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, 1999
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
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Sheila Drive, Tinton Falls, New Jersey 07724
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(Address of Principal Executive Offices) (Zip Code)
(732) 747-6995
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(Registrant's Telephone Number,
Including Area Code)
(732) 747-6995
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:
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 31, 1999:
Class Number of Shares
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Common Stock, $.01 par value 11,028,084
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ECCS, INC.
TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION................................................1
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Item 1. Financial Statements...........................................1
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998..............................................2
Consolidated Statements of Operations for the
three months ended March 31, 1999 and
March 31, 1998 (unaudited).........................................3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and
March 31, 1998 (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...................................14
PART II. OTHER INFORMATION..................................................18
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Item 5. Other Information.............................................18
Item 6. Exhibits and Reports on Form 8-K..............................18
SIGNATURES .................................................................19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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ECCS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31, March 31,
1998 1999
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(unaudited)
Assets
Current Assets:
Cash and cash equivalents........................... $ 5,374 $ 6,351
Accounts receivable, less allowance for doubtful
accounts of $104 and $334 at March 31, 1999 and
December 31, 1998, respectively.................... 6,644 7,066
Inventories......................................... 5,563 4,644
Prepaid expenses and other receivables.............. 314 292
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17,895 18,353
Property, plant and equipment (net)................... 1,916 1,796
Capitalized software (net)............................ 1,302 1,457
Other assets.......................................... 261 322
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Total Assets..................................... $ 21,374 $ 21,928
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Liabilities and Shareholders' Equity
Current Liabilities:
Loans payable....................................... $ -- $ 485
Payable to Finova Capital........................... 1,231 919
Current portion of capital lease.................... 110 99
Accounts payable.................................... 2,800 1,668
Accrued expenses and other.......................... 1,140 2,580
Warranty............................................ 523 600
Customer deposits, advances and other credits....... 122 48
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5,926 6,399
Capital lease obligations, net of current portions.... 135 152
Deferred rent......................................... 81 65
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6,142 6,616
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Shareholders' Equity:
Preferred stock, $.01 par value per share,
Authorized, 3,000,000 shares; Issued and
outstanding, none at March 31, 1999 and
December 31, 1998, respectively.................... -- --
Common stock, $.01 par value per share, Authorized,
20,000,000 shares; Issued and outstanding,
11,028,084 shares and 11,027,084 shares at March
31, 1999 and December 31, 1998, respectively....... 110 110
Capital in excess of par value - common ............ 25,860 25,867
Accumulated Deficit................................. (10,738) (10,665)
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15,232 15,312
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Total Liabilities and Shareholders' Equity....... $ 21,374 $ 21,928
======== ========
See notes to consolidated financial statements.
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ECCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months
Ended March 31,
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1998 1999
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Net sales......................................... $ 8,240 $ 9,433
Cost of sales..................................... 5,810 6,494
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Gross profit..................................... 2,430 2,939
Operating expenses:
Selling, general & administrative................ 1,847 2,498
Research & development........................... 604 452
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Operating loss.................................... (21) (11)
Net interest income.............................. 125 84
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Net income........................................ $ 104 $ 73
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Preferred dividends.............................. -- --
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Net income applicable to
common shares.................................... $ 104 $ 73
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Earnings per common share:
Net income per common
share - basic................................... $ 0.01 $ 0.01
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Earnings per common share -
assuming dilution:
Net income per common share
- diluted........................................ $ 0.01 $ 0.01
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Weighted average number of common and
dilutive shares - basic.......................... 10,918 11,027
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Weighted average number of common and
dilutive shares - diluted........................ 11,251 11,337
========== ========
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three Months Ended March 31,
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1998 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 104 $ 73
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation and amortization.............................. 255 272
Increase in accounts receivable............................ (1,307) (422)
Decrease in inventories.................................... 169 919
Decrease (increase) in prepaid expenses and other.......... 149 (39)
Decrease in payable to Finova Group/AT&T Commercial........ -- (312)
(Decrease) increase in accounts payable, accrued
liabilities, deferred rent and other...................... (384) 369
Decrease in customer deposits, advances and other credits.. (125) (74)
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Net cash (used in) provided by operating activities............ (1,139) 786
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Cash flows from investing activities:
Additions to property, plant and equipment................... (383) (122)
Additions to capitalized software............................ (178) (185)
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Net cash used in investing activities.......................... (561) (307)
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Cash flows from financing activities:
Borrowings under revolving credit agreement.................. 1,250 5,163
Repayments under revolving credit agreement.................. (1,600) (4,678)
Repayment of capital lease obligations....................... (11) 6
Net (cost) proceeds from exercise of employee
stock options and issuance of common stock................... (3) 7
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Net cash (used in) provided by financing activities............ (364) 498
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Net (decrease) increase in cash and cash equivalents........... (2,064) 977
Cash and cash equivalents at beginning of period............... 11,625 5,374
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Cash and cash equivalents at end of period..................... $ 9,561 $ 6,351
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................... $ 17 $ 25
========= ========
</TABLE>
See notes to consolidated financial statements.
