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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File No. 0-21600
ECCS, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-2288911
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Sheila Drive, Tinton Falls, New Jersey 07724
(Address of principal executive offices) (zip code)
(908) 747-6995
(Registrant's telephone number,
including area code)
Securities registered under Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
------------------------- ---------------------------
------------------------- ---------------------------
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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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 by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $15,855,420 at February 28, 1997 based on the
last sales price on that date. Such amount does not include the value of any
Preferred Stock of the Company held by non-affiliates.
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of February 28, 1997:
Class Number of Shares
- ----- ----------------
Common Stock, $.01 par value 4,462,124
The following documents are incorporated by reference into the
Annual Report on Form 10-K: Portions of the Registrant's definitive Proxy
Statement for its 1997 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Report.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Page
---- ----
<S> <C> <C>
PART I ...............................................................................4
1. Business.......................................................................4
2. Properties....................................................................23
3. Legal Proceedings.............................................................23
4. Submission of Matters to a Vote of Security Holders...........................24
PART II ..............................................................................25
5. Market for the Company's Common Equity and Related Stockholder Matters........25
6. Selected Financial Data.......................................................27
7. Management's Discussion and Analysis of Results of Operations and
Financial Condition........................................................28
8. Financial Statements and Supplementary Data...................................37
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................37
PART III ..............................................................................38
10. Directors and Executive Officers of the Company...............................38
11. Executive Compensation........................................................38
12. Security Ownership of Certain Beneficial Owners and Management ...............38
13. Certain Relationships and Related Transactions................................38
PART IV ..............................................................................39
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............39
SIGNATURES .......................................................................................40
EXHIBIT INDEX......................................................................................42
FINANCIAL STATEMENTS AND SCHEDULE.................................................................F-1
</TABLE>
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Statements contained or incorporated by reference in this Form 10-K
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-K 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.
PART I
ITEM 1. BUSINESS.
GENERAL
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.
The year ended December 31, 1996 was a transitional year for the
Company during which the Company shifted its primary market position from that
of a value added reseller ("VAR") and integrator of third party products to a
provider of its own proprietary mass storage enhancement systems including
storage subsystems. In connection with such transition, the Company began in
1996 to distinguish its revenues as follows: (i) those revenues derived from
sales of mass storage enhancement products, 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. The Company devoted substantial product
development efforts commencing in 1994 to make commercially available its
Synchronix product family which currently includes varying offerings of the
Synchronix Storage Management Subsystem. The Company commenced shipping to
end-users the initial version of this product family in the first quarter of
1996.
The Company's family of mass storage enhancement products for
leading Open Systems environments includes RAID ("Redundant Array of Independent
Disks") products and technology; external disk, optical and tape systems; and
internal disk and tape storage devices. ECCS provides high availability Open
Systems-based networked computer solutions deployed for
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implementation in enterprise-wide, transaction-oriented and client server
applications which incorporate significant storage requirements. In its systems
integration activities, the Company designs and configures integrated systems
that include hardware, software, networking and communications, and provides
related technical services. The Company's systems are designed to operate in a
multi-vendor heterogeneous environment and support industry standard third-party
software.
Currently a significant majority of the end user customers for the
Company's products and services are large corporations and federal agencies. The
Company also markets its products through alternate channels of distribution,
including other original equipment manufacturers (OEMs) (collectively referred
to as alternate channel partners). An integral part of the Company's strategy
will continue to be the increase of its sales of mass storage enhancement
products through alternate channel partners, value added resellers, distributors
and its own direct sales organization. The Company's primary alternate channel
partner in 1996 was Unisys Corporation ("Unisys").
The Company believes that the increasing size and complexity of Open
Systems-based networked computing has created a demand for more sophisticated
and powerful storage products which can provide reliability and performance
approaching that which currently is available in mainframe and mini-computer
environments.
The Company began offering its own mass storage enhancement products
in the late 1980s, primarily as part of its systems integration activities. For
the year ended December 31, 1996, sales of the Company's proprietary mass
storage enhancement systems, which historically have had higher gross margins
than the Company's traditional sales of third party hardware, represented 80% of
net sales and 91.4% of gross profit, up from 60.3% of net sales and 51.2% of
gross profit in 1995. These systems, designed and manufactured by or for ECCS,
currently are sold directly to end-users primarily through the Company's direct
sales force, or by the Company in its capacity as a subcontractor to
organizations which resell to Federal government customers, or through alternate
channel partners, such as Unisys. Consistent with the Company's transition to a
developer and manufacturer of proprietary mass storage enhancement systems
during 1996, the Company hopes to maintain an ongoing sales mix of over 80%
sales of proprietary mass storage enhancement systems and services. There can be
no assurance, however, that the Company will achieve this objective.
In 1996, the Synchronix family of products was first made
commercially available by the Company. The Synchronix family, which includes
RAIDS 0, 1, 3, 5 and 10, also includes varying offerings of the Synchronix
Storage Management Subsystem, which provide concurrent, user- definable
implementations of RAID fault tolerant and non-RAID configurations; and
Synchronection, a high performance NFS file server. The Synchronix family of
products provides ECCS' customers with a Graphical User Interface (GUI) which
allows for the monitoring and management of virtually all systems functions,
including configuration, cache policies, data rebuild and load balancing.
Through the GUI, the system administrator can visually and audibly detect system
changes as subtle as a rise in temperature. All active components including disk
drives, power supplies, fans and system controllers are fully
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redundant, hot-swappable and can be monitored on-line through the GUI. See "--
Products and Technology -- RAID Technology."
The Company was incorporated in New Jersey in February 1980 under
the name The Word Store, Inc. The Company's name was changed to ECCS, Inc. in
November 1985. Unless the context otherwise requires, the terms "Company" and
"ECCS" refer to ECCS, Inc. and its subsidiaries. The address of the Company's
principal corporate offices is One Sheila Drive, Tinton Falls, New Jersey
07724, and its telephone number is 908-747-6995.
The Company has registered trademarks for RAID 10 PERFORMANCE
MANAGER, INTELLIGENT REBUILD, SPLIT MIRROR, EXAMODULE, SYNCHRONIX, INVERSE
MIRRORING, SYNCHRONISM, SYNCHRONECTION, SPLIT VOLUME and EASY BACKUP. All other
tradenames referenced are the servicemarks, trademarks or registered tradenames
of their respective companies or organizations.
INDUSTRY BACKGROUND
The Open Systems marketplace has benefited from major trends within
business computing over the last decade. In the early 1980s, corporations
operated in highly centralized environments where data centers were equipped
with mainframe and/or mini-computer hosts and accommodated multiple mass storage
systems providing substantial storage capacity capable of housing large
databases and applications. These computing products were based on a broad
variety of different and proprietary operating systems which made it impractical
to port applications across disparate platforms. In the late 1980s, networks
based on lower cost but powerful non-mainframe, non-mini-computer, computers
using the UNIX operating system began to emerge as a growing market for Open
Systems and in the 1990's systems using the Microsoft NT operating system have
contributed to such market growth. As microcomputers grew in processing power
and networks began to proliferate in corporate environments, businesses began to
downsize from mainframe and mini-computer, host-based computing and to migrate
applications, including mission critical ones, toward networks of Open
Systems-based computers. These changes were driven by the significant advantages
Open Systems enjoy over proprietary systems in terms of price/performance and
flexibility.
As the size and complexity of networks and the applications and data
residing on them have grown, storage and data access requirements and
reliability concerns have strained the resources of many computing environments.
The Company believes that these trends in networked computing are creating
growing demand for more sophisticated and powerful storage products and are
defining new requirements for storage compatibility, reliability, performance,
scalability and management, including increased automation simplification of the
systems administrator's tasks. Mass storage enhancement products for networked
computers have been developed and marketed, including higher capacity and
performance external disk, tape and optical systems and internal disk and tape
storage devices. Despite the alternatives and the high capacities available in
storage and backup media, networked Open Systems computers historically have not
offered the data integrity characteristic of mainframe platforms. In addition,
because Open Systems do not require the same level of human resources as is
typically required
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in mainframe and large mini-computer installations, the Company believes that
systems administrators may find Open Systems to be a more efficient and
economical mass storage solution.
There are many mission critical applications, including on-line
transaction processing, likely to require improved reliability and
fault-tolerant hardware. Although these markets traditionally have been
dominated by mainframe and mini-computer based systems, Open Systems and the
Microsoft Windows NT environments are rapidly becoming increasingly important.
This increase is driven largely by the trend toward rightsizing -- moving
applications and data to more efficient networked systems. It also is driven by
the growth of departmental networked computing environments involving databases
for applications not previously automated in mainframe or minicomputer
environments as these become mission critical to the users.
Interest in RAID subsystems in networks of Open Systems-based
computers has been generated by the concern for data preservation, coupled with
the increased capacity available in such systems and the demands for I/O
performance. RAID technology initially was developed at the University of
California, Berkeley in 1986. The RAID Advisory Board, of which the Company is a
member, is an industry consortium created to: (i) promote the exchange of
information among RAID manufacturers; (ii) educate the public about RAID and its
implications for the computer industry; and (iii) develop reference materials
and standards which can help both providers and purchasers in the selection of
RAID subsystems. The Company works closely with the RAID Advisory Board to
ensure that the Company's RAID standards are compatible with industry standards.
RAID technology enhances reliability (fault tolerance) and can improve certain
performance features of file servers and multiuser computers by using parallel
disk drives to achieve higher data availability. The redundancy of the disk
drives reduces the risk of data loss due to the failure of a single drive unit.
It is commonly believed in the industry that one of the most fragile components
of a computer system is the disk subsystem. Disk drives, therefore, have become
a focus of reliability concerns. Disk drive failures, depending on the extent of
the damage and the user's backup practices, can be not only costly and time
consuming but even catastrophic for a business user.
PRODUCTS AND TECHNOLOGY
Prior to the Company's transition during 1996 to a developer and
manufacturer of proprietary mass storage enhancement systems, the vast majority
of the Company's products were sold in connection with the implementation of
NCR, SUN, HP and IBM computer systems as part of a complete solution, primarily
with an NCR computer system. Sales of proprietary mass storage enhancement
systems in 1996 represented 80% of net sales and the Company hopes to maintain
an ongoing sales mix of over 80% sales of proprietary mass storage enhancement
systems and services. There can be no assurance, however, that the Company will
achieve this objective. The Company's family of mass storage enhancement
products includes RAID products, external disk, optical and tape systems; and
internal disk and tape storage devices and storage related software. The Company
believes that such products provide either a level of performance or features or
a combination thereof not generally available from other vendors.
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During 1996, the Company expanded development of products based on its
proprietary know-how, including, but not limited to, RAID hardware, firmware and
software technologies, and network attached storage products which the Company
intends to market on a broader scale, including increased emphasis on sales
through alternate channel partners.
All of the Company's products are compatible with the SCSI (Small
Computers Systems Interface) protocol, an industry standard interface for
peripheral devices supported by the vast majority of computer manufacturers, as
well as with SCSI 2, an enhancement of the SCSI protocol and fiber protocol. The
Company's products operate with many major Open Systems hardware platforms and
operating systems environments. Thus, the Company may better address customer
needs for portability and integration in their respective application
environments.
Recent advances in the speed and capacity of servers in networked
environments often have exceeded the growth in capability of traditional
off-the-shelf storage systems. In anticipation of and in response to these
industry trends, the Company has focused its product development efforts on
advanced storage products.
The Company's currently available mass storage systems and products,
as summarized in the following table, comprise a family of enhancement solutions
across a wide range of capacities and operate over multiple standard platforms:
<TABLE>
<CAPTION>
PRINCIPAL PLATFORMS(1)
--------------------------
OPERATING RANGE OF SELECTED PRIMARY
PRODUCT SYSTEM (2) SERVER CAPACITY FEATURES APPLICATIONS
- ------- ------------ ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Storage Subsystem
Synchronix UNIX SVR4 NCR 4.2GB-819GB High Availability Enterprise wide
Sun O/S Sun High performance applications
Sun-Solaris HP Fault tolerant Data base environments
HP-UX IBM Redundant components
Windows NT NT (generic) Highly scalable
Wolfpack Multi-host connect
IBM Array based failover
AIX Concurrently supports
multiple RAID levels
(0, 1, 3, 5, 10) &
JBOD Advanced GUI
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NETWORK STORAGE
SUBSYSTEM
Synchronection Ethernet 10/100 BaseT Up to 4TB High Availability Network wide
FDDI 100/Mbsec fibre High Performance
CDDI100/MBsec Fault resilient
Twisted pair Dynamic ally Extensible
SMB/CIFS Proprietary real time OS
TCP/UDP/IP Automatic Network
Processor Failover
(ANPF)
- ----------------------------------------------------------------------------------------------------------------------------------
WORK STATION (SERVER)
RAVEN Sun Solaris 2.5.1 4.2-46GB High Availability Departmental data server
High performance
- ----------------------------------------------------------------------------------------------------------------------------------
DISK DRIVE SUBSYSTEMS
Removable Disk UNIX SVR4 NCR 4.2GB - 33.6GB Hot swap removable Enterprise applications
Module (RDM) SunO/S, Sun SPARC disks requiring very high
Solaris, HP Redundant power performance with
HP-UX IBM supplies minimal down time and
Windows NT Supports eight 3.5 data security
AIX half-height devices
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL PLATFORMS(1)
OPERATING RANGE OF SELECTED PRIMARY
PRODUCT SYSTEM (2) SERVER CAPACITY FEATURES APPLICATIONS
- ------- ------------ ------ -------- -------- ------------
<S> <C> <C> <C> <C> <C>
DISK ARRAY
STORAGE(3)
MicroDFT-1 UNIX SVR4 NCR 2.1-4.2GB Scalability Mission critical
SUN O/S SUN SPARC Hot-swapping applications
Solaris HP Plug and play requiring small
HP-UX Novell Small form factor size, high
Novell IBM performance,
Windows NT disk fault
AIX tolerance and
fault tolerance
boot drive
MicroDFT-1E UNIX SVR4 NCR 2.1-4.2GB Scalability Mission critical
SUN O/S SUN SPARC Hot-swapping applications
Solaris HP Plug and play requiring small
HP-UX Novell Desk-top size, high
Novell IBM enclosure performance,
Windows NT disk fault
AIX tolerance and
fault tolerance
boot drive
MicroDFT-1R UNIX SVR4 NCR 2.1GB-16.8GB Supports RAID Mission critical
Sun O/S, SUN SPARC levels 0,1 & 10 applications
Solaris HP Hot swap disks requiring large
HP-UX Novell Automatic rebuild capacity, high
Windows NT IBM Redundant power performance and
AIX supplies disk fault
Supports eight tolerance
3.5"
half-height
devices
FFT-1 UNIX SVR4 NCR 2.1-12.6GB Extensive Mission critical
SUN O/S SUN SPARC Scalability applications
Solaris HP Hot-swapping requiring high
HP-UX Novell Plug and play performance, and
Novell Power supplies full fault
Windows NT and fans tolerance
RAID UNIX SVR4 NCR N/A RAID 10 Highest
Performance SUN O/S SUN SPARC performance performance
Manager (RPM) Solaris when used with possible while
(Software) ECCS RAID still
systems maintaining
redundancy
SPLIT MIRROR UNIX SVR4 NCR N/A Mirrored pair Allows back-up
Option SUN O/S SUN SPARC splitting without
(Software) Solaris HP software disturbing
HP-UX system operation
and software
upgrading
without shutting
system down
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
MISCELLANEOUS
PRODUCTS
DATA CENTER
CABINETS
<S> <C> <C> <C> <C> <C>
5631BASE N/A N/A N/A Used for all High capacity
(54" Data Center ECCS rackmount storage
cabinet) products environments
5640BASE N/A N/A N/A Used for all High capacity
(70" Data Center ECCS rackmount storage
cabinet) products environments
</TABLE>
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N/A = Not applicable.
(1) These products also are compatible with other hardware and software
platforms not listed.
(2) To the extent that they provide support for the SCSI, SCSI 2, or SCSI 3
(ULTRA) interface, the Company's products are compatible with all UNIX and
NT platforms.
(3) See "Raid Technology."
RAID Technology
RAID, an acronym for Redundant Array of Independent Disks, uses
multiple disk drives to increase the reliability and availability of data
storage. The redundancy of the disk drives ensures
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that no data is lost due to the failure of a single drive unit. RAID is designed
to take advantage of low cost, high volume disk drives by combining multiple
drives into a system or array to improve reliability. By using an array of
drives, configured so that the operating system treats multiple drives as a
single drive, computers and networks can improve reliability and certain
performance characteristics through greater capacity, higher data transfer and
access speeds, and greater protection against data loss. The components most
likely to fail, such as drives and power supplies, can be duplicated so that the
system will continue to operate without breakdown or loss of data. A properly
designed RAID subsystem incorporates redundancy into a drive array, permitting a
network to remain on-line until, or even while, a damaged drive is rebuilt.
Depending on the design of the RAID, failed components may be replaced while the
system is operating (hot-swapping) or at a later time when the system is
off-line.
RAID is available in several architectures, known as levels "0"
through "5". Although these six categories have become recognized standards,
they are still evolving. The Company works closely with the RAID Advisory Board
to ensure that the Company's RAID standards are compatible with industry
standards. The RAID Advisory Board, of which the Company is a member, is an
industry consortium involved in developing and standardizing RAID technologies.
ECCS was instrumental in developing a RAID tutorial for such Board, which is
used to educate member companies and potential users about RAID.
The various RAID implementations (referred to in the industry as
RAID levels 0 through 5) utilize different forms of spreading data across disks.
In mirroring, data is duplicated through simultaneous writes to two identical
disk drives. Data is read from a single disk with a redundant disk available as
a fault tolerant on-line backup. In striping, data is partitioned across the
disks and redundancy can be achieved through the use of error correcting codes.
These codes generate redundant data, typically known as parity, from the logical
combination of non-redundant data on other disks. In the event of a disk crash,
part or all of the lost data may be reconstructed from the error correcting
codes which are stored on either a different drive or across multiple drives. In
1992, the Company conceived and introduced a hybrid architecture of RAID which
it terms RAID 10. RAID 10, unlike RAID 0 through 5, combines mirroring and
striping thus providing the best cost/performance for on-line transaction
processing (OLTP) applications. The RAID Advisory Board has proposed the
adoption of a certification and testing procedure that does not include RAID
level certification. The plan concentrates on functionality, performance and
reliability and, if adopted as proposed, will not have a material effect on
ECCS' operations.
Each of the different RAID architectures has certain advantages and
disadvantages depending upon the application. For example, the Company believes
that in many environments RAID 0 provides the highest I/O performance but
without redundancy; RAID 1 provides fault tolerance but involves twice the disk
cost; RAID 3 provides optimal architecture for high-performance, large-block
serial access files typically found in many imaging and video on-demand
applications; RAID 5 provides fault tolerance at a lower cost but has the
slowest I/O performance in write-intensive applications; and RAID 10 provides
both high I/O performance and redundancy but is the most costly per megabyte.
For any given RAID application, users must undertake a cost/benefit analysis and
choose among the technical features and relative costs of the several RAID
architectures, including degree of fault tolerance, capacity and performance.
