities as to which
the Underwriter is exercising the option and the settlement date. Delivery of
certificates for the shares of option Securities by the Company and payment
therefor to the Company shall be made as provided in Section 3 hereof.
(c) Subject to the terms and conditions and in reliance upon the
representations and warranties set forth herein, on the Closing Date (as
defined herein) the Company agrees to pay the Underwriter a non-accountable
expense allowance in the amount of $50,000.
3. Delivery and Payment. Delivery of and payment for the
Underwritten Securities and the Option Securities
<PAGE> 11
11
(if the option provided for in Section 2(b) hereof shall have been exercised on
or before the third business day prior to the Closing Date) shall be made at
10:00 AM, New York City time, on August 25, 1997, or such later date (not later
than September 4, 1997) as the Underwriter shall designate, which date and time
may be postponed by agreement among the Underwriter, the Company and the Selling
Shareholders or as provided in Section 9 hereof (such date and time of delivery
and payment for the Securities being herein called the "Closing Date"). Delivery
of the Securities shall be made to the Underwriter against payment of the
aggregate purchase prices of the Securities being sold by the Company and each
of the Selling Shareholders to the Company and the Selling Shareholders or the
Custodian on behalf of the Selling Shareholders, by wire transfer in immediately
available funds. Delivery of the Underwritten Securities and (if the option
provided for in Section 2(b) hereof shall have been exercised) the Option
Securities shall be made at such location the Underwriter shall reasonably
designate at least one business day in advance of the Closing Date and payment
for such Securities shall be made at such location in the State of New Jersey as
the Company and the Underwriter shall agree. Certificates for the Securities
shall be registered in such names and in such denominations as the Underwriter
may request not less than three full business days in advance of the Closing
Date.
The Company and the Selling Shareholders agree to have the
Underwritten Securities (and, if the option provided for in Section 2(b) hereof
shall have been exercised, the Option Securities) available for inspection,
checking and packaging by the Underwriter in New York, New York, not later than
1:00 PM on the business day prior to the Closing Date.
Each Selling Shareholder will pay all applicable state transfer
taxes, if any, involved in the transfer to the Underwriter of the Securities to
be purchased by them from such Selling Shareholder and the Underwriter will pay
any additional stock transfer taxes involved in further transfers.
If the option provided for in Section 2(b) hereof is exercised after
the third business day prior to the Closing Date, the Company will deliver (at
the expense of the Company) to the Underwriter, on the date specified by the
Underwriter (which shall be within three business days after exercise of said
option), and at such place as may be
<PAGE> 12
12
designated by the Underwriter, certificates for the Option Securities in such
names and denominations as the Underwriter shall have requested against payment
of the purchase price thereof to the Company by wire transfer in immediately
available funds. If settlement for the Option Securities occurs after the
Closing Date, the Company will deliver to the Underwriter on the settlement date
for the Option Securities, and the obligation of the Underwriter to purchase the
Option Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof.
4. Offering by the Underwriter. It is understood that the
Underwriter proposes to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements.
(a) The Company agrees with the Underwriter that:
(i) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment
thereof, to become effective. Prior to the termination of the offering of
the Securities, the Company will not file any amendment of the
Registration Statement or supplement to the Prospectus without your prior
consent. Subject to the foregoing sentence, if the Registration Statement
has become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will cause
the Prospectus, properly completed, and any supplement thereto to be filed
with the Commission pursuant to the applicable paragraph of Rule 424(b)
within the time period prescribed and will provide evidence satisfactory
to the Underwriter of such timely filing. The Company will promptly advise
the Underwriter (A) when the Registration Statement, if not effective at
the Execution Time, and any amendment thereto, shall have become
effective, (B) when the Prospectus, and any supplement thereto, shall have
been filed (if required) with the Commission pursuant to Rule 424(b), (C)
when, prior to termination of the offering of the Securities, any
amendment to the Registration Statement shall have
<PAGE> 13
13
been filed or become effective, (D) of any request by the Commission for
any amendment of the Registration Statement or supplement to the
Prospectus or for any additional information, (E) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceeding
for that purpose and (F) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Securities for
sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order and, if issued, to obtain as
soon as possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which the Prospectus as then supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein in the light of the circumstances under
which they were made not misleading, or if it shall be necessary to amend
the Registration Statement or supplement the Prospectus to comply with the
Act or the rules thereunder, the Company promptly will prepare and file
with the Commission, subject to the second sentence of paragraph (a) of
this Section 5, an amendment or supplement which will correct such
statement or omission or effect such compliance.
