SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission File No. 0-21600
ECCS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2288911
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Sheila Drive, Tinton Falls, New Jersey 07724
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(732) 747-6995
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(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
----- -----
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of September 30, 1997:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 10,896,491
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ECCS, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION............................................1
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Item 1. Financial Statements.........................................1
Consolidated Balance Sheets as of September 30, 1997 (unaudited)
and December 31, 1996 (audited)...................................2
Consolidated Statements of Operations for the
three months ended September 30, 1997 and
September 30, 1996 and for the nine months
ended September 30, 1997 and
September 30, 1996 (unaudited).....................................3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and
September 30, 1996 (unaudited).....................................4
Notes to Consolidated Financial Statements (unaudited).............5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............11
Overview .........................................................11
Results of Operations.............................................12
Liquidity and Capital Resources...................................16
PART II. OTHER INFORMATION..............................................19
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Item 5. Other Information...........................................19
Item 6. Exhibits and Reports on Form 8-K............................20
SIGNATURES .............................................................21
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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ECCS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
Assets
Current Assets:
Cash and cash equivalents........................... $ 11,397 $ 4,393
Accounts receivable, less allowance for doubtful
accounts of $243 and $184 at September 30, 1997
and December 31, 1996, respectively................ 4,815 3,162
Inventories......................................... 3,804 4,680
Prepaid expenses and other receivables.............. 350 257
------- --------
20,366 12,492
Property, plant and equipment (net)................... 1,041 1,190
Capitalized software (net)............................ 772 814
Other assets.......................................... 340 56
------- --------
$22,519 $ 14,552
======= ========
Liabilities and Shareholders' Equity
Current Liabilities:
Loans payable....................................... $ -- $ 1,762
Payable to AT&T Commercial.......................... 69 64
Current portion of capital lease obligations........ 22 91
Accounts payable.................................... 2,707 4,061
Accrued expenses and other.......................... 1,138 986
Warranty............................................ 552 414
Customer deposits, advances and other credits....... 458 834
------- --------
4,946 8,212
Capital lease obligations, net of current portion..... -- 8
Deferred rent......................................... 147 155
------- --------
5,093 8,375
------- --------
Shareholders' Equity:
Preferred stock, $.01 par value per share,
authorized, 3,000,000 shares;
Series B cumulative convertible preferred
stock, issued and outstanding, none at
September 30, 1997 and 1,600,000 shares at
December 31, 1996............................... -- 16
Series C cumulative convertible preferred
stock, issued and outstanding, none at
September 30, 1997 and 500,000 shares at -- 5
December 31, 1996...............................
Common stock, $.01 par value per share, authorized,
20,000,000 shares; issued and outstanding,
10,896,491 shares and 4,432,216 shares at 109 44
September 30, 1997 and December 31, 1996,
respectively.......................................
Capital in excess of par value - preferred.......... -- 4,522
Capital in excess of par value - common ............ 25,600 10,254
Retained earnings (deficit)......................... (8,283) (8,664)
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17,426 6,177
------- --------
Total Liabilities and Shareholders' Equity $22,519 $ 14,552
======= ========
See notes to consolidated financial statements.
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<TABLE>
ECCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales .............................. $ 8,669 $ 5,230 $ 26,509 $ 18,068
Cost of sales .......................... 6,210 3,455 19,058 12,186
-------- -------- -------- --------
Gross profit ......................... 2,459 1,775 7,451 5,882
Operating expenses:
Selling, general & administrative .... 1,601 1,527 5,087 5,179
Research & development ............... 478 338 1,174 1,011
-------- -------- -------- --------
Operating income (loss) ................ 380 (90) 1,190 (308)
Net interest expense ................. 58 65 170 222
-------- -------- -------- --------
Income (loss) before extraordinary item 322 (155) 1,020 (530)
Extraordinary item (note 7) .......... 120 -- 120 --
-------- -------- -------- --------
Net income (loss) ...................... $ 202 $ (155) $ 900 $ (530)
-------- -------- -------- --------
Preferred dividends .................. 38 77 192 163
-------- -------- -------- --------
Net income (loss) applicable to
common shares .......................... $ 164 $ (232) $ 708 $ (693)
======== ======== ======== ========
Primary income per common share
before extraordinary item .............. $ 0.04 $ -- $ 0.14 $ --
======== ======== ======== ========
Primary net income (loss) per
common share ........................... $ 0.02 $ (0.05) $ 0.12 $ (0.16)
======== ======== ======== ========
Fully diluted income per common
share before extraordinary item ........ $ 0.03 $ -- $ 0.11 $ --
======== ======== ======== ========
Fully diluted net income per common
share .................................. $ 0.02 $ -- $ 0.10 $ --
======== ======== ======== ========
Primary weighted average number of
common and common equivalent shares .... 7,798 4,385 6,096 4,328
======== ======== ======== ========
Fully diluted weighted average number of
common and common equivalent shares .... 10,327 -- 9,646 --
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
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<TABLE>
ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................... $ 900 $ (530)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................. 897 900
Gain on sale of Illinois property ......................... -- (83)
(Increase) decrease in accounts receivable ................ (1,653) 7
Decrease in inventories ................................... 876 2,440
Increase in prepaid expenses, other receivables and
other assets.............................................. (377) (41)
Increase (decrease) in payable to AT&T Commercial ......... 5 (1,192)
Decrease in accounts payable, accrued liabilities,
deferred rent and other .................................. (1,072) (127)
Decrease in customer deposits, advances and other
credits................................................... (376) (124)
-------- --------
Net cash (used in) provided by operating activities .......... (800) 1,250
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ................. (311) (478)
Gross proceeds from sale of Illinois Property .............. -- 855
Additions to capitalized software .......................... (395) (335)
-------- --------
Net cash (used in) provided by investing activities .......... (706) 42
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit agreement ................ 17,812 13,103
Repayments under revolving credit agreement ................ (19,574) (13,654)
Net repayment of capital lease obligations ................. (77) --
Repayment of mortgage payable .............................. -- (502)
Gross proceeds from issuance of preferred stock ............ -- 3,000
Expenses for issuance of preferred stock ................... -- (251)
Proceeds from exercise of employee stock options and
issuance of common stock ................................. 185 190
Gross proceeds from sales of common stock .................. 11,831 --
Underwriting discounts, commissions and expenses for
sales of common stock .................................... (1,148) --
Dividends paid on Series B and Series C Convertible
Preferred Stock .......................................... (519) --
-------- --------
Net cash provided by financing activities .................... 8,510 1,886
-------- --------
Net increase in cash and cash equivalents .................... 7,004 3,178
Cash and cash equivalents at beginning of period ............. 4,393 1,514
-------- --------
Cash and cash equivalents at end of period ................... $ 11,397 $ 4,692
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .................................................. $ 170 $ 289
======== ========
See notes to consolidated financial statements.