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The following table lists principal features of each RAID
configuration (consistent with current industry standards):
<TABLE>
<CAPTION>
LEVEL Description Features
----- ----------- --------
<S> <C> <C>
RAID 0 Striping - number of drives is scalable
Data Striping - no redundancy - independent data paths to drives
w/o Parity - irretrievable loss of data if one disk crashes
- --------------------------------------------------------------------------------------------------------------------------------
RAID 1 Mirroring - number of drives is not scalable
Mirrored Disk - each block of data duplicated on mirror drive - independent data paths to drives
Array through simultaneous writes
- --------------------------------------------------------------------------------------------------------------------------------
RAID 2 Striping - number of drives is not scalable
Hamming Code for - data is striped by bit (bit- interleave) - independent data paths to drives
Error Correction - multiple disks store data; check disks are added
for single error correction and double error
detection
- --------------------------------------------------------------------------------------------------------------------------------
RAID 3 Striping - drives together work as virtual drive
Parallel Disk - array of parallel drives transfer data with single - number of drives is expandable
Array drive functioning as a parity check disk - parallel data paths to drives
- --------------------------------------------------------------------------------------------------------------------------------
RAID 4 STRIPING - number of drives is scalable
Independent - data is striped by system block size - independent data paths to drives
Disk Array - reads and writes on independent drives with
dedicated parity drive
- --------------------------------------------------------------------------------------------------------------------------------
RAID 5 Striping - number of drives is scalable
Independent - data is striped by system block size - independent data paths to drives
Disk Array - reads and writes on independent drives with
parity spread across all drives
- --------------------------------------------------------------------------------------------------------------------------------
RAID 10(1) STRIPING AND MIRRORING - number of drives is scalable
- block striping of data performed on top of - independent data paths to drives
parallel mirroring - hybrid architecture that simultaneously
provides the performance of RAID 0 with the
fault tolerance of RAID 1
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Defined as hybrid technology RAID Level 0&1 by the RAID Advisory Board.
During 1995, and continuing through 1996, the Company continued to
focus substantial product development efforts on its RAID products, and
specifically, on the development of a new product family, Synchronix, ECCS' next
generation, high availability controller and subsystem. Synchronix currently
includes varying offerings of the Synchronix Storage Management Subsystem, which
can be configured to provide capabilities ranging from just an array of
independent disks through multiple levels of RAID and which can incorporate
advanced, easy to utilize storage management and system administration
capabilities. Synchronix first became commercially available in 1996, and the
Company commenced shipping to end-users the initial version of this product
family in the first quarter of 1996. Synchronix has been and is being
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designed to feature a high-performance, high availability architecture for use
in mission-critical applications for Open Systems computing environments. It
combines RAID technology and hierarchical disk management to ensure high data
availability and performance. Synchronix uses intelligent data migration to hold
mission-critical data in on-line, high performance storage, migrating older,
less critical data to other media where it can be kept near-line or archived.
During the second quarter of 1996, the Company announced the availability of an
enterprise storage and retrieval system named Synchronection. Synchronection
combines the Company's Synchronix system with network software, offering storage
capability up to 1.6 terabytes. Synchronection, due to its software component,
offers more flexibility and a greater degree of compatibility with most
networked systems, reducing the need for customized solutions and extensive
testing periods. Computer Technology Review, a publication subscribed to by over
75,000 Information Systems Professionals, has awarded ECCS its "Editor's Choice
Award" for Synchronix. There can be no assurance, however, that the Company will
be successful in continuing to commercialize its Synchronix family of products.
The Company announced several new RAID products during 1994,
including: (i) the MicroDFT-1E to address high availability requirements at the
workstation level; (ii) a GUI-based version of its RAID Performance Monitor
which was designed to provide an easy method for striping and concatenating data
over disk drives which are configured as part of the Company's RAID subsystems;
(iii) a GUI-based version of its status monitor which allows for the
configuration of subsystems from an operator's console and also allows for
remote monitoring of the status of a subsystem; and (iv) the MicroDFT-1R which
is a scalable rackmount version of the MicroDFT-1, with redundant power
supplies. A custom rackmount package, with specialized applications, to house
the MicroDFT-1R along with two SUN SparcStations was announced in 1995.
In addition, during 1994, the Company introduced several feature
upgrades to its RAID products. The first of these was Split Mirror which
provides the advantages of a RAID 1 configuration but allows a redundant disk
drive to be used independently so that it may be disconnected from the mirror
and mounted as an external volume or used as additional storage. The Company
also announced increases in disk drive capacities for its RAID and removable
disk drive units from 2.1GBs to 4.2GBs.
The Company's first RAID product, the DFT-1 Module, was introduced
in 1992, the first in a planned line of feature fault tolerant storage
subsystems collectively known as RAID Modules, that continue to be designed by
the Company to meet the growing demand for data integrity among customers who
are rightsizing from mainframe to Open Systems platforms and/or who are in the
process of developing departmental networks with large database requirements,
the integrity and high availability of which are mission critical to the users.
The DFT-1 Module is disk fault tolerant. It provides complete disk fault
tolerance through mirroring performed across SCSI disks. The DFT-1 is "RAID 10
Ready" inasmuch as parallel striping and mirroring are achieved by coupling the
DFT-1 hardware with striping software available through the Company or
third-party vendors. The Company currently offers striping software for certain
Open System platforms. ECCS believes that a combination hardware/software
solution achieves certain benefits for its RAID 10 without the excessive
consumption of CPU capacity or I/O
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bandwidth generally associated with software-only RAID implementations. The
Company believes that RAID 10 is a more efficient RAID alternative for certain
applications that are characterized by numerous writes to disk.
Also in 1992, the Company conceived and introduced a hybrid RAID
architecture, which it terms RAID 10. Since introduction of its first RAID
product in October 1992, the Company has supplemented its storage products with
additional offerings, including new RAID products and technologies. In 1994, the
Company also enhanced its product offerings through OEM/reseller agreements
covering the FFT-1035 RAID product, 8mm and 4mm tape products and optical
jukeboxes. In 1995, the Company introduced the FFT-105C product, a fault
tolerant based storage product with RAID levels 1, 0 and 5 and a GUI. The
Company also introduced in 1995 a number of enhancements such as EXAMODULE TURBO
7005XL, and other enhancements to vanity and memory products. The Generic Driver
Tray (GDT) enclosure was introduced along with the FFT 1035. The Company
increased its product connectivity with the expansion of the MicroDFT, FFT and
EDT products to include the RS6000 family from IBM, in addition to NCR, SUN and
HP.
The Company believes that its success depends, in part, on its
ability to enhance existing products and to develop new products that maintain
technological leadership, meet a wide range of changing customer needs and
achieve market acceptance. The year ended December 31, 1996 was a transitional
year for the Company during which 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. The Company is continuing to focus its attention
on new and improved technologies that the Company is designing and testing for
anticipated market release in the next twelve to twenty-four months. These new
areas are consistent with the Company's core storage product expertise, with
focus on host and new network-based storage technologies. The Company previously
announced that in January 1997, the Company executed a letter of intent with
Tandem Computers for the development of ServerNet based, fault tolerant, high
performance, network storage systems. Given the early stage of this development
project, the Company currently is unable to assess the impact this new
technology may have on the Company's future revenues, if any. Lack of market
acceptance for the Company's existing or new products, the Company's failure to
introduce new products in a timely or cost-effective manner, or its failure to
increase functionality of existing products or remain price competitive, would
materially adversely affect the Company's operating results. There can be no
assurance that the Company will be successful in its new product development
efforts or that the Company's new and/or enhancements of existing products, even
if successfully developed, will achieve market acceptance.
VALUE ADDED RESELLER AND SERVICES AND OTHER REVENUES
ECCS' integration strategy is to primarily pursue integration
projects that incorporate the Company's proprietary enhancement systems. In its
systems integration activities, ECCS designs and configures integrated systems
that include hardware, software, networking and communications, and provides
related technical services. Some of its projects involve custom applications of
its own mass storage enhancement products as well as other vendor storage
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products. The following is a summary description of systems integration
activities and target environments addressed by the Company:
- End-user customers who are implementing high
availability solutions which require redundant CPUs, a
failover operating environment, RAID mass storage
redundancy and network redundancy.
- End-user customers who are rightsizing data center
systems from mainframes to Open Systems-based networks.
ECCS works with its customers to determine whether
applications should reside on mainframes or departmental
servers and provides application prototyping,
benchmarking, implementation planning, and installation.
- End-user customers who are implementing client/server
oriented systems. Installations range from local area
networks to wide area networks.
- Acting as a subcontractor for larger organizations that
provide software, hardware or services to their
customers. The Company provides products and services
such as: presales marketing support; configuration,
design, testing, and application development support;
delivery and installation of an integrated system;
delivery and installation of enhancements; and, in
separate arrangements under a master contract or
pursuant to a service contract, post-sales support and
facilities management.
The Company is capable of offering a comprehensive package of
resources necessary to implement major systems projects for large corporate
clients. The Company attempts to differentiate itself in the Open Systems market
from other systems integrators by focusing on customer requirements that include
a need for mass storage systems in which its proprietary mass storage
enhancement systems can be incorporated and by providing a range of technical
skills, such as logical and physical design and testing, and technical expertise
in computer systems, storage systems, networking, operating systems,
communications, and implementation and related post-sales support. See "--
Competition."
SALES AND MARKETING
ECCS currently focuses its direct marketing and sales efforts on
corporate end user accounts and organizations selling to Federal government
customers. The Company uses its direct sales and marketing force consisting of
19 people, of whom 12 are salespersons subject to quotas. The Company conducts
sales and marketing from its corporate headquarters in New Jersey and from its
offices in Aventura, Florida; Alpharetta, Georgia; Herndon, Virginia; and San
Jose, California. The Company believes that direct sales and support can lead to
better account penetration and control, better communications and long-term
relationships with end user customers, opportunities for follow-on sales to the
existing customer base and more accurate identification of current and future
end user customer requirements with which to guide product specification and
development efforts. In order to maximize market opportunities, and recognizing
the significant costs of increasing its direct sales force, the Company also
sells its
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proprietary systems and products through alternate channel partners. ECCS
currently has two full-time salespersons pursuing alternate channels.
The Company's sales currently are derived approximately 62% from its
direct sales organization, of which 30% are sales into the federal government
with the balance being derived from various commercial customers, and
approximately 38% from alternate channel partners. Prior to the Company's
transition in 1996, at which time 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, the Company categorized its internal sales
organization as being comprised of three sectors, Communications, Commercial and
Federal, each of which marketed to end-user customers by direct sales calls,
direct mail and telemarketing. Although the Company continues to market to end
users by such direct sales calls, direct mail and telemarketing methods, the
Company now distinguishes its revenues as follows: (i) those revenues derived
from sales of mass storage enhancement products, 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 these
categories, the Company further distinguishes revenues generated by sales to
alternate channels, of which 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 prime contractor Hughes Data
Systems were significant, given the substantial percentage of revenues generated
by each.
Sales of the Company's proprietary mass storage enhancement systems
accounted for 80%, 45% and 36% of net sales in 1996, 1995 and 1994,
respectively. Sales by the Company in its capacity as a value added reseller
accounted for 8%, 40% and 52% of net sales in 1996, 1995 and 1994, respectively.
Services and other revenues accounted for 12%, 15% and 12% of net sales in 1996,
1995 and 1994, respectively. The year to year percentage increases in sales by
the Company of its proprietary systems, as well as the year to year percentage
decreases in sales by the Company in its 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.
Sales to alternate channel partners accounted for approximately 38%,
8% and 3% of net sales in 1996, 1995, and 1994, respectively. 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
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<PAGE> 16
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 as described below. 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.
Sales to the Company's primary alternate channel partner, Unisys,
accounted for 30% of the Company's net sales in 1996. All sales to Unisys, which
began in 1996, were sales of mass storage enhancement products. Effective May 1,
1995, the Company entered into an OEM agreement with Unisys. Such agreement, as
subsequently amended, grants to Unisys exclusive world-wide rights to sell and
distribute certain of the Company's proprietary products, and a non-exclusive
world-wide right to sell and distribute certain other products. The agreement
provides that product pricing shall remain in effect throughout the term of the
agreement unless market conditions dictate that the Company should provide more
favorable pricing terms to Unisys. The agreement is for an initial five year
term beginning May 1, 1995 and Unisys has the right to extend such term for
successive one year periods upon appropriate written notice. The agreement may
be terminated under certain conditions and Unisys may, subject to certain
conditions, terminate the agreement in the event that the Company fails to
timely perform its delivery obligations under the agreement. While the Company
has an OEM agreement with Unisys that defines the terms of the sales and
support services provided thereunder, this agreement does not include specific
quantity commitments. 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.
Federal systems entity sales, which are comprised of sales into the
Federal government, represented 30%, 21%, and 7% of net sales in 1996, 1995, and
1994, respectively. As previously reported, during 1996 the Company became a
subcontractor to a prime contractor, Hughes Data Systems, which was awarded a
United States Air Force Workstation Contract, along with Sun Microsystems, Inc.
Sales pursuant to this arrangement totaled $3.7 million in 1996 or 16% of sales.
There are no minimum purchase requirements. There can be no assurance that any
of the Company's options will be selected in the future or that the contract
will not be prematurely terminated.
The United States Air Force, an end user of the Company's products
which purchases such products through Hughes Data Systems and other government
contractors, purchased $5.7 million of products, or 25% and 84% of the Company's
net sales and sales into federal systems, respectively, in 1996.
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<PAGE> 17
As previously reported, the Company has entered into a new
relationship with Tandem Computers for a ServerNet based, fault tolerant, high
performance, network storage system. The Company does not expect this effort to
have any revenue associated with it in the first two quarters of 1997. It is too
early to accurately determine the impact that such relationship will have on the
Company's revenue for 1997 or beyond, if any.
In 1996, 1995 and 1994, purchases by multiple AT&T business units
represented 14%, 51% and 65%, respectively of all purchases from the Company.
All such sales by the Company to AT&T were made on an individual purchase order
basis and, therefore, there were and are no ongoing written commitments by AT&T
to purchase from the Company. The Company historically sold its mass storage
enhancement systems and provided systems integration services to AT&T, and,
acting as a value added reseller of NCR products, sold NCR computer hardware
systems to multiple AT&T business units for either their own use as an end user
or for resale by such business units to third parties.
Effective December 2, 1996, the Company executed a Value Added
Reseller Agreement with NCR pursuant to which the Company is an authorized VAR
of NCR products and, subject to certain agreed upon terms and conditions, may
purchase NCR products for resale in the United States at a discounted price as
determined by NCR, and subject to change at any time. There are no minimum
purchase requirements under the agreement. The agreement does require, however,
an obligation by the Company to use its best efforts to achieve an agreed upon
sales target. The Company does not believe that it will achieve the sales target
set for 1997, and, accordingly, the cost to the Company of acquiring products
from NCR under this agreement in the future will increase, and the Company's
margin on sales of such products will decrease. The Company believes, however,
that it will not be materially adversely affected by such product cost
increases, given the Company's diminished reliance on such sales. There can be
no assurance, however, that the Company's operating results will not be
materially adversely affected. The agreement is terminable by either party for
any reason upon ninety days written notice, and may be terminated sooner under
certain conditions.
The Company continues to place emphasis on growth in sales of its
Synchronix family of products and other proprietary products through the
allocation to such products of an increasing percentage of the Company's sales
and marketing resources. Emphasis also is being placed on marketing the
Company's RAID subsystems through alternate channel partners where the Company's
RAID solutions become an integral part of the solution being provided to such
alternate channel partners' customers. See "-- Products and Technology -- RAID
Technology."
There can be no assurance that the Company will be able to expand
activity in any of its target markets.
TECHNICAL SUPPORT SERVICES
A key element of ECCS' business strategy is to provide extensive
support, directly and through third parties, to its customers. The Company
provides full hardware and software support and technical services to customers
in or around the Company's regional support areas in the United States. The
Company has established a customer service and support organization
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<PAGE> 18
that provides both pre- and post-sales support. Customers have toll-free
telephone access (1-800-2-GET-HLP) to technical specialists who respond to
hardware, software and applications questions. The Company tracks service
reports through a customer database which maintains current status reports as
well as historical logs of customer interaction. The Company offers different
levels of service contracts utilizing its own and/or third party personnel (e.g.
7x24x365) with defined critical on-site response times.
The Company's technical support specialists are divided into three
"tiers" or "levels" of support, and are thus able not only to diagnose and solve
technical problems but also to assist customers with systems integration and
use.
ECCS provides a one-year warranty with its tape products, a
three-year warranty on the proprietary content of its RAID products and, with
respect to the non-proprietary content of such RAID products, passes through to
customers applicable vendor warranties. The Company provides customers the
option of purchasing an extended maintenance contract for all of its products.
COMPETITION
ECCS is engaged in fields within the data processing industry
characterized by a high level of competition. Many established companies,
including manufacturers of computers, systems integrators and manufacturers of
mass storage enhancement products and networking products compete with the
Company. Many of such competitors have resources greater than those of the
Company. There can be no assurance that the Company will be able to continue to
compete successfully with existing or new competitors.
ECCS also believes it distinguishes itself from its competitors on
the basis of the combination of its technical expertise, its systems integration
services and its service and customer support. The Company believes it
distinguishes itself from competitors through the available features, price and
performance of its own mass storage enhancement products.
With respect to mass storage enhancement products, there are many
competitors in each product category, none of which is dominant in any one
product category, but each of which addresses specific applications and/or
markets. The Company believes that the currently available alternative mass
storage devices are not adequate substitutes with respect to the particular
applications addressed by the Company's products. Such alternatives address
different requirements for such characteristics as storage capacity, data access
speed, reliability, fault tolerance and price/performance. With respect to RAID
products and technology, EMC Corp. and Storage Technology Corporation are
significant participants in the RAID market for IBM mainframe computers and have
acquired companies which have products that address the open- system market.
Most computer systems companies and companies that offer memory enhancement
products also offer RAID, mass storage and backup products and technologies, or
are undertaking development efforts, which compete or may compete with the
Company in the RAID marketplace for Open Systems-based networked computers,
including companies considerably larger and with greater resources than those of
the Company. Companies such as IBM, Tandem, Stratus and Sequoia currently
provide RAID solutions for the mainframe and
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<PAGE> 19
mini-computer market segments. There can be no assurance that such companies
will not enter the RAID marketplace for Open Systems-based non-mainframe,
non-mini-computer computers. To the best knowledge of the Company, current
providers of RAID products and technology in the Open Systems marketplace on an
OEM basis and/or to end users include, among others, SUN, IBM, Digital Equipment
Corporation, Data General, Hewlett Packard, Compaq, Artecon, EMC and Hyundai's
Symbios Logic Division.
The Company designs its RAID products to comply with standards
adopted by the industry and the RAID Advisory Board, which the Company believes
are industry-accepted standards, and the Company works closely with the RAID
Advisory Board to ensure that the Company's RAID standards are compatible with
industry standards. Although the Company knows of no other standard-setting body
currently in existence, there can be no assurance that other standards will not
become industry-accepted standards.
Competitive factors include relative price/performance; product
features, quality and reliability; adherence to industry standards; financial
strength; and service, support and reputation. For certain of the Company's
products, an important factor in competition may be the timing of market
introduction of its or its competitors' products, relative time to market of
products and product availability. Accordingly, the relative speed with which
the Company can develop products and bring them to market also are important
competitive factors.
MANUFACTURING AND SUPPLIERS
ECCS relies on outside manufacturers to manufacture and produce
certain of the Company's products for use in the Company's proprietary systems,
as well as for the direct sale to end users, and relies on outside suppliers to
supply subassemblies, component parts and computer systems for resale. Certain
components used in the Company's business are available only from a limited
number of sources. Any delays in obtaining component parts could adversely
affect the Company's results of operations. Manufacturing by the Company
consists primarily of light assembly, systems integration, testing and quality
assurance. The Company relies on independent contractors and outside suppliers
to manufacture subassemblies to the Company's specifications. Each of the
Company's products undergoes testing and quality inspection at the final
assembly stage. The Company has not experienced material problems with its
proprietary systems manufacturers or its suppliers of subassemblies. There can
be no assurance, however, that material problems will not arise in the future
that could significantly impede or interrupt the Company's business. Although no
assurances may be given, the Company anticipates that its current facilities
coupled with the Company's ability to hire contract manufacturers will
adequately satisfy its manufacturing requirements for the foreseeable future.