(iii) As soon as practicable, the Company will make generally
available to its security holders and to the Underwriter an earnings
statement or statements of the Company and its subsidiaries which will
satisfy the provisions of Section 11(a) of the Act and Rule 158 under the
Act.
(iv) The Company will furnish to the Underwriter and its counsel,
without charge, signed copies of the Registration Statement (including
exhibits thereto) and, so long as delivery of a prospectus by the
Underwriter or any dealer may be required by the Act, as many copies of
each Preliminary Prospectus and the Prospectus and any supplement thereto
as the Underwriter may reasonably request. The Company will furnish or
cause to be furnished to the Underwriter
<PAGE> 14
14
copies of all reports on Form SR required by Rule 463 under the Act. The
Company will pay the expenses of printing or other production of all
documents relating to the offering.
(v) The Company will arrange for the qualification of the Securities
for sale under the laws of such jurisdictions as the Underwriter may
designate, and will maintain such qualifications in effect so long as
required for the distribution of the Securities and will pay the fee of
the National Association of Securities Dealers, Inc., in connection with
its review of the offering.
(vi) The Company will apply the net proceeds from the sale of the
Securities in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
(vii) The Company will not, for a period of 90 days following the
Execution Time, without the prior written consent of Unterberg Harris,
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce the offering of, any other shares of Common Stock
or any securities convertible into, or exchangeable for, shares of Common
Stock; provided, however, that the Company may (a) issue and sell Common
Stock pursuant to any employee stock option plan in effect at the
Execution Time, (b) issue Common Stock issuable upon the conversion of
securities or the exercise of warrants outstanding at the Execution Time,
and (c) if so provided in the Company's Savings and Protection Plan at the
Execution Time, issue Common Stock as all or part of the Company's
"Employer Matching Contributions" thereunder, as that term is defined
therein.
(viii) The Company will pay all expenses, fees and taxes (other than
any transfer taxes and fees and disbursements of counsel for the
Underwriter except as set forth under Section 7 hereof) in connection with
(i) the preparation and filing of the Registration Statement, each
Preliminary Prospectus, the Prospectus, and any amendments or supplements
thereto, and the printing and furnishing of copies of each thereof to the
Underwriter and to dealers (including costs of mailing and shipment), (ii)
the issuance, sale and delivery of the Securities by the Company and the
Selling Shareholders, (iii) the word processing or
<PAGE> 15
15
printing, and reproduction and distribution, of this Agreement, any
Agreement Among Underwriters, any dealer agreements, any Statements of
Information and the Custody Agreements and the reproduction or printing
and furnishing of copies of each thereof to the Underwriter and to
dealers (including costs of mailing and shipment), (iv) the distribution
of the terms of agreement relating to the organization of the underwriting
syndicate and selling group to the members thereof by mail, telex,
telecopy or other means of communication, (v) the qualification of the
Securities for offering and sale under state laws and the determination of
their eligibility for investment under state law as aforesaid (including
the legal fees and filing fees and other disbursements of counsel for
the Underwriter) and the printing and furnishing of copies of any blue
sky surveys or legal investment surveys to the Underwriter and to
dealers, (vi) any listing of the Securities on any securities exchange or
designation of the Securities for inclusion on the NASDAQ SmallCap Market
and any registration thereof under the Exchange Act, (vii) the filing for
review of the public offering of the Securities by the National
Association of Securities Dealers, Inc. (the "NASD"), and (viii) the
performance of the Company's and the Selling Shareholders' other
obligations hereunder; and
(b) Each Selling Shareholder agrees with the Underwriter that
such Selling Shareholder will not, during the period of 90 days following the
Execution Time, without the prior written consent of Unterberg Harris, offer,
sell or contract to sell, or otherwise dispose of, directly or indirectly, or
announce the offering of, any other shares of Common Stock beneficially owned by
such person, or any securities convertible into, or exchangeable for, shares of
Common Stock.