</TABLE>
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1997 and September 30, 1996 is unaudited)
Note 1 -- Basis of Presentation:
- --------------------------------
The information presented for September 30, 1997 and September 30, 1996 and
for the three and nine-month periods then ended, is unaudited, but, in the
opinion of the management of ECCS, Inc. ("ECCS" or the "Company"), the
accompanying unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for the fair presentation of the Company's financial position as of
September 30, 1997, the results of its operations for the three and nine-month
periods ended September 30, 1997 and September 30, 1996 and its cash flows for
the nine-month periods ended September 30, 1997 and September 30, 1996. The
consolidated financial statements included herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1996, which were included as part of
the Company's Annual Report on Form 10-K/A, as filed with the Securities and
Exchange Commission.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances have been
eliminated.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
Note 2 -- Summary of Significant Accounting Policies
- ----------------------------------------------------
(a) Organization and Business
ECCS provides intelligent solutions to store, protect and access mission
critical information for the Open Systems and related markets. The Company
designs, manufactures and sells high performance, fault tolerant data storage
solutions for a wide range of customer requirements. ECCS' flagship product,
Synchronix, which the Company began selling in 1996, is a full feature RAID
(redundant array of independent disks) product family designed for use in NT and
UNIX clustered environments. The Company's products are compatible with most
Open System computing platforms and enable customers to store, protect and
access data and to centralize data management functions across an organization's
disparate computer environments.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1997 and September 30, 1996 is unaudited)
(b) Cash and Cash Equivalents
The Company considers short-term investments with a maturity of three
months or less when purchased to be cash equivalents.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Inventories consist of the following (in thousands):
September 30, December 31,
1997 1996
------------ -----------
(unaudited)
Purchased parts .................................. $2,451 $2,181
Finished goods ................................... 2,100 3,280
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4,551 5,461
Less: inventory valuation reserve .............. 747 781
------ ------
$3,804 $4,680
====== ======
(d) Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation and
amortization are provided on a straight-line basis over the estimated useful
lives ranging from 3 to 5 years.
Equipment under capital leases is recorded at the lower of fair value or
present value of minimum lease payments at the inception of the lease.
Amortization of the leased property is computed using the straight-line method
over the term of the lease.
(e) 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 software development is charged to cost
of sales and aggregated $437,000 and $372,000 for the nine month periods ended
September 30, 1997 and September 30, 1996, respectively. At September 30, 1997
and December 31, 1996, the Company had capitalized $2,408,000 and $2,013,000 of
software
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1997 and September 30, 1996 is unaudited)
development costs, respectively, of which $1,636,000 and $1,199,000 had been
amortized, respectively.
(f) Impairment of Long-Lived Assets
In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which had no
effect on its financial condition or results of operations. The Company records
impairment losses on long-lived assets used in operations or expected to be
disposed of when events and circumstances indicate that the cash flows expected
to be derived from those assets are less than the carrying amounts of those
assets. No such events and circumstances have occurred.
(g) Revenue Recognition
In general, revenue is recognized upon shipment of the product or system or
as services are provided. Periodically, revenue is recognized on product which
is being held at the customer's request. Revenue is only recognized on such
product when all risks of ownership have passed to the customer and the Company
has no specific performance obligations remaining. Revenues related to
maintenance contracts are recognized over the respective terms of the
maintenance contracts. Revenue for certain major product enhancements and major
new product offerings, for which the Company believes that significant product
development risks may exist which can realistically only be addressed during
live beta testing at end-user sites, is not recognized until successful
completion of such end-user beta testing.
(h) Warranty
Estimated future warranty obligations related to ECCS products are provided
by charges to operations in the period the related revenue is recognized.
(i) Research and Development Costs
Research and development costs are expensed as incurred, except for
software development costs which are accounted for as noted above.
(j) Income Taxes
Income taxes are accounted for by the liability method in accordance with
the provisions of SFAS No. 109 "Accounting for Income Taxes."
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1997 and September 30, 1996 is unaudited)
(k) Stock Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
(l) Per Share Information
Primary net income (loss) per share is computed using the weighted average
number of common shares and common share equivalents outstanding during the
periods presented. Common share equivalents result from outstanding options and
warrants to purchase common stock. To the extent common share equivalents are
anti-dilutive, they are not included in the calculation. The fully diluted net
income per share computation reflects the dilutive effect of the common share
equivalents.