Significant vendors of the Company include Unisys, Bell
Microproducts and Anthem Electronics, Inc. ("Anthem"). During 1996, purchases
from these vendors totaled $4.3 million or 26.1%, $2.1 million or 12.7% and $1.2
million or 7.3%, respectively, of the Company's total purchases in 1996.
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On June 27, 1995, the Company entered into a Manufacturing Services
Agreement with Unisys, its primary manufacturer, that defines the terms of sales
and support services. Pursuant to such agreement, Unisys will manufacture
certain of the Company's products for use in the Company's proprietary systems
as well as for the direct sale to end-users. The agreement does not contain
specific quantity commitments and purchases are made on a purchase order basis.
The agreement does not include any long-term commitment by the Company to
Unisys. The contract had an initial term of one year, and automatically renews
for successive one year periods. The contract was automatically renewed on June
27, 1996. Pricing and deliverables are to be negotiated each year. Either party
can terminate the agreement with written notice, provided, however, that if
Unisys cancels the agreement, it shall be obligated to continue accepting
manufacturing orders for a period of six months thereafter. In the event that
the Company terminates the agreement, the Company shall be liable for inventory
procured to fill the Company's orders. The Company primarily relies on regular
trade credit with open terms for the financing of purchases under this
agreement.
The Company has a supply arrangement with Bell Microproducts
pursuant to which the Company orders from Bell Microproducts when, and as
needed, and on terms negotiated at the time of each such order. There are no
minimum purchase requirements. The arrangement is terminable by either party at
any time.
The Company's purchases from Anthem totaled $1.2 million, or 7.3% of
the Company's total purchases and $3.1 million or 12% of the Company's total
purchases in 1996 and 1995, respectively. Such purchases consisted primarily of
disk drives. The Company purchases from Anthem on an open account basis.
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. The weighted average interest
rate on such line in 1996 was 11.54%. In addition, the agreement requires a
commitment fee of 0.5% of the total available financing amount, payable annually
on each anniversary date of the agreement. The financing facility agreement is
for a period of three years beginning March 28, 1995 and the obligations under
such agreement are collateralized by substantially all of the assets of the
Company. The 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. The outstanding balance for the line of
credit at December 31, 1996 and 1995 was approximately $1,800,000 each year.
Available borrowings from the Company's accounts receivable line of credit were
$926,000 at December 31, 1996. See "Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition."
Effective December 2, 1996, the Company executed a Value Added
Reseller Agreement with NCR pursuant to which the Company is an authorized VAR
of NCR products and, subject to certain agreed upon terms and conditions, may
purchase NCR products for resale in the United States at a discounted price as
determined by NCR, and subject to change at any time. There are no minimum
purchase requirements under the agreement. The agreement does require, however,
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<PAGE> 21
an obligation by the Company to use its best efforts to achieve an agreed upon
sales target. The Company does not believe that it will achieve the sales target
set for 1997, and, accordingly, the cost to the Company of acquiring products
from NCR under this agreement in the future will increase, and the Company's
margin on sales of such products will decrease. The Company believes, however,
that it will not be materially adversely affected by such product cost
increases, given the Company's diminished reliance on such sales. There can be
no assurance, however, that the Company's operating results will not be
materially adversely affected. The agreement is terminable by either party for
any reason upon ninety days written notice, and may be terminated sooner under
certain conditions.
On May 17, 1996, simultaneously with the consummation of the sale of
462,512 shares of Series C Preferred Stock, the Company's direct pay line of
credit with AT&T Commercial Finance Corporation ("AT&T-CFC") was terminated and
its general line of credit with AT&T-CFC was increased to $2 million and has the
same financial covenants as the Company's previous line of credit with AT&T-CFC.
Such general line of credit expires on May 1, 1997 and may be renewed on such
date. In 1996, the Company relied on extended payment terms from AT&T- CFC for
7.5% of its inventory acquisitions, the majority of which were purchases from
NCR. In 1995 and 1994, purchases from such vendor represented 37% and 45%,
respectively, of the Company's inventory purchases. The year ended December 31,
1996 was a transitional year for the Company during which 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. The Company's obligations
under the agreement with AT&T-CFC are collateralized by substantially all of
the assets of the Company. As of December 31, 1995, the Company was in default
with respect to its net worth covenant of $5.5 million. On May 6, 1996,
AT&T-CFC waived such default through June 30, 1996. Effective with the Series C
Preferred Stock placement, the Company's net worth satisfied such net worth
covenant. As of December 31, 1996 and 1995, the Company owed approximately
$64,000 and $1.3 million, respectively, under this credit line, and available
credit under such line towards future inventory purchases of floor plan
products was $1.9 million and $4.2 million at December 31, 1996 and 1995,
respectively. The Company is in negotiations with AT&T-CFC to provide
additional financing through December 31, 1997. There can be no assurance,
however, that any agreement between the Company and AT&T-CFC will be reached,
or if reached, will be on terms favorable to the Company.
The foregoing statements are summaries of the provisions of the
Company's agreements with Unisys, Fidelity, NCR and AT&T-CFC which are
incorporated by reference as exhibits to this Annual Report on Form 10-K. The
foregoing summaries are qualified in their entirety by reference to such
agreements.
RESEARCH AND DEVELOPMENT
The Company participates in an industry that is subject to rapid
technological changes, and its ability to remain competitive depends on, among
other things, its ability to anticipate such changes. As a result, the Company
has devoted substantial resources to product development. The Company's research
and development expenditures were $1,466,000 in 1996, $1,303,000 in 1995, and
$1,952,000 in 1994, of which $438,762, $180,000, and $974,000 respectively, were
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capitalized in accordance with Financial Accounting Standards Board SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. The Company also intends to continue to participate in and monitor the
activities of the RAID Advisory Board.
A substantial portion of the Company's research and development
expenditures in 1996 were devoted to the continued development of its Synchronix
family of products. Synchronix is ECCS' next generation high-availability
controller and subsystem. Synchronix features a high-performance, fault tolerant
architecture to satisfy large-scale, mission-critical applications for the Open
Systems computing environment. To a lesser extent, research and development
expenditures in 1996 related to feature upgrades and advanced engineering of
ECCS' other current product lines.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Proprietary protection for the Company's technological know-how,
products and product candidates is important to its business. The Company relies
upon trade secrets, know-how and continuing technological innovation to develop
and maintain its competitive position. The Company also relies on a combination
of copyright and trade secret protection and non-disclosure agreements to
establish and protect its proprietary rights. The Company has filed numerous
patent applications covering various aspects of its Synchronix product family.
There can be no assurance that patents will issue from any applications or, if
patents do issue, that any claims allowed will be sufficiently broad to prohibit
others from marketing similar products. In addition, there can be no assurance
that any patents that may be issued to the Company, or which the Company may
license from third parties, will not be challenged, invalidated or circumvented,
or that any rights granted thereunder will provide proprietary protection to the
Company. Although the Company continues to implement protective measures and
intends to defend its proprietary rights, policing unauthorized use of the
Company's technology or products is difficult and there can be no assurance that
these measures will be successful.
Although management believes that patents will provide some
competitive advantage, the Company's success is dependent to a great extent on
its proprietary knowledge, innovative skills, technical expertise and marketing
ability. Because of rapidly changing technology, the Company's present intention
is not to rely primarily on patents or other intellectual property rights to
protect or establish its market position.
The Company has registered trademarks for RAID 10 PERFORMANCE
MANAGER, INTELLIGENT REBUILD, SPLIT MIRROR, EXAMODULE, SYNCHRONIX, INVERSE
MIRRORING, SYNCHRONISM, SYNCHRONECTION, SPLIT VOLUME and EASY BACKUP. All other
tradenames referenced are the servicemarks, trademarks or registered tradenames
of their respective companies or organizations.
Since 1989, the Company has required that all new employees,
consultants and contractors execute non-disclosure agreements as a condition of
employment or engagement by the Company. There can be no assurance, however,
that the Company can limit unauthorized or wrongful disclosures of unpatented
trade secret information.
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EMPLOYEES
As of January 31, 1997, the Company employed 79 persons, of whom 19
were engaged in marketing and sales; 16 were engaged in research and
development; 25 were engaged in operations, including customer and technical
support, manufacturing and fulfillment; and 19 were engaged in finance,
administration and management. None of the Company's employees are covered by
collective bargaining agreements. The Company believes that it has been highly
successful in attracting skilled and experienced personnel; however, competition
for such personnel is intensive. The Company's future success will depend in
part on its ability to continue to attract, retain and motivate highly qualified
technical, manufacturing, marketing and management personnel. The Company
considers relations with its employees to be excellent.
ITEM 2. PROPERTIES.
The Company's real property consisting of office and warehouse space
in Romeoville, Illinois was sold on March 19, 1996 for $855,000, with net cash
proceeds to the Company of approximately $270,000. Such property was held as
investment property. See "Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital
Resources."
The Company leases facilities in Tinton Falls, New Jersey totaling
38,000 square feet. One lease covers 28,000 square feet and expires on December
31, 2000. Such lease contains a renewal option for an additional four-year term.
A second lease covers 10,000 square feet and expires on March 31, 1998, with an
option for an additional 33 months. The leased space in New Jersey is used for
research and development, manufacturing, quality assurance, a substantial
portion of sales and marketing and administration. The Company also leases
offices in Aventura, Florida; Alpharetta, Georgia; Herndon, Virginia; and San
Jose, California.
ITEM 3. LEGAL PROCEEDINGS.
There are no individual material litigation matters pending to
which the Company is a party or to which any of its property is subject.
On March 23, 1993, the Company was served with a complaint in which
a terminated employee of the Company, alleges that the Company and its former
President and Chief Executive Officer, fraudulently induced such employee to
join the Company; negligently misrepresented the Company, its products and
markets and the position offered to such former employee; and breached a
covenant of good faith and fair dealing. The action was brought in Superior
Court of New Jersey, Monmouth County, Law Division. The plaintiff seeks an
unspecified amount of damages, including punitive damages and the costs of suit.
The Company denies the allegations made and believes that such former employee
does not have any basis for any claims against the Company. The Company intends
to defend vigorously the action. The Company does not believe that the action is
material.
On July 10, 1995, the Company filed a complaint in the Maricopia
County Superior Court, in Phoenix, Arizona, seeking monetary damages against a
customer for non-payment of
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<PAGE> 24
invoices relating to products shipped by the Company in the first quarter of
1995. On August 11, 1995, such customer filed a counterclaim against the Company
alleging breach of contract. The Company intends to deny the allegations made
and to defend vigorously the action. The Company does not believe that the
outcome of the action will be material.
On or about April 27, 1996, the Company was served with a complaint
filed in the Superior Court of New Jersey, Law Division, Monmouth County. The
action arose out of a motor vehicle accident between an employee of the Company,
who was returning to his home from his job at the Company, and the plaintiff in
the action. The plaintiff sought unspecified damages and alleged negligence on
the part of the Company arising from the Company's alleged actions requiring
such employee to work an excessive number of hours, allegedly causing such
employee to fall asleep while driving. The Company denied the allegations and
defended vigorously the action. On October 17, 1996, the Company received notice
from the Superior Court that the complaint filed against the Company had been
dismissed with prejudice.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE> 25
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to June, 1993, there was no established market for the
Company's Common Stock. The Common Stock was listed on the Nasdaq National
Market (the "National Market") from June 14, 1993, when the Company conducted
its initial public offering, until May 29, 1996, on which date the Nasdaq Stock
Market, Inc. ("Nasdaq") delisted the Company's Common Stock from the National
Market. Effective May 29, 1996, the Common Stock of the Company was listed on
the Nasdaq SmallCap Market (the "SmallCap Market"). Such delisting from the
National Market occurred as a result of Nasdaq's denial of the Company's request
for exceptions to Nasdaq's net tangible assets and shareholder approval
requirements in connection with the Company's issuance of shares of Series C
Cumulative Convertible Preferred Stock in May 1996. The Company's Common Stock
is listed under the symbol "ECCS".
The following table sets forth, for each of the quarters since the
quarter ended March 31, 1995, the high and low sales prices per share of Common
Stock as reported by the National Market for each of the quarters ended March
31, 1995 through March 31, 1996 and as reported by the SmallCap Market for each
of the quarters ended June 30, 1996 through December 31, 1996. The prices shown
represent quotations among securities dealers, do not include retail markups,
markdowns or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
National Market: Quarter Ended High Low
------------------------------ ---- ---
<S> <C> <C>
March 31, 1995 2.625 0.69
June 30, 1995 3.25 1.63
September 30, 1995 5.50 2.25
December 31, 1995 4.50 1.50
March 31, 1996 3.25 1.75
SmallCap Market: Quarter Ended High Low
------------------------------ ---- ---
June 30, 1996 3.875 1.875
September 30, 1996 3.625 2.00
December 31, 1996 4.75 2.25
</TABLE>
As of January 31, 1997, the approximate number of holders of record
of the Common Stock was 99 and the approximate number of beneficial holders of
Common Stock was 664.
The Company has never declared or paid dividends on its Common
Stock. The Company intends to retain any earnings to fund future growth and the
operation of its business and, therefore, does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future.
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<PAGE> 26
The following information relates to all securities of the Company
sold by the Company within the past year which were not registered under the
Act and which were not previously included in a Quarterly Report on Form 10-Q:
1. On each of March 18, 1996, April 18, 1996 and July 2,
1996, the Company issued 17,609, 19,587 and 14,573
shares of restricted Common Stock, respectively, to an
officer of the Company in lieu of salary for a
purchase price of $1.51, $1.36 and $1.60 per share,
respectively, representing aggregate consideration of
$76,658.41.
2. On November 18, 1996, the Company issued 25,000 shares
of restricted Common Stock to an officer of the Company
as incentive compensation. The aggregate value of such
shares was $30,500.00.
3. The Company from time to time has granted stock options
outside of the Company's registered stock option plans
to certain officers. The following table sets forth
certain information regarding such grants in 1996:
<TABLE>
<CAPTION>
NUMBER RANGE OF
OF SHARES EXERCISE PRICES
--------- ---------------
<S> <C>
100,000 $2.875-$4.50
</TABLE>
4. The Company from time to time has issued stock to
employees, directors and consultants pursuant to the
exercise of stock options that were granted outside of
the Company's registered stock option plans. The
following table sets forth certain information regarding
such exercises in 1996:
<TABLE>
<CAPTION>
NUMBER
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C>
10,250 $2.13
</TABLE>
No underwriter was employed by the Company in connection with the
issuance and sale of the securities described above. The Company believes that
the issuance and sale of all of the foregoing securities were exempt from
registration under either (i) Section 4(2) of the Act as transactions not
involving any public offering, or (ii) Rule 701 under the Act as transactions
made pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation. Appropriate legends were affixed to the stock
certificates issued in such transactions. All recipients had adequate access to
information about the Company.
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<PAGE> 27
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data for the five years ended
December 31, 1996 have been derived from the audited financial statements of the
Company. The selected consolidated financial data set forth below should be read
in conjunction with the Company's audited consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994(1) 1993(2) 1992(2)
---- ---- ------- ------- -------
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales ..................................... $ 22,604 $ 31,174 $ 42,738 $51,574 $43,483
Cost of sales .............................. 15,165 23,256 36,563 38,144 33,457
-------- -------- -------- ------- -------
Gross profit .................................. 7,439 7,918 6,175 13,430 10,026
Selling, general and administrative expenses 6,907 9,967 12,415 10,444 6,735
Research and development expenses .......... 1,027 1,123 978 758 552
-------- -------- -------- ------- -------
Operating income (loss) ....................... (495) (3,172) (7,218) 2,228 2,739
Net interest expense ....................... 274 487 764 586 236
-------- -------- -------- ------- -------
Income (loss) from operations before provision
for income taxes ........................... (769) (3,659) (7,982) 1,642 2,503
Provision (benefit) for income taxes ....... -- -- (1,192) 531 972
-------- -------- -------- ------- -------
Net income (loss) ............................. $ (769) $ (3,659) $ (6,790) $ 1,111 $ 1,531
======== ======== ======== ======= =======
Net income (loss) per share:
Primary .................................... $ (0.23) $ (0.88) $ (1.63) $ 0.32 $ 0.64
Fully diluted(3) ........................... $ -- $ -- $-- $ 0.30 0.52
Weighted average common shares outstanding
and equivalents used for per share data .... 4,346 4,232 4,160 3,666 2,939
BALANCE SHEET DATA:
Working capital ............................... $ 4,280 $ 1,134 $ 2,932 $10,115 $ 3,281
Total assets .................................. 14,552 12,435 21,507 33,948 20,095
Loans payable ................................. 1,762 1,849 4,089 4,803 3,693
Long-term obligations under capital leases .... 8 50 121 78 83
Mortgage payable .............................. -- -- 503 515 --
Redeemable convertible preferred stock ........ -- -- -- -- 1,500
Series B cumulative redeemable convertible
preferred stock ............................ -- 1,794 -- -- --
Shareholders' equity .......................... 6,177 2,122 5,673 12,373 2,483
</TABLE>
--------
(1) Includes $380,000 related to the write-down of certain capitalized
software, $374,000 related to employee termination costs and $3,500,000 of
inventory adjustments.
(2) Certain prior year balances have been reclassified to conform to the 1996,
1995 and 1994 presentation.
(3) After giving effect to the conversion of all outstanding Preferred Stock
into an aggregate of 750,000 shares of Common Stock.
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<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
OVERVIEW
The Company traditionally has generated revenue as a value added
reseller ("VAR") and integrator of third party products. The Company became a
charter AT&T value added reseller and began providing systems integration
services in 1984, and in 1986 began making additional sales through other
resellers. In 1989, the Company acquired a computer reseller located in the
Midwest that allowed the Company to expand its operations geographically and
broaden its customer base and provided the Company with expanded purchasing
power with suppliers. The Company made a strategic decision in 1990 to
concentrate on direct sales to and systems integration for large end users in
what it then classified as the communications, federal and commercial markets,
and to curtail sales to small corporate customers and small resellers. The year
ended December 31, 1996 was a transitional year for the Company, during which
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. Since
the Company believes that its proprietary mass storage enhancement products are
applicable to markets broader than the markets currently accessed by the
Company's direct sales force, ECCS has commenced selling these products through
alternate channel partners.
The Company began offering its own mass storage enhancement products
in the late 1980s primarily as part of its systems integration activities. Sales
of the Company's proprietary systems, which historically have had higher gross
margins than reseller activities, represented 80% of net sales and 91.4% of
gross profit in 1996. In October 1992, the Company commenced sales and shipments
of its initial RAID products and technology. In connection with the Company's
transition in 1996, the Company devoted substantial product development efforts
during 1995 and 1996 to make available its Synchronix family of solutions which
currently includes varying offerings of the Synchronix Storage Management
Subsystem. 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 products, 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 these categories, the Company further distinguishes revenues
generated by sales to alternate channels, of which 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 prime
contractor Hughes Data Systems were significant, given the substantial
percentage of revenues generated by each. The Company believes the analysis
provided by such new breakdown provides a more meaningful and relevant analysis
of the Company's operations as they are now structured. The Company intends to
continue to
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<PAGE> 29
supplement its current storage products and systems with additional offerings,
including new RAID products and technology.