6. Conditions to the obligations of the Underwriter. The
obligations of Unterberg Harris to purchase the Underwritten Securities and the
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Shareholders contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company and the Selling Shareholders made in any certificates pursuant to
the provisions hereof, to the performance by the Company and the Selling
Shareholders of
<PAGE> 16
16
their respective obligations hereunder and to the following additional
conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Underwriter agrees in writing to a later time,
the Registration Statement will become effective not later than (i) 6:00 PM New
York City time on the date of determination of the public offering price, if
such determination occurred at or prior to 3:00 PM New York City time on such
date or (ii) 10:00 AM on the business day following the day on which the public
offering price was determined, if such determination occurred after 3:00 PM New
York City time on such date; if filing of the Prospectus, or any supplement
thereto, is required pursuant to Rule 424(b), the Prospectus, and any such
supplement, will be filed in the manner and within the time period required by
Rule 424(b); and no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been instituted or threatened.
(b) The Company shall have furnished to the Underwriter the opinion
of Buchanan Ingersoll, counsel for the Company, dated the Closing Date, to the
effect that:
(i) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction in
which it is chartered or organized, with full corporate power and
authority to own its properties and conduct its business as described in
the Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction
which requires such qualification wherein it owns or leases material
properties or conducts material business; and each subsidiary,
(individually a "Subsidiary" and collectively the "Subsidiaries") is
inactive, and the Subsidiaries do not, either individually or in the
aggregate, own or lease a material portion of the Company's property or
assets or conduct a material portion of the Company's business;
(ii) all the outstanding shares of capital stock of each Subsidiary
have been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise set forth in the Prospectus
(including the security interests of NationsBanc
<PAGE> 17
17
Commercial Corporation and AT&T Commercial Finance Corporation described
therein), all outstanding shares of capital stock of the Subsidiaries are
owned by the Company either directly or through wholly owned subsidiaries
free and clear of any perfected security interest and, to the knowledge of
such counsel, after due inquiry, any other security interests, claims,
liens or encumbrances;
(iii) the Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms to the
description thereof contained in the Prospectus; the outstanding shares of
Common Stock (including the Securities being sold hereunder by the Selling
Shareholders) have been duly and validly authorized and issued and are
fully paid and nonassessable; the Securities being sold hereunder by the
Company have been duly and validly authorized, and, when issued and
delivered to and paid for by the Underwriter pursuant to this Agreement,
will be fully paid and nonassessable; the Securities being sold hereunder
by the Company and by the Selling Shareholders are duly designated for
inclusion, subject to official notice of issuance by the Company, on the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
SmallCap Market System; the certificates for the Securities are in valid
and sufficient form; and to the best knowledge of such counsel, the
holders of outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to subscribe for the Securities;
(iv) to the best knowledge of such counsel, there is no pending or
threatened action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Company or any
of its subsidiaries of a character required to be disclosed in the
Registration Statement which is not adequately disclosed in the
Prospectus, and to the best knowledge of such counsel, there is no
franchise, contract or other document of a character required to be
described in the Registration Statement or Prospectus, or to be filed as
an exhibit, which is not described or filed as required;
(v) the Registration Statement has become effective under the Act;
any required filing of the Prospectus, and any supplements thereto,
pursuant to
<PAGE> 18
18
Rule 424(b) has been made in the manner and within the time period
required by Rule 424(b); to the best knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement has been
issued, no proceedings for that purpose have been instituted or threatened
and the Registration Statement and the Prospectus (other than the
financial statements and other financial and statistical information
contained therein as to which such counsel need express no opinion) comply
as to form in all material respects with the applicable requirements of
the Act and the rules thereunder; and such counsel has no reason to
believe that at the Effective Date the Registration Statement contained
any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus includes any untrue
statement of a material fact or omits to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading;
(vi) this Agreement has been duly authorized, executed and delivered
by the Company;
(vii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated herein, except such as have been obtained under
the Act and such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriter and such other approvals (specified in such
opinion) as have been obtained;
(viii) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions herein contemplated nor the
fulfillment of the terms hereof will conflict with, result in a breach or
violation of, or constitute a default under any law or the charter or
by-laws of the Company or the terms of any indenture or other agreement or
instrument known to such counsel and to which the Company or any of its
subsidiaries is a party or bound or any judgment, order or decree known to
such counsel to be applicable to the Company or any of its subsidiaries of
any court,
<PAGE> 19
19
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over the Company or any of its subsidiaries; and
(ix) except to the extent set forth in the Prospectus or waived with
respect to registration of any of the Securities to be issued and sold
pursuant to this Agreement, no holders of securities of the Company have
rights to the registration of such securities under the Registration
Statement.