In February 1997, the Financial Accounting Standards Board issued SFAS 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 nine months ended September 30, 1997 of $0.02 and is
expected to have no impact for the nine months ended September 30, 1996 and the
quarters ended September 30, 1997 and 1996, respectively. The impact of SFAS No.
128 on the calculation of fully diluted earnings per share for all periods
presented is not expected to be material.
Note 3 -- Litigation
- --------------------
There are no individual material litigation matters pending to which the
Company is a party or to which any of its property is subject.
Note 4 -- Public Offering of Common Stock
- -----------------------------------------
On August 25, 1997, the Company consummated a follow-on public offering
(the "Offering") of 2,500,000 shares of its common stock at a price to the
public of $4.50 per share,
-8-
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1997 and September 30, 1996 is unaudited)
of which 2,254,018 shares were issued and sold by the Company and 245,982 shares
were sold by certain selling shareholders. On September 15, 1997 and as part of
the Offering, an additional 375,000 shares were issued and sold by the Company
at a price to the public of $4.50 per share to cover over-allotments. The
Company received $4.19 per share, before offering expenses, resulting in net
proceeds, after underwriting discounts and commissions and other expenses, of
approximately $10,683,000. The Company did not receive any proceeds from the
sale of shares by the selling shareholders.
Note 5 -- Conversion of Preferred Stock and Related Dividend Payments
- ---------------------------------------------------------------------
On August 25, 1997, upon the closing of the Offering, all 1,600,000 shares
of 6% Cumulative Convertible Preferred Stock, Series B (the "Series B Preferred
Stock") were automatically converted into 1,770,590 shares of the Company's
common stock, and all 500,000 shares of Cumulative Convertible Preferred Stock,
Series C (the "Series C Preferred Stock") were automatically converted into
2,000,000 shares of the Company's common stock.
Prior to the closing of the Offering, dividends on the Series B Preferred
Stock accumulated at the rate of $0.02 per share per quarter. In addition,
interest of 6% per annum accrued on any unpaid dividends. On August 21, 1997,
the Company's Board of Directors (the "Board of Directors") declared a cash
dividend representing cumulative unpaid dividends and interest on the Series B
Preferred Stock for the period from May 19, 1995 through and including August
25, 1997.
In addition, prior to the closing of the Offering, dividends on the Series
C Preferred Stock accumulated at the rate of $0.09 per share per quarter.
Interest of 6% per annum also accrued on any unpaid dividends. On August 21,
1997, the Board of Directors declared a cash dividend representing cumulative
unpaid dividends and interest on the Series C Preferred Stock for the period
from May 17, 1996 through and including August 25, 1997.
The Company used a portion of the net proceeds from the Offering to pay
approximately $317,000 and $242,000 to the holders of the Series B Preferred
Stock and the Series C Preferred Stock, respectively. Such payments represented
both of the cash dividends, including accrued interest thereon, declared by the
Board of Directors on August 21, 1997. All other rights with respect to the
Series B Preferred Stock and the Series C Preferred Stock (collectively, the
"Convertible Preferred Stock") ceased upon the closing of the Offering.
Note 6 -- Related Party Transaction
- -----------------------------------
On June 6, 1997, the Company entered into a loan transaction with its
President and Chief Executive Officer (the "Borrower") pursuant to a $250,000
promissory note in favor of the
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for September 30, 1997 and September 30, 1996 is unaudited)
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 7 -- New Credit Facility
- -----------------------------
On July 9, 1997, the Company entered into a full recourse factoring
facility with NationsBanc Commercial Corporation ("NCC") which provides for
aggregate advances not to exceed the lesser of $7 million or up to 85% of
Eligible Receivables (as defined in the agreement). Interest on such advances is
payable monthly in arrears at the prime lending rate and the Company is
obligated to pay certain annual fees. The factoring facility is for a period of
three years (unless terminated by NCC by providing the Company sixty days prior
written notice) beginning on July 30, 1997. The obligations of the Company under
such agreement are collateralized by substantially all of the assets of the
Company.
Until July 30, 1997, the Company had a financing facility with Fidelity
Funding of California, Inc. ("Fidelity"). In connection with the termination of
such financing facility, the Company incurred a one-time extraordinary charge of
$120,000.
AT&T Commercial Finance Corporation ("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.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
- --------
ECCS provides intelligent solutions to store, protect and access mission
critical information for the Open Systems and related markets. The Company
designs, manufactures and sells high performance, fault tolerant data storage
solutions for a wide range of customer requirements.
From its founding until 1994, the Company's principal business was the
value added resale of NCR products. Sales to AT&T business units made up a large
portion of such business. During 1994, as a result of AT&T's acquisition of NCR
and subsequent change in its purchasing policies, the Company undertook a
product development initiative to reposition the Company as a provider of
proprietary mass storage enhancement products. In 1995, the Company's sales of
its proprietary products exceeded its sales as a value added reseller ("VAR")
due to both increasing sales of its own products and decreasing sales as a VAR.
Beginning in 1996, a substantial portion of the Company's revenues has been
generated from sales of its own products.