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(INFORMATION FOR MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
NOTE 1 -- BASIS OF PRESENTATION
The information presented for March 31, 1998 and March 31, 1999 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, 1999. 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, 1998,
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, user definable, fault
tolerant, direct platform-attached and network-attached storage subsystems for a
wide range of customer requirements.
ECCS sells to a broad range of customers in various industries (e.g. large
database companies, financial enterprises, retail enterprises, non-profits
organizations, Internet Service Providers, digital imaging users,
telecommunications companies and the US Government).
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(INFORMATION FOR MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
(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:
December 31, March 31,
1998 1999
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(unaudited)
Purchased parts.................................. $2,500 $2,334
Finished goods................................... 3,848 3,015
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6,348 5,349
Less: inventory valuation reserve.............. 785 705
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$5,563 $4,644
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(d) Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation and
amortization are provided on a straight-line basis over the estimated useful
lives ranging from 3 to 5 years.
Equipment under capital leases is recorded at the lower of fair value or
present value of minimum lease payments at the inception of the lease.
Amortization of the leased property is computed using the straight-line method
over the term of the lease.
(e) 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
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(INFORMATION FOR MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
charged to cost of sales and aggregated $63 and $30 for the three month periods
ended March 31, 1998 and March 31, 1999, respectively. At March 31, 1999 and
December 31, 1998, the Company had capitalized $3,481 and $3,661 of software
development costs, respectively, of which $2,024 and $1,993 had been amortized,
respectively. During 1998, the Company wrote off $366 of previously capitalized
projects.
(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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(INFORMATION FOR MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
(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.
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
Compaq Computer Corp. ("Compaq"), the corporate owner of Tandem Computers
Incorporated ("Tandem"), acquired Digital Equipment Corporation ("Digital"), a
competitor of the Company, in 1998. On March 24, 1998, the Company announced a
relationship with
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ECCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(INFORMATION FOR MARCH 31, 1998 AND MARCH 31, 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
Tandem pursuant to which Tandem could purchase Synchronix from the Company and
resell Synchronix under a private label with Tandem's own systems. Although
Tandem purchased product from the Company through 1998, the acquisition of
Digital by Compaq has adversely effected the Company's sales to Compaq/Tandem.
As a result of Compaq's acquisition of Digital, whose products included a
similar storage system to that of ECCS, Compaq decided to focus its marketing
efforts on its own products in lieu of outsourced products. The Company was
informed that Tandem intends to discontinue the marketing of the Company's
product after the second quarter of 1999. Accordingly, the Company notified
Tandem that it would terminate the contract effective February 15, 1999, which,
pursuant to the reseller agreement, would give Tandem an additional ninety days
to purchase product from the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
ECCS is a provider of enterprise storage solutions to protect and ensure
access to critical data for server attached, Storage Area Networks (SAN), Fibre
Channel Storage, and Network Attached storage markets. ECCS designs,
manufactures, sells and supports high performance, user-definable, fault and
non-fault tolerant storage subsystems to meet a wide range of customer
applications, needs and Operating Systems (NT and UNIX). These connectivity
options enable storage users the flexibility to choose and deploy a particular
storage solution to meet their needs, accommodating both centralized to
distributed storage environments.