The following table sets forth for the periods indicated certain
financial data as a percentage of net sales.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales ................................... 100.0% 100.0% 100.0%
Cost of sales ............................ 67.1 74.6 85.6
----- ----- -----
Gross profit ................................ 32.9 25.4 14.4
Selling, general & administrative expenses 30.6 32.0 29.0
Research & development expenses .......... 4.5 3.6 2.3
----- ----- -----
Operating loss .............................. (2.2) (10.2) (16.9)
Net interest expense ..................... 1.2 1.5 1.8
----- ----- -----
Loss before benefit for income taxes ........ (3.4) (11.7) (18.7)
Benefit for income taxes ................. -- -- (2.8)
----- ----- -----
Net loss .................................... (3.4)% (11.7)% (15.9)%
===== ===== =====
</TABLE>
Net Sales
The following table sets forth, for the periods indicated, the
percentage of net sales derived from each of the product groupings the Company
now uses to analyze sales and revenue:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
ECCS mass storage enhancement products (including all ECCS proprietary products
and certain third party component products) ................................... 80.0% 44.9% 36.0%
Value added resales ........................................................... 8.3% 40.0% 51.7%
Services and other revenues ................................................... 11.7% 15.1% 12.3%
</TABLE>
The following table sets forth, for the periods indicated, the
percentage of net sales derived from each of those categories previously
evaluated as relevant to the Company's strategic direction:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Communications sector 14% 51% 70%
Commercial sector ... 56% 28% 23%
Federal sector ...... 30% 21% 7%
</TABLE>
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<PAGE> 30
Prior to the Company's transition in 1996, a significant majority of
OEM sector sales were included in sales to the commercial sector. Such OEM sales
accounted for 38%, 8% and 3% of net sales for the years 1996, 1995 and 1994,
respectively.
The majority of sales previously designated as communication sector
sales were sales to AT&T. The Company believes any remaining sales which would
have been classified in either the communications or commercial sectors are now
more appropriately monitored as either (i) sales of mass storage enhancement
products, 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
revenues.
Net sales decreased by $8,570,000, or 27.5%, in 1996 and decreased
by $11,564,000, or 27.1%, in 1995 as compared to net sales in the respective
preceding years. The decrease in 1996 resulted primarily from a decrease of
value added resales to $1,865,000 or 8.3% of sales in 1996, from $12,487,000 or
40.1% of sales in 1995. Such decrease reflects the continued decline in revenues
from the Company's historic positioning as a value added reseller and integrator
of third party products. The Company experienced continued declines in sales to
AT&T business units and substantial reductions in system orders and shipments
which incorporated NCR products. Such declines were, in part, offset by
increases in sales of the Company's proprietary mass storage systems, including
sales to both Federal customers and through relationships with OEMs, such as
Unisys. The decrease in 1995, from 1994, resulted from a decrease in
communications sector sales of $13,984,000, resulting primarily from decreased
sales to multiple AT&T business units, and a decrease in commercial sector sales
of $1,174,000 offset, in part, by an increase in Federal sector sales of
$3,594,000. The Company's prior classification of communications sales included,
primarily, those sales to multiple AT&T business units and sales of NCR
products.
Sales of the Company's proprietary mass storage enhancement systems
accounted for 80%, 45% and 36% of net sales in 1996, 1995 and 1994,
respectively. Sales by the Company in its capacity as a value added reseller
accounted for 8%, 40% and 52% of net sales in 1996, 1995 and 1994, respectively.
Services and other revenues accounted for 12%, 15% and 12% of net sales in 1996,
1995 and 1994, respectively. The year to year percentage increases in sales by
the Company of its proprietary systems, as well as the year to year percentage
decreases in sales by the Company in its 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 providing
its own proprietary mass storage enhancement systems including storage
subsystems.
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. In
connection with the Company's transition in 1996, the Company devoted
substantial product development efforts during 1996 to make its Synchronix
family of products commercially available. The Company commenced shipping to
end-users the initial version of this product family in the first quarter of
1996. In connection with its transition,
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<PAGE> 31
the Company derived the majority of its 1996 revenues in approximately equal
proportions from sales of its Synchronix family of products and, as a group,
sales of all other proprietary systems. A substantial portion of the Company's
sales of its Synchronix products were derived from one OEM customer in 1996,
while a substantial portion of sales of all other proprietary systems were
derived from sales to parties who sell to Federal government customers.
Sales to alternate channel partners accounted for approximately 38%,
8% and 3% of net sales in 1996, 1995, and 1994, respectively. 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.
Sales to the Company's primary alternate channel partner, Unisys,
accounted for 30% of the Company's net sales in 1996. All sales to Unisys, which
began in 1996, were sales of mass storage enhancement products. Effective May 1,
1995, the Company entered into an OEM agreement with Unisys. Such agreement, as
subsequently amended, grants to Unisys exclusive world-wide rights to sell and
distribute certain of the Company's proprietary products, and a non-exclusive
world-wide right to sell and distribute certain other products. The agreement
provides that product pricing shall remain in effect throughout the term of the
agreement unless market conditions dictate that the Company should provide more
favorable pricing terms to Unisys. The agreement is for an initial five year
term beginning May 1, 1995 and Unisys has the right to extend such term for
successive one year periods upon appropriate written notice. The agreement may
be terminated under certain conditions and Unisys may, subject to certain
conditions, terminate the agreement in the event that the Company fails to
timely perform its delivery obligations under the agreement. While the Company
has an OEM agreement with Unisys that defines the terms of the sales and
support services provided thereunder, this agreement does not include specific
quantity commitments. 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
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<PAGE> 32
cancellation or rescheduling of orders already placed, would materially and
adversely affect the Company's business, financial condition and operating
results.
Federal systems entity sales, which are comprised of sales into the
Federal government, represented 30%, 21%, and 7% of net sales in 1996, 1995, and
1994, respectively. As previously reported, during 1996 the Company became a
subcontractor to a prime contractor, Hughes Data Systems, which was awarded a
United States Air Force Workstation Contract, along with Sun Microsystems, Inc.
Sales pursuant to this arrangement totaled $3.7 million in 1996 or 16% of sales.
There are no minimum purchase requirements. There can be no assurance that any
of the Company's options will be selected in the future or that the contract
will not be prematurely terminated.
The United States Air Force, an end user of the Company's products
which purchases such products through Hughes Data Systems and other government
contractors, purchased $5.7 million of products, or 25% and 84% of the Company's
net sales, and sales into federal systems, respectively, in 1996.
In 1996, 1995 and 1994, purchases by multiple AT&T business units
represented 14%, 51% and 65%, respectively of all purchases from the Company.
All such sales by the Company to AT&T were made on an individual purchase order
basis and, therefore, there were and are no ongoing written commitments by AT&T
to purchase from the Company. The Company historically sold its mass storage
enhancement systems and provided systems integration services to AT&T, and,
acting as a value added reseller of NCR products, sold NCR computer hardware
systems to multiple AT&T business units for either their own use as an end user
or for resale by such business units to third parties.
Effective December 2, 1996, the Company executed a Value Added
Reseller Agreement with NCR pursuant to which the Company is an authorized VAR
of NCR products and, subject to certain agreed upon terms and conditions, may
purchase NCR products for resale in the United States at a discounted price as
determined by NCR, and subject to change at any time. There are no minimum
purchase requirements under the agreement. The agreement does require, however,
an obligation by the Company to use its best efforts to achieve an agreed upon
sales target. The Company does not believe that it will achieve the sales target
set for 1997, and, accordingly, the cost to the Company of acquiring products
from NCR under this agreement in the future will increase, and the Company's
margin on sales of such products will decrease. The Company believes, however,
that it will not be materially adversely affected by such product cost
increases, given the Company's diminished reliance on such sales. There can be
no assurance, however, that the Company's operating results will not be
materially adversely affected. The agreement is terminable by either party for
any reason upon ninety days written notice, and may be terminated sooner under
certain conditions. The Company has, in 1996, 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. There can be no assurance, however, that such
transition will successfully replace the revenue and profit margin previously
derived from sales to AT&T and from sales of NCR products, or otherwise increase
revenues or profit margins.
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<PAGE> 33
Gross Profit
The Company's cost of sales includes primarily the cost of the
Company's own and other vendors' products and systems. The Company's gross
profit decreased by $479,000 or 6.1% in 1996, and increased by $1,743,000 or
28.2% in 1995 as compared to the gross profit earned in the respective preceding
year. The decrease in 1996 resulted from a decrease in net sales, offset by
higher gross margins due to a favorable change in product mix. The favorable
change in product mix is primarily due to increased sales of the Company's own
proprietary systems which typically have higher gross margins. The increase in
1995 resulted from an increased gross margin percentage on a decreased sales
volume. The Company's gross margin percentage increased to 32.9% in 1996 as
compared to 25.4% in 1995 as a result of an increase in sales of the Company's
proprietary products and the higher gross margins associated with these
products.
Operating Expenses
Selling, general and administrative expenses consist primarily of
salaries, commissions, bonuses and related employee benefits, payroll taxes and
other administrative and overhead costs. Selling, general and administrative
expenses decreased over $3 million from 1995 levels, and, as a percentage of net
sales, to 30.6% in 1996, a decrease of 1.4 percentage points from the prior
year. This decrease is mainly attributable to a reduction in commissions due to
lower sales volume, in addition to management's efforts in controlling these
expenses. Salaries, commissions, bonuses and related employee benefits and
payroll taxes were the largest components of selling, general and administrative
expenses. During 1996 and 1995, the Company's staff was reduced by 8% and 13%,
respectively, largely through attrition.
Selling, general and administrative expenses increased as a
percentage of net sales in 1995 to 32% from 29% in the prior year. The increase
was due principally to lower than expected sales which were not sufficient to
support the Company's sales and marketing structure.
Research and development expenses consist primarily of the costs
associated with research and development personnel. In 1996, net research and
development expenses (after capitalized costs related to internally developed
software in accordance with SFAS No. 86) decreased by $96,000 or 8.5% from
$1,123,000 in 1995. In 1995, research and development expenses increased by
$145,000 or 14.8% from $978,000 in 1994. The Company has devoted considerable
resources to research and development over the past three years as the Company
continued to enhance its tape backup devices, focused on the development of its
RAID products and related mass storage technology and focused substantial
development activities on the Synchronix family of products. Research and
development expenses were a small percentage of the Company's total net sales
in 1996. Such expenses represented approximately 5.7% of the net sales of mass
storage enhancement products (8.1% including the amount capitalized in
accordance with SFAS No. 86). In 1995, such expenses represented approximately
8.0% of the net sales of mass storage enhancement products (9.3% including the
amount capitalized in accordance with SFAS No. 86).
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<PAGE> 34
Net Interest Expense
In 1996, net interest expense decreased by $213,000 or 43.7% from
$487,000 in 1995. The decrease was due principally to a combination of decreased
inventory carrying levels and an increase in interest income. Net interest
expense decreased in 1995 by $277,000 or 36.3% from $764,000 in 1994. The
decrease was due principally to decreased inventory carrying levels.
Provision (Benefit) for Income Taxes
The Company has accounted for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, for 1996, 1995 and 1994. The Company's effective tax rate (benefit) was
(14.9%) in 1994. No benefit was recorded for the losses incurred in 1996 or
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $4.3 million, $1.1 million and
$2.9 million at December 31, 1996, 1995 and 1994, 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 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. The weighted average interest
rate on such line in 1996 was 11.54%. In addition, the agreement requires a
commitment fee of 0.5% of the total available financing amount, payable annually
on each anniversary date of the agreement. The financing facility agreement is
for a period of three years beginning March 28, 1995 and the obligations under
such agreement are collateralized by substantially all of the assets of the
Company. The 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. The outstanding balance for the line of
credit at December 31, 1996 and 1995 was approximately $1,800,000 each year.
Available borrowings from the Company's accounts receivable line of credit were
$926,000 at December 31, 1996.
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 expires on May 1, 1997 and
may be renewed on such date. The Company relied on extended payment terms from
AT&T-CFC for 7.5% and 37% of its inventory acquisitions in 1996 and 1995,
respectively, the majority of which were purchases from NCR. In 1995 and 1994,
purchases from such vendor represented 37% and 45%, respectively, of the
Company's inventory purchases. The year ended December 31, 1996 was a
transitional year for the Company during which the Company shifted its primary
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<PAGE> 35
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. The Company's obligations under the
agreement with AT&T-CFC are collateralized by substantially all of the assets of
the Company. As of December 31, 1995, the Company was in default with respect to
its net worth covenant of $5.5 million. On May 6, 1996, AT&T-CFC waived such
default through June 30, 1996. Effective with the Series C Preferred Stock
placement, the Company's net worth satisfied such net worth covenant. As of
December 31, 1996 and 1995, the Company owed approximately $64,000 and $1.3
million, respectively, under this credit line, and available credit under such
line towards future inventory purchases of floor plan products was $1.9 million
and $4.2 million at December 31, 1996 and 1995, respectively. The Company is in
negotiations with AT&T-CFC to provide additional financing through December 31,
1997. There can be no assurance, however, that any agreement between the Company
and AT&T-CFC will be reached, or if reached, will be on terms favorable to the
Company.
The Company previously had entered into an agreement with NCR,
pursuant to which NCR agreed to supply product directly to the Company under
either a consignment or agency relationship, at the discretion of NCR, if
AT&T-CFC ceased to provide inventory financing to the Company for any reason
other than the failure of the Company to make timely payments. The Company did
not use or renew these arrangements in 1996. The Company does not believe that
the loss of this prior arrangement has had or will have a material adverse
effect on the Company's ability to obtain inventory.
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 May 19, 1995, the Company consummated a private placement of 6%
Cumulative Redeemable Convertible Preferred Stock, Series B (the "Series B
Preferred Stock") pursuant to which the Company issued and sold to certain
investors 1,600,000 shares of Series B Preferred Stock at a price per share of
$1.25. On May 17, 1996, the Series B Preferred Stock was amended to delete the
mandatory and optional redemption provisions contained therein. As a result of
the deletion of the mandatory and optional redemption provisions, the Series B
Preferred Stock was reclassified to equity in the Balance Sheet.
Also on May 17, 1996, 500,000 shares of the Company's Preferred
Stock were designated as Cumulative Convertible Preferred Stock, Series C
("Series C Preferred Stock"). Of such shares, 462,512 were issued into escrow on
May 17, 1996 at a price per share of $6.00. Dividends with respect to such
shares are calculated based on $0.09 per share per quarter and accumulate if not
declared and paid. Interest of 6% per annum accrues on any unpaid dividends. At
any time, the Series C Preferred Stockholders 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, as such conversion ratio may
be adjusted from time to time (see below). However, upon the consummation of a
public offering that meets certain terms, as defined, the Series C Preferred
Stock will automatically convert. The Company has reserved 2,000,000 shares of
Common Stock for the conversion of the outstanding Series C Preferred Stock. The
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<PAGE> 36
462,512 shares of Series C Preferred Stock and the proceeds thereof were
released from escrow on May 25, 1996 upon satisfaction of all applicable
conditions to release, after denial by Nasdaq of the Company's request for
exceptions to Nasdaq's net tangible assets and the shareholder approval
requirements. The issuance of such shares of Series C Preferred Stock without
exceptions to such requirements constituted a breach of the Company's listing
agreement with Nasdaq. Consequently, the Company was delisted from the National
Market and is now listed on the SmallCap Market. The Company's Board of
Directors had determined that the issuance of the shares of Series C Preferred
Stock without shareholder approval was necessary for the continued financial
viability of the Company.
On May 30, 1996, the Company issued directly to certain investors
the remaining 37,488 shares of Series C Preferred Stock at a price of $6.00 per
share. In connection with the issuance of the Series C Preferred Stock and
pursuant to the anti-dilution provisions of the Series B Preferred Stock, the
conversion ratio of the Series B Preferred Stock was adjusted. As a result, the
Series B Preferred Stock is currently convertible into approximately 1,770,590
shares of Common Stock. The Company has reserved 1,770,590 shares of Common
Stock for the conversion of outstanding Series B Preferred Stock. 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.
On July 20, 1993, the Company entered into a mortgage agreement
bearing 8% interest with a bank for the principal amount of $529,250,
collateralized by property located in Romeoville, Illinois. On March 19, 1996,
the Company sold such property for gross proceeds of $855,000 and used a portion
of such proceeds to repay the mortgage, in full.
The Company has a net operating loss carryover for Federal income
tax purposes of approximately $8,300,000, which will expire in 2009. The Company
also has research and development tax credit carryovers for Federal income tax
purposes of approximately $122,000 which will begin to expire in 2009. In
addition, the Company has alternative minimum tax credits of approximately
$53,000. These credits can be carried forward indefinitely. The Company has
experienced a change in ownership in 1995 as defined by Section 382 of the
Internal Revenue Code. Accordingly, future use of these NOLs and income tax
credits may be limited.
Under SFAS No. 109, a valuation allowance is established, if based
on the weight of available evidence, it is more likely than not that a portion
of the deferred tax asset will not be realized. Accordingly, a full valuation
allowance has been provided to off-set the Company's net deferred tax assets.
On December 31, 1996, the Company's cash and cash equivalents
balance was approximately $4.4 million.
The Company invested $642,000, $318,000 and $603,000 in capital
equipment and leasehold improvements in 1996, 1995 and 1994, respectively. Of
such amounts, $78,000, $0 and $114,000 were funded through capital leases in
those respective years. Capital expenditures
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for 1997 are expected to be approximately $845,000 although such amounts are not
subject to formal commitment.
There are no other material commitments for capital expenditures
currently outstanding.
The Company believes that its existing available cash, credit
facilities and the cash flow expected to be generated from operations, will be
adequate to satisfy its current and planned operations for at least the next 12
months. The net cash provided by operating activities during 1996 was $693,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed pursuant to this Item
8 are appended to this Annual Report on Form 10-K. A list of the financial
statements filed herewith is found at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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<PAGE> 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for
election as directors and executive officers under the headings "Election of
Directors" and "Executive Officers" in the Company's definitive proxy statement
for the 1997 Annual Meeting of Stockholders is incorporated herein by reference
to such proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the
Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders
is incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for the 1997 Annual Meeting of Stockholders is incorporated herein by reference
to such proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1997 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
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<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements
and Schedule on Page F-1.
(a) (2) Financial Statement Schedule.
Reference is made to the Index to Financial Statements
and Schedule on Page F-1.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 42.
(b) Reports on Form 8-K.
None
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<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 this 27th
day of March, 1997.
ECCS, INC.
By: /s/Michael E. Faherty
------------------------------
Michael E. Faherty, Chairman of
the Board
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<PAGE> 41
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gregg M. Azcuy President, Chief Executive Officer March 27, 1997
- ---------------------------------- and Director (Principal Executive
Gregg M. Azcuy Officer)
/s/ Louis Altieri Vice President, Finance and March 27, 1997
- ---------------------------------- Administration (Principal Financial
Louis Altieri and Accounting Officer)
/s/ Michael E. Faherty Chairman of the Board and March 27, 1997
- ---------------------------------- Director
Michael E. Faherty
/s/ Gale R. Aguilar Director March 27, 1997
- ----------------------------------
Gale R. Aguilar
/s/ James K. Dutton Director March 27, 1997
- ----------------------------------
James K. Dutton
/s/ Donald E. Fowler Director March 27, 1997
- ----------------------------------
Donald E. Fowler
/s/ Frank R. Triolo Director March 27, 1997
- ----------------------------------
Frank R. Triolo
/s/ Thomas I. Unterberg Director March 27, 1997
- ----------------------------------
Thomas I. Unterberg
</TABLE>
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<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
--- ----------------------
<S> <C>
3.1 Restated and Amended Certificate of Incorporation of the
Company. (Incorporated by reference to the Company's
Registration Statement on Form S-1 (File Number 33-60986)
which became effective on June 14, 1993.)
3.2 Certificate of Amendment to the Restated and Amended
Certificate of Incorporation, as amended. (Incorporated by
reference to the Company's Current Report on Form 8-K filed
June 2, 1995.)
3.3 Certificate of Amendment to the Restated and Amended
Certificate of Incorporation, as amended. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the annual period ended December 31, 1995 filed on May 17,
1996.)
3.4 Certificate of Amendment to the Restated and Amended
Certificate of Incorporation, as amended. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the annual period ended December 31, 1995 filed on May 17,
1996.)
3.5 By-Laws of the Company, as amended. (Incorporated by
reference to the Company's Registration Statement on Form
S-1 (File Number 33-60986) which became effective on June
14, 1993.)
