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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission File No. 0-21600
ECCS, INC.
(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2288911
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Shelia Drive, Tinton Falls, New Jersey 07724
(Address of Principal Executive Offices) (Zip Code)
(908) 747-6995
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No: ___
---
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 31, 1997:
Class Number of Shares
Common Stock, $.01 par value 4,462,124
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ECCS, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION ................................................... 1
Item 1. Financial Statements ................................................. 1
Consolidated Balance Sheets as of March 31, 1997 (unaudited) and
December 31, 1996 (audited) .............................................. 2
Consolidated Statements of Operations for the three months ended March 31,
1997 and March 31, 1996 (unaudited) ...................................... 3
Consolidated Statements of Cash Flows for the three months ended March
31, 1997 and March 31, 1996 (unaudited) .................................. 4
Notes to Consolidated Financial Statements (unaudited) ................... 5
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition .................................................. 10
Overview ................................................................. 10
Results of Operations .................................................... 10
Liquidity and Capital Resources .......................................... 13
PART II. OTHER INFORMATION ...................................................... 15
Item 6. Exhibits and Reports on Form 8-K ..................................... 15
SIGNATURES ...................................................................... 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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ECCS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
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<CAPTION>
March 31, December 31,
1997 1996
-------- --------
(unaudited)
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Assets
Current Assets:
Cash and cash equivalents ................................................... $ 5,736 $ 4,393
Accounts receivable, less allowance for doubtful accounts of $184 at
March 31, 1997 and December 31, 1996, respectively ......................... 4,334 3,162
Inventories ................................................................. 2,255 4,680
Prepaid expenses and other receivables ...................................... 241 257
-------- --------
12,566 12,492
Property, plant and equipment (net) ............................................ 1,091 1,190
Capitalized software (net) ..................................................... 799 814
Other assets ................................................................... 51 56
-------- --------
$ 14,507 $ 14,552
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Loans payable ............................................................... $ 2,389 $ 1,762
Payable to AT&T Commercial .................................................. 166 64
Current portion of capital lease obligations ................................ 72 91
Accounts payable ............................................................ 2,868 4,061
Accrued expenses and other .................................................. 1,031 986
Warranty .................................................................... 486 414
Customer deposits, advances and other credits ............................... 736 834
-------- --------
7,748 8,212
Capital lease obligations, net of current portion .............................. -- 8
Deferred rent .................................................................. 153 155
-------- --------
7,901 8,375
-------- --------
Shareholders' Equity:
Preferred stock, $.01 par value per share, Authorized, 3,000,000 shares;
Series B cumulative convertible preferred stock, Issued and outstanding,
1,600,000 shares at March 31, 1997 and at December 31, 1996 ................ 16 16
Series C cumulative convertible preferred stock, Issued and outstanding,
500,000 shares at March 31, 1997 and at December 31, 1996 .................. 5 5
Common stock, $.01 par value per share, Authorized, 20,000,000 shares; Issued
and outstanding, 4,462,124 shares and 4,432,216 shares at March 31, 1997 and
December 31, 1996, respectively ............................................ 45 44
Capital in excess of par value - preferred .................................. 4,522 4,522
Capital in excess of par value - common ..................................... 10,337 10,254
Retained earnings (deficit) ................................................. (8,319) (8,664)
-------- --------
6,606 6,177
-------- --------
Total Liabilities and Shareholders' Equity .............................. $ 14,507 $ 14,552
======== ========
</TABLE>
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See notes to consolidated financial statements.
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ECCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
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<CAPTION>
For the Three For the Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
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Net sales ......................................... $ 8,737 $ 5,105
Cost of sales ..................................... 6,335 3,528
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Gross profit .................................... 2,402 1,577
Operating expenses:
Selling, general & administrative ............... 1,622 1,522
Research & development .......................... 377 271
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Operating income (loss) ........................... 403 (216)
Net interest expense ............................ 58 97
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Net income (loss) ............................... $ 345 $ (313)
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Preferred Dividends ............................. 80 32
Net income (loss) applicable to common
shares .......................................... $ 265 $ (345)
======= =======
Primary net income (loss) per share ............... $ 0.05 $ (0.08)
======= =======
Fully diluted net income per share ................ $ 0.04 $ --
======= =======
Primary weighted average number of
common and common equivalent shares ............. 5,226 4,281
======= =======
Fully diluted weighted average number of
common and common equivalent shares ............. 8,996 --
======= =======
</TABLE>
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See notes to consolidated financial statements.
