SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-21600
ECCS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2288911
- ------------------------------- ---------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Sheila Drive, Tinton Falls, New Jersey 07724
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(732)747-6995
---------------------------------
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
------ ------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 31, 1998:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 10,918,438
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ECCS, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION......................................... 1
Item 1. Financial Statements...................................... 1
Consolidated Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997 (audited)................................ 2
Consolidated Statements of Operations for the
three months ended March 31, 1998 and
March 31, 1997 (unaudited)...................................... 3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and
March 31, 1997 (unaudited)...................................... 4
Notes to Consolidated Financial Statements (unaudited).......... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.......... 10
Overview ....................................................... 10
Results of Operations........................................... 11
Liquidity and Capital Resources................................. 13
PART II. OTHER INFORMATION............................................ 17
Item 2. Changes in Securities and Use of Proceeds................. 17
Item 5. Other Information......................................... 17
Item 6. Exhibits and Reports on Form 8-K.......................... 17
SIGNATURES............................................................ 18
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PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements.
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<CAPTION>
ECCS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
1998 1997
--------- ------------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ............................................... $ 9,561 $ 11,625
Accounts receivable, less allowance for doubtful accounts of $188
and $297 at March 31, 1998 and December 31, 1997, respectively......... 7,044 5,737
Inventories ............................................................. 4,427 4,596
Prepaid expenses and other receivables .................................. 444 506
------- --------
21,476 22,464
Property, plant and equipment (net) ........................................ 1,563 1,372
Capitalized software (net) ................................................. 926 811
Other assets ............................................................... 258 345
-------- --------
Total Assets ........................................................ $ 24,223 $ 24,992
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Loans payable ........................................................... $ 681 $ 1,031
Current portion of capital lease obligations ............................ -- 11
Accounts payable ........................................................ 3,646 3,833
Accrued expenses and other .............................................. 1,188 1,385
Warranty ................................................................ 550 534
Customer deposits, advances and other credits ........................... 285 410
-------- --------
6,350 7,204
Deferred rent .............................................................. 129 145
-------- --------
6,479 7,349
-------- --------
Shareholders' Equity:
Preferred stock, $.01 par value per share, Authorized, 3,000,000
shares; Issued and outstanding, none at March 31, 1998 and
December 31, 1997, respectively ....................................... -- --
Common stock, $.01 par value per share, Authorized, 20,000,000
shares; Issued and outstanding, 10,918,438 shares and 10,918,188
shares at March 31, 1998 and December 31, 1997, respectively ............ 109 109
Capital in excess of par value - common ................................. 25,612 25,615
Deficit ................................................................. (7,977) (8,081)
-------- --------
17,744 17,643
-------- --------
Total Liabilities and Shareholders' Equity .......................... $ 24,223 $ 24,992
======== ========
See notes to consolidated financial statements.
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<CAPTION>
ECCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months
Ended March 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales ........................................ $ 8,240 $ 8,737
Cost of sales .................................... 5,810 6,335
-------- --------
Gross profit ................................... 2,430 2,402
Operating expenses:
Selling, general & administrative .............. 1,847 1,622
Research & development ......................... 604 377
-------- --------
Operating (loss) income .......................... (21) 403
Net interest (income) expense .................. (125) 58
-------- --------
Net income ....................................... $ 104 $ 345
-------- --------
Preferred dividends ............................ -- 80
-------- --------
Net income applicable to
common shares .................................. $ 104 $ 265
======== ========
EARNINGS PER COMMON SHARE:
Net income per common
share - basic .................................. $ 0.01 $ 0.06
======== ========
EARNINGS PER COMMON SHARE -
ASSUMING DILUTION:
Net income per common share
- diluted ...................................... $ 0.01 $ 0.04
======== ========
Weighted average number of common and
dilutive shares - basic ........................ 10,918 4,457
======== ========
Weighted average number of common and
dilutive shares - diluted ...................... 11,251 8,996
======== ========
See notes to consolidated financial statements.