The Company's revenues are generated from three primary sources: (i)
revenues derived from sales of mass storage enhancement products, which include
sales of all ECCS mass storage enhancement products, including the Synchronix
family of products, and sales of certain third party component products that are
incorporated into such mass storage enhancement systems; (ii) revenues generated
by the Company as a VAR which include the Company's sales to AT&T business units
for non-storage related products; and (iii) revenues derived from services and
other revenue which include professional services and maintenance contracts. The
Company believes that revenues derived from maintenance contracts and value
added resales will decrease as more resources are deployed for the development
and marketing of proprietary products.
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995). Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
These forward-looking statements, such as statements regarding anticipated
future revenues, capital expenditures, research and development expenditures and
other statements regarding matters that are not historical facts, involve
predictions. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements contained in this Quarterly Report on Form 10-Q.
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Results of Operations
- ---------------------
Three Months Ended September 30, 1997 and 1996
----------------------------------------------
Net Sales
---------
Net sales increased by approximately $3,439,000 or 66%, in the three months
ended September 30, 1997, as compared to net sales in the three months ended
September 30, 1996. Sales of the Company's proprietary mass storage enhancement
systems, including sales of certain third party component products, accounted
for 93% and 83% of net sales in the quarters ended September 30, 1997 and 1996,
respectively. Sales by the Company in its capacity as a VAR accounted for 1% and
3% of net sales in the quarters ended September 30, 1997 and 1996, respectively.
Services and other revenues accounted for 6% and 14% of net sales in the
quarters ended September 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, offset, in part, by a decrease in value
added resales.
Sales to the U.S. Air Force through a Federal integrator accounted for
approximately 41% of net sales in the quarter ended September 30, 1997. The
Company expects that sales to the U.S. Air Force will continue to comprise a
significant portion of the Company's net sales for the next 12 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 38% of net
sales in the quarter ended September 30, 1997. Sales to the Company's primary
alternate channel partner, Unisys Corporation ("Unisys"), accounted for
approximately 21% of the Company's net sales in the quarter ended September 30,
1997.
While the Company has an OEM agreement with Unisys that defines the terms
of the sales and support services provided thereunder, this agreement does not
include specific quantity commitments. The Company's sales are made by purchase
order and, therefore, the Company has no long-term commitments from Unisys and
such customer generally may cancel orders on 30 days notice. Accordingly, there
can be no assurance that orders from Unisys will continue at their historic
levels, or that the Company will be able to obtain any new orders from Unisys.
The loss of Unisys as a customer, or the cancellation or rescheduling of orders
already placed, would materially and adversely affect the Company's business,
financial condition and operating results.
Sales to Tandem accounted for approximately 10% of the Company's net sales
in the quarter ended September 30, 1997. There can be no assurance that Tandem
will continue to purchase from the Company at third quarter levels, if at all.
The Company continues efforts to establish potential OEM relationships for
specialized and standard versions of its Synchronix product line, in addition to
its relationships with Unisys
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<PAGE>
and Tandem. There can be no assurance, however, that such additional
relationships will be established, or if established, that they will decrease
the Company's reliance on its OEM relationships with Unisys and Tandem.
Gross Profit
------------
The Company's cost of sales includes primarily the cost of the Company's
own and other vendors' products and systems. The Company's gross profit
increased by approximately $684,000 in the three months ended September 30, 1997
to approximately $2,459,000, from $1,775,000 in the three months ended September
30, 1996. The increase in the 1997 period resulted from increased sales volume,
offset by lower margins resulting from the higher level of third party component
products sold during the third quarter of 1997. The Company's gross margin
decreased to 28% in the three months ended September 30, 1997, as compared to
34% in the corresponding period of the prior year. Such decrease in gross margin
is due primarily to the higher volume of sales to the U. S. Air Force through a
Federal integrator during the third quarter of 1997 which consisted primarily of
third party component products integrated with the Company's proprietary mass
storage enhancement products. Such third party component products generally have
lower gross margins than those realized by the Company on the sales of its own
products.
Operating Expenses
------------------
Selling, general and administrative expenses consist primarily of salaries,
commissions, bonuses and related employee benefits, payroll taxes and other
administrative and overhead costs. Selling, general and administrative expenses
decreased as a percentage of net sales representing 19% and 29% for the three
months ended September 30, 1997 and 1996, respectively. Such decrease was due
primarily to higher sales volume in the three months ended September 30, 1997.
As the Company attempts to expand its sales activities, the Company anticipates
that selling, general and administrative expenses as a percentage of net sales
will increase. Selling, general and administrative expenses increased by $74,000
to $1,601,000 in the three months ended September 30, 1997 from $1,527,000 in
the three months ended September 30, 1996. Salaries, commissions, bonuses,
employee benefits and payroll taxes were the largest components of selling,
general and administrative expenses, accounting for 64% and 53% of such expenses
in the three months ended September 30, 1997 and September 30, 1996,
respectively.
Research and development expenses consist primarily of the costs associated
with research and development personnel. These expenses increased in the three
months ended September 30, 1997 by $140,000 or 41% from $338,000 in the
corresponding 1996 period. This increase is due primarily to the Company's
continued product development initiative associated with the enhancements to the
Company's proprietary mass storage products. Such expenses for the third quarter
of 1997 represented approximately 6.8% of the Company's net sales and,
-13-
<PAGE>
including the amount capitalized in accordance with SFAS No. 86, represented
approximately 5.5% of the Company's net sales.
Net Interest Expense
--------------------
Net interest expense for the three months ended September 30, 1997
decreased slightly by $7,000 as compared to the three months ended September 30,
1996, due principally to a reduction in the borrowings against the Company's
accounts receivable line of credit.
Extraordinary Item
------------------
The extraordinary item for the three months ended September 30, 1997
consists primarily of a one-time charge incurred in connection with the
termination of the Company's financing facility with its former lender.