The Company believes it has developed innovative fault tolerant storage
systems through continued investment in engineering and through customer-driven
product development. ECCS' strategy is to provide its customers with product
innovation to meet their changing business and computing needs. The Company also
provides its customers with connectivity options, performance enhancements,
flexibility and improved data migration paths to serve most Opens System
environments. The user tools the Company has engineered and incorporated into
its products are easy to use and automate event fixes, work-arounds and various
notification means to track potential problems.
ECCS products are sold globally through OEM's, VAR's and system
integrators. In addition, ECCS' direct sales force sells its products
domestically. ECCS sells to a broad range of customers in various industries
(e.g. large database companies, financial enterprises, retail enterprises,
non-profits organizations, Internet Service Providers, digital imaging users,
telecommunications companies and the US Federal Government).
The Company's revenues are generated from two 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; and (ii) revenues
derived from services and other revenue which include professional services and
maintenance contracts.
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, Year 2000 compliance, capital expenditures, selling, general
and administrative expenditures, research and
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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. Factors that could cause actual results, performance or
achievements to vary materially include, but are not limited to: component
quality and availability, changes in business conditions, Year 2000 compliance
of the Company's and other vendors' products and related issues, including
impact of the Year 2000 problem on customer buying patterns, changes in ECCS'
sales strategy and product development plans, changes in the data storage or
network marketplace, competition between ECCS and other companies that may be
entering the data storage host/network attached markets, competitive pricing
pressures, continued market acceptance of ECCS' open systems products, delays in
the development of new technology and changes in customer buying patterns.
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
Three Months Ended March 31, 1998 and 1999
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Net Sales
Net sales increased by approximately $1,193 or 15%, in the three months
ended March 31, 1999, as compared to net sales in the three months ended March
31, 1998. Sales of the Company's proprietary mass storage enhancement systems,
including sales of certain third party component products, accounted for 89% and
96% of net sales in the quarters ended March 31, 1998 and 1999, respectively.
Sales by the Company in its capacity as a VAR accounted for 2% and less than 1%
of net sales in the quarters ended March 31, 1998 and 1999, respectively.
Services and other revenues accounted for 9% and 4% of net sales in the quarters
ended March 31, 1998 and 1999, respectively. The increase in the 1999 period
resulted primarily from an increase in sales of the Company's mass storage
enhancement systems to Federal customers.
Sales to the U.S. Air Force through Federal integrators accounted for
approximately 64% of net sales in the quarter ended March 31, 1999. 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 17% of net
sales in the quarter ended March 31, 1999. Sales to the Company's primary
alternate channel partner, Unisys Corporation ("Unisys"), accounted for
approximately 11% of the Company's net sales in the quarter ended March 31,
1999. 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
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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 6% of the Company's net
sales in the quarter ended March 31, 1999. 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. Although
Tandem purchased product from the Company during the quarter ended March 31,
1999, the acquisition of Digital by Compaq has adversely effected the Company's
sales to Tandem/Compaq. As a result of Compaq's acquisition of Digital, whose
products include a similar storage system to that of ECCS, Compaq decided to
focus its marketing efforts on its own products in lieu of outsourced products.
The Company was informed that Tandem intends to discontinue the marketing of the
Company's product after the second quarter of 1999. Accordingly, the Company
notified Tandem that it would terminate the contract effective February 15,
1999, which, pursuant to the reseller agreement, would give Tandem an additional
ninety days to purchase product from the Company.