In rendering such opinions, such counsel may rely (A) as to matters involving
the application of laws of any jurisdiction other than the State of New Jersey
or the United States, to the extent they deem proper and specified in such
opinion, upon the opinion of other counsel of good standing whom they believe to
be reliable and who are satisfactory to counsel for the Underwriter and (B) as
to matters of fact, to the extent they deem proper, on certificates of
responsible officers of the Company and public officials. Reference to the
Prospectus in this paragraph (b) include any supplements thereto at the Closing
Date.
(c) The Selling Shareholders shall have furnished to the Underwriter
the opinion of Buchanan Ingersoll, counsel for the Selling Shareholders,
dated the Closing Date, to the effect that:
(i) this Agreement and the Power of Attorney and Custody Agreement
have been duly authorized, executed and delivered by the Selling
Shareholders, the Power of Attorney and Custody Agreement is valid and
binding on the Selling Shareholders and each Selling Shareholder has full
legal right and authority to sell, transfer and deliver in the manner
provided in this Agreement and the Power of Attorney and Custody Agreement
the Securities being sold by such Selling Shareholder hereunder;
(ii) the delivery by each Selling Shareholder to the Underwriter of
certificates for the Securities being sold hereunder by such Selling
Shareholder against payment therefor as provided herein, will pass good
and marketable title to such Securities to the Underwriter, free and
clear of all liens, encumbrances, equities and claims whatsoever;
(iii) no consent, approval, authorization or
<PAGE> 20
20
order of any court or governmental agency or body is required for the
consummation by any Selling Shareholder of the transactions contemplated
herein, except such as may have been obtained under the Act and such as
may be required under the blue sky laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the Underwriter
and such other approvals (specified in such opinion) as have been
obtained; and
(iv) neither the sale of the Securities being sold by any Selling
Shareholder nor the consummation of any other of the transactions herein
contemplated by any Selling Shareholder or the fulfillment of the terms
hereof by any Selling Shareholder will conflict with, result in a breach
or violation of, or constitute a default under any law or certificate of
limited partnership or limited partnership agreement of any Selling
Shareholder or the terms of any indenture or other agreement or instrument
known to such counsel and to which any Selling Shareholder is a party or
bound, or any judgment, order or decree known to such counsel to be
applicable to any Selling Shareholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over any Selling Shareholder.
(v) to the best of such counsel's knowledge, the statements in the
Prospectus under the caption "Principal and Selling Shareholders" insofar
as such statements constitute a summary of the matters referred to therein
present fairly the information called for with respect to such matters.
In rendering such opinion, such counsel may rely (A) as to matters involving the
application of laws of any jurisdiction other than the State of New Jersey or
the United States, to the extent they deem proper and specified in such opinion,
upon the opinion of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriter, and (B) as to
matters of fact, to the extent they deem proper, on certificates of the Selling
Shareholders or of responsible officers of the Selling Shareholders and public
officials or on the certificate of limited partnership and partnership agreement
of the Selling Shareholders.
<PAGE> 21
21
(d) The Underwriter shall have received from its counsel,
Cravath, Swaine & Moore, such opinions or letters, dated the Closing Date, with
respect to the issuance and sale of the Securities, the Registration Statement,
the Prospectus (together with any supplement thereto) and other related matters
as the Underwriter may reasonably require, and the Company and each Selling
Shareholder shall have furnished to such counsel such documents as they request
for the purpose of enabling them to pass upon such matters.