Nine Months Ended September 30, 1997 and 1996
---------------------------------------------
Net Sales
---------
Net sales increased by approximately $8,441,000 or 47%, in the nine months
ended September 30, 1997, as compared to net sales in the nine months ended
September 30, 1996. Sales of the Company's proprietary mass storage enhancement
systems, including sales of certain third party component products, accounted
for 94% and 77% of net sales in the nine month period ended September 30, 1997
and 1996, respectively. Sales by the Company in its capacity as a VAR accounted
for 1% and 10% of net sales in the nine months ended September 30, 1997 and
1996, respectively. Services and other revenues accounted for 5% and 13% of net
sales in the nine months ended September 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, offset, in part, by
a decrease in value added resales.
Sales to the U.S. Air Force through a Federal integrator accounted for
approximately 48% and 30% of net sales in the nine months ended September 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 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 30% and 31%
of net sales in the nine months ended September 30, 1997 and 1996, respectively.
Sales to the Company's primary alternate channel partner, Unisys, accounted for
approximately 13% of the Company's net sales in the nine months ended September
30, 1997.
-14-
<PAGE>
During the first quarter of 1997, the Company commenced selling products to
Tandem. Sales to Tandem accounted for approximately 10% of the Company's net
sales in the nine months ended September 30, 1997.
Gross Profit
------------
The Company's gross profit increased by approximately $1,569,000 in the
nine months ended September 30, 1997 to approximately $7,451,000, from
$5,882,000 in the nine months ended September 30, 1996. The increase in the 1997
period resulted from increased sales volume. The Company's gross margin
decreased to 28% in the nine months ended September 30, 1997, as compared to 33%
in the corresponding period of the prior year. The decrease in gross margin is
due primarily to the higher volume of sales to the U. S. Air Force through a
Federal integrator during the first nine 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 products.
Operating Expenses
------------------
Selling, general and administrative expenses decreased slightly by $92,000
to $5,087,000 in the nine months ended September 30, 1997 from $5,179,000 in the
nine months ended September 30, 1996. Selling, general and administrative
expenses decreased as a percentage of net sales representing 19% and 29% for the
nine months ended September 30, 1997 and 1996, respectively. This percentage
decrease was primarily due to higher sales volume in the nine months ended
September 30, 1997. As the Company attempts to expand its sales activities, the
Company anticipates that selling, general and administrative expenses as a
percentage of net sales will increase. Salaries, commissions, bonuses, employee
benefits and payroll taxes were the largest components of selling, general and
administrative expenses, accounting for 62% and 60% of such expenses in the nine
months ended September 30, 1997 and September 30, 1996, respectively.
Research and development expenses increased in the first nine months of
1997 by $163,000 or 16% from $1,011,000 in the first nine months of 1996. This
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 nine months ended September 30, 1997 represented approximately
5.9% of the Company's net sales and, including the amount capitalized in
accordance with SFAS No. 86, represented approximately 4.4% 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.
-15-
<PAGE>
Net Interest Expense
--------------------
Net interest expense for the nine months ended September 30, 1997 decreased
by $52,000 as compared to the nine months ended September 30, 1996, due
principally to a reduction in the borrowings against the Company's accounts
receivable line of credit.
Extraordinary Item
------------------
The extraordinary item for the nine months ended September 30, 1997
consists primarily of a one-time charge incurred in connection with the
termination of the Company's financing facility with its former lender.
Liquidity and Capital Resources
- -------------------------------
Since 1994, the Company has funded its operations primarily from cash
generated by operations augmented with funds from borrowings under a line of
credit and inventory financing, through private sales of equity securities and
net proceeds from the Offering.
On August 25, 1997, the Company consummated the Offering of 2,500,000
shares of its common stock at a price to the public of $4.50 per share. Of such
shares, 2,254,018 were issued and sold by the Company and an aggregate of
245,982 were sold by certain selling shareholders (the "Selling Shareholders").
On September 15, 1997 and as part of the Offering, an additional 375,000 shares
were issued and sold by the Company at a price to the public of $4.50 per share
to cover over-allotments. The Company received $4.19 per share, before offering
expenses, resulting in net proceeds, after underwriting discounts and
commissions and other expenses, of approximately $10,683,000. The Company did
not receive any proceeds from the sale of shares by the Selling Shareholders.
Upon the closing of the Offering, all of the shares of the Series B
Preferred Stock and the Series C Preferred Stock were automatically converted
into 3,770,590 shares of the Company's common stock. The Company used a portion
of the net proceeds from the Offering to pay approximately $317,000 and $242,000
of cumulative dividends and interest on the Series B Preferred Stock and the
Series C Preferred Stock, respectively. For further discussion of these dividend
payments see Item 5. Other Information -- Conversion of Preferred Stock and
Related Dividend Payments, contained in Part II. Other Information.
Net cash used in operations was $800,000 for the nine months ended
September 30, 1997, while net cash provided by operating activities was
$1,250,000 for the nine months ended September 30, 1996. Such use of cash in
1997 resulted primarily from an increase in accounts receivable coupled with a
decrease in accounts payable, offset, in part, by a decrease in inventory
levels. Net cash provided by financing activities was $8,510,000 for the nine
months ended September 30, 1997 and $1,886,000 for the nine months ended
September 30, 1996. The increase in net cash provided by financing activities
resulted primarily from cash generated by the Company's Offering.