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ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
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<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
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Cash flows from operating activities:
Net income (loss) ...................................... $ 345 $ (313)
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ........................ 294 326
Gain on sale of Illinois property .................... -- (145)
(Increase) decrease in accounts receivable ........... (1,017) 577
Decrease in inventories .............................. 2,425 1,554
Decrease in prepaid expenses and other assets ........ 21 92
Increase (decrease) in payable to AT&T
Commercial .......................................... 102 (973)
Decrease in accounts payable, accrued liabilities,
deferred rent and other ............................. (1,078) (804)
(Decrease) increase in customer deposits, advances and
other credits ....................................... (253) 238
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Net cash provided by operating activities ................. 839 552
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Cash flows from investing activities:
Additions to property, plant and equipment ............. (63) (61)
Gross proceeds from sale of Illinois property .......... -- 855
Additions to capitalized software ...................... (117) (128)
------- -------
Net cash (used in) provided by investing activities ....... (180) 666
------- -------
Cash flows from financing activities:
Borrowings under revolving credit agreement ............ 5,582 3,908
Repayments under revolving credit agreement ............ (4,955) (4,655)
Repayment of mortgage payable ......................... -- (502)
Proceeds from exercise of employee stock options and
issuance of common stock ............................. 84 37
Repayment of capital lease obligations ................. (27) (28)
------- -------
Net cash provided by (used in) financing activities ....... 684 (1,240)
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Net increase (decrease) in cash and cash equivalents ...... 1,343 (22)
Cash and cash equivalents at beginning of period .......... 4,393 1,514
------- -------
Cash and cash equivalents at end of period ................ $ 5,736 $ 1,492
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................. $ 84 $ 170
======= =======
</TABLE>
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See notes to consolidated financial statements.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1997 and March 31, 1996 is unaudited)
NOTE 1 - BASIS OF PRESENTATION:
The information presented for March 31, 1997 and March 31, 1996 and for
the three-month periods then ended, is unaudited, but, in the opinion of the
Company's management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for the fair presentation of the
Company's financial position as of March 31, 1997, and the results of its
operations and cash flows for the three month periods ended March 31, 1997 and
March 31, 1996. The financial statements included herein have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1996, which were included as part of
the Company's Annual Report on Form 10-K/A.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances have been
eliminated.
Results for the interim period are not necessarily indicative of
results that may be expected for the entire year.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Business
ECCS, Inc. ("ECCS" or the "Company") is a designer and manufacturer of
innovative, high-performance, user-definable, fault-tolerant storage subsystems
for open systems and proprietary systems needs. ECCS' primary focus is storage
and storage subsystem solutions. As a subset of this, the Company also provides
computer software and hardware systems integration solutions that feature high
availability mass storage enhancement products including those designed and
manufactured by or for the Company. Notable features related to ECCS'
high-availability mass storage enhancement products include RAID 10, Split
Mirror (TM), Single Button Rebuild, Status Monitor software, fault tolerance,
high performance and an intuitive graphical user interface. The Company's
systems integration services feature custom design and support of high
availability operating environments which include such features as automatic
server failover, hot-swappable component replacement, and on-line system
maintenance.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1997 and March 31, 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. Cost includes invoiced amounts plus capitalized labor,
freight and overhead related to purchasing, distribution and manufacturing
activities.
Inventories consist of the following (in thousands):
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March 31, December 31,
1997 1996
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(unaudited)
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Purchased parts .................................. $1,999 $2,181
Finished goods ................................... 1,072 3,280
------ ------
3,071 5,461
Less: inventory valuation reserve ............. 816 781
------ ------
$2,255 $4,680
====== ======
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(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 Board ("SFAS") No. 86. Such
costs are capitalized after technological feasibility has been demonstrated.
Such capitalized amounts are amortized commencing with product introduction on a
straight-line basis utilizing the estimated economic life ranging from one to
three years. Amortization of capitalized software development is charged to cost
of sales and aggregated $132,000 and $136,000 for the periods ending March 31,
1997 and March 31, 1996, respectively. At March 31, 1997 and December 31, 1996,
the Company had capitalized $2,130,000 and $2,013,000 of software development
costs, respectively, of which $1,331,000 and $1,199,000 had been amortized,
respectively.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1997 and March 31, 1996 is unaudited)
(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. 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."