(e) The Company shall have furnished to the Underwriter a
certificate of the Company, signed by the Chairman of the Board or the President
and the principal financial or accounting officer of the Company, dated the
Closing Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date and the
Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or, to the Company's knowledge, threatened; and
(iii) since the date of the most recent financial statements
included in the Prospectus (exclusive of any supplement thereto), there
has been no material adverse change in the condition (financial or other),
earnings, business or properties of the Company and its subsidiaries,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(f) At the Execution Time and at the Closing Date, Ernst & Young
shall have furnished to the Underwriter a letter or letters, dated respectively
as of the Execution Time and as of the Closing Date, in form and substance
satisfactory to the Underwriter, confirming that they are
<PAGE> 22
22
independent accountants within the meaning of the Act and the applicable
published rules and regulations thereunder and stating in effect that:
(i) in their opinion the audited consolidated financial statements
and financial statement schedules included in the Registration Statement
and the Prospectus and reported on by them comply in form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations;
(ii) on the basis of a reading of the latest unaudited consolidated
financial statements made available by the Company and its subsidiaries;
their limited review in accordance with standards established by the
American Institute of Certified Public Accountants of the unaudited
interim financial information for the six-month period ended June 30,
1997, and as at August [ ], 1997, as indicated in their report dated
August [ ], 1997; carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing standards)
which would not necessarily reveal matters of significance with respect to
the comments set forth in such letter; a reading of the minutes of the
meetings of the Shareholders, directors and audit and compensation
committees of the Company and the Subsidiaries; and inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters of the Company and its subsidiaries as to transactions
and events subsequent to June 30, 1997, nothing came to their attention
which caused them to believe that:
(1) any unaudited financial statements included in the
Registration Statement and the Prospectus do not comply in form in
all material respects with applicable accounting requirements of the
Act and with the published rules and regulations of the Commission
with respect to registration statements on Form S-2; and said
unaudited financial statements are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements included in
the Registration Statement and the Prospectus;
<PAGE> 23
23
(2) with respect to the period subsequent to June 30, 1997,
there were any changes, at a specified date not more than five
business days prior to the date of the letter, in the notes payable
or long-term debt of the Company and the Subsidiaries or capital
stock of the Company or decreases in the Shareholders' equity of the
Company or decreases in working capital of the Company and the
Subsidiaries as compared with the amounts shown on the June 30, 1997
consolidated balance sheet included in the Registration Statement
and the Prospectus, or for the period from July 1, 1997 to such
specified date there were any decreases, as compared with the
corresponding period in the preceding year and the corresponding
period in the preceding quarter in net sales or gross profit or
income before provision for income taxes or income from continuing
operations or net income, of the Company and the Subsidiaries,
except in all instances for changes or decreases set forth in such
letter, in which case the letter shall be accompanied by an
explanation by the Company as to the significance thereof unless
said explanation is not deemed necessary by the Underwriter;
(iii) they have performed certain other specified procedures as a
result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial
or statistical information derived from the general accounting records of
the Company and its subsidiaries) set forth in the Registration Statement
and the Prospectus, agrees with the accounting records of the Company and
its subsidiaries, excluding any questions of legal interpretation.
References to the Prospectus in this paragraph (f) include any supplement
thereto at the date of the letter.
(g) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto),
there shall not have been (i) any change or decrease specified in the letter or
letters referred to in paragraph (g) of this Section 6 or (ii) any change, or
any development
<PAGE> 24
24
involving a prospective change, in or affecting the business or properties of
the Company and its subsidiaries the effect of which, in any case referred to in
clause (i) or (ii) above, is, in the judgment of the Underwriter, so material
and adverse as to make it impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Registration
Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto).
(h) At the Execution Time, the Company shall have furnished to
the Underwriter a letter substantially in the form of Exhibit A hereto from
each warrantholder, certain holders of the Company's Series B or Series C
Preferred Stock, each officer and director of the Company and each Selling
Shareholder, addressed to Unterberg Harris, in which each such person agrees not
to offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce an offering of, any shares of Common Stock beneficially
owned by such person or any securities convertible into, or exchangeable for,
shares of Common Stock for a period of 90 days following the Execution Time,
without the prior written consent of Unterberg Harris.