-16-
<PAGE>
The Company used $311,000 and $478,000 for the acquisition of equipment by
direct purchase during such respective periods. For the nine months ended
September 30, 1997 and 1996, the Company acquired equipment under capital leases
of $0 and $78,000, respectively, and made payments under capital leases of
$77,000 and $104,000, respectively. Total capital expenditures for 1997 are
expected to be approximately $845,000, although such amounts are not subject to
formal commitments. The Company anticipates that such expenditures will include
the purchase of capital equipment for research and development, general
corporate use and an investment in an enterprise wide resource planning
software. There are no other material commitments for capital expenditures
currently outstanding. Net repayments under the Company's accounts receivable
financing facility used funds of $1,762,000 and $551,000 for the nine months
ended September 30, 1997 and 1996, respectively.
The Company's working capital was $15.4 million and $4.3 million at
September 30, 1997 and December 31, 1996, respectively.
Until July 30, 1997, the Company had a financing facility with 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. Such
financing facility was terminated in July, 1997 in connection with the
consummation of the Company's new financing facility with NCC and all
outstanding amounts have been repaid. In connection with the termination of such
financing facility, the Company incurred a one-time extraordinary charge of
$120,000.
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. As of September 30, 1997 the Company had no balance
outstanding under this full recourse factoring facility.
On May 17, 1996, the Company's direct pay line of credit with 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 12% of its inventory acquisitions in the first nine
-17-
<PAGE>
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 September 30, 1997, the Company owed approximately $69,000 under this credit
line, and available credit under such line towards future inventory purchases
was approximately $1.9 million.
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 the dividends paid to the holders of the
Convertible Preferred Stock) without NCC's prior written consent. The Company's
agreement with AT&T-CFC prohibits the payment of dividends. AT&T-CFC waived such
prohibition in connection with the dividend payments made to the holders of the
Convertible Preferred Stock.
On June 6, 1997, the Company loaned its President and Chief Executive
Officer an aggregate amount of $250,000 on a secured basis.
On September 30, 1997, the Company's cash balance was approximately $11.4
million.
The Company believes that its existing available cash, credit facilities
and the cash flow expected to be generated from operations, will be adequate to
satisfy its current and planned operations for at least the next 12 months.
The Company's operating results are affected by seasonal factors,
particularly the spending fluctuations of its largest customers including
Unisys, Tandem and the Federal government. 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 Company does not
expect such spending fluctuations to be altered in the future. A significant
reduction in orders from any of the Company's largest customers could have a
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.
-18-
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information.
- ------- ------------------
Public Offering of Common Stock
-------------------------------
On August 25, 1997, the Company consummated the Offering of 2,500,000
shares of its common stock at a price to the public of $4.50 per share, of which
2,254,018 were issued and sold by the Company and an aggregate of 245,982 were
sold by the Selling Shareholders. On September 15, 1997 and as part of the
Offering, an additional 375,000 shares were issued and sold by the Company at a
price to the public of $4.50 per share to cover over-allotments. The Company
received $4.19 per share, before offering expenses, resulting in net proceeds,
after underwriting discounts and commissions and other expenses, of
approximately $10,683,000. The Company did not receive any proceeds from the
sale of shares by the Selling Shareholders.
The Company used a portion of the net proceeds from the Offering to pay an
aggregate of approximately $559,000 of cumulative unpaid dividends and interest
to holders of the Convertible Preferred Stock. For a detailed discussion of
these payments see "Conversion of Preferred Stock and Related Dividend Payments"
below. The Company intends to use the remainder of the net proceeds from the
Offering 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. Pending such uses, the Company intends to invest the net
proceeds of the Offering in short-term, investment-grade, interest-bearing
instruments.
Conversion of Preferred Stock and Related Dividend Payments
-----------------------------------------------------------
Upon the closing of the Offering, all 1,600,000 shares of Series B
Preferred Stock were automatically converted into 1,770,590 shares of the
Company's common stock and all 500,000 shares of Series C Preferred Stock were
automatically converted into 2,000,000 shares of the Company's common stock.
Prior to the closing of the Offering, dividends on the Series B Preferred
Stock accumulated at the rate of $0.02 per share per quarter. In addition,
interest of 6% per annum accrued on any unpaid dividends. On August 21, 1997,
the Board of Directors declared a cash dividend representing cumulative unpaid
dividends and interest on the Series B Preferred Stock for the period from May
19, 1995 through and including August 25, 1997.
In addition, prior to the closing of the Offering, dividends on the Series
C Preferred Stock accumulated at the rate of $0.09 per share per quarter.
Interest of 6% per annum also accrued on any unpaid dividends. On August 21,
1997, the Board of Directors declared a cash dividend
-19-
<PAGE>
representing cumulative unpaid dividends and interest on the Series C Preferred
Stock for the period from May 17, 1996 through and including August 25, 1997.
The Company used a portion of the net proceeds from the Offering to pay
approximately $317,000 and $242,000 to the holders of the Series B Preferred
Stock and the Series C Preferred Stock, respectively. Such payments represented
both of the cash dividends declared by the Board of Directors on August 21,
1997. Upon the closing of the Offering and the subsequent receipt of the cash
dividends declared by the Board of Directors on August 21, 1997, the rights of
the holders of the Convertible Preferred Stock relating to the accumulation of
dividends, the payment of accumulated dividends, the payment of interest on
accumulated dividends and the right to a preference payment in the event of any
liquidation, dissolution or winding-up of the Company ceased.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 By-Laws of the Company, as amended.