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<CAPTION>
ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three Months Ended March 31,
----------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................................... $ 104 $ 345
Adjustments to reconcile net income to net cash(used in) provided by
operating activities:
Depreciation and amortization .................................................. 255 294
Increase in accounts receivable ................................................ (1,307) (1,017)
Decrease in inventories ........................................................ 169 2,425
Decrease in prepaid expenses and other ......................................... 149 21
Increase in payable to Finova Group/AT&T Commercial ............................ -- 102
Decrease in accounts payable, accrued liabilities, deferred rent and other ..... (384) (1,078)
Decrease in customer deposits, advances and other credits ...................... (125) (253)
-------- --------
Net cash (used in) provided by operating activities ................................. (1,139) 839
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ....................................... (383) (63)
Additions to capitalized software ................................................ (178) (117)
-------- --------
Net cash used in investing activities ............................................... (561) (180)
-------- --------
Cash flows from financing activities:
Borrowings under revolving credit agreement ...................................... 1,250 5,582
Repayments under revolving credit agreement ...................................... (1,600) (4,955)
Repayment of capital lease obligations ........................................... (11) (27)
Net (cost) proceeds from exercise of employee stock options and issuance of
common stock ................................................................... (3) 84
-------- --------
Net cash (used in) provided by financing activities ................................. (364) 684
-------- --------
Net (decrease) increase in cash and cash equivalents ................................ (2,064) 1,343
Cash and cash equivalents at beginning of period .................................... 11,625 4,393
-------- --------
Cash and cash equivalents at end of period .......................................... $ 9,561 $ 5,736
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ....................................................................... $ 17 $ 84
======== ========
See notes to consolidated financial statements.
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for March 31, 1998 and March 31, 1997 is unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The information presented for March 31, 1998 and March 31, 1997 and for
the three-month periods then ended, is unaudited, but, in the opinion of the
management of ECCS, Inc. ("ECCS" or the "Company"), the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for the fair
presentation of the Company's financial position as of March 31, 1998 and the
results of its operations and cash flows for the three month periods ended March
31, 1998 and March 31, 1997. The consolidated financial statements included
herein have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These consolidated financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1997,
which were included as part of the Company's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Results for the interim period are not necessarily indicative of results
that may be expected for the entire year.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Business
-------------------------
ECCS provides intelligent solutions to store, protect and access mission
critical information for the Open Systems and related markets. The Company
designs, manufactures and sells high performance, fault tolerant data storage
solutions for a wide range of customer requirements.
From its founding until 1994, the Company's principal business was the
value added resale of NCR products. Sales to AT&T business units made up a large
portion of such business. During 1994, as a result of AT&T's acquisition of NCR
and subsequent change in its purchasing policies, the Company undertook a
product development initiative to reposition the Company as a provider of
proprietary mass storage enhancement products. A number of products have
resulted from these efforts including Synchronix and Synchronection-FT, a fault
tolerant network file server.
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for March 31, 1998 and March 31, 1997 is unaudited)
(b) Cash and Cash Equivalents
-------------------------
The Company considers short-term investments with a maturity of three
months or less when purchased to be cash equivalents.
(c) Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
Inventories consist of the following (in thousands):
March 31, December 31,
1998 1997
----------- ------------
(unaudited)
Purchased parts.................................. $ 3,021 $ 2,496
Finished goods................................... 2,119 2,808
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5,140 5,304
Less: inventory valuation reserve.............. 713 708
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$ 4,427 $ 4,596
======= =======
(d) Property, Plant and Equipment
-----------------------------
Property, plant and equipment are carried at cost. Depreciation and
amortization are provided on a straight-line basis over the estimated useful
lives ranging from 3 to 5 years.
Equipment under capital leases is recorded at the lower of fair value or
present value of minimum lease payments at the inception of the lease.
Amortization of the leased property is computed using the straight-line method
over the term of the lease.
(e) Fair Value of Financial Instruments
-----------------------------------
The fair value amounts for cash, accounts receivable and short term debt
approximate carrying amounts due to the short maturity of these instruments.
(f) 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 $63,000 and $132,000 for the three month periods ended
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for March 31, 1998 and March 31, 1997 is unaudited)
March 31, 1998 and March 31, 1997, respectively. At March 31, 1998 and December
31, 1997, the Company had capitalized $2,793,000 and $2,615,000 of software
development costs, respectively, of which $1,867,000 and $1,804,000 had been
amortized, respectively.
(g) 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.
(h) Revenue Recognition
-------------------
In general, revenue is recognized upon shipment of the product or system
or as services are provided. Periodically, revenue is recognized for product
which is being held at the customer's request. Revenue is only recognized on
such product when all risks of ownership have passed to the customer and the
Company has no specific performance obligations remaining. Revenues related to
maintenance contracts are recognized over the respective terms of the
maintenance contracts. Revenue for certain major product enhancements and major
new product offerings, for which the Company believes that significant product
development risks may exist which can realistically only be addressed during
live beta testing at end-user sites, is not recognized until successful
completion of such end-user beta testing.