In August 1998, the Company executed an agreement with Hewlett Packard
Company ("HP") pursuant to which HP may resell the Company's Synchronix products
and services through HP's North American Local Product Organization. This
agreement provides the Company with an additional alternate channel partner. The
Company believes that HP provides ECCS with an established reseller capability
in a wide range of markets. In addition, HP customers will now be able to
acquire ECCS' product and services as part of an integrated HP solution. There
can be no assurance that the Company's sales of Synchronix products, or other
products, will increase as a result of its agreement with HP. To date there have
been no significant sales to HP.
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
or compensate for the adverse impact on Company sales to Tandem resulting from
Compaq's acquisition of Digital.
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<PAGE>
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 by approximately $509
in the three months ended March 31, 1999 to approximately $2,939, from $2,430 in
the three months ended March 31, 1998. The Company's gross margin increased to
31.2% in the three months ended March 31, 1999, as compared to 29.5% in the
corresponding period of the prior year. Such increase in gross margin is due
primarily to an increase in sales of the Company's proprietary mass storage
products which generally have higher gross margins than other products that the
Company sells.
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. SG&A expenses increased as a percentage
of net sales representing 22.4% and 28.6% for the three months ended March 31,
1998 and 1999, respectively. SG&A expenses increased by $651 to $2,498 in the
three months ended March 31, 1999 from $1,847 in the three months ended March
31, 1998. Such increases were due primarily to the hiring of additional sales
and marketing personnel, coupled with enhanced marketing efforts related to the
Company's current and new product offering. Salaries, commissions, bonuses,
employee benefits and payroll taxes were the largest components of SG&A
expenses, accounting for 72% and 70% of such expenses in the three months ended
March 31, 1998 and March 31, 1999, respectively.
Research and development expenses consist primarily of salaries and
benefits paid to engineers and programmers and other related overhead expenses.
These expenses decreased in the three months ended March 31, 1999 by $152 or 25%
from $604 in the corresponding period of the prior year. This decrease is due
primarily to the Company's decision to discontinue its efforts to develop a
fibre controller and a controller design that incorporates Tandem's Servernet
technology. Such expenses for the first quarter of 1999 represented
approximately 4.8% of the Company's net sales and, including the amount
capitalized in accordance with SFAS No. 86, represented approximately 6.8% 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) a next generation of the Synchronix
family of products; (ii) the development of a distributed file system storage
architecture; (iii) new interface connectivities; and (iv) customized OEM
products. The Company believes that the anticipated increase in its research and
development investment could adversely affect earnings in the next six months.
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Net Interest (Income) Expense
Net interest income was $125 and $84 for the three months ended March 31,
1998 and March 31, 1999, respectively. The $41 reduction in interest income was
due primarily to lower cash balances in 1999 compared to the same period in
1998.
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 levels financing and through private and public sales of
equity securities. On March 31, 1999, the Company's cash balance was
approximately $6,351.
Net cash used in operating activities was $1,139 for the three months ended
March 31, 1998 and net cash provided by operating activities was $786 for the
three months ended March 31, 1999. Such source of cash in 1999 resulted
primarily from a decrease in inventory levels. Net cash used in financing
activities was $364 for the three months ended March 31, 1998 and net cash
provided by financing activities was $498 for the three months ended March 31,
1999. Such source of cash in 1999 resulted primarily from an increase in amounts
due NationsBanc under the Company's revolving credit agreement.
The Company used $383 and $122 for the acquisition of equipment by direct
purchase during the quarter ended March 31, 1998 and March 31, 1999,
respectively. Total capital expenditures for 1999 are expected to be
approximately $600, 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 payments under the Company's accounts receivable financing
facility for the three months ended March 31, 1998 was $350. Such amounts for
the three months ended March 31, 1999 represent net borrowings of $485.
The Company's working capital was approximately $12,000 at December 31,
1998 and March 31, 1999.
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 $7,000 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, 1999, the Company's balance outstanding under this full recourse
factoring facility was approximately $485.
