SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File No. 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)
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 September 30, 1999:
Class Number of Shares
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Common Stock, $.01 par value 11,078,206
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ECCS, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION.............................................. 1
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Item 1. Financial Statements........................................ 1
Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999 (unaudited)................................. 2
Consolidated Statements of Operations for the
three months ended September 30, 1998 and
September 30, 1999 and for the nine months
ended September 30, 1998 and
September 30, 1999 (unaudited)..................................... 3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and
September 30, 1999 (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.................................... 16
PART II. OTHER INFORMATION................................................. 21
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Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
SIGNATURES................................................................. 22
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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ECCS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
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(unaudited)
<S> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents.................................................... $ 5,374 $ 3,494
Accounts receivable, less allowance for doubtful accounts of $334
and $104 at December 31, 1998 and September 30, 1999,
respectively................................................................ 6,644 7,541
Inventories.................................................................. 5,563 7,267
Prepaid expenses and other receivables....................................... 314 315
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17,895 18,617
Property, plant and equipment (net)............................................ 1,916 1,710
Capitalized software (net)..................................................... 1,302 1,650
Other assets................................................................... 261 379
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Total Assets ............................................................. $ 21,374 $ 22,356
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Liabilities and Shareholders' Equity
Current Liabilities:
Payable to Finova Capital.................................................... $ 1,231 696
Current portion of capital lease obligations................................. 110 128
Accounts payable............................................................. 2,800 3,263
Accrued expenses and other................................................... 1,140 1,086
Warranty..................................................................... 523 672
Customer deposits, advances and other credits................................ 122 85
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5,926 5,930
Capital lease-long term net of current portion................................. 135 62
Deferred rent.................................................................. 81 31
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6,142 6,023
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Shareholders' Equity:
Preferred Stock $0.01 par value per share, authorized, 3,000,000
shares; Issued and outstanding, none at December 31, 1998 and
September 30, 1999, respectively............................................. -- --
Common stock, $0.01 par value per share, authorized, 20,000,000
shares; Issued and outstanding 11,027,084 shares and 11,078,206
shares at December 31, 1998 and September 30, 1999, respectively............. 110 111
Capital in excess of par value - common ....................................... 25,860 25,978
Accumulated Deficit............................................................ (10,738) (9,756)
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15,232 16,333
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Total Liabilities and Shareholders' Equity................................ $ 21,374 $ 22,356
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</TABLE>
See notes to consolidated financial statements.
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ECCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
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1998 1999 1998 1999
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<S> <C> <C> <C> <C>
Net sales.......................................... $ 6,317 $ 11,737 $ 21,026 $ 30,079
Cost of sales...................................... 4,402 8,114 14,714 20,317
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Gross profit...................................... 1,915 3,623 6,312 9,762
Operating expenses:
Selling, general & administrative................. 2,222 2,466 6,127 7,514
Research & development............................ 733 488 2,049 1,415
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Operating (loss) income............................ (1,040) 669 (1,864) 833
Net interest income............................... (103) (32) (319) (149)
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Net (loss) income................................. $ (937) $ 701 $ (1,545) $ 982
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Net (loss) income applicable to shares............. $ (937) $ 701 $ (1,545) $ 982
========== =========== ============= -----------
(LOSS) EARNINGS PER SHARE:
Net (loss) income per share - basic................ $ (0.09) $ 0.06 $ (0.14) $ 0.09
========== =========== ============= ===========
(LOSS) EARNINGS PER SHARE-
ASSUMING DILUTION:
Net (loss) income per share - diluted.............. $ (0.09) $ 0.06 $ (0.14) $ 0.08
========== =========== ============= ===========
Weighted average number of common
shares - basic.................................... 10,998 11,066 10,959 11,041
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Weighted average number of common
and common equivalent shares - diluted............ 10,998 12,274 10,959 11,828
========== =========== ============= ===========
</TABLE>
See notes to consolidated financial statements.