(i) Warranty
--------
Estimated future warranty obligations related to ECCS products are
provided by charges to operations in the period the related revenue is
recognized.
(j) Research and Development Costs
------------------------------
Research and development costs are expensed as incurred, except for
software development costs which are accounted for as noted above.
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for March 31, 1998 and March 31, 1997 is unaudited)
(k) Income Taxes
------------
Income taxes are accounted for by the liability method in accordance with
the provisions of SFAS No. 109, Accounting for Income Taxes.
(l) Stock Based Compensation
------------------------
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
(m) Per Share Information
---------------------
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the SFAS No. 128 requirements.
(n) Use of Estimates
----------------
The preparation of interim financial statements in accordance with
generally accepted accounting principles for interim financial information
requires management to make estimates and assumptions that affect the amounts
reported in the interim financial statements and accompanying notes. Actual
results could differ from such estimates.
(o) Segment Information
-------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which is
effective for years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also established standards for related disclosures about
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for March 31, 1998 and March 31, 1997 is unaudited)
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. Management has not completed its review of SFAS No. 131, but does not
anticipate that the adoption of this statement will have a significant effect on
the Company's reported segments.
NOTE 3 -- LITIGATION
There are no individual material litigation matters pending to which the
Company is a party or to which any of its property is subject.
NOTE 4 -- CONVERTIBLE PREFERRED STOCK
The Company has an authorized class of 3,000,000 shares of Preferred Stock
which may be issued by the Board of Directors on such terms and with such
rights, preferences and designations as the Board may determine.
NOTE 5 -- TRANSACTION WITH A SIGNIFICANT CUSTOMER
On March 24, 1998, the Company announced that it had signed a corporate
purchasing agreement with Tandem Computers Incorporated ("Tandem") pursuant to
which Tandem has the ability to purchase Synchronix from the Company and resell
Synchronix under a private label with Tandem's own systems. The Company's sales
to Tandem will be made by purchase order. The Company has no long-term
commitments from Tandem and Tandem generally may cancel orders upon appropriate
written notice to the Company.
NOTE 6 -- CANCELLATION AND REISSUANCE OF STOCK OPTIONS
On October 28, 1997, the Company granted options to purchase (i) 498,400
shares of its common stock, $.01 par value (the "Common Stock") outside of the
Company's registered stock option plans, and (ii) 106,000 shares of its Common
Stock under the 1996 Stock Plan ((i) and (ii) are collectively referred to as
the "Options"), to certain officers and employees at an exercise price of $8.00
per share. On February 18, 1998 the Company canceled the Options previously
granted on October 28, 1997. In addition, on February 18, 1998 the Company
reissued the Options to certain officers and employees at an exercise price of
$4.00 per share.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
ECCS provides intelligent solutions to store, protect and access mission
critical information for the Open Systems and related markets. The Company
designs, manufactures and sells high performance, fault tolerant data storage
solutions for a wide range of customer requirements.
From its founding until 1994, the Company's principal business was the
value added resale of NCR products. Sales to AT&T business units made up a large
portion of such business. During 1994, as a result of AT&T's acquisition of NCR
and subsequent change in its purchasing policies, the Company undertook a
product development initiative to reposition the Company as a provider of
proprietary mass storage enhancement products. In 1995, the Company's sales of
its proprietary products exceeded its sales as a value added reseller ("VAR")
due to both increasing sales of its own products and decreasing sales as a VAR.
Beginning in 1996, a substantial portion of the Company's revenues has been
generated from sales of its own products.
The Company's revenues are generated from three primary sources: (i)
revenues derived from sales of mass storage enhancement products, which include
sales of all ECCS mass storage enhancement products, including the Synchronix
family of products, and sales of certain third party component products that are
incorporated into such mass storage enhancement systems; (ii) revenues generated
by the Company as a VAR which include the Company's sales to AT&T business units
for non-storage related products; and (iii) revenues derived from services and
other revenue which include professional services and maintenance contracts. The
Company believes that revenues generated by the Company as a VAR, which include
sales to AT&T business units of non-storage related products, will be minimal in
the future.