- 14 -
<PAGE>
The Company also has a $2,000 general line of credit with the Finova Group,
Inc. ("Finova"). 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. Finova increased such general line of credit
to $3,000 through January 31, 1999, on the same terms and conditions. After such
date, the line returned to $2,000.
The Company uses its line of credit with Finova to augment its purchasing
ability with various vendors. The maximum amount, during the preceding twelve
months, that the Company has drawn under such general line of credit has been
approximately $123. As of March 31, 1999, the Company had a balance of $919
outstanding under this credit line, and available credit under such line towards
future inventory purchases was approximately $1,081.
NCC and Finova had entered into an intercreditor subordination agreement
with respect to their relative interests in substantially all of the Company's
assets.
The Company's agreement with NCC restricts the Company's ability to pay
certain dividends without NCC's prior written consent. The Company's agreement
with Finova prohibits the payment of dividends.
During 1997, the Company utilized $1,118 of net operating loss carryover
("NOL") for federal tax purposes. The Company has a NOL for Federal income tax
purposes of approximately $10,278, which will begin to expire in 2009. The
Company also has research and development tax credit carryovers for Federal
income tax purposes of approximately $376, which will begin to expire in 2009.
In addition, the Company has alternative minimum tax credits of approximately
$67. 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 $12,965 of state NOL carryforwards which
will begin to expire in 2001 and state research and development tax credit
carryforwards of $334 as of December 31, 1998.
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.
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.
- 15 -
<PAGE>
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.
IMPACT OF THE YEAR 2000
General
Computer systems were originally designed to recognize calendar years by
the last two digits in the date code field. Beginning in the Year 2000, these
date code field will need to accept four digit entries to distinguish
twenty-first century dates from twentieth century dates. Any of ECCS' computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the Year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. As a result, in the coming year, the
computerized systems (including both information and non-information technology
systems) and applications used by ECCS will need to be reviewed, evaluated and,
if and where necessary, modified or replaced to ensure that all financial,
information and operating systems are Year 2000 compliant.
State of Readiness
ECCS has formed an internal task force comprised of representatives of its
various relevant departments to address Year 2000 compliance matters. The task
force has undertaken a preliminary review of internal and external areas that
are likely to be affected by Year 2000 compliance matters and has classified the
various areas as mission critical, important or non-critical/non-important.
With respect to internal matters, ECCS has completed a review of its
hardware and software to determine whether its business-related applications
(including applications relating to distribution, finance, inventories,
operations, products, purchasing and sales/marketing) will be Year 2000
compliant. In addition, in 1998, programs designed to identify Year 2000
problems associated with dates embedded in certain business-related files were
created and executed to identify any Year 2000 compliance issues. The testing
unearthed a few Year 2000 problems, all of which have been addressed and
retested for Year 2000 readiness. The results of such tests continue to be
analyzed. There can be no assurance, however, that such testing has detected, or
will detect, all compliance issues related to the Year 2000 problem.
- 16 -
<PAGE>
With respect to external matters, ECCS has distributed questionnaires and
requests for certification to its mission critical vendors and in the process of
obtaining and reviewing the responses thereto. The questionnaires have requested
information concerning embedded technologies of such vendors, the hardware and
software applications used by such vendors and the Year 2000 compliance efforts
of such vendors relating thereto.
Estimated Year 2000 Compliance Costs
Through March 31, 1999, ECCS has incurred approximately $1,275 in costs
(excluding in-house labor and hardware), which includes installation of the ERP
system in 1998, in connection with Year 2000 compliance matters. ECCS estimates
that it will expend approximately $100 in fiscal year 1999 on additional
hardware, software and other items related to the Year 2000 compliance matters.
Risks Relating to Year 2000 Compliance Matters
ECCS' goal to become Year 2000 compliant with respect to internal matters
during calendar year 1999. Although ECCS has begun and is undertaking testing of
its internal business-related hardware and software applications, there can be
no assurances that such testing will detect all applications that may be
affected by year 2000 compliance problems. With respect to external matters, due
to the multi-dependent and interdependent issues raised by Year 2000 compliance,
including many factors beyond its control, ECCS may face the possibility that
one or more of its mission critical vendors, such as its utilities, telephone
carriers or equipment manufacturers, may not be Year 2000 compliance on a timely
basis. Because of the unique nature of such vendors, alternate providers may not
be available.