4.1* Stock Purchase Agreement dated May 9, 1989 by and among
the Company, Marbeth J. Shay, Joseph L. Shay and Edison
Venture Fund, L.P. (Incorporated by reference to the
Company's Registration Statement on Form S-1 (File Number
33-60986) which became effective on June 14, 1993.)
4.2 Warrant Certificate No. W-1 dated May 9, 1989 issued by
Joseph L. Shay in the name of Anthony J. Giglio and
Elizabeth A. Giglio, joint tenants, for warrants to
purchase 27,750 shares of Common Stock of the Company.
(Incorporated by reference to the Company's Registration
Statement on Form S-1 (File Number 33-60986) which became
effective on June 14, 1993.)
4.3 Warrant Certificate No. W-2 dated May 9, 1989 issued by
Joseph L. Shay in the name of Anthony J. Giglio, trustee
U/A dated 8/12/83 fbo Cynthia Giglio, for warrants to
purchase 5,250 shares of Common Stock of the Company.
(Incorporated by reference to the Company's Registration
Statement on Form S-1 (File Number 33-60986) which became
effective on June 14, 1993.)
</TABLE>
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<PAGE> 43
<TABLE>
<CAPTION>
<S> <C>
4.4 Warrant Certificate No. W-3 dated May 9, 1989 issued by
Joseph L. Shay in the name of Anthony J. Giglio, trustee
U/A dated 10/11/87 fbo Katherine Giglio, for warrants to
purchase 5,250 shares of Common Stock of the Company.
(Incorporated by reference to the Company's Registration
Statement on Form S-1 (File Number 33-60986) which became
effective on June 14, 1993.)
4.5 Warrant Certificate No. W-4 dated May 9, 1989 issued by
Joseph L. Shay in the name of Anthony J. Giglio, trustee
U/A dated 10/11/87 fbo Lisa Giglio, for warrants to
purchase 5,250 shares of Common Stock of the Company.
(Incorporated by reference to the Company's Registration
Statement on Form S-1 (File Number 33-60986) which became
effective on June 14, 1993.)
4.6 Warrant Certificate No. W-5 dated May 9, 1989 issued by
Joseph L. Shay in the name of Anthony J. Giglio, trustee
U/A dated 6/28/83 fbo Sharon Giglio, for warrants to
purchase 5,250 shares of Common Stock of the Company.
(Incorporated by reference the Company's Registration
Statement on Form S-1 (File Number 33-60986) which became
effective on June 14, 1993.)
4.7 Warrant Certificate No. W-6 dated May 9, 1989 issued by
Joseph L. Shay in the name of Miles Spencer for warrants to
purchase 26,250 shares of Common Stock of the Company.
(Incorporated by reference to the Company's Registration
Statement on Form S-1 (File Number 33-60986) which became
effective on June 14, 1993.)
4.8* The Stock Option Plan of the Company. (Incorporated by
reference to the Company's Registration Statement on Form
S-1 (File Number 33-60986) which became effective on June
14, 1993.)
4.9* Warrant issued to Michael E. Faherty to purchase 266,601
shares of Common Stock of the Company. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1995 filed on May
15, 1995.)
4.10* Form of Option Agreement, pursuant to which the Company
granted non-qualified stock options outside the Company's
Stock Option Plan. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1995 filed on May 15, 1995.)
4.11* Option issued to Gregg M. Azcuy to purchase 80,000 shares
of Common Stock of the Company. (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1995 filed on May 15,
1995.)
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
<S> <C>
4.12* 1996 Stock Plan of the Company. (Incorporated by reference
to the Company's Form S-8, Registration Statement under the
Securities Act of 1933 (File No. 333-15529) which became
effective on November 5, 1996.)
4.13* 1996 Non-Employee Directors Stock Option Plan of the
Company. (Incorporated by reference to the Company's Form
S-8, Registration Statement under the Securities Act of
1933 (File No. 333-15529) which became effective on
November 5, 1996.)
10.1 Form of Non-Competition and Non-Disclosure Agreement
executed by substantially all optionholders. (Incorporated
by reference to the Company's Registration Statement on
Form S-1 (File Number 33-60986) which became effective on
June 14, 1993.)
10.2 Form of Employee's Invention Assignment and Confidential
Information Agreement. (Incorporated by reference to the
Company's Registration Statement on Form S-1 (File Number
33-60986) which became effective on June 14, 1993.)
10.3 Lease Agreements between the Company and Philip J. Bowers &
Company dated September 20, 1988 and May 13, 1991 and
modified June 10, 1992 for the Company's Tinton Falls, New
Jersey Facilities. (Incorporated by reference to the
Company's Registration Statement on Form S-1 (File Number
33-60986) which became effective on June 14, 1993.)
10.4 Agreement for Wholesale Financing dated June 15, 1990 by
and between the Company and AT&T Commercial Finance
Corporation. (Incorporated by reference to the Company's
Registration Statement on Form S-1 (File Number 33-60986)
which became effective on June 14, 1993.)
10.5 INTENTIONALLY LEFT BLANK.
10.6 U.S. Indirect Value Added Reseller Agreement dated December
10, 1992 by and between SUN Microsystem Computer
Corporation and the Company. (Incorporated by reference to
the Company's Registration Statement on Form S-1 (File
Number 33-60986) which became effective on June 14, 1993.)
10.7* Indemnification Agreement as of October 1, 1993 by and
between the Company and Joseph L. Shay. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 filed on March 31, 1994.)
10.8* Indemnification Agreement as of October 1, 1993 by and
between the Company and Marbeth J. Shay. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 filed on March 31, 1994.)
</TABLE>
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<PAGE> 45
<TABLE>
<CAPTION>
<S> <C>
10.9* Indemnification Agreement as of October 1, 1993 by and
between the Company and Jay A. Disler. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 filed on March 31, 1994.)
10.10* Indemnification Agreement as of October 1, 1993 by and
between the Company and Anthony J. Giglio. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 filed on March 31, 1994.)
10.11* Indemnification Agreement as of October 1, 1993 by and
between the Company and Philip V. Piccione. (Incorporated
by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 filed on March 31,
1994.)
10.12* Indemnification Agreement as of October 1, 1993 by and
between the Company and Philip E. Blocker. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 filed on March 31, 1994.)
10.13* Indemnification Agreement as of October 1, 1993 by and
between the Company and Thomas J. Sliben. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 filed on March 31, 1994.)
10.14* Indemnification Agreement as of October 1, 1993 by and
between the Company and Robert J. Leibman. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 filed on March 31, 1994.)
10.15* Indemnification Agreement as of October 1, 1993 by and
between the Company and William A. Nazaret. (Incorporated
by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 filed on March 31,
1994.)
10.16* Indemnification Agreement as of October 1, 1993 by and
between the Company and Gustav H. Koven, III. (Incorporated
by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 filed on March 31,
1994.)
10.17* Indemnification Agreement as of October 1, 1993 by and
between the Company and Frank Pinto. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 filed on March 31, 1994.)
10.18 Systems Integrator Agreement dated December 16, 1993 by and
between the Company and AT&T GIS (now NCR). (Incorporated
by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 filed on March 31,
1994.)
</TABLE>
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<PAGE> 46
<TABLE>
<CAPTION>
<S> <C>
10.19* Indemnification Agreement as of August 22, 1994 by and
between the company and Michael R. Bruce. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended October 1, 1994 filed on
November 8, 1994.)
10.20* Indemnification Agreement as of August 22, 1994 by and
between the Company and James K. Dutton. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended October 1, 1994 filed on
November 8, 1994.)
10.21* Registration Agreement dated August 26, 1994 among the
Company, Joseph L. Shay and Marbeth J. Shay. (Incorporated
by reference to the Company's Current Report on Form 8-K
filed December 5, 1994.)
10.22* Severance Agreement dated November 29, 1994 by and
between the Company and Marbeth J. Shay, with exhibits.
(Incorporated by reference to the Company's Current Report
on Form 8-K filed December 5, 1994.)
10.23* Severance Agreement dated November 29, 1994 by and
between the Company and Joseph L. Shay, with exhibits.
(Incorporated by reference to the Company's Current Report
on Form 8-K filed December 5, 1994.)
10.24* Employment Agreement dated November 29, 1994 by and
between the Company and Michael Faherty, with exhibits.
(Incorporated by reference to the Company's Current Report
on Form 8-K filed December 5, 1994.)
10.25 Standstill Agreement made as of September 1, 1994 by and
between the Company and AT&T Commercial Finance
Corporation. (Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1994 filed on April 13, 1995.)
10.26 Lease Agreement, dated May 15, 1994 between the Company and
John Donato, Jr., d/b/a Mid Atlantic Industrial Co., with
Security Amendment and Subordination, Attornment and Non
Disturbance Agreement dated May 25, 1994 executed by the
Company, as lessee, John Donato, Jr., as mortgagor, and
Starbase II Partners, L.P., as mortgagee. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 filed on April 13, 1995.)
10.27* Indemnification Agreement as of March 1, 1995 by and
between the Company and Gale R. Aguilar. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 filed on April 13, 1995.)
</TABLE>
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<PAGE> 47
<TABLE>
<CAPTION>
<S> <C>
10.28* Separation Agreement dated June 1, 1994 by and between
the Company and Phillip E. Blocker. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 filed on April 13, 1995.)
10.29* Consulting Agreement dated August 16, 1994 by and between
the Company and William A. Nazaret, along with related
Consultant's Invention Assignment, Confidential Information
and Non-Competition Agreement. (Incorporated by reference
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 filed on April 13, 1995.)
10.30* Separation Agreement dated as of October 21, 1994 by and
between the Company and Philip Piccione, with exhibits.
(Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 filed on
April 13, 1995.)
10.31* Separation Agreement dated as of November 23, 1994 by and
between the Company and Jay A. Disler, with exhibits.
(Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 filed on
April 13, 1995.)
10.32* Settlement Agreement and General Release dated as of May
26, 1994 between the Company and Thomas J. Sliben.
(Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 filed on
April 13, 1995.)
10.33 Purchase and Sale Agreement dated as of March 27, 1995
between the Company and Fidelity Funding of California,
Inc. (Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994
filed on April 13, 1995.)
10.34 Letter from AT&T Global Information Solutions dated April
4, 1995 regarding consignment or agency relationship.
(Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994 filed on
April 13, 1995.)
10.35* Indemnification Agreement as of April 5, 1994 by and
between the Company and Gregg M. Azcuy. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 filed on April 13, 1995.)
10.36* Indemnification Agreement as of September 12, 1994 by and
between the Company and Louis J. Altieri. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 filed on April 13, 1995.)
</TABLE>
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<PAGE> 48
<TABLE>
<CAPTION>
<S> <C>
10.37* Indemnification Agreement as of December 6, 1994 by and
between the Company and Michael E. Faherty. (Incorporated
by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 filed on April 13,
1995.)
10.38 Agreement to Continue Financing made as of May 9, 1995 by
and between the Company and AT&T Commercial Finance
Corporation. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995 filed on May 15, 1995.)
10.39* Change in Control Severance Pay Agreement made as of
February 1, 1995 by and between the Company and Gregg M.
Azcuy. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995 filed on May 15, 1995.)
10.40* Change in Control Severance Pay Agreement made as of
February 1, 1995 by and between the Company and Robert J.
Leibman. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995 filed on May 15, 1995.)
10.41* Change in Control Severance Pay Agreement made as of
February 1, 1995 by and between the Company and Frank
Pinto, Jr. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995 filed on May 15, 1995.)
10.42* Change in Control Severance Pay Agreement made as of
February 1, 1995 by and between the Company and Louis J.
Altieri. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995 filed on May 15, 1995.)
10.43* Change in Control Severance Pay Agreement made as of
February 1, 1995 by and between the Company and Priyan
Guneratne. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995 filed on May 15, 1995.)
10.44* Change in Control Severance Pay Agreement made as of
February 1, 1995 by and between the Company and Mark Ish.
(Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 1995 filed on May 15, 1995.)
10.45* Change in Control Severance Pay Agreement made as of
February 1, 1995 by and between the Company and Thomas
Ricca. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1995 filed on May 15, 1995.)
</TABLE>
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<PAGE> 49
<TABLE>
<CAPTION>
<S> <C>
10.46 Series B Convertible Preferred Stock Purchase Agreement
made as of May 12, 1995 by and between the Company and the
investors set forth on the Schedule of Purchasers attached
thereto as Exhibit A, and related letter agreement dated as
of May 12, 1995. (Incorporated by reference to the
Company's Current Report on Form 8-K filed June 2, 1995.)
10.47 Agreement dated as of May 9, 1996 by and between the
Company and AT&T Commercial Finance Corporation.
(Incorporated by reference to the Company's Annual Report
on Form 10-K for the annual period ended December 31, 1995
filed on May 17, 1996.)
10.48 Series C Convertible Preferred Stock Purchase Agreement
made as of May 17, 1996 by and between the Company and the
investors set forth on the Schedule of Purchasers attached
thereto as Exhibit A. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the annual period
ended December 31, 1995 filed on May 17, 1996.)
10.49 Escrow Agreement dated May 17, 1996 between the Company and
Unterberg Harris. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the annual period
ended December 31, 1995 filed on May 17, 1996.)
10.50* Indemnification Agreement as of June 20, 1996 by and
between the Company and Thomas I. Unterberg. (Incorporated
by reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1996, filed on August 14,
1996.)
10.51* Indemnification Agreement as of June 20, 1996 by and
between the Company and Frank R. Triolo. (Incorporated by
reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1996, filed on August 14,
1996.)
10.52* Indemnification Agreement as of June 20, 1996 by and
between the Company and Donald E. Fowler. (Incorporated by
reference to the Company's Report on Form 10-Q for the
quarterly period ended June 30, 1996, filed on August 14,
1996.)
10.53* Indemnification Agreement as of July 8, 1996 by and between
the Company and David J. Boyle. (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996, filed on
November 14, 1996.)
10.54* Indemnification Agreement as of August 22, 1996 by and
between the Company and Priyan Guneratne.
</TABLE>
-49-
<PAGE> 50
<TABLE>
<CAPTION>
<S> <C>
10.55* 1995 Employee Stock Purchase Plan of the Company.
(Incorporated by reference to the Company's Form S-8,
Registration Statement under the Securities Act of 1933
(File No. 33-93480) which became effective on June 14,
1995.)
10.56 Manufacturing Services Agreement, dated June 15, 1995, by
and between the Company and Unisys Corporation.
10.57 Agreement dated August 13, 1996 by and between the Company
the Company and AT&T Capital Corporation.
11 Statement re: Computation of Per Share Earnings.
21 Listing of Subsidiaries.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule for the year ended December 31,
1996.
</TABLE>
- ---------------
* A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
-50-
<PAGE> 51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors........................................F-2
Consolidated Balance Sheets as of
December 31, 1996 and 1995.........................................F-3
Consolidated Statements of Operations for
each of the three years in the period ended
December 31, 1996..................................................F-4
Consolidated Statements of Shareholders'
Equity for each of the three years in
the period ended December 31, 1996.................................F-5
Consolidated Statements of Cash Flows
for each of the three years in the period
ended December 31, 1996............................................F-6
Notes to Consolidated Financial Statements............................F-7
Schedule II - Valuation and Qualifying Accounts.......................S-1
</TABLE>
Schedules other than those listed are omitted as they are not applicable, or the
required or equivalent information has been included in the financial statements
or notes thereto.
F-1
<PAGE> 52
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ECCS, Inc.
We have audited the accompanying consolidated balance sheets of
ECCS, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14 (a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of ECCS, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Princeton, New Jersey
February 25, 1997
F-2
<PAGE> 53
ECCS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ............................................................. $ 4,393 $ 1,514
Accounts receivable, less allowance for doubtful accounts of $184 in 1996 and $226
in 1995 ............................................................................. 3,162 2,767
Inventories ........................................................................... 4,680 4,854
Prepaid expenses and other receivables ................................................ 257 303
-------- --------
12,492 9,438
Property, plant and equipment (net) ..................................................... 1,190 1,311
Investment in real estate (net) ......................................................... -- 714
Capitalized software (net) .............................................................. 814 919
Other assets ............................................................................ 56 53
-------- --------
$ 14,552 $ 12,435
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Loans payable ......................................................................... $ 1,762 $ 1,849
Payable to AT&T Commercial ............................................................ 64 1,254
Current portion of mortgage payable ................................................... -- 502
Current portion of capital lease obligations .......................................... 91 78
Accounts payable ...................................................................... 4,061 1,440
Accrued expenses and other ............................................................ 986 1,841
Warranty .............................................................................. 414 350
Customer deposits, advances and other credits ......................................... 834 990
-------- --------
8,212 8,304
Capital lease obligations, net of current portion ....................................... 8 50
Deferred rent ........................................................................... 155 165
-------- --------
8,375 8,519
-------- --------
Series B cumulative redeemable convertible preferred stock, $.01 par value per
share, Authorized 3,000,000 shares; Issued and outstanding, 1,600,000 shares
at December 31, 1995 ................................................................. -- 16
Capital in excess of par value .......................................................... -- 1,778
-------- --------
-- 1,794
-------- --------
Shareholders' Equity:
Preferred stock, $.01 par value per share, Authorized, 3,000,000 shares; Series
B cumulative convertible preferred stock, Issued and outstanding, 1,600,000
shares at December 31, 1996 ......................................................... 16 --
Series C cumulative convertible preferred stock, Issued and outstanding, 500,000
shares at December 31, 1996 ......................................................... 5 --
Common stock, $.01 par value per share, Authorized, 20,000,000 shares; Issued and
outstanding, 4,432,216 shares and 4,277,975 shares at December 31, 1996 and
December 31, 1995, respectively ..................................................... 44 43
Capital in excess of par value - preferred ............................................ 4,522 --
Capital in excess of par value - common ............................................... 10,254 9,974
Retained earnings (deficit) ........................................................... (8,664) (7,895)
-------- --------
6,177 2,122
-------- --------
Total Liabilities and Shareholders' Equity ..................................... $ 14,552 $ 12,435
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 54
ECCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales ............................... $ 22,604 $ 31,174 $ 42,738
Cost of sales ........................... 15,165 23,256 36,563
-------- -------- --------
Gross profit ......................... 7,439 7,918 6,175
Operating expenses:
Sales, general & administrative ...... 6,907 9,967 12,415
Research & development ............... 1,027 1,123 978
-------- -------- --------
Operating loss .......................... (495) (3,172) (7,218)
Net interest expense ................. 274 487 764
-------- -------- --------
Loss before benefit for income taxes (769) (3,659) (7,982)
Benefit for income taxes ................ -- -- (1,192)
-------- -------- --------
Net loss ............................. $ (769) $ (3,659) $ (6,790)
======== ======== ========
Preferred dividends ..................... 248 79 --
-------- -------- --------
Loss applicable to common shares ........ $ (1,017) $ (3,738) $ (6,790)
======== ======== ========
Primary net loss per share .............. $ (0.23) $ (0.88) $ (1.63)
======== ======== ========
Weighted average common shares .......... 4,346 4,232 4,160
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 55
ECCS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Capital in Capital in Total
Excess of Excess of Retained Shareholders'
Shares Amount Par Value Shares Amount Par Value Earnings Equity
------ ------ --------- ------ ------ --------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994....... 4,126,250 $ 41 $ 9,778 $ 2,554 $12,373
Stock option exercises........ 90,100 1 89 90
Net loss......................... (6,790) (6,790)
--------- ----- ------- -------- -------
Balance at December 31, 1994..... 4,216,350 42 9,867 (4,236) 5,673
Issuance of stock and stock option
exercises...................... 61,625 1 107 108
Net loss......................... (3,659) (3,659)
--------- ----- ------- -------- -------
Balance at December 31, 1995..... 4,277,975 43 9,974 (7,895) 2,122
Reclassification of Series B
Convertible Preferred Stock.... 1,600,000 16 1,778 1,794
Issuance of Series C Convertible
Preferred Stock................ 500,000 5 2,744 2,749
Issuance of stock and stock option
exercises...................... 154,241 1 280 281
Net loss......................... (769) (769)
--------- ----- ------- --------- ----- ------- -------- -------
Balance at December 31, 1996..... 4,432,216 $ 44 $ 10,254 2,100,000 $ 21 $ 4,522 $ (8,664) $ 6,177
========= ===== ======== ========= ===== ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 56
ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $ (769) $ (3,659) $ (6,790)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization .......................................... 1,311 1,017 1,422
Gain on sale of Illinois property ...................................... (145) -- --
(Increase) decrease in accounts receivable ............................. (395) 5,249 3,619
Decrease in inventories ................................................ 174 1,734 9,657
(Increase) decrease in income taxes refunded ........................... -- 854 (854)
Decrease in prepaid expenses and other ................................. 43 535 1,683
(Decrease) in payable to AT&T Commercial ............................... (1,190) (2,547) (4,730)
Increase (decrease) in accounts payable, accrued
liabilities and other ............................................... 1,820 (2,446) (765)
Increase (decrease) in customer deposits ............................... (156) 49 537
-------- -------- --------
Net cash provided by operating activities .................................. 693 786 3,779
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ............................... (642) (318) (603)
Gross proceeds from sale of Illinois property ............................ 855 -- --
Additions to capitalized software ........................................ (439) (180) (974)
-------- -------- --------
Net cash used in investing activities ....................................... (226) (498) (1,577)
-------- -------- --------
Cash flows from financing activities:
Borrowings under revolving credit agreement .............................. 15,379 28,006 43,459
Repayments under revolving credit agreement .............................. (15,466) (30,246) (44,173)
Repayment of capital lease obligations ................................... (29) (94) (30)
Repayment of mortgage payable ............................................ (502) (12) (12)
Gross proceeds from issuance of preferred stock .......................... 3,000 2,000 --
Expenses for issuance of preferred stock ................................. (251) (206) --
Proceeds from exercise of employee stock options and
issuance of common stock ............................................ 281 108 90
-------- -------- --------
Net cash provided by (used in) financing activities ......................... 2,412 (444) (666)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........................ 2,879 (156) 1,536
Cash and cash equivalents at beginning of period ............................ 1,514 1,670 134
-------- -------- --------
Cash and cash equivalents at end of period .................................. $ 4,393 $ 1,514 $ 1,670
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................................... $ 422 $ 461 $ 764
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 57
ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 -- THE COMPANY
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.