The statements contained in this Quarterly Report on Form 10-Q that are
not historical facts are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995). Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
These forward-looking statements, such as statements regarding anticipated
future revenues, capital expenditures, research and development expenditures and
other statements regarding matters that are not historical facts, involve
predictions. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements contained in this Quarterly Report on Form 10-Q.
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RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
------------------------------------------
Net Sales
Net sales decreased by approximately $497,000 or 5.7%, in the three months
ended March 31, 1998, as compared to net sales in the three months ended March
31, 1997. Sales of the Company's proprietary mass storage enhancement systems,
including sales of certain third party component products, accounted for 89% and
91% of net sales in the quarters ended March 31, 1998 and 1997, respectively.
Sales by the Company in its capacity as a VAR accounted for 2% of net sales in
both the quarters ended March 31, 1998 and 1997, respectively. Services and
other revenues accounted for 9% and 7% of net sales in the quarters ended March
31, 1998 and 1997, respectively. The decrease in the 1998 period resulted
primarily from a decrease in sales of the Company's mass storage enhancement
systems to Federal customers.
Sales to the U.S. Air Force through a Federal integrator accounted for
approximately 35% of net sales in the quarter ended March 31, 1998. The Company
believes that sales to the U.S. Air Force will continue to comprise a
significant portion of the Company's net sales for at least the next 12 months.
However, there can be no assurance that the U.S. Air Force will continue to
purchase from the Company at historical levels, if at all.
Sales to alternate channel partners accounted for approximately 45% of net
sales in the quarter ended March 31, 1998. Sales to the Company's primary
alternate channel partner, Unisys Corporation ("Unisys"), accounted for
approximately 22% of the Company's net sales in the quarter ended March 31,
1998. There can be no assurance that Unisys will continue to place orders with
the Company or that orders from Unisys will continue at their previous levels.
While the Company has an OEM agreement with Unisys that defines the terms
of the sales and support services provided thereunder, this agreement does not
include specific quantity commitments. The Company's sales are made by purchase
order and, therefore, the Company has no long-term commitments from Unisys and
such customer generally may cancel orders on 30 days notice. Accordingly, there
can be no assurance that orders from Unisys will continue at their historic
levels, or that the Company will be able to obtain any new orders from Unisys.
The loss of Unisys as a customer, or the cancellation or rescheduling of orders
already placed, would materially and adversely affect the Company's business,
financial condition and operating results.
During the first quarter of 1997, the Company commenced selling products
to Tandem. Sales to Tandem accounted for approximately 15% of the Company's net
sales in the quarter ended March 31, 1998. In January 1998 Compaq Computer Corp.
("Compaq"), the corporate owner of Tandem, announced its planned acquisition of
Digital Equipment Corp. ("Digital"), a competitor of the Company. Presently, it
is too early to accurately determine the impact of Compaq's potential
acquisition of Digital on the Company's direct sales to Tandem. There can
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be no assurance that Tandem will continue to purchase from the Company at first
quarter levels, if at all.
On March 24, 1998, the Company announced that it had signed a corporate
purchasing agreement with Tandem pursuant to which Tandem has the ability to
purchase Synchronix from the Company and resell Synchronix under a private label
with Tandem's own systems. The Company's sales to Tandem will be made by
purchase order. Therefore, the Company has no long-term commitments from Tandem
and Tandem generally may cancel orders upon appropriate written notice to the
Company. There can be no assurance that orders from Tandem will continue at
their historic levels or that the Company will be able to obtain any new orders
from Tandem.
The Company continues efforts to establish potential OEM relationships for
specialized and standard versions of its Synchronix product line, in addition to
its relationships with Unisys and Tandem. There can be no assurance, however,
that such additional relationships will be established, or if established, that
they will decrease the Company's reliance on its OEM relationships with Unisys
and Tandem.
Gross Profit
The Company's cost of sales includes primarily the cost of purchased
material, direct labor and related overhead expenses, and amortization of
capitalized software. The Company's gross profit increased slightly by
approximately $28,000 in the three months ended March 31, 1998 to approximately
$2,430,000, from $2,402,000 in the three months ended March 31, 1997. The
Company's gross margin increased to 29.5% in the three months ended March 31,
1998, as compared to 27.5% in the corresponding period of the prior year. Such
increase in gross margin is due primarily to the lower volume of sales to the U.