Contingency Planning
ECCS has begun the process of assessing contingency plans that might be
available in the event of either internal or external Year 2000 compliance
problems. To this end, ECCS' various internal departments have begun to prepare
assessments of potential contingency alternatives. The task force will undertake
a review of these assessments in respect of application of contingency plans on
a department-by-department basis and on a company-wide basis. ECCS intends to
complete its contingency planning in respect to Year 2000 compliance during the
third quarter of calendar year 1999.
- 17 -
<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 5. OTHER INFORMATION.
Compaq Computer Corp. ("Compaq"), the corporate owner of Tandem Computers
Incorporated ("Tandem"), acquired Digital Equipment Corporation ("Digital"), a
competitor of the Company, in 1998. On March 24, 1998, the Company announced a
relationship with Tandem pursuant to which Tandem could purchase Synchronix from
the Company and resell Synchronix under a private label with Tandem's own
systems. Although Tandem purchased product from the Company through 1998, the
acquisition of Digital by Compaq has adversely effected the Company's sales to
Compaq/Tandem. As a result of Compaq's acquisition of Digital, whose products
included a similar storage system to that of ECCS, Compaq decided to focus its
marketing efforts on its own products in lieu of outsourced products. The
Company was informed that Tandem intends to discontinue the marketing of the
Company's product after the second quarter of 1999. Accordingly, the Company
notified Tandem that it would terminate the contract effective February 15,
1999, which, pursuant to the reseller agreement, would give Tandem an additional
ninety days to purchase product from the Company.
In February 1999, Unisys, the primary outside manufacturer for the
Synchronix system, notified the Company that Unisys was closing its Winnipeg
computer storage systems manufacturing plant by July 31, 1999 and accordingly,
the Manufacturing Service Agreement will be terminated at that time. The Company
plans to locate another third party manufacturer and/or manufacture such systems
in-house. Although the Company anticipates that it has sufficient facilities and
expertise to manufacture the Synchronix 1000 and Synchronix 2000 in-house, there
can be no assurance that material problems will not arise in the future that
could materially adversely effect the Company's results of operations.
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.
- 18 -
<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 14, 1999 By: /s/ Gregg M. Azcuy
-------------------------------------
Gregg M. Azcuy, President
and Chief Executive Officer
(Principal Executive Officer)
DATE: May 14, 1999 By: /s/ Louis J. Altieri
-------------------------------------
Louis J. Altieri, Vice President,
Finance and Administration (Principal
Financial and Accounting Officer)
- 19 -
EXHIBIT 11
Calculation of Earnings per Share
Three Months
Ended March 31,
------------------------
1998 1999
---------- ----------
Numerator:
Net income $ 104 $ 73
Preferred stock dividends -- --
-------- --------
Numerator for basic earnings per share -
income available to common shareholders 104 73
Effect of dilutive securities:
Preferred stock dividends -- --
-------- --------
Interest on unpaid preferred stock dividends -- --
-------- --------
-- --
-------- --------
Numerator for dilutive earnings per share -
income available to common shareholders after
assumed conversion 104 73
Denominator:
Denominator for basic earnings per share -
weighted-average shares 10,918 11,027
Effect of dilutive securities:
Employee stock options and warrants 333 310
Dilutive potential common shares
Denominator for diluted earnings per share -
Adjusted weighted-average shares and
assumed conversion 11,251 11,337
======== ========
Basic earnings per share $ 0.01 $ 0.01
======== ========
Diluted earnings per share $ 0.01 $ 0.01
======== ========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
consolidated financial statements at March 31, 1999 and for the three month
period ended March 31, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
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<NAME> ECCS, Inc.
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<PERIOD-START> JAN-01-1999
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