(i) Prior to the Closing Date, the Company shall have furnished to
the Underwriter such further information, certificates and documents as
the Underwriter may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Underwriter and its counsel, this Agreement and all
obligations of the Underwriter hereunder may be canceled at, or at any time
prior to, the Closing Date by the Underwriter. Notice of such cancelation shall
be given to the Company and each Selling Shareholder in writing or by telephone
or telegraph confirmed in writing.
7. Reimbursement of the Underwriter's Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriter set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on
<PAGE> 25
25
the part of the Company or any Selling Shareholder to perform any agreement
herein or comply with any provision hereof other than by reason of a default by
the Underwriter, the Company will reimburse the Underwriter upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel,
but not including, for purposes of this Section 7, any lost profits of the
Underwriter) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. If the Company is required to make
any payments to the Underwriter under this Section 7 because of any Selling
Shareholder's refusal, inability or failure to satisfy any condition to the
obligations of the Underwriter set forth in Section 6, such Selling Shareholder
shall reimburse the Company on demand for all amounts so paid.
8. Indemnification and Contribution. (a) The Company and the Selling
Shareholders jointly and severally agree to indemnify and hold harmless the
Underwriter, the directors, officers, employees and agents of the Underwriter
and each person who controls the Underwriter within the meaning of either the
Act or the Securities Exchange Act of 1934 (the "Exchange Act") against any and
all losses, claims, damages or liabilities, joint or several, to which they or
any of them may become subject under the Act, the Exchange Act or other Federal
or state statutory law or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Securities as originally filed or in any amendment thereof, or in any
Preliminary Prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that (i) the
Company and the Selling Shareholders will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company the Underwriter
<PAGE> 26
26
specifically for inclusion therein and (ii) such indemnity with respect to any
Preliminary Prospectus shall not inure to the benefit of the Underwriter (or any
director, officer, employee or agent of the Underwriter or any person
controlling the Underwriter) from whom the person asserting any such loss,
claim, damage or liability purchased the Securities that are the subject thereof
if such person did not receive a copy of the Prospectus (or the Prospectus as
supplemented) excluding documents incorporated therein by reference at or prior
to the confirmation of the sale of such Securities to such person in any case
where such delivery is required under the Act and any untrue statement or
omission of a material fact contained in any Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as supplemented). This indemnity
agreement will be in addition to any liability which the Company or the Selling
Shareholders may otherwise have.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who signs the Registration
Statement, and each person who controls the Company within the meaning of either
the Act or the Exchange Act and each Selling Shareholder, to the same extent as
the foregoing indemnity to the Underwriter, but only with reference to written
information relating to the Underwriter furnished by the Underwriter to the
Company specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
the Underwriter may otherwise have. The Company and each Selling Shareholder
acknowledge that the statements set forth in the last paragraph of the cover
page and under the heading "Underwriting" in any Preliminary Prospectus and the
Prospectus constitute the only information furnished in writing by or on behalf
of the Underwriter for inclusion in any Preliminary Prospectus or the
Prospectus, and you confirm that such statements are correct.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party
<PAGE> 27
27
of substantial rights and defenses and (ii) will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a) or (b) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case the
indemnifying party shall not thereafter be responsible for the fees and expenses
of any separate counsel retained by the indemnified party or parties except as
set forth below); provided, however, that such counsel shall be satisfactory to
the indemnified party. Notwithstanding the indemnifying party's election to
appoint counsel to represent the indemnified party in an action, the indemnified
party shall have the right to employ separate counsel (including local counsel),
and the indemnifying party shall bear the reasonable fees, costs and expenses of
such separate counsel if (i) the use of counsel chosen by the indemnifying party
to represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any
<PAGE> 28
28
reason, the Company and the Selling Shareholders, jointly and severally, and
the Underwriter agree to contribute to the aggregate losses, claims, damages
and liabilities (including legal or other expenses reasonably incurred in
connection with investigating or defending same) (collectively "Losses") to
which the Company, one or more of the Selling Shareholders and the Underwriter
may be subject in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Shareholders on the one hand
and by the Underwriter on the other from the offering of the Securities;
provided, however, that in no case shall the Underwriter be responsible for any
amount in excess of the underwriting discount or commission applicable to the
Securities purchased hereunder. If the allocation provided by the immediately
preceding sentence is unavailable for any reason, the Company and the Selling