S. Air Force through a Federal integrator during the first quarter of 1998, a
large proportion of which consist of third party components integrated with the
Company's proprietary mass storage enhancement products. Third party components
generally have lower gross margins than the Company's proprietary products.
Operating Expenses
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries, commissions, and travel costs for sales and marketing personnel, trade
shows and expenses associated with the Company's management, accounting,
contract and administrative functions. The Company anticipates that SG&A
spending levels will decrease as a percentage of sales to the extent sales to
OEMs increase as a percentage of sales. Sales to OEMs typically absorb much of
the administrative burden otherwise incurred by the Company. SG&A expenses
increased as a percentage of net sales representing 22.4% and 18.6% for the
three months ended March 31, 1998 and 1997, respectively. SG&A expenses
increased by $225,000 to $1,847,000 in the three months ended March 31, 1998
from $1,622,000 in the three months ended March 31, 1997. Such increases were
due primarily to lower sales volume and the hiring of additional sales and
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<PAGE>
marketing personnel. Salaries, commissions, bonuses, employee benefits and
payroll taxes were the largest components of SG&A expenses, accounting for 72%
and 71% of such expenses in the three months ended March 31, 1998 and March 31,
1997, respectively.
Research and development expenses consist primarily of salaries and
benefits paid to engineers and programmers and other related overhead expenses.
These expenses increased in the three months ended March 31, 1998 by $227,000 or
60.2% from $377,000 in the corresponding period of the prior year. This increase
is due primarily to the hiring of additional engineers to continue the product
development initiative associated with the enhancements to the Company's
proprietary mass storage products. Such expenses for the first quarter of 1998
represented approximately 7.3% of the Company's net sales and, including the
amount capitalized in accordance with SFAS No. 86, represented approximately
9.5% of the Company's net sales. Research and development expenses are
anticipated to increase substantially, in the near future, to enable the Company
to update and expand upon its existing product offerings and to integrate its
products into systems of future OEMs.
Research and development projects for which the Company expects to devote
resources in the near future relate to: (i) the continued development of a new
technology center; (ii) a next generation of the Synchronix family of products;
(iii) the development of a distributed file system storage architecture; (iv)
new interface connectivities; (v) customized OEM products; and (vi) the
development of a ServerNet product with Tandem. The Company believes that the
anticipated increase in its research and development investment could adversely
affect earnings in the next six months.
Net Interest (Income) Expense
Net interest income was $125,000 for the three months ended March 31,
1998, while net interest expense was $58,000 for the three months ended March
31, 1997. Such fluctuation was due principally to an increase in interest income
due to higher cash balances resulting from cash generated by the Company's
follow-on public offering in August 1997 and a reduction in the borrowings
against the Company's accounts receivable line of credit.
LIQUIDITY AND CAPITAL RESOURCES
Since 1994, the Company has funded its operations primarily from cash
generated by operations augmented with funds from borrowings under a line of
credit and inventory financing and through private and public sales of equity
securities. On March 31, 1998, the Company's cash balance was approximately $9.6
million.
Net cash used in operating activities was $1,139,000 for the three months
ended March 31, 1998, while net cash provided by operating activities was
$839,000 for the three months ended March 31, 1997. Such use of cash resulted
primarily from an increase in accounts receivable. Net cash used in financing
activities was $364,000 for the three months ended March 31, 1998, while net
cash provided by financing activities was $684,000 for the three months
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ended March 31, 1997. Such use of cash resulted primarily from a net reduction
of certain loans payable.
The Company used $383,000 and $63,000 for the acquisition of equipment by
direct purchase during such respective periods. Total capital expenditures for
1998 are expected to be approximately $1,000,000, although such amounts are not
subject to formal commitments. The Company anticipates that such expenditures
will include the purchase of capital equipment for research and development and
general corporate use. There are no other material commitments for capital
expenditures currently outstanding. Net borrowings under the Company's accounts
receivable financing facility used funds of $350,000 and provided funds of
$627,000 for the three months ended March 31, 1998 and 1997, respectively.
The Company's working capital was $15.1 million and $15.3 million at March
31, 1998 and December 31, 1997, respectively.