The year ended December 31, 1996 was a transitional year for the
Company during which 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. ECCS currently focuses its marketing and sales efforts on corporate
end-user accounts, organizations selling to federal government customers and
alternate channel partners. The Company conducts sales and marketing from its
corporate headquarters in New Jersey and from its offices in Aventura, Florida;
Alpharetta, Georgia; Herndon, Virginia; and San Jose, California.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Reclassification
Certain prior year balances have been reclassified to conform to the
1996 presentation.
Cash and Cash Equivalents
The Company considers short-term investments with a maturity of
three months or less when purchased to be cash equivalents.
F-7
<PAGE> 58
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation and
amortization are provided on a 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.
Investment in Real Estate
In 1993, the Company purchased real estate, including a building and
land, in Romeoville, Illinois for $753,000. Depreciation on the building has
been recognized on a straight line basis over the estimated useful life of 31.5
years. On March 19, 1996, the Company sold such property for gross proceeds of
$855,000. These proceeds were used, in part, to pay off the mortgage in full.
Net cash proceeds to the Company, after repayment of the mortgage, were
approximately $270,000.
Software Development Costs
The Company capitalizes software development costs in accordance
with the Statement of Financial Accounting Standards ("SFAS") No. 86. Such costs
are capitalized after technological feasibility has been demonstrated. Such
capitalized amounts are amortized commencing with product introduction on a
straight-line basis utilizing the estimated economic life ranging from one to
three years. Amortization of capitalized software development is charged to cost
of sales and aggregated $544,000, $307,000 and $615,000 for 1996, 1995 and 1994,
respectively. Amortization of capitalized software development costs in 1995
includes approximately $13,000 related to the writedown of certain of such costs
to net realizable value. At December 31, 1996, the Company has capitalized
$2,013,000 of software development costs, of which $1,199,000 has been
amortized.
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.
F-8
<PAGE> 59
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Warranty
Estimated future warranty obligations related to ECCS products are
provided by charges to operations in the period the related revenue is
recognized.
Research and Development Costs
Research and development costs are expensed as incurred, except for
software development costs which are accounted for as noted above.
Income Taxes
Income taxes are accounted for by the liability method in accordance
with the provisions of SFAS No. 109 "Accounting for Income Taxes".
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
Per Share Information
Net 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 1996 and 1995, from redeemable convertible
preferred stock. To the extent common share equivalents are anti-dilutive, they
are not included in the calculation. Common share equivalents were anti-dilutive
for all periods presented.
F-9
<PAGE> 60
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statement and
accompanying notes. Actual results could differ from those estimates.
NOTE 3 -- TRANSACTIONS WITH SIGNIFICANT VENDORS AND CUSTOMERS
On June 27, 1995, the Company entered into a Manufacturing Services
Agreement with Unisys, its primary manufacturer, that defines the terms of sales
and support services. Pursuant to such agreement, Unisys will manufacture
certain of the Company's products for use in the Company's proprietary systems
as well as for the direct sale to end-users. The agreement does not contain
specific quantity commitments and purchases are made on a purchase order basis.
The agreement does not include any long-term commitment by the Company to
Unisys. The contract had an initial term of one year, and automatically renews
for successive one year periods. The contract was automatically renewed on June
27, 1996. Pricing and deliverables are to be negotiated each year. Either party
can terminate the agreement with written notice, provided, however, that if
Unisys cancels the agreement, it shall be obligated to continue accepting
manufacturing orders for a period of six months thereafter. In the event that
the Company terminates the agreement, the Company shall be liable for inventory
procured to fill the Company's orders. The Company primarily relies on regular
trade credit with open terms for the financing of purchases under this
agreement. The Company's purchases under this agreement totaled $4.3 million in
1996.
Sales to the Company's primary alternate channel partner, Unisys,
accounted for 30% of the Company's net sales in 1996. All sales to Unisys, which
began in 1996, were sales of mass storage enhancement products. Effective May 1,
1995, the Company entered into an OEM agreement with Unisys. Such agreement, as
subsequently amended, grants to Unisys exclusive world-wide rights to sell and
distribute certain of the Company's proprietary products, and a non-exclusive
world-wide right to sell and distribute certain other products. The agreement
provides that product pricing shall remain in effect throughout the term of the
agreement unless market conditions dictate that the Company should provide more
favorable pricing terms to Unisys. The agreement is for an initial five year
term beginning May 1, 1995 and Unisys has the right to extend such term for
successive one year periods upon appropriate written notice. The agreement may
be terminated under certain conditions and Unisys may, subject to certain
conditions, terminate the agreement in the event that the Company fails to
timely perform its delivery obligations under the agreement. While the Company
has an OEM agreement with Unisys that defines the terms of the sales and
support services provided thereunder, this agreement does not include specific
quantity commitments.
F-10
<PAGE> 61
NOTE 3 -- TRANSACTIONS WITH SIGNIFICANT VENDORS AND CUSTOMERS (CONTINUED)
Federal systems entity sales, which are comprised of sales into the
Federal government, represented 30%, 21%, and 7% of net sales in 1996, 1995, and
1994, respectively. As previously reported, during 1996 the Company became a
subcontractor to a prime contractor, Hughes Data Systems, which was awarded a
United States Air Force Workstation Contract, along with Sun Microsystems, Inc.
Sales pursuant to this arrangement totaled $3.7 million in 1996 or 16% of sales.
There are no minimum purchase requirements.
The United States Air Force, an end user of the Company's products
which purchases such products through Hughes Data Systems and other government
contractors, purchased $5.7 million of products, or 25% and 84% of the Company's
net sales, and sales into federal systems, respectively, in 1996.
In 1996, 1995 and 1994, purchases by multiple AT&T business units
represented 14%, 51% and 65%, respectively of all purchases from the Company.
All such sales by the Company to AT&T were made on an individual purchase order
basis and, therefore, there were and are no ongoing written commitments by AT&T
to purchase from the Company. The Company historically sold its mass storage
enhancement systems and provided systems integration services to AT&T, and,
acting as a value added reseller ("VAR") of NCR products, sold NCR computer
hardware systems to multiple AT&T business units for either their own use as an
end user or for resale by such business units to third parties.
In 1996, the Company purchased 7.5% of its inventory acquisitions
from NCR. In 1995 and 1994, purchases from such vendor represented 37% and 45%,
respectively, of the Company's inventory purchases.
The Company has a supply arrangement with Bell Microproducts
pursuant to which the Company orders from Bell Microproducts when, and as
needed, and on terms negotiated at the time of each such order. There are no
minimum purchase requirements. The arrangement is terminable by either party at
any time. 1996 purchases from Bell Microproducts totaled approximately $2.1
million or 12.7% of all purchases.
F-11
<PAGE> 62
NOTE 3 -- TRANSACTIONS WITH SIGNIFICANT VENDORS AND CUSTOMERS (CONTINUED)
Anthem Electronics, Inc. ("Anthem") is a significant vendor to the
Company. The Company's purchases from Anthem totaled $1.2 million, or 7.3% of
the Company's total purchases and $3.1 million or 12% of the Company's total
purchases in 1996 and 1995, respectively. Such purchases consisted primarily of
disk drives. The Company purchases from Anthem on an open account basis.
NOTE 4 -- INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
---- ----
<S> <C> <C>
Purchased parts ....................... $2,181 $2,538
Finished goods ........................ 3,280 3,129
------ ------
5,461 5,667
Less: inventory valuation reserve 781 813
------ ------
$4,680 $4,854
====== ======
</TABLE>
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
---- ----
<S> <C> <C>
Property ......................................................... $ 490 $ 498
Computer equipment ............................................... 3,018 2,409
Vehicles ......................................................... 47 47
Leasehold improvements ........................................... 350 350
Equipment under capital leases ................................... 367 368
------ ------
4,272 3,672
Less accumulated depreciation and amortization, including $346 and
$331 relating to equipment under capital leases for the years
ended December 31, 1996 and December 31, 1995, respectively ... 3,082 2,361
------ ------
$1,190 $1,311
====== ======
</TABLE>
NOTE 6 -- LOANS PAYABLE AND PAYABLE TO AT&T COMMERCIAL
On May 17, 1996, simultaneously with the consummation of the sale of
462,512 shares of Series C Preferred Stock, the Company's direct pay line of
credit with AT&T Commercial Finance Corporation ("AT&T-CFC") was terminated and
its general line of credit with AT&T-CFC was increased to $2 million and has
the same financial covenants as the Company's previous line of credit with
AT&T-CFC. Such general line of credit expires on May 1, 1997 and may be
renewed on such date. The Company relied on extended payment terms from
AT&T-CFC for 7.5% and 37% of its inventory acquisitions in 1996 and 1995,
respectively, the majority of which were purchases from NCR. In 1995 and 1994,
purchases from such vendor represented 37% and 45%, respectively, of the
Company's inventory purchases. The year ended December 31, 1996 was a
transitional year for the Company during which the Company shifted its primary
market position
F-12
<PAGE> 63
NOTE 6 -- LOANS PAYABLE AND PAYABLE TO AT&T COMMERCIAL (CONTINUED)
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. The Company's obligations under the agreement with AT&T-CFC
are collateralized by substantially all of the assets of the Company. As of
December 31, 1995, the Company was in default with respect to its net worth
covenant of $5.5 million. On May 6, 1996, AT&T-CFC waived such default through
June 30, 1996. Effective with the Series C Preferred Stock placement, the
Company's net worth satisfied such net worth covenant. As of December 31, 1996
and 1995, the Company owed approximately $64,000 and $1.3 million, respectively,
under this credit line, and available credit under such line towards future
inventory purchases of floor plan products was $1.9 million and $4.2 million at
December 31, 1996 and 1995, respectively. The Company is in negotiations with
AT&T-CFC to provide additional financing through December 31, 1997.
The Company has a financing facility with Fidelity Funding of
California, Inc. ("Fidelity") which provides for maximum eligible (as defined)
accounts receivable financing of $7 million at the prime lending rate (8.25% at
December 31, 1996) with a 0.5% transaction fee applied to each borrowing. The
weighted average interest rate on such line in 1996 was 11.54%. In addition, the
agreement requires a commitment fee of 0.5% of the total available financing
amount, payable annually on each anniversary date of the agreement. The
financing facility agreement is for a period of three years beginning March 28,
1995 and the obligations under such agreement are collateralized by
substantially all of the assets of the Company. The outstanding balance for the
line of credit at December 31, 1996 and 1995 was approximately $1,800,000 each
year. Available borrowings from the Company's accounts receivable line of credit
were $926,000 at December 31, 1996.
NOTE 7 -- MORTGAGE PAYABLE
On July 20, 1993, the Company entered into a mortgage agreement
bearing 8% interest with a bank for the principal amount of $529,250,
collateralized by property located in Romeoville, Illinois. On March 19, 1996,
the Company sold such property for gross proceeds of $855,000 and used a portion
of such proceeds to repay the mortgage, in full.
NOTE 8 -- LEASES
The Company has capitalized leases for certain equipment. The
capitalized lease obligations are payable through July 1997 and bear interest at
rates ranging from 7.2% to 19.45%. In addition, the Company is obligated through
the year 2000 under non-cancelable operating leases for office and warehouse
space. The leases provide for all real estate taxes and operating expenses to be
paid by the Company. Under certain leases, the Company has the option to renew
for additional terms at specified rentals. Rental expense for such leases
approximated $501,000, $571,000 and $581,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
F-13
<PAGE> 64
NOTE 8 -- LEASES (CONTINUED)
Deferred rent on the accompanying consolidated balance sheet
represents the excess of rents to be paid in the future over rent expense
recognized on a straight-line basis.
The following is a schedule of future minimum lease payments for
capital and non-cancelable operating leases, together with the present value of
the net minimum lease payments, as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
------ ------
<S> <C> <C>
1997 ...................................... $100 $440
1998 ...................................... 8 320
1999 ...................................... -- 306
2000 ...................................... -- 306
Thereafter ................................ -- --
---- ------
Total minimum lease payments .............. 108 $1,372
---- ======
Less amount representing interest ......... 9
----
Present value of net minimum lease payments $ 99
====
</TABLE>
NOTE 9 -- CONVERTIBLE PREFERRED STOCK
The Company has an authorized class of 3,000,000 shares of Preferred
Stock which may be issued by the Board of Directors on such terms and with such
rights, preferences and designations as the Board may determine. On May 19,
1995, the Company consummated a private placement of 6% Cumulative Redeemable
Convertible Preferred Stock, Series B (the "Series B Preferred Stock") pursuant
to which the Company issued and sold to certain investors 1,600,000 shares of
Series B Preferred Stock at a price per share of $1.25. The Series B Preferred
Stock was redeemable by the Company, at its option, after one year at $1.25 per
share, or $2 million in the aggregate, plus any accrued and unpaid dividends. In
addition, it was mandatorily redeemable four years from the date of issuance at
the same amounts. On May 17, 1996, the Series B Preferred Stock was amended to
delete the mandatory and optional redemption provisions contained therein. As a
result of the deletion of the mandatory and optional redemption provisions, the
Series B Preferred Stock was reclassified to equity in the Balance Sheet.
Dividends with respect to such shares are calculated based on $0.02
per share per quarter and accumulate if not declared and paid. As of December
31, 1996, an aggregate of $215,000 ($136,000 of which accrued in 1996 and
$79,000 of which accrued in 1995) 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.
F-14
<PAGE> 65
NOTE 9 -- CONVERTIBLE PREFERRED STOCK (CONTINUED)
Also on May 17, 1996, 500,000 shares of the Company's Preferred
Stock were designated as Cumulative Convertible Preferred Stock, Series C
("Series C Preferred Stock"). Of such shares, 462,512 were issued into escrow on
May 17, 1996 at a price per share of $6.00. Dividends with respect to such
shares are calculated based on $0.09 per share per quarter and accumulate if not
declared and paid. Interest of 6% per annum accrues on any unpaid dividends. At
any time, the Series C Preferred Stockholders may convert their Series C
Preferred Stock into Common Stock, at the initial rate of four shares of Common
Stock for each share of Series C Preferred Stock. The Company has reserved
2,000,000 shares of Common Stock for the conversion of the outstanding Series C
Preferred Stock. The 462,512 shares of Series C Preferred Stock and the proceeds
thereof were released from escrow on May 25, 1996 upon satisfaction of all
applicable conditions to release, after denial by Nasdaq of an exception to the
shareholder approval requirement. The issuance of such shares of Series C
Preferred Stock without shareholder approval and without an exception to such
requirement constitutes a breach of the Company's listing agreement with Nasdaq.
Consequently, the Company has been delisted from the National Market and is now
listed on the SmallCap Market. The Company's Board of Directors had determined
that the issuance of the shares of Series C Preferred Stock without shareholder
approval was necessary for the continued financial viability of the Company.
On May 30, 1996, the Company issued directly to certain investors
the remaining 37,488 shares of Series C Preferred Stock at a price of $6.00 per
share.
In connection with the issuance of the Series C Preferred Stock and
pursuant to the anti-dilution provisions of the Series B Preferred Stock, the
conversion ratio of the Series B Preferred Stock was adjusted. As a result, the
Series B Preferred Stock is currently convertible into approximately 1,770,590
shares of Common Stock. The Company has reserved 1,770,590 shares of Common
Stock for the conversion of outstanding Series B Preferred Stock.
As of December 31, 1996, an aggregate of $112,000 of the Series C
Preferred Stock dividends had accumulated and had not been declared or paid. 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.
NOTE 10 -- STOCK OPTION PLANS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
F-15
<PAGE> 66
NOTE 10 -- STOCK OPTION PLANS (CONTINUED)
The 1989 Stock Option Plan
Under the Company's 1989 Stock Option Plan, as amended, 900,000 shares of common
stock can be issued through incentive stock options and non-statutory stock
options. The incentive stock options allow designated full-time employees,
including officers, to purchase shares of common stock at prices equal to fair
market value at the date of grant. For individuals who own more than 10% of the
stock of the Company, the option price of the shares may not be less than 110%
of the fair market value on the date of grant. The incentive stock options
expire five years from the date of the grant for shareholders owning more than
10% of the voting rights (as defined). The non-statutory stock options may be
granted to full-time employees, including officers and non-employee directors or
consultants at prices as determined by the Board of Directors. The stock options
are exercisable over a period determined by the Board of Directors. To date, no
options have been granted with a vesting period of more than five years.
A summary of the changes in outstanding common stock options under
the 1989 Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------
Weighted-Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Balance at January 1, 1994 ................................................... 308,400 $ 2.01
--------
Options granted ........................................................... 367,017 $ 3.10
Options exercised ......................................................... (90,120) $ 1.00
Options canceled .......................................................... (144,380) $ 2.47
--------
Balance at December 31, 1994 ................................................. 440,917 $ 3.03
--------
Options granted ........................................................... 270,000 $ 2.21
Options exercised ......................................................... (16,375) $ 1.16
Options canceled .......................................................... (99,625) $ 2.93
--------
Balance at December 31, 1995 ................................................. 594,917 $ 2.73
--------
Options granted ........................................................... 310,559 $ 2.76
Options exercised ......................................................... (15,225) $ 3.31
Options canceled .......................................................... (126,075) $ 3.22
--------
Balance at December 31, 1996 ................................................. 764,176 $ 2.65
--------
Options exercisable at December 31, 1996 .................................. 217,987 $ 2.62
</TABLE>
The weighted average remaining contractual life for the balance at
December 31, 1996 in the 1989 Stock Option Plan is nine (9) years and the
exercise price range is $1.00 - $4.25.