Shareholders, jointly and severally, and the Underwriter shall contribute in
such proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company and the Selling Shareholders on the one
hand and of the Underwriter on the other in connection with the statements or
omissions which resulted in such Losses as well as any other relevant equitable
considerations. Benefits received by the Company and the Selling Shareholders
shall be deemed to be equal to the total net proceeds from the offering (before
deducting expenses), and benefits received by the Underwriter shall be deemed
to be equal to the total underwriting discounts and commissions, in each case as
set forth on the cover page of the Prospectus. Relative fault shall be
determined by reference to whether any alleged untrue statement or omission
relates to information provided by the Company, the Selling Shareholders or
the Underwriter, the intent of the parties and their relative knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriter agree that it would
not be just and equitable if contribution were determined by pro rata allocation
or any other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls the Underwriter within the meaning of
either the Act or the Exchange Act and each
<PAGE> 29
29
director, officer, employee and agent of the Underwriter shall have the same
rights to contribution as the Underwriter, and each person who controls the
Company within the meaning of either the Act or the Exchange Act, each officer
of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (d).
(e) Without limitation of and in addition to its obligations under
the other paragraphs of this Section 8, the Company agrees to indemnify and hold
harmless Burnham Securities Inc. in its role as a "qualified independent
underwriter" (within the meaning of Rule 2720 of the Conduct Rules of the NASD),
its directors, officers, employees and agents and each person who controls
Burnham Securities Inc. within the meaning of either the Act or the Exchange
Act, provided that they comply with Rule 2720 of the Conduct Rules of the NASD,
against any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject that are separate or different from
liabilities as an underwriter referred to in Section 8(a), insofar as such
losses, claims, damages or liabilities (or action in respect thereof) arise out
of or are based upon Burnham Securities Inc.'s acting as a "qualified
independent underwriter" in connection with the offering contemplated by this
Agreement, and agrees to reimburse each such indemnified party, as incurred, for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action.
(f) The liability of each Selling Shareholder under such Selling
Shareholder's representations and warranties contained in Section I hereof and
under the indemnity and contribution agreements contained in this Section 8
shall be limited to an amount equal to the net proceeds of the Securities sold
by such Selling Shareholder to the Underwriter. The Company and the Selling
Shareholders may agree, as among themselves and without limiting the rights of
the Underwriter under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
9. Default by Unterberg Harris. If Unterberg Harris shall fail to
purchase and pay for any of the Securities it has agreed to purchase and such
failure to purchase shall constitute a default in the performance of
<PAGE> 30
its obligations under this Agreement, this Agreement will terminate. Nothing
contained in this Agreement shall relieve Unterberg Harris of its liability, if
any, to the Company and the Selling Shareholders for damages occasioned by its
default hereunder.
10. Termination. This Agreement shall be subject to termination in
the absolute discretion of the Underwriter, by notice given to the Company
prior to delivery of and payment for the Securities, if prior to such time (i)
trading in the Company's Common Stock shall have been suspended by the
Commission or the NASDAQ SmallCap Market System or trading in securities
generally on the New York Stock Exchange, the NASDAQ National Market System or
the NASDAQ SmallCap Market System shall have been suspended or limited or
minimum prices shall have been established on either such Exchange or Market
System, (ii) a banking moratorium shall have been declared either by Federal
authorities or by authorities in the States of New York or New Jersey or (iii)
there shall have occurred any outbreak or escalation of hostilities, declaration
by the United States of a national emergency or war or other calamity or crisis
the effect of which on financial markets is such as to make it, in the judgment
of the Underwriter, impracticable or inadvisable to proceed with the offering
or delivery of the Securities as contemplated by the Prospectus (exclusive of
any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each Selling Shareholder and of the Underwriter set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of the Underwriter,
any Selling Shareholder or the Company or any of the officers, directors
or controlling persons referred to in Section 8 hereof, and will survive
delivery of and payment for the Securities. The provisions of Sections 7 and 8
hereof shall survive the termination or cancelation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to Unterberg Harris, will be mailed,
delivered or telegraphed and confirmed at 10 East 50th Street, 22nd Floor, New
York, New York, 10022; or, if sent to the Company, will be mailed, delivered or
telegraphed and confirmed to it at One Sheila Drive, Tinton Falls, NJ 07724,
attention of the President
<PAGE> 31
31
and Chief Executive Officer; or if sent to a Selling Shareholder, will be
mailed, delivered or telegraphed and confirmed to such Selling Shareholder at
the address of such Selling Shareholder set forth in Schedule II hereto.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and construed
in accordance with the laws of the State of New York.