On July 9, 1997, the Company entered into a full recourse factoring
facility with NationsBanc Commercial Corporation ("NCC") which provides for
aggregate advances not to exceed the lesser of $7 million or up to 85% of
Eligible Receivables (as defined). Interest on such advances is payable monthly
in arrears at the prime lending rate and the Company is obligated to pay certain
annual fees. The factoring facility is for a period of three years (unless
terminated by NCC by providing the Company sixty days prior written notice)
beginning on July 30, 1997. The obligations of the Company under such agreement
are collateralized by substantially all of the assets of the Company. As of
March 31, 1998 the Company's balance outstanding under this full recourse
factoring facility was approximately $681,000.
On May 17, 1996, the Company's direct pay line of credit with AT&T
Commercial Finance Corporation ("AT&T-CFC") was terminated and its general line
of credit with AT&T-CFC was increased to $2 million. Effective December 1, 1997,
The Finova Group Inc. ("Finova") acquired the Company's general line of credit
with AT&T-CFC. The agreement with Finova contains covenants relating to net
worth, total assets to debt and total inventory to debt. The Company's
obligations under the agreement with Finova are collateralized by substantially
all of the assets of the Company. Subsequent to the end of the quarter, such
general line of credit was extended to April 30, 1999 on the same terms and
conditions.
The Company uses its line of credit with Finova to augment its purchasing
ability with various vendors. The Company relied on this line of credit for 1%
and 5% of its inventory acquisitions, respectively, the majority of which were
purchases from Tech Data Corporation in the three months ended March 31, 1998
and Decision Support Systems in the three months ended March 31, 1997. The
maximum amount, during the preceding twelve months, that the Company has drawn
under such general line of credit has been approximately $1.7 million. As of
March 31, 1998, the Company had no balance outstanding under this credit line,
and available credit under such line towards future inventory purchases was
approximately $2.0 million.
-14-
<PAGE>
AT&T-CFC and NCC had entered into an intercreditor subordination agreement
with respect to their relative interests in substantially all of the Company's
assets. Effective December 1, 1997, Finova entered into such intercreditor
subordination agreement with NCC.
The Company's agreement with NCC restricts the Company's ability to pay
certain dividends without NCC's prior written consent. The Company's agreement
with Finova prohibits the payment of dividends. AT&T-CFC, the previous lender
under the Finova line of credit, waived such prohibition in connection with the
dividend payments made to the holders of the Series B Preferred Stock and Series
C Preferred Stock.
During 1997, the Company utilized $222,000 of net operating loss carryover
("NOL") for federal tax purposes. The Company has a NOL for Federal income tax
purposes of approximately $7,174,000, which will begin to expire in 2009. The
Company also has research and development tax credit carryovers for Federal
income tax purposes of approximately $226,000 which will begin to expire in
2009. In addition, the Company has alternative minimum tax credits of
approximately $68,000. These credits can be carried forward indefinitely. The
Company experienced a change in ownership in 1996 as defined by Section 382 of
the Internal Revenue Code. Accordingly, future use of these NOLs and income tax
credits may be limited.
The Company also has approximately $9,974,000 of state NOL carryforwards
which will begin to expire in 2001 and state research and development tax credit
carryforwards of $219,000 as of December 31, 1997.
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 since the
Company is in a cumulative loss position. Such valuation allowance will be
reassessed periodically by the Company.
In February 1998, the Company's Board of Directors approved resolutions
authorizing the expenditure of up to one million dollars for research and
development of a distributed file system storage architecture and other
significant enhancements to the current Synchronix product family. As of March
31, 1998, the Company spent approximately $21,000 on such research and product
developments.
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than the year
2000. This, in turn, could result in major system failures or miscalculations,
and is generally referred to as the "Year 2000 Problem." In December 1997, the
Company began developing an implementation plan for a new enterprise management
system to internally resolve the Year 2000 Problem. The Company expects to
complete such implementation by the first quarter of 1999. As part of the
process, the Company is currently evaluating options with respect to the
replacement of certain hardware and software to make its computer systems Year
2000 compliant. Presently, the Company does not believe
-15-
<PAGE>
that Year 2000 compliance will result in material investments by the Company,
nor does the Company anticipate that the Year 2000 Problem will have material
adverse effects on the business operations or financial performance of the
Company. There can be no assurance, however, that the Year 2000 Problem will not
adversely affect the Company's business, operating results and financial
condition.