On October 6, 1994, the Board of Directors offered to reduce the
exercise price of certain options to the fair market value of the Company's
Common Stock on such date. Upon acceptance by the option holders, the vesting
period began from the date of the offer and the options become exercisable
ratably over a period of four years and expire ten years from the date of
issuance.
F-16
<PAGE> 67
NOTE 10 -- STOCK OPTION PLANS (CONTINUED)
1996 Stock Option Plan
In June 1996, the Board of Directors of the Company adopted, subject
to stockholder approval, such approval being granted in July of 1996, the 1996
Stock Plan. Under the 1996 Stock Plan, 600,000 shares of common stock can be
issued through incentive stock options and non-statutory stock options and/or
stock purchase rights. The incentive stock options allow designated employees,
non-employee directors and consultants to purchase shares of common stock at
prices equal to fair market value at the date of grant. For individuals who own
more than 10% of the stock of the Company, the option price of the shares may
not be less than 110% of the fair market value on the date of grant. The
incentive stock options expire five (5) years from the date of grant for
shareholders owning more than 10% of the voting rights (as defined). The
non-statutory stock options may be granted to employees, non-employee directors
and consultants at prices as determined by the Board of Directors. The stock
options are exercisable over a period determined by the Board of Directors. To
date, no options have been granted with a vesting period of more than five (5)
years.
A summary of the changes in outstanding common stock options under
the 1996 Stock Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted-Average
Shares Exercise Price
------ --------------
<S> <C> <C>
Balance at January 1, 1995 ................ -- --
-------
Options granted ........................ 212,000 $4.06
Options exercised ...................... -- --
Options canceled ....................... -- --
-------
Balance at December 31, 1996 .............. 212,000 $4.06
Options exercisable at December 31, 1996... -- --
</TABLE>
The weighted average remaining contractual life for the balance at
December 31, 1996 in the 1996 Stock Option Plan is ten (10) years and the
exercise price range is $3.38 - $4.50.
Non-Qualified Stock Options
On February 1, 1995, 306,000 common stock purchase options were
granted by the Board to full-time employees, including officers, and a
non-employee consultant. The exercise prices is $2.13, the fair market value of
the Company's Common Stock at the date of grant. These options are exercisable
over a period of four years and expire ten years from the date of issuance.
These options were granted outside the Company's 1989 Stock Option Plan pursuant
to non-qualified stock option agreements (the "Non-Qualified Agreements"). On
May 19, 1995, in connection with the sale by the Company of 1,600,000 shares of
Series B 6% Cumulative Redeemable Convertible Preferred Stock (see Note 9), and
pursuant to an anti-dilution provision contained in certain of such options
granted to an officer of the Company, the number of options granted to
F-17
<PAGE> 68
NOTE 10 -- STOCK OPTION PLANS (CONTINUED)
such officer was increased to 113,691. The exercise price of the 113,691 options
granted to such officer was adjusted to $1.25, the purchase price of the Series
B 6% Cumulative Redeemable Convertible Preferred Stock. The anti-dilution
provision expired on December 31, 1995. No anti-dilution provision was included
in connection with the issuance of the Series C Convertible Preferred Stock.
A summary of the changes in outstanding common stock options under
the Non-Qualified Agreements is as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------
Weighted-Average
Shares Exercise Price
------ ----------------
<S> <C> <C>
Balance at January 1, 1995.................................... 20,000 $2.38
-------
Options granted............................................ 339,691 $1.83
Options exercised.......................................... (20,000) $2.38
Options canceled........................................... (29,500) $2.13
-------
Balance at December 31, 1995.................................. 310,191 $1.80
-------
Options granted ........................................... 100,000 $3.04
Options exercised.......................................... (10,250) $2.13
Options canceled........................................... (57,750) $2.13
-------
Balance at December 31, 1996.................................. 342,191 $2.53
-------
Options exercisable at December 31, 1996................... 90,548 $2.10
</TABLE>
The weighted average remaining contractual life for the balance at
December 31, 1996 under the Non-Qualified Agreements is 9.3 years and the
exercise price range is $1.25 - $4.50.
In February of 1996, the Board of Directors of the Company adopted,
subject to stockholder approval, such approval being granted in July of 1996,
the 1996 Non-Employee Directors Stock Option Plan (the "1996 Non-Employee
Directors Plan"). 150,000 shares of Common Stock can be issued under such plan
through non-statutory stock options. Under the terms of the 1996 Non-Employee
Directors Plan, each non-employee director who first becomes a member of the
Board after approval of such plan by the stockholders of the Company, shall be
automatically granted, on the date such person becomes a member of the Board, an
option to purchase 30,000 shares of Common Stock. In addition, each non-employee
director who is a member of the Board on the first trading day of each year
shall be automatically granted on such date, without further action by the
Board, an option to purchase 5,000 shares of Common Stock. Messrs. Faherty and
Azcuy are ineligible to receive options under the 1996 Non-Employee Directors
Plan. The exercise price per share under the 1996 Non-Employee Directors Plan
shall be equal to the fair market value (as defined) of a share of Common Stock
on the applicable grant date, and options granted under the 1996 Non-Employee
Directors Plan shall vest over a four (4) year period. No stock options were
issued under this plan during 1996.
F-18
<PAGE> 69
NOTE 10 -- STOCK OPTION PLANS (CONTINUED)
Stock Warrants
On December 6, 1994, common stock purchase warrants for 266,601
shares exercisable at $1.75 per share, the fair market value of the Company's
Common Stock on such date, were granted to an officer and director of the
Company. These warrants become exercisable at various dates during the first
year and expire ten years from the date of issuance. On May 19, 1995, in
connection with the sale by the Company of 1,600,000 shares of the Series B
Preferred Stock (see Note 9), pursuant to an anti-dilution provision contained
in such common stock purchase warrants, the number of warrants granted to such
officer and director was increased to 298,848 and the exercise price was
adjusted to $1.25, the purchase price of the Series B Preferred Stock.
At December 31, 1996, 298,848 of such warrants were exercisable.
The Company has reserved 2,130,589 shares of Common Stock for the
exercise of stock options and warrants as described above.
FAS 123 Pro Forma Information
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995: risk-free interest rates of between 5.48%-7.58%
in 1996 and 5.45%-6.69% in 1995; dividend yields of zero; volatility factors of
the expected market price of the Company's common stock of 1.02; and a
weighted-average expected life of four (4) years. The weighted average fair
market value of stock options issued in 1996 and 1995 was $2.35 and $1.48 per
share, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-19
<PAGE> 70
NOTE 10 -- STOCK OPTION PLANS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows (in thousands except for earnings
per share information):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss as reported........................................ $ (769) $(3,659)
Pro forma net loss.......................................... $(1,093) $(3,793)
Loss per share as reported
Primary.................................................. $ (.23) $ (.88)
Pro forma loss per share
Primary.................................................. $ (.25) $ (.91)
</TABLE>
NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN
In June 1995, the Company adopted a 1995 Employee Stock Purchase
Plan (the "Purchase Plan") and reserved for issuance an aggregate of 150,000
shares of Common Stock. The Purchase Plan allows eligible employees to purchase
Common Stock, through payroll deductions during a Purchase Period, at a purchase
price that shall be the lesser of (a) 85% of the Fair Market Value of a share of
Common Stock on the first day of such Purchase Period, or (b) 85% of the Fair
Market Value of a share of Common Stock on the Exercise Date of such Purchase
Period, as each of such terms are defined in the 1995 Employee Stock Purchase
Plan. The option to purchase stock under the Purchase Plan will terminate
December 31, 1999. At December 31, 1996, 77,247 shares were issued under the
Purchase Plan, of which 51,997 were issued in 1996.
NOTE 12 -- INCOME TAXES
The provision for income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal:
Current.................................. $ -- $ -- $(1,007)
Deferred................................. -- -- (117)
State:
Current.................................. -- -- (32)
Deferred................................. -- -- (36)
----- ----- -------
Total....................................... $ 0 $ 0 $(1,192)
====== ===== =======
</TABLE>
F-20
<PAGE> 71
NOTE 12 -- INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. Significant components
of the Company's deferred tax balances as of December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Tax credits.................................... $ 268 $ 225
Net operating losses........................... 3,384 2,977
Capitalized software........................... (317) (358)
Deferred rent.................................. 737 810
Valuation allowance............................ (4,072) (3,654)
-------- --------
Total.......................................... 0 0
Current........................................ 0 0
------- -------
Non-current.................................... $ 0 $ 0
======= =======
</TABLE>
The Company has a net operating loss carryover for Federal income
tax purposes of approximately $8,300,000, which will expire in 2009. The Company
also has research and development tax credit carryovers for Federal income tax
purposes of approximately $122,000 which will begin to expire in 2009. In
addition, the Company has alternative minimum tax credits of approximately
$53,000. These credits can be carried forward indefinitely. The Company has
experienced a change in ownership in 1995 as defined by Section 382 of the
Internal Revenue Code. Accordingly, future use of these NOLs and income tax
credits may be limited.
Under SFAS No. 109, a valuation allowance is established, if based
on the weight of available evidence, it is more likely than not that a portion
of the deferred tax asset will not be realized. Accordingly, a full valuation
allowance has been provided to off-set the Company's net deferred tax assets.
The differences between the provision for income taxes and income
taxes computed using the Federal income tax rate were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax benefit............................................. $(261) $(1,210) $(2,715)
State income taxes, net of federal income tax benefit and state
valuation allowance......................................................... -- -- (45)
Increase in federal valuation allowance..................................... 418 1,312 1,588
Research and development tax credits........................................ (183) (119) (56)
Other....................................................................... 26 17 36
----- ------- -------
Actual tax benefit.......................................................... $ -- $ -- $(1,192)
===== ======= ========
</TABLE>
F-21
<PAGE> 72
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
In both 1996 and 1995, the Company adopted a plan whereby senior
management will be entitled to six months severance payments in the event of
certain terminations after a change-in- control of the Company, and an incentive
bonus will be paid if such persons are still in the employ of the Company at the
completion of a change-in-control.
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.
F-22
<PAGE> 73
SCHEDULE II
ECCS, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
--------------------
Charged
Charged to
Balance at to Other Balance at
DESCRIPTION Beginning Costs and Accounts- Deductions- End of
of Period Expenses Describe Describe Period
<S> <C> <C> <C> <C> <C>
YEAR ENDED December 31, 1996:
Allowance for Doubtful
Accounts & Returns/Credits........................... $ 226 $ $ $ 42 (A) $ 184
------- ------- --- ------ ------
Inventory............................................ $ 813 $ 620 $ $ 652 (B) $ 781
------- ------- --- ------ ------
Subtotal.......................................... $ 1,039 $ 620 $ $ 694 $ 965
------- ------- --- ----- ------
Warranty............................................. $ 350 $ 64 $ $ $ 414
------- ------- --- ------ ------
YEAR ENDED December 31, 1995:
Allowance for Doubtful
Accounts & Returns/Credits........................... $ 310 $ 186 $ $ 270 (A) $ 226
------- ------- --- ------ ------
Inventory............................................ $ 1,096 $ 510 $ $ 793 (B) $ 813
------- ------- --- ------ ------
Subtotal.......................................... $ 1,406 $ 696 $ $1,063 $1,039
------- ------- --- ------ ------
Warranty............................................. $ 163 $ 187 $ $ $ 350
------- ------- --- ------ ------
YEAR ENDED December 31, 1994:
Allowance for Doubtful
Accounts & Returns/Credits........................... $ 274 $ 53 $ $ 17 (A) $ 310
------- ------- --- ----- ------
Inventory............................................ $ 207 $ 1,184 $ $ 295 (A) $1,096
------- ------- --- ----- ------
Subtotal.......................................... $ 481 $ 1,237 $ $ 312 $1,406
------- ------- --- ----- ------
Warranty............................................. $ 79 $ 84 $ $ $ 163
------- ------- --- ----- ------
</TABLE>
(A) Amounts written off during the year.
(B) Amounts written off during the year or obsolete inventory sold.
S-1
<PAGE> 1
EXHIBIT 10.54
INDEMNIFICATION AGREEMENT OF PRIYAN GUNERATNE
<PAGE> 2
Exhibit 10.54
ECCS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of August 22,
1996, by and between ECCS, Inc. a New Jersey corporation (the "Company"), and
Priyan Guneratne ("Indemnitee").
WHEREAS, Indemnitee is an officer of the Company and performs a
valuable service in such capacity for the Company;
WHEREAS, the Company and Indemnitee recognize the difficulty in
obtaining liability insurance for its directors, officers, employees, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited;
WHEREAS, Indemnitee does not regard the current protection available,
including the Company's current insurance policies, if any, as adequate under
the present circumstances, and the Indemnitee and other directors, officers,
employees, agents and fiduciaries of the Company may not be willing to continue
to serve in such capacities without additional protection; and
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve the Company and, in
part, in order to induce Indemnitee to continue to provide services to the
Company as an officer, the Company wishes to provide for the indemnification and
advancing of expenses to Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Indemnification of Expenses. The Company shall indemnify
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry or investigation that Indemnitee in good faith believes
might lead to the institution of any such action, suit, proceeding or
alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee, agent or fiduciary of the
Company, or any subsidiary of the Company, or is or was serving at the request
of the Company as a director, officer, employee, agent or fiduciary of another
<PAGE> 3
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action or inaction on the part of Indemnitee while serving in such
capacity (hereinafter an "Indemnifiable Event") against any and all expenses
(including attorneys' fees and all other costs, expenses and obligations
incurred in connection with investigating, defending, being a witness in or
participating in (including on appeal), or preparing to defend, be a witness in
or participate in, any such action, suit, proceeding, alternative dispute
resolution mechanism, hearing, inquiry or investigation), judgments, fines,
penalties and amounts paid in settlement (if such settlement is approved in
advance by the Company, which approval shall not be unreasonably withheld) of
such Claim and any federal, state, local or foreign taxes imposed on the
Indemnitee as a result of the actual or deemed receipt of any payments under
this Agreement (collectively, hereinafter "Expenses"), including all interest,
assessments and other charges paid or payable in connection with or in respect
of such Expenses. Such payment of Expenses shall be made by the Company as soon
as practicable but in any event no later than thirty (30) days after written
demand by Indemnitee therefor is presented to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
obligations of the Company under Section l(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any
Expense Advance shall be unsecured and no interest shall be charged thereon. If
there has not been a Change in Control (as defined in Section 10(c) hereof), the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section l(c) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the right to commence
litigation seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including the legal
or factual bases therefor, and the Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the Reviewing Party
otherwise shall be conclusive and binding on the Company and Indemnitee.
-2-
<PAGE> 4
(c) Change in Control. The Company agrees that if there is a
Change in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then with respect to all matters
thereafter arising concerning the rights of Indemnitee to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
the Company shall seek legal advice only from Independent Legal Counsel (as
defined in Section 10(d) hereof) selected by Indemnitee and approved by the
Company (which approval shall not be unreasonably withheld). Such counsel, among
other things, shall render its written opinion to the Company and Indemnitee as
to whether and to what extent Indemnitee would be permitted to be indemnified
under applicable law. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to fully indemnify such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section (1)(a)
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all
Expenses incurred by Indemnitee. The advances to be made hereunder shall be paid
by the Company to Indemnitee as soon as practicable but in any event no later
than thirty (30) days after written demand by Indemnitee therefor to the
Company.
(b) Notice; Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as reasonably practicable
of Indemnitee's receipt of notice of any Claim (for purposes of this Section
2(b) and the notice required by the Indemnitee to the Company under this section
the term "Claim" shall not include a threatened Claim) made against Indemnitee
for which indemnification will or could be sought under this Agreement. Notice
to the Company shall be directed to the Chief Executive Officer of the Company
at the address shown on the signature page of this Agreement (or such other
address as the Company shall designate in writing to Indemnitee). In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
(c) No Presumptions; Burden of Proof. For purposes of this
Agreement, the termination of any claim, action, suit or proceeding, by
judgment, order, settlement (whether with or
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<PAGE> 5
without court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law, shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief. In connection with any determination by the Reviewing Party
or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies.
(e) Selection of Counsel; Right to Defend. In the event the
Company shall be obligated hereunder to pay the Expenses of any claim, action,
suit, proceeding, inquiry or investigation, the Company, if appropriate, shall
be entitled to assume the defense of such action, suit, proceeding, inquiry or
investigation with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same action, suit, proceeding, inquiry or investigation; provided
that, (i) Indemnitee shall have the right to employ Indemnitee's counsel in any
such action, suit, proceeding, inquiry or investigation at Indemnitee's expense
and (ii) if (A) the employment of counsel by Indemnitee has been previously
authorized by the Company, (B) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and Indemnitee in the
conduct of any such defense, or (C) the Company shall not continue to retain
such counsel to defend such action, suit, proceeding, inquiry or investigation,
then the fees and expenses of Indemnitee's counsel shall be at the expense of
the Company. Notwithstanding the foregoing, with respect to the subject matter
of this Section 2(e), the provisions of any liability insurance applicable to
directors and/or officers shall govern.
3. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. The Company hereby agrees to indemnify the
Indemnitee to the fullest extent permitted by law, notwithstanding that such
indemnification is not specifically
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<PAGE> 6
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any change
after the date of this Agreement in any applicable law, statute or rule which
expands the right of a New Jersey corporation to indemnify a member of its board
of directors or an officer, employee, agent or fiduciary, it is the intent of
the parties hereto that Indemnitee shall enjoy by this Agreement the greater
benefits afforded by such change. In the event of any change in any applicable
law, statute or rule which narrows the right of a New Jersey corporation to
indemnify a member of its board of directors or an officer, employee, agent or
fiduciary, such change, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement, shall have no effect on this
Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this
Agreement shall be in addition to any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested directors, the Business Corporation Act of
the State of New Jersey, or otherwise. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though Indemnitee may have ceased
to serve in such capacity.
4. No Duplication of Payments. The Company shall not be liable under
this Agreement to make any payment in connection with any action, suit,
proceeding, inquiry or investigation made against Indemnitee to the extent
Indemnitee has otherwise actually received payment (under any insurance policy,
or pursuant to the Certificate of Incorporation, Bylaws or otherwise) of the
amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses in the investigation, defense, appeal or settlement of any
civil or criminal action, suit, proceeding, inquiry or investigation, but not,
however, for all of the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion of such Expenses to which Indemnitee is
entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Liability Insurance. To the extent the Company maintains liability
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the
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<PAGE> 7
Company's key employees, agents or fiduciaries, if Indemniteeis not an
officer or director but is a key employee, agent or fiduciary.
8. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for
acts, omissions or transactions from which Indemnitee may not be relieved of
liability under applicable law.
(b) Claims Initiated by Indemnitee. To indemnify or advance
Expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except (1) with
respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other agreement or insurance policy
or under the Company's Certificate of Incorporation or Bylaws now or hereafter
in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if
the Board of Directors has approved the initiation or bringing of such suit, or
(iii) as otherwise required under Section 14A:3-5 of the New Jersey Business
Corporation Act, regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advance Expense payment or insurance recovery,
as the case may be.
(c) Lack of Good Faith. To indemnify Indemnitee for any
Expenses incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for
Expenses or the payment of profits arising from the purchase and sale, or sale
and purchase, by Indemnitee of securities in violation of Section 16(b) of the
Securities Exchange Act of 1934, as amended, or any similar successor statute.
9. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
10. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the
"Company" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
agents or
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<PAGE> 8
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee, agent or fiduciary of the
Company which imposes duties on, or involves services by, such director,
officer, employee, agent or fiduciary with respect to an employee benefit plan,
its participants or its beneficiaries; and if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall
be deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under said Act), directly or indirectly, of securities of the Company
representing more than 20% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all of the
Company's assets.