<PAGE> 32
32
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company, the Selling Shareholders and the Underwriter.
Very truly yours,
ECCS, Inc.,
By:
-------------------------------
Name:
Title:
Selling Shareholders
By:
-------------------------------
Attorney-in-Fact
<PAGE> 33
33
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written
Unterberg Harris
By:
-------------------------------
Name:
Title:
<PAGE> 34
SCHEDULE I
<TABLE>
<CAPTION>
Number of Shares of
Underwritten
Selling Securities
Shareholders Address To Be Sold
- ------------ ------- -----------
<S> <C> <C>
Monmouth University Dennis C. Macrow 66,668
Monmouth University
Division of Institutional
Advancement
Office of the Vice President
West Long Branch, NJ 07764-1898
Joseph M. Tucci Wang Laboratory, Inc. 50,000
One Technology Park Drive
Billerica, MA 01821
John Dexheimer c/o Unterberg Harris 7,500
Swiss Bank Tower
10 East 50th Street
22nd Floor
New York, NY 10022
George Karfunkel c/o American Stock Transfer Co. 121,814
40 Wall Street
46th Floor
New York, NY 10005
-------
TOTAL 245,982
=======
</TABLE>
<PAGE> 1
EXHIBIT 5
August 18, 1997
ECCS, Inc.
One Sheila Drive; Bldg. 6A
Tinton Falls, NJ 07724
Gentlemen:
In connection with the Registration Statement on Form S-2, as amended (the
"Registration Statement"), filed on the date hereof by ECCS, Inc., a New Jersey
corporation (the "Company"), under the Securities Act of 1933, as amended,
relating to the public offering of an aggregate of up to 2,875,000 shares of the
Company's Common Stock, par value of $.01 per share, of which (a) 2,254,018
shares will be purchased by the underwriter from the Company; (b) 245,982 shares
will be purchased by the underwriter from certain existing shareholders of the
Company (the "Selling Shareholders"); and (c) up to an aggregate of 375,000
shares may be purchased by the underwriter from the Company, if the underwriter
exercises the option granted to it by the Company to cover over-allotments
(collectively, the "Shares"), we, as counsel for the Company, have examined such
corporate records, other documents, and questions of law as we have considered
necessary or appropriate for the purposes of this opinion.
Upon the basis of such examination, we advise you that in our opinion:
(i) the Shares to be issued and sold by the Company have been duly and
validly authorized and, when sold in the manner contemplated by the
underwriting agreement (the "Underwriting Agreement") filed as an exhibit
to the Registration Statement and upon receipt by the Company of payment
therefor as provided in the Underwriting Agreement, will be legally issued,
fully paid and non-assessable; and
(ii) the Shares to be sold by the Selling Shareholders are duly and
validly authorized, legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and the reference to this firm under the caption "Legal Matters" in
the Prospectus contained therein.
Very truly yours,
/s/ Buchanan Ingersoll
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 25, 1997, in the Amendment No. 2 to the
Registration Statement (Form S-2 Registration Statement No. 333-32931) and
related Prospectus of ECCS, Inc.
We also consent to the incorporation by reference therein of our report
dated February 25, 1997 with respect to the financial statements and schedule of
ECCS, Inc. for the years ended December 31, 1996, 1995, and 1994 included in the
Annual Report (Form 10-K/A) for 1996 filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
Princeton, New Jersey
August 18, 1997