The Company believes that each of Synchronix, Synchronection-FT and Raven
UX 410 is Year 2000 compliant. There can be no assurances, however, that such
products are Year 2000 compliant. Although the Company believes its products are
Year 2000 compliant, the purchasing patterns of customers and potential
customers may be affected by issues associated with the Year 2000 Problem. As
companies expend significant resources to correct their current data storage
solutions, these expenditures may result in reduced funds available to purchase
products such as those offered by the Company. There can be no assurance that
the Year 2000 Problem will not adversely affect the Company's business,
operating results and financial condition.
The Company believes that its existing available cash, credit facilities
and the cash flow expected to be generated from operations, will be adequate to
satisfy its current and planned operations for at least the next 12 months.
The Company's operating results are affected by seasonal factors,
particularly the spending fluctuations of its largest customers including
Unisys, Tandem and the Federal government. Due to the relatively fixed nature of
certain of the Company's costs, a decline in net sales in any fiscal quarter
will have a material adverse effect on that quarter's results of operations. The
Company does not expect such spending fluctuations to be altered in the future.
A significant reduction in orders from any of the Company's largest customers
could have a material adverse effect on the Company's results of operations.
There can be no assurance that the Company's largest customers will continue to
place orders with the Company or that orders of its customers will continue at
their previous levels.
-16-
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 2. Changes in Securities and Use of Proceeds.
On October 28, 1997, the Company granted options to purchase 498,400
shares of its Common Stock (the "Non-Qualified Options"), outside of the
Company's registered stock option plans, to certain officers and employees at an
exercise price of $8.00 per share. During the quarter ended March 31, 1998, on
February 18, 1998, the Company canceled the Non-Qualified Options previously
granted on October 28, 1997. In addition, on such date the Company reissued the
Non-Qualified Options, outside of the Company's registered stock option plans,
to certain officers and employees at an exercise price of $4.00 per share. The
shares of Common Stock underlying such Non-Qualified Options have been
registered pursuant to Post-Effective Amendment No. 1 to Form S-8/S-8,
Registration No. 333-8416, dated February 27, 1998.
No underwriter was employed by the Company in connection with the
cancellations and reissuances described above. The Company believes that such
cancellations and reissuances were exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended, as transactions not involving any
public offering. No public offering was involved and the securities were
acquired for investment and not with a view to distribution. All recipients had
adequate access to information about the Company.
Item 5. Other Information.
On March 24, 1998, the Company announced that it had signed a corporate
purchasing agreement with Tandem pursuant to which Tandem has the ability to
purchase Synchronix from the Company and resell Synchronix under a private label
with Tandem's own systems. The Company's sales to Tandem will be made by
purchase order. Therefore, the Company has no long-term commitments from Tandem
and Tandem generally may cancel orders upon appropriate written notice to the
Company. There can be no assurance that orders from Tandem will continue at
their historic levels or that the Company will be able to obtain any new orders
from Tandem.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11 Calculation of Earnings per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECCS, Inc.
DATE: May 8, 1998 By: /s/ Gregg M. Azcuy
-------------------------------------
Gregg M. Azcuy, President
and Chief Executive Officer
(Principal Executive Officer)
DATE: May 8, 1998 By: /s/ Louis J. Altieri
-------------------------------------
Louis J. Altieri, Vice President,
Finance and Administration (Principal
Financial and Accounting Officer)
-18-
Exhibit 11
Calculation of Earnings per Share
Three Months
Ended March 31,
---------------------
1998 1997
---- ----
Numerator:
Net income ........................................ $ 104 $ 345
Preferred stock dividends ......................... -- (80)
------- -------
Numerator for basic earnings per share -
income available to common shareholders ........... 104 265
Effect of dilutive securities:
Preferred stock dividends ......................... -- 80
Interest on unpaid preferred stock dividends ...... -- 5
------- -------
-- 85
------- -------
Numerator for dilutive earnings per share -
income available to common shareholders after
assumed conversion ................................ 104 350
Denominator:
Denominator for basic earnings per share-
weighted-average shares ........................... 10,918 4,457
Effect of dilutive securities:
Employee stock options and warrants ............... 333 768
Convertible preferred stock ....................... -- 3,771
------- -------
333 4,539
Dilutive potential common shares
Denominator for diluted earnings per share-
Adjusted weighted-average shares and
assumed conversion ................................ 11,251 8,996
======= =======
Basic earnings per share .......................... $ 0.01 $ 0.06
======= =======
Diluted earnings per share ........................ $ 0.01 $ 0.04
======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THIS FORM
10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
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<NAME> ECCS, INC.
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