(k) 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
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1997 and March 31, 1996 is unaudited)
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
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 and, in 1997 and 1996, from convertible
preferred stock. To the extent common share equivalents are anti-dilutive, they
are not included in the calculation.
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 first quarter ended March 31, 1997 of $.01
and is expected to have no impact for the quarter ended March 31, 1996. The
impact of Statement 128 on the calculation of fully diluted earnings per share
for these quarters 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.
The Company is involved in various pending legal proceedings arising
out of the ordinary course of the Company's business. None of these legal
proceedings is expected to have a material adverse effect on the financial
condition of the Company. A range of possible outcomes for all of these legal
proceedings currently cannot be estimated. However, if all or substantially all
of these legal proceedings were to be determined adversely to the Company, there
could be a material adverse effect on the financial condition of the Company.
NOTE 4 -- CONVERTIBLE PREFERRED STOCK
The Company has an authorized class of 3,000,000 shares of Preferred
Stock which may be issued by the Board of Directors on such terms and with such
rights, preferences and designations as the Board may determine.
Dividends with respect to the Company's issued and outstanding Series B
Preferred Stock are calculated based on $0.02 per share per quarter and
accumulate if not declared and paid. As
-8-
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information for March 31, 1997 and March 31, 1996 is unaudited)
of March 31, 1997, an aggregate of approximately $239,000 of the Series B
Preferred Stock dividends had accumulated and have not been declared or paid. In
addition, interest of 6% per annum accrues on any unpaid dividends.
Dividends with respect to the Company's issued and outstanding Series C
Preferred Stock are calculated based on $0.09 per share per quarter and
accumulate if not declared and paid. As of March 31, 1997, an aggregate of
approximately $157,000 of the Series C Preferred Stock dividends had accumulated
and had not been declared or paid. In addition, interest of 6% per annum accrues
on any unpaid dividends.
The Series B Preferred Stock is currently convertible into
approximately 1,770,590 shares of Common Stock. The Company has reserved
1,770,590 shares of Common Stock for the conversion of outstanding Series B
Preferred Stock.
At any time, the Series C Preferred shareholders may convert their
Series C Preferred Stock into Common Stock, at the initial rate of four shares
of Common Stock for each share of Series C Preferred Stock. The Company has
reserved 2,000,000 shares of Common Stock for the conversion of the outstanding
Series C Preferred Stock.
In the event of liquidation, dissolution or winding up of the Company,
Series B Preferred Stockholders and Series C Preferred Stockholders, on a pro
rata basis, are entitled to receive prior and in preference to Common
Stockholders.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
OVERVIEW
During 1996, the Company shifted its primary market position from that
of a value added reseller and integrator of third party products to a provider
of its own proprietary mass storage enhancement systems including storage
subsystems. Consistent with its 1996 transition, the Company revised its
traditional grouping of sales and revenue among the communications, federal and
commercial markets, and began in 1996 to distinguish revenues as follows: (i)
those revenues derived from sales of mass storage enhancement systems, which
includes sales of all ECCS mass storage enhancement products, including the
Synchronix family of products and MicroDFT and FFT product lines, 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 value
added reseller; and (iii) revenues derived from services and other revenue.
Within each of such categories of sales, the Company further distinguishes
revenues generated by sales to alternate channels, of which Unisys Corporation
("Unisys") is the Company's primary alternate channel partner, and aggregate
sales to all federal customers, of which sales by the Company in its capacity as
a subcontractor to various prime contractors are significant. The majority of
sales previously designated as communication sector sales were sales to AT&T.
The Company believes sales which would have been classified as communications,
commercial or federal sector sales, are now more appropriately monitored under
the Company's new sales categories.