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ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
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1998 1999
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<S> <C> <C>
Cash flows from operating activities:
Net (loss) income................................................................. $ (1,545) $ 982
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization................................................... 822 1,070
Decrease (increase) in accounts receivable...................................... 113 (897)
Increase in inventories......................................................... (189) (1,704)
Decrease (increase) in prepaid expenses, other receivables and other assets..... 87 (119)
Decrease in payable to Finova Capital........................................... -- (535)
(Decrease) increase in accounts payable, accrued liabilities, deferred rent
and other liabilities.......................................................... (715) 508
Decrease in customer deposits, advances and other credits....................... (192) (37)
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Net cash (used in) operating activities............................................. (1,619) (732)
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Cash flows from investing activities:
Additions to property, plant and equipment........................................ (1,112) (452)
Additions to capitalized software................................................. (680) (760)
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Net cash used in investing activities............................................... (1,792) (1,212)
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Cash flows from financing activities:
Borrowings under revolving credit agreement....................................... 7,281 14,263
Repayments under revolving credit agreements...................................... (6,902) (14,263)
Net proceeds from (repayment of) long term debt, capital lease obligations........ 202 (55)
Net proceeds from exercise of employee stock options and issuance
of common stock.................................................................. 210 119
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Net cash provided by financing activities......................................... 791 64
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Net decrease in cash and cash equivalents......................................... (2,620) (1,880)
Cash and cash equivalents at beginning of period.................................... 11,625 5,374
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Cash and cash equivalents at end of period.......................................... $ 9,005 $ 3,494
============ ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest......................................................................... $ 71 $ 92
============ ==========
</TABLE>
See notes to consolidated financial statements.
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(INFORMATION FOR SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
NOTE 1 - BASIS OF PRESENTATION:
The information presented for September 30, 1999 and for the three and
nine-month periods then ended, is unaudited, but, in the opinion of the
management of ECCS, Inc. ("ECCS" or the "Company"), the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for the fair
presentation of the Company's financial position as of September 30, 1999, the
results of its operations for the three and nine-month periods ended September
30, 1998 and September 30, 1999 and its cash flows for the nine-month periods
ended September 30, 1998 and September 30, 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 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 for
a wide range of customer requirements.
ECCS sells to a broad range of customers in various industries (e.g.
database companies, financial enterprises, retail enterprises, non-profit
organizations, Internet Service Providers, digital imaging users,
telecommunications companies and the U.S. Government).
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(INFORMATION FOR SEPTEMBER 30, 1998 AND SEPTEMBER 30, 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:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
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(unaudited)
<S> <C> <C>
Purchased parts.......................................................... $ 2,500 $ 3,669
Finished goods........................................................... 3,848 4,458
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6,348 8,127
Less: inventory valuation reserve..................................... 785 860
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$ 5,563 $ 7,267
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</TABLE>
(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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(INFORMATION FOR SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
charged to cost of sales and aggregated $148 and $411 for the nine-month periods
ended September 30, 1998 and September 30, 1999, respectively. At December 31,
1998 and September 30, 1999, the Company had capitalized $3,661 and $4,054 of
software development costs, respectively, of which $1,993 and $2,404 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.
(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.
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(INFORMATION FOR SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
(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 in
conformity with 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
Sales to the U.S. Air Force through Federal integrators were $18,743 and
accounted for approximately 62.3% of net sales in the nine months ended
September 30, 1999. Sales to the U.S. Air Force in the nine months ended
September 30, 1999 increased by approximately 213.0% as compared to such sales
in the nine months ended September 30, 1998.
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(INFORMATION FOR SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999 IS UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
NOTE 6 - PAYABLE TO FINOVA GROUP, INC. AND TRANSACTION WITH A SIGNIFICANT VENDOR
The Company 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, 2000, on the same terms and conditions. During the third
quarter, however, the Company was allowed to exceed such amount by $295. After
such date, the amount available under such general line of credit shall revert
back to the original line of credit of $2,000.
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
31.6% of its inventory acquisitions, the majority of which were purchases from
Bell Micro Corporation in the nine months ended September 30, 1999. The maximum
amount, during the preceding twelve months, that the Company has drawn under
such general line of credit has been approximately $3,295. As of September 30,
1999, the Company had a balance of $696 outstanding under this credit line, and
available credit under such line towards future inventory purchases was $2,304.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (DOLLARS IN THOUSANDS)
OVERVIEW
ECCS is a provider of enterprise storage solutions to protect and ensure
access to critical data for server attached, Network Attached Storage (NAS),
Fibre Channel Storage and Storage Area Networks (SAN) 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. In addition, ECCS' direct
sales force sells its products domestically to VAR's, system integrators as well
as end user customers. 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 U.S. 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 development expenditures and other
statements regarding matters that are not historical facts,
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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
THREE MONTHS ENDED SEPTEMBER 30, 1998 and 1999
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NET SALES
Net sales increased by approximately $5,420, or 85.8%, in the three months
ended September 30, 1999 as compared to net sales in the three months ended
September 30, 1998. Sales of the Company's proprietary mass storage enhancement
systems, including sales of certain third party component products, accounted
for 93.8% and 94.2% of net sales in the quarters ended September 30, 1998 and
1999, respectively. Sales by the Company in its capacity as a VAR accounted for
2.4% and less than 1.0% of net sales in the quarters ended September 30, 1998
and 1999, respectively. Services and other revenues accounted for 3.8% and 5.8%
of net sales in the quarters ended September 30, 1998 and 1999, respectively.