(d) For purposes of this Agreement, "Independent Legal
Counsel" shall mean an attorney or firm of attorneys, selected in accordance
with the provisions of Section 1(c) hereof, who shall not have otherwise
performed services for the Company or Indemnitee within the last three
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<PAGE> 9
years (other than with respect to matters concerning the rights of Indemnitee
under this Agreement, or of other indemnitees under similar indemnity
agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall
mean any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall
mean any securities of the Company that vote generally in the election of
directors.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director of the Company or of any other enterprise at the Company's request.
13. Actions by Indemnitee. In the event that any action is instituted
by Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action, unless as a part of such action the
court of competent jurisdiction over such action determines that each of the
material assertions made by Indemnitee as a basis for such action were not made
in good faith or were frivolous. In the event of an action instituted by or in
the name of the Company under this Agreement to enforce or interpret any of the
terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses
incurred by Indemnitee in defense of such action (including costs and expenses
incurred with respect to Indemnitee's counterclaims and cross-claims made in
such action), and shall be entitled to the advancement Expenses with respect to
such action, unless as a part of such action the court having jurisdiction over
such action determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
14. Notice. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted
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<PAGE> 10
for by the party addressee, on the date of such receipt, or (ii) if mailed by
domestic certified or registered mail with postage prepaid, on the third
business day after the date postmarked. Addresses for notice to either party are
as shown on the signature page of this Agreement, or as subsequently modified by
written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of New Jersey
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the State of New
Jersey, which shall be the exclusive and only proper forum for adjudicating such
a claim.
16. Severability. The provisions of this Agreement shall be severable
in the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its
provisions construed and enforced in accordance with the laws of the State of
New Jersey, as applied to contracts between New Jersey residents, entered into
and to be performed entirely within the State of New Jersey, without regard to
the conflict of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement by the
Company, the Company shall be subrogated to the extent of such payment to all of
the rights of recovery of Indemnitee, who shall execute all documents required
and shall do all acts that may be necessary to secure such rights and to enable
the Company effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless it is in writing
signed by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
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<PAGE> 11
21. No Construction as Employment Agreement. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
* * * * * *
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
ECCS, INC.
By: /s/Gregg M. Azcuy
___________________________________________
Gregg M. Azcuy, President
and Chief Executive Officer
AGREED TO AND ACCEPTED
INDEMNITEE:
/s/ Priyan Guneratne
________________________________
(signature)
Priyan Guneratne
________________________________
(name of Indemnitee)
53 Kinglet Dr So
________________________________
Cranbury NJ 08512
________________________________
(address)
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<PAGE> 1
EXHIBIT 10.56
MANUFACTURING SERVICES AGREEMENT,
DATED JUNE 15, 1995, BY AND BETWEEN THE COMPANY
AND UNISYS CORPORATION
<PAGE> 2
Exhibit 10.56
MANUFACTURING SERVICES AGREEMENT
BY AND BETWEEN
ECCS INCORPORATED
AND
UNISYS CORPORATION
JUNE 15, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
/s/ Priyan Guneratne 6/15/95 /s/ Ed Flory 6/27/95
- ---------------------------------- -----------------------------------
Priyan Guneratne Ed Flory
Director of Operations General Manager
ECCS Inc. Winnipeg Plant
Tinton Falls, NJ Unisys Canada Inc.
</TABLE>
<PAGE> 3
MANUFACTURING SERVICES AGREEMENT
PURPOSE
This MSA and the Exhibits attached set forth the basic terms and conditions
under which Unisys will manufacture ECCS' products.
TERM OF AGREEMENT
This MSA shall be in effect from the date of execution by both parties for a
term of one (1) year. This will automatically renew for consecutive one (1) year
terms subject to the same terms and conditions as herein specified and
renegotiated pricing and/or deliverables. Either party can cancel this MSA with
written notice. If Unisys cancels this MSA, Unisys will continue accepting
orders for a period of six (6) months to enable ECCS to transition to another
manufacturer. If ECCS cancels this MSA, ECCS is liable for the inventory
procured to fill firm orders.
PROPRIETARY INFORMATION
All transactions between ECCS and the manufacturer is bound by the
non-disclosure signed dated March 21, 1995 and the Mutual Proprietary
Information Agreement signed dated May 24, 1994 and amended June 14, 1995.
FORECASTS
ECCS will provide Unisys with a rolling written six (6) month forecast of its
planned purchase.
ORDERS FOR PRODUCT
Unisys will supply Product to ECCS only in response to written Purchase Orders
(original or facsimile) which may be issued by ECCS from time to time during the
term of this MSA. ECCS will place each Purchase Order for Product with Unisys at
least ninety (90) calendar days prior to the date of delivery required by such
Purchase Order. Orders within thirty (30) calendar days are firm commitments and
are not subject to cancellation.
ECCS may cancel any order for Products issued hereunder, by giving written
notice to Unisys prior to the scheduled ship date, subject only to payment of a
negotiable cancellation fee, which shall be limited to a percentage of the
product price as follows:
<TABLE>
<CAPTION>
NOTICE OF CANCELLATION
DAYS PRIOR TO CANCELLATION FEE
SCHEDULED SHIP DATE (MAXIMUN)
------------------- ---------
<S> <C> <C>
90 or more 0%
60 - 89 10%
30 - 59 20%
</TABLE>
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<PAGE> 4
ECCS will provide Unisys with the final configuration and the ship-to address at
least fourteen (14) calendar days prior to the date of delivery.
In addition to the said product, Unisys will supply additional Seagate Barracuda
drives (2.1 GB and 4.2 GB) to ECCS at the price set forth in Exhibit A. Unisys
will supply additional Seagate drives as well as other storage devices for a
price to be negotiated later.
The Synchronix order for Unisys Mission Viejo will not include drives at this
time.
PRODUCT DEFINITION
The Synchronix product is a 10/20/30 drive storage subsystem as defined by the
Bills of material in Exhibit B. This is for a complete turnkey manufacturing
solution, including: parts procurement, build, test, quality management
reporting, packaging and shipping the finished product per the purchase orders
provided by ECCS.
ECCS will provide Unisys with the finalized drawing package with the latest
revisions by May 15, 1995.
NOTICE OF DELAY
Unisys agrees to notify ECCS promptly of any factor, occurrence, or event coming
to its attention that may affect Unisys's ability to meet the required dates as
stated in the purchase order. Unisys will exert their best effort to achieve
such schedule date, not limited to absorbing cost of overtime labor to maintain
the scheduled delivery dates.
Unisys will exert their best effort to achieve such schedule date, not limited
to absorbing cost of overtime labor to maintain the scheduled delivery dates.
PRICING
The purchase price is set forth in Exhibit A of this MSA. All monies are in US
Dollars. At the end of each calendar Quarter ECCS and Unisys will re-price the
Bills of Material to take advantage of price reductions. Price reductions from
disk drives will be shared at 70% to ECCS and 30% to Unisys. All other price
reductions will be shared equally between the two companies.
Unisys agrees that the charges established under this agreement shall not exceed
those offered or imposed with respect to similar services provided to other
Unisys customers.
The pricing is based on 500 controllers in the next twelve (12) month period.
PAYMENT TERMS
Payment terms are Net forty seven (47) days after receipt of Product or service
and related invoice. All payments, quotations and invoices are in US dollars.
The products purchased under this MSA will be resold as such or incorporated
into systems sold by ECCS. Therefore, taxes should not be included upon the sale
of this product to ECCS.
2
<PAGE> 5
DELIVERY AND ACCEPTANCE
Delivery to ECCS is deemed to have occurred after receipt of the product at ECCS
plant or the location specified in the ship to address with the order. Terms are
FOB shipping point (Winnipeg). Unisys bears the risk of all international duties
and taxes.
QUALITY ASSURANCE
ECCS reserves the right to perform quality audits at the Unisys facility (see
Exhibit F). The first article Production Approval Unit (PAU) will be tested at
the Tinton Falls facility within fifteen (15) days of delivery. If all tests
pass, ECCS will give the go-ahead to continue with the rest of the terms
outlined in this MSA.
Unisys will manufacture all products to the Unisys company procedures and
Quality Manual. See Exhibit E.
Unisys will provide failure analysis and quality charts to ECCS via a direct
on-line system.
PROJECT MANAGER
ECCS and Unisys will notify with the name and telephone number of its Project
Manager. The Project Manager shall be the point of contact for all coordination
between the parties.
Unisys will also provide free of charge office space, desk and telephone for an
ECCS employee for the duration of the MSA.
RESCHEDULING
ECCS may reschedule any shipment date with fourteen (14) calendar days advanced
written notice to Unisys. Delays shall not exceed thirty (30) calendar days from
the original ship date specified in the Purchase order unless agreed to by
Unisys.
TOOLING (TBD)
Tooling as identified in Exhibit C shall:
Become and remain the property of ECCS.
Be utilized by Unisys only for benefits of ECCS.
Be used, maintained and repaired by Unisys in accordance with the terms and
conditions of this MSA.
NOTE: Unisys will provide a list of Tooling to be attached in Exhibit C.
ENGINEERING CHANGE NOTICE
An Engineering Change Notice (ECN) shall mean any mechanical, electrical or
process change that would affect the design, performance, cost, reliability,
serviceability, compatibility,
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<PAGE> 6
appearance, dimensions, tolerances, materials or composition of the product.
ECCS and Unisys may from time to time propose to one another ECNs.
Each party shall provide the other with written notification and a detailed
written description for each requested ECN. If any additional charges to ECCS is
required by such ECN, Unisys shall provide ECCS with a written quotation for
such additional charges.
Unisys will not change, modify the product without the written consent from
ECCS.
INITIAL INVENTORY
At the start of the contract, ECCS will consign to Unisys any long lead items
purchased by ECCS for this product. After the initial inventory is depleted,
Unisys will procure all material and provide a full turnkey solution.
OBSOLETE PARTS INVENTORY
Obsolete parts inventory caused by ECCS initiated ECNs will be paid for by ECCS.
Unisys will attempt to return for credit or otherwise use any non-unique parts
which become obsolete due to ECCS initiated ECNs.
WARRANTY
Unisys warrants that each product will be free from defects in workmanship for
thirty six (36) months after the date of receipt. Disk drives and other procured
parts will carry the original manufacturers warranties. Unisys further warrants
that the product will be manufactured in accordance with ISO 9001 standards.
PACKING AND SHIPPING
All products will be packed in accordance with Unisys' packing specifications
used in all other products packed and shipped from the Winnipeg plant. OEM
customers will have OEM logos while non-OEM customers will have ECCS logos.
Pakaging price for the rack mount units are not included in the prices in
Exhibit A. This price will not exceed $71.
4
<PAGE> 1
EXHIBIT 10.57
AGREEMENT DATED AUGUST 13, 1996
BY AND BETWEEN THE COMPANY
AND AT&T CAPITAL CORPORATION
<PAGE> 2
Exhibit
10.57
=====
[LOGO] AT&T
CAPITAL CORPORATION
-----------------------------------------------------------------------
STEPHAN M. TAFT 44 Whippany Road
Director Credit Operations Morristown, NJ 07962
201 397-4098
August 13, 1996 FAX 201 397-4375
Mr. Greg Azcuy
ECCS, Inc.
One Sheila Drive, Building 6A
Tinton Falls, NJ 07724
Re: Approval of Line of Credit with AT&T Commercial Finance
Corporation
Dear Mr. Azcuy,
AT&T Commercial Finance Corporation ("AT&T-CFC") is pleased to advise you of
our commitment to offer ECCS, Inc. (the "Borrower") a line of credit in an
amount not to exceed $2,000,000.00 (the "Line of Credit"). This commitment is
made subject to the following terms and conditions:
1. Amount of Line of Credit
------------------------
The Line of Credit shall be in a MAXIMUM amount of $2,000,000.00.
AT&T-CFC may from time to time finance sums above the committed line at its
sole discretion. Further, any such additional advances are not intended to be
and should not be construed as a permanent commitment above the approved line
and are subject to immediate repayment, at our sole option, upon notice by
AT&T-CFC. There shall be no minimum extension of credit required of AT&T-CFC
under this commitment. All extensions of credit shall be made in the sole and
complete discretion of AT&T-CFC. The outstanding balance under the Line of
Credit shall be computed by adding the principal outstanding amount and the
amount of unpurchased approvals.
2. Duration of Line of Credit
--------------------------
The term of the Line of Credit shall commence on July 1, 1996, and
shall continue until May 1, 1997 at which time the Line of Credit shall
terminate and expire. AT&T-CFC will annually review the line for renewal based
on our receipt and satisfactory review of your next fiscal year end, at our
sole option, AT&T-CFC may. In its sole and absolute discretion, extend the Line
of Credit for such additional periods of time and under such terms and
conditions as AT&T-CFC determines to be appropriate. No advances will be made
by AT&T-CFC until AT&T-CFC actually receives executed copies of any and all
documentation required by AT&T-CFC.
3. Early Termination
-----------------
The Line of Credit may be terminated by AT&T-CFC at any time prior to
May 1, 1997, If:
a) The Borrower fails to execute and/or deliver any and all financing
documents required by AT&T-CFC, which financing documents shall
include, but shall not be limited to, an Agreement for Wholesale
Financing.
b) The Borrower in breach of any of the provisions of any of the
financing documents required by AT&T-CFC or is in default under any
such document.
<PAGE> 3
c) The Borrower fails to provide in form and substance satisfactory to
AT&T-CFC, at its sole discretion, quarterly interim financial statements within
60 days of closing, annual financial statements within 90 days of closing along
with Inventory an Accounts Receivable aging reports for each Interim and annual
reporting period.
d) There has occurred any adverse change in the financial condition of
business prospects of the Borrower or any guarantor of the Borrower's
indebtedness to AT&T-CFC or if AT&T-CFC shall learn of any misrepresentation or
omission of a fact or circumstance by the Borrower (or any guarantor of the
Borrower's indebtedness to AT&T-CFC) or if AT&T-CFC shall learn of any
misrepresentation or omission of a fact or circumstance by the Borrower (or
any guarantor) that AT&T-CFC deems to be material. The Borrower and all
guarantors shall be obligated to notify AT&T-CFC in writing of any change in
either of their financial condition, structure, ownership, or business
prospects.
4. Prior Agreements
This letter shall replace and supersede all prior commitment letters
from AT&T-CFC to Borrower, including without limitation, that certain
commitment letter dated May 6, 1996.
5. No Assignment
-------------
This commitment may not be assigned by the Borrower without the prior
written consent of AT&T-CFC, which consent shall be granted or withheld in the
sole and absolute discretion of AT&T-CFC.
We look forward to working with you.
Very truly yours,
AT&T Commercial Finance Corporation
BY: /s/ S.M. Taft
--------------------------------
(Name)
VP Credit & Ops.
--------------------------------
(Title)
<PAGE> 4
Schedule of Additional covenant(s)
Terms defined in the Agreement for wholesale financing between AT&T and
Dealer (the "Agreement") and not otherwise defined herein have those meanings
assigned to them in the Agreement. Notwithstanding anything contained in the
Agreement or otherwise to the contrary, Dealer hereby covenants and agrees that
at all times Dealer will maintain on its premises or otherwise in its
possession, or under its custody or control, Inventory And Accounts Receivable
subject to the first lien of AT&T having an actual value from time to time
equal to at least one hundred fifty percent (150%) of the Indebtedness
outstanding from time to time. For the purpose of this Schedule, the term
Accounts Receivable shall mean 85% of Dealer's accounts receivable, not
including those accounts receivable which have aged more than 90 days, Within
fifteen (15) days after the end of each month, Dealer shall provide AT&T with
evidence satisfactory to AT&T in all respects that dealer is in compliance with
this covenant, and from time to time Dealer shall pay AT&T such amounts as are
necessary to reduce the Indebtedness outstanding from time to time to an amount
whereby Dealer shall be in compliance with this covenant at all times.
Dealer shall, at all times, maintain Tangible Net Worth, calculated
according to GAAP, of at least $5,500,000.00. Dealer shall from time to time,
or upon reasonable notice from AT&T, provide AT&T with satisfactory evidence of
its compliance with this covenant.
Without AT&T's prior written consent, Dealer shall not: i) declare or
pay any dividend, purchase, redeem, retire or otherwise acquire for value any
of its capital stock now or hereafter outstanding; ii) make any distribution of
assets to its shareholders as such, whether in cash, assets or in obligations
of Dealer, or otherwise set apart any sum for the payment of any dividend or
distribution on, or for the purchase, redemption, or retirement of, any shares
of its capital stock; or iii) make any other distribution by reduction of
capital or otherwise in respect of any shares of its capital stock.
Date: 8/2/96
ECCS, Inc.
By: /s/ L. Altieri
------------------------------------
Title: V.P. Finance & Administration
---------------------------------
One Sheila Drive, Building 6A
Tinton Falls, NJ 07724
AT&T COMMERCIAL FINANCE CORPORATION
By: /s/ S.M. Taft
---------------------------
Title: VP Credit & Ops.
------------------------
44 Whippany road
Morristown, NJ 07962
<PAGE> 1
EXHIBIT 11
ECCS, INC.
SCHEDULE OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Primary
Average shares outstanding ... 4,346 4,232 4,160
------- ------- -------
Net loss ..................... $ (769) $(3,659) $(6,790)
Less preferred stock dividends (248) (79) --
------- ------- -------
$(1,017) $(3,738) $(6,790)
======= ======= =======
Per share amount ............. $ (0.23) $ (0.88) $ (1.63)
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 21
LISTING OF SUBSIDIARIES
Vartech, a corporation formed pursuant to the state laws of Illinois
and a wholly owned subsidiary of ECCS, Inc.
Media Software & Systems, Inc., a corporation formed pursuant to the
state laws of Illinois and a wholly owned subsidiary of ECCS, Inc.
Synchronix, Inc., a corporation formed pursuant to the state laws of
New Jersey and a wholly owned subsidiary of ECCS, Inc.
ECCS Venture Corporation, a corporation formed pursuant to the state
laws of New Jersey and a wholly owned subsidiary of ECCS, Inc.
ECCS de Venezuela, CA., a corporation formed pursuant to the laws of
Venezuela and a wholly owned subsidiary of ECCS, Inc.
ECCS Foreign Sales Corporation, a corporation formed pursuant to the
laws of Barbados and a wholly owned subsidiary of ECCS, Inc.
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8 Registration No. 33-93480) pertaining to the 1989 Stock
Option Plan, as amended (the "Option Plan"); the 1995 Employee Stock Purchase
Plan; and 306,000 shares issuable under certain options granted outside the
Option Plan in February 1995 and the Registration Statement (Form S-8
Registration No. 333-15529) pertaining to the 1996 Non-Employee Directors Stock
Option Plan and the 1996 Stock Plan of our report dated February 25, 1997, with
respect to the consolidated financial statements and schedule of ECCS, Inc.
included in the Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Princeton, New Jersey
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR THE YEAR ENDED
DECEMBER 31, 1996 EXTRACTED FROM THE ISSUER'S ANNUAL REPORT ON FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,393
<SECURITIES> 0
<RECEIVABLES> 3,346
<ALLOWANCES> 184
<INVENTORY> 4,680
<CURRENT-ASSETS> 12,492
<PP&E> 4,272
<DEPRECIATION> 3,082
<TOTAL-ASSETS> 14,552
<CURRENT-LIABILITIES> 8,212
<BONDS> 0
0
21
<COMMON> 44
<OTHER-SE> 6,112
<TOTAL-LIABILITY-AND-EQUITY> 14,552
<SALES> 22,604
<TOTAL-REVENUES> 22,604
<CGS> 15,165
<TOTAL-COSTS> 6,907
<OTHER-EXPENSES> 1,027
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274
<INCOME-PRETAX> (769)
<INCOME-TAX> 0
<INCOME-CONTINUING> (769)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (769)
<EPS-PRIMARY> (.23)
<EPS-DILUTED> 0
</TABLE>