11 Calculation of Earnings per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECCS, Inc.
DATE: November 3, 1997 By: /s/ Gregg M. Azcuy
------------------
Gregg M. Azcuy, President
and Chief Executive Officer
(Principal Executive Officer)
DATE: November 3, 1997 By: /s/ Louis J. Altieri
--------------------
Louis J. Altieri, Vice President,
Finance and Administration (Principal
Financial and Accounting Officer)
-21-
EXHIBIT 3.1
<PAGE>
AMENDED BY-LAWS
OF
ECCS, INC.
- --------------------------------------------------------------------------------
Initially adopted May 3, 1989
ARTICLE I
OFFICES
-------
1. Registered Office and Agent. The registered office of the
Corporation in the State of New Jersey is at 500 College Road East, Princeton,
New Jersey 08540.
The registered agent of the Corporation at such office is
DAVID J. SORIN, ESQ.
2. Principal Place of Business. The principal place of business of the
Corporation is One Sheila Drive, Building 6A, Tinton Falls, New Jersey 07724.
3. Other Places of Business. Branch or subordinate places of business
or offices may be established at any time by the Board at any place or places
where the Corporation is qualified to do business.
<PAGE>
ARTICLE II
SHAREHOLDERS
------------
1. Annual Meeting. The annual meeting of shareholders shall be held
upon not less than ten nor more than sixty days written notice of the time,
place, and purposes of the meeting at 10 o'clock a.m. on the first business day
of the month of January of each year at 437A Newman Springs Road, Lincroft, NJ
07738, or at such other time and place as shall be specified in the notice of
meeting, in order to elect directors and transact such other business as shall
come before the meeting. If that date is a legal holiday, the meeting shall be
held at the same hour on the next succeeding business day.
2. Special Meetings. A special meeting of shareholders may be called
for any purpose by the president, the Board or any shareholders beneficially
holding, in the aggregate, at least 10% of the voting stock of the Company. A
special meeting shall be held upon not less than ten nor more than sixty days
written notice of the time, place and purposes of the meeting.
3. Action Without Meeting. The shareholders may act without a meeting
if, prior or subsequent to such action, each shareholder who would have been
entitled to vote upon such action shall consent in writing to such action. Such
written consent or consents shall be filed in the minute book.
4. Quorum. The presence at a meeting in person or by proxy of the
holders of shares entitled to cast a majority of the votes shall constitute a
quorum.
-2-
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
------------------
1. Number and Term of Office. The number of directors that shall
constitute the whole Board of Directors shall be no less than four (4) and no
more than seven (7). The number of directors may be increased within the range
of four (4) to seven (7) by a vote of the majority of the Board without
shareholder approval. Except as otherwise provided herein, directors shall be
elected at the annual meeting of shareholders and each director shall be elected
to serve until his successor has been elected and shall qualify. Directors need
not be shareholders.
2. Regular Meetings. A regular meeting of the Board shall be held
without notice immediately following and at the place the annual shareholders'
meeting for the same purpose of electing officers and conducting such other
business as may come before the meeting. The Board, by resolution, may provide
for additional regular meetings which may be held without notice, except to
directors not present at the time of the adoption of the resolution.
3. Special Meetings. A special meeting of the Board may be called at
any time by the Chairman, the president, the chief operating officer or by two
directors for any purpose. Such meeting shall be held upon not less than 24
hours prior notice. Such notice may be given orally (either by telephone or in
person), by facsimile transmission or written notice actually received. Such
notice shall specify the time and place of the meeting, but need not specify the
purpose or purposes of the special meeting.
-3-
<PAGE>
4. Action Without Meeting. The Board may act without a meeting if,
prior to or subsequent to such action, each member of the Board consents in
writing to such action. Such written consent or consents shall be filed in the
minute book.
5. Quorum. Three directors from the entire Board shall constitute a
quorum for the transaction of business.
6. Vacancies in Board of Directors. Any vacancy on the Board may be
filled in the manner set forth in Article III herein. In the case of an increase
in the number of directors, by the stockholders, group of stockholders or other
group who shall be entitled to nominate such new director or directors in the
manner and as set forth in Article III hereof.
-4-
<PAGE>
ARTICLE IV
WAIVERS OF NOTICE
-----------------
Any notice required by these by-laws, by the certificate of
incorporation, or by the New Jersey Business Corporation Act may be waived in
writing by any person entitled to notice. The waiver or waivers may be executed
either before or after the event with respect to which notice is waived. Each
director or shareholder attending a meeting without protesting, prior to its
conclusion, the lack of proper notice shall be deemed conclusively to have
waived notice of the meeting.
-5-
<PAGE>
ARTICLE V
OFFICERS
--------
1. Election. At its regular meeting following the annual meeting of
shareholders, the Board shall elect a president, a treasurer, a secretary, and
it may elect such other officers, including one or more vice presidents, as it
shall deem necessary. One person may hold two or more offices.
2. Duties and Authority of President. The president shall be chief
executive officer of the Corporation. Subject only to the authority of the
Board, he shall have general charge and supervision over, and responsibility
for, the business and affairs of the Corporation. Unless otherwise directed by
the Board, all other officers shall be subject to the authority and supervision
of the president. The president may enter into and execute in the name of the
Corporation contracts or other instruments in the regular course of business or
contracts or other instruments not in the regular course of business which are
authorized, either generally or specifically, by the Board. He shall have the
general powers and duties of management usually vested in the office of
president of a corporation.
3. Duties and Authority of Vice President. The vice president shall
perform such duties and have such authority as from time to time may be
delegated to him by the president or by the Board. In the absence of the
president or in the event of his death, inability or refusal to act, the vice
president shall perform the duties and be vested with the authority of the
president.