Statements contained or incorporated by reference in this Quarterly
Report on Form 10-Q that are not based on historical fact are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Forward-looking statements may be identified by use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of those terms or the
negative of those terms. This Form 10-Q contains forward-looking statements
that involve risk and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements
contained herein.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and March 31, 1996
Net Sales
Net sales increased by approximately $3,632,000 or 71.1%, in the three
months ended March 31, 1997, as compared to net sales in the three months ended
March 31, 1996. Sales of the Company's proprietary mass storage enhancement
systems, including sales of certain third party component products, accounted
for 91.3% and 69.6% of net sales in the quarters ended March 31, 1997 and 1996,
respectively. Sales by the Company in its capacity as a value added reseller
accounted for 1.5% and 14.4% of net sales in the quarters ended March 31, 1997
and 1996, respectively. Services and other revenues accounted for 7.2% and 16.0%
of net sales in the quarters ended March 31, 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 both federal
customers and through relationships with OEMs, offset, in part, by a decrease in
value added resales. In particular, in December 1996, the Company received a
$3.0 million order from the U.S. Air Force through a federal integrator for
predominately third party component products integrated with the Company's
proprietary mass storage enhancement products, which the Company shipped during
the first quarter of 1997. The increases in sales by the Company of its
proprietary systems, as well as the decreases in sales by the Company in its
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capacity as a value added reseller are due, primarily, to the Company's shift in
its primary market position from that of a value added reseller and integrator
of third party products to a provider of its own proprietary mass storage
enhancement systems, including storage subsystems and third party component
products.
An integral part of the Company's strategy is to continue to seek to
diversify its customer base and proprietary storage systems offerings as well as
to increase direct sales and sales through alternate channel partners. Sales to
alternate channel partners accounted for approximately 29.8% of net sales in the
quarter ended March 31, 1997. Sales to the Company's primary alternate channel
partner, Unisys, accounted for 18.5% of the Company's net sales in the quarter
ended March 31, 1997. The Company hopes to increase its revenue in a controlled
manner by increasing its efforts to develop broader market penetration for its
proprietary products through alternate channel partners, value added resellers,
distributors and its own direct sales organization. There can be no assurance,
however, that such increase in revenue or such development of broader market
penetration by the Company will occur to a meaningful extent, if at all. If the
Company's efforts to increase sales through alternate channel partners are
successful, the Company believes that direct end-user sales will, in the future,
represent a smaller percentage of total sales, and thus, that the Company's
dependence on sales to any one customer will be lessened. There can be no
assurance, however, that the Company's alternate channel marketing efforts will
be successful in reducing dependence on any one customer. The Company continues
efforts to establish potential OEM relationships for specialized and standard
versions of its Synchronix product line, in addition to its relationship with
Unisys. The Company believes that additional OEM relationships may decrease the
Company's reliance on its OEM relationship with Unisys. There can be no
assurance, however, that such relationships will be established, or if
established, that they will decrease the Company's reliance on its OEM
relationship with Unisys.
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. As a result, historical sales cannot
be relied upon as an accurate indicator of future sales. 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.
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 $825,000 in the three months ended March 31,
1997 to gross profit of approximately $2,402,000, from $1,577,000 in the three
months ended March 31, 1996. The increase in the 1997 period resulted from
increased sales volume, offset by the lower margins resulting from the third
party
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<PAGE> 14
component parts shipped during the first quarter of 1997. The Company's gross
margin percentage decreased to 27.5% in the three months ended March 31, 1997,
as compared to 30.9% in the corresponding period of the prior year. Such
decrease in gross margin percentage is due primarily to the $3.0 million order
shipped to the U. S. Air Force in the first 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 on the sales of
the Company's own mass storage enhancement 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 18.6% and 29.8% for
the three months ended March 31, 1997 and 1996, respectively, a decrease of
11.2 percentage points. Such decrease was due primarily to the higher sales
levels in 1997. Selling, general and administrative expenses increased in
absolute dollars by $100,000 to $1,622,000 in the three months ended March 31,
1997 from $1,522,000 in the three months ended March 31, 1996. Such increase
was due principally to higher commissions resulting from the higher net sales
levels in 1997. Salaries, commissions, bonuses, employee benefits and payroll
taxes were the largest components of selling, general and administrative
expenses, accounting for 71.0% and 66.0% of such expenses in the three months
ended March 31, 1997 and March 31, 1996, respectively.
Research and development expenses consist primarily of the costs
associated with research and development personnel. These expenses increased in
1997 by $106,000 or 39.1% from the 1996 level of $271,000. This increase is
primarily due to the Company's continued investment in and enhancements to the
Company's current mass storage enhancement products. Such expenses for the first
quarter of 1997 represented approximately 4.7% of the net sales of the Company's
mass storage enhancement systems and 4.3% of all of the Company's net sales
(6.2% of the Company's mass storage enhancement systems and 5.7% of the total
Company's net sales including the amount capitalized during the first quarter of
1997 in accordance with SFAS No. 86). The Company expects to devote greater
resources to product development in the future.