-6-
<PAGE>
4. Duties and Authority of Treasurer. The treasurer shall have the
custody of the funds and securities of the Corporation and shall keep or cause
to be kept regular books of account for the Corporation. The treasurer shall
perform such other duties and possess such other powers as are incident to that
office or as shall be assigned by the president or the Board.
5. Duties and Authority of Secretary. The secretary shall cause
notices of all meetings to be served as prescribed in these by-laws and shall
keep or cause to be kept the minutes of all meetings of the shareholders and the
Board. The secretary shall have charge of the seal of the Corporation. The
secretary shall perform such other duties and possess such other powers as are
incident to that office or as are assigned by the president or the Board.
-7-
<PAGE>
ARTICLE VI
AMENDMENTS TO AND EFFECT OF BY-LAWS;
FISCAL YEAR
------------------------------------
1. Force and Effect of By-laws. These by-laws are subject to the
provisions of the New Jersey Business Corporation Act and the Corporation's
certificate of incorporation, as it may be amended from time to time. If any
provision in these by-laws is inconsistent with a provision in that Act or the
certificate of incorporation, the provision of that Act or the certificate of
incorporation shall govern.
2. Wherever in these by-laws references are made to more than one
incorporator, director or shareholder, they shall, if this is a sole
incorporator, director, shareholder corporation, be construed to mean the
solitary person; and all provisions dealing with the quantum of majorities or
quorums shall be deemed to mean the action by the one person constituting the
corporation.
3. Amendments to By-laws. These by-laws may be altered, amended or
repealed by the shareholders or the Board. Any by-law adopted, amended or
repealed by the shareholders may be amended or repealed by the Board, unless the
resolution of the shareholders adopting such by-law expressly reserves to the
shareholders the right to amend or repeal it.
4. Fiscal Year. The fiscal year of the Corporation shall begin on the
first day of January of each year.
-8-
<PAGE>
ARTICLE VII
INDEMNIFICATION AND INSURANCE
-----------------------------
Every person who was or is a party or is threatened to be made a party
to or is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or a person of
whom he is the legal representative is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation or for its
benefit as a director or officer of another corporation, or as a representative
in another enterprise, shall be indemnified and held harmless to the fullest
extent permissible under and pursuant to any procedure specified in the Business
Corporation Act of the State of New Jersey, as amended from time to time,
against all expenses, liabilities and losses (including attorneys' fees,
judgments, fines and amounts paid or to be paid in settlement) reasonably
incurred or suffered by him in connection therewith. Such right of
indemnification shall be a contract that may be enforced in any manner desired
by such person. Such right of indemnification shall not be exclusive of any
right which such directors, officers or representatives may have or any other
right which such directors, officers or representatives may have or hereafter
acquire and, without limiting the generality of such statement, they shall be
entitled to their respective rights of indemnification under any agreement, vote
of shareholders, provision of law or otherwise, as well as their rights under
this Article.
The Board of Directors may cause the Corporation to purchase and
maintain insurance on behalf of any person who is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director or officer of another corporation, or as its representative in a
partnership, joint venture, trust or other enterprise against any liability
-9-
<PAGE>
asserted against such person and incurred in any such capacity or arising out of
such status, whether or not the Corporation would have the power to indemnify
such person.
-10-
<TABLE>
Exhibit 11
Calculation of Earnings per Share
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ---------------------
1997 1996 1997 1996
-------- --------- -------- -----------
<S> <C> <C> <C> <C>
Net income (loss) before extraordinary item.. $ 322 $ (155) $ 1,020 $ (530)
Extraordinary item ........................... 120 -- 120 --
Net income (loss) ............................ 202 (155) 900 (530)
Preferred Dividends .......................... 38 77 192 163
Net income (loss) applicable to common
shares........................................ 164 (232) 708 (693)
Primary net income per share
before extraordinary item .................... $ 0.04 $ -- $ 0.14 $ --
------- ------- ------- -------
Primary net income (loss) per share .......... $ 0.02 $ (0.05) $ 0.12 $ (0.16)
------- ------- ------- -------
Fully diluted net income per share
before extraordinary item .................... $ 0.03 $ -- $ 0.11 $ --
------- ------- ------- -------
Fully diluted net income per share ........... $ 0.02 $ -- $ 0.10 $ --
------- ------- ------- -------
Primary weighted average number of
common and common equivalent shares .......... 7,798 4,385 6,096 4,328
Fully diluted weighted average
number of common and common equivalent shares. 10,327 -- 9,646 --
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THIS FORM
10-Q FOR THE PERIOD ENDING SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000900619
<NAME> ECCS, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> 11,397
<SECURITIES> 0
<RECEIVABLES> 5,058
<ALLOWANCES> 243
<INVENTORY> 3,804
<CURRENT-ASSETS> 20,366
<PP&E> 4,562
<DEPRECIATION> 3,521
<TOTAL-ASSETS> 22,519
<CURRENT-LIABILITIES> 4,946
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 17,317
<TOTAL-LIABILITY-AND-EQUITY> 22,519
<SALES> 26,509
<TOTAL-REVENUES> 26,509
<CGS> 19,058
<TOTAL-COSTS> 5,087
<OTHER-EXPENSES> 1,174
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 170
<INCOME-PRETAX> 1,020
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,020
<DISCONTINUED> 0
<EXTRAORDINARY> 120
<CHANGES> 0
<NET-INCOME> 900
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.10
</TABLE>