Interest Expense
Interest expense for the three months ended March 31, 1997 decreased by
$39,000 as compared to the three months ended March 31, 1996, due principally to
decreased inventory carrying levels resulting in a decrease in borrowings.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $4.8 million at March 31, 1997 and
$4.3 million at December 31, 1996, respectively.
Since its inception, the Company has funded its operations primarily
from cash generated by operations augmented with funds from borrowings under a
line of credit and inventory financing and through both private sales and a
public offering of equity securities. The Company also remains dependent on its
ability to finance accounts receivable and certain inventory.
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 with a
0.5% transaction fee applied to each borrowing. In addition, the agreement
requires a commitment fee of 0.5% of the total available financing amount,
payable annually on each anniversary date of the agreement. The financing
facility agreement is for a period of three years beginning March 28, 1995 and
the obligations under such agreement are collateralized by substantially all of
the assets of the Company. The agreement does not contain any cash withdrawal
restrictions, any requirements for maintenance of specific financial ratios or
minimum net worth or limitations on dividend payments. As of March 31, 1997, the
Company owed approximately $2.4 million under this financing facility.
On May 17, 1996, simultaneously with the consummation of the sale of
462,512 shares of Series C Preferred Stock (as described below), 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 and has the same financial covenants as the Company's previous line of
credit with AT&T-CFC. Such general line of credit expired on May 1, 1997, and
was extended to March 31, 1998. The Company relied on extended payment terms
from AT&T-CFC for 5% of its inventory acquisitions in the first quarter of 1997,
the majority of which were purchases from Decision Support Systems. The
Company's obligations under the agreement with AT&T-CFC are collateralized by
substantially all of the assets of the Company. As of March 31, 1997, the
Company owed approximately $166,000 under this credit line, and available credit
under such line towards future inventory purchases of floor plan products was
approximately $1.8 million at March 31, 1997.
AT&T-CFC and Fidelity have entered into an intercreditor subordination
agreement with respect to their relative interests in substantially all of the
Company's assets.
On March 31, 1997, the Company's cash balance was approximately $5.7
million.
The Company had, as of March 31, 1997, invested $63,000 in capital
equipment and leasehold improvements. 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.
-13-
<PAGE> 16
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.
-14-
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
11 Calculation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
-15-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECCS, Inc.
DATE: May 12, 1997 By: /s/ Gregg M. Azcuy
----------------------------------
Gregg M. Azcuy, President and
Chief Executive Officer (Principal
Executive Officer)
DATE: May 12, 1997 By: /s/ Louis J. Altieri
----------------------------------
Louis J. Altieri, Vice President,
Finance and Administration (Principal
Financial and Accounting Officer)
-16-
<PAGE> 1
Exhibit 11
Calculation of Earnings per Share
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Net income (loss) $ 345 $ (313)
Preferred Dividends 80 32
Net income (loss) applicable to common shares 265 (345)
Primary net income (loss) per share 0.05 (0.08)
Fully diluted net income per share $ 0.04 $ --
Primary weighted average number of
common and common equivalent shares 5,226 4,281
Fully diluted average number of common
and common equivalent shares 8,996 --
</TABLE>
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,736
<SECURITIES> 0
<RECEIVABLES> 4,518
<ALLOWANCES> 184
<INVENTORY> 2,255
<CURRENT-ASSETS> 12,566
<PP&E> 4,310
<DEPRECIATION> 3,219
<TOTAL-ASSETS> 14,507
<CURRENT-LIABILITIES> 7,748
<BONDS> 0
0
21
<COMMON> 45
<OTHER-SE> 6,540
<TOTAL-LIABILITY-AND-EQUITY> 14,507
<SALES> 8,737
<TOTAL-REVENUES> 8,737
<CGS> 6,335
<TOTAL-COSTS> 1,622
<OTHER-EXPENSES> 377
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 345
<INCOME-TAX> 0
<INCOME-CONTINUING> 345
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 345
<EPS-PRIMARY> .05
<EPS-DILUTED> .04
</TABLE>