The increase in net sales in the 1999 period resulted primarily from an increase
in sales of the Company's mass storage enhancement systems to commercial end
users and to the U.S. Air Force through Federal integrators, offset in part by
decreases in the OEM market.
Sales to the U.S. Air Force through Federal integrators were $6,214 and
accounted for approximately 52.9% of net sales in the quarter ended September
30, 1999. Sales to the U.S. Air Force in this quarter increased by approximately
256.0% as compared to the quarter ended September 30, 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 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 OEMs were $967 and accounted for approximately 8.2% of net sales
in the quarter ended September 30, 1999. Such sales represent a 59.0% decrease
as compared to sales to alternate channel partners in the third quarter of 1999.
Such decrease represents a decrease in sales to Unisys Corporation ("Unisys"),
the primary alternate channel partner of approximately $990, combined with the
$382 decrease in sales to Tandem Computers, Inc. ("Tandem").
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During the first quarter of 1997, the Company commenced selling products to
Tandem. Sales to Tandem accounted for less than 1.0% of the Company's net sales
in the quarter ended September 30, 1999. In January 1998, Compaq Computer Corp.
("Compaq"), the corporate owner of Tandem, announced its planned acquisition of
Digital Equipment Corp. ("Digital"), a competitor. Although Tandem purchased
product from the Company during 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 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 intended to
discontinue the marketing of the Company's product after the second quarter of
1999. Accordingly, the Company notified Tandem that it terminated the contract
effective February 15, 1999, which, pursuant to the reseller agreement, gave
Tandem an additional ninety days to purchase product from the Company.
During the first quarter of 1999, the Company informed Unisys that it would
be discontinuing the Synchronix 1000 product family. As such, Unisys would not
continue the marketing of the Company's Synchronix 1000 product after January
31, 2000. Unisys has also informed the Company that it does not intend to
initiate purchases of the Synchronix 2000. Unisys is under contractual
obligation, however, to purchase certain of the Company's product through
January 31, 2000.
The Company continues its efforts to establish additional OEM relationships
and alternate channel relationships for specialized and standard versions of its
Synchronix product line. As a result of the consolidation of OEMs, and decrease
in demand of OEMs seeking new storage solutions/vendors, the Company has shifted
its sales and marketing focus to end users, resellers and VAR's. There can be no
assurance, however, that such additional relationships, including relationships
with end users and resellers, will be established, or if established, that they
will compensate for the adverse impacts on Company sales to Tandem resulting
from Compaq's acquisition of Digital and the anticipated loss of the Company's
OEM relationship with Unisys in the Year 2000.
Sales to the Company's commercial customers were $4,556 and accounted for
approximately 38.8% of net sales in the quarter ended September 30, 1999. Such
sales represent a 104.0% increase as compared to sales to commercial accounts in
the quarter ended September 30, 1998. During the latter part of 1998, the
Company shifted its sales and marketing focus to end user and reseller accounts.
In addition, during the first quarter of 1999, the Company introduced Synchronix
2000 and Synchronection 2 in support of this new sales and marketing strategy.
With the investment in both the sales and marketing infrastructure, including
additional sales personnel, as well as the investment in new product offerings
introduced during the first part of 1999, the Company expects that sales to the
commercial market should improve on a long term basis. To that end, the Company
announced in June 1999, that it had received a five-terabyte, $1.1 million order
for its fault tolerant Synchronection 2 network attached storage device. There
can be no assurance, however, that sales to commercial accounts will continue at
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such levels, if at all.
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
$1,708, to approximately $3,623 from $1,915 in the three months ended September
30, 1998. Such increase in gross profit is due primarily to the higher level of
sales in 1999.
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 decreased as a percentage
of net sales representing 35.2% and 21.0% for the three months ended September
30, 1998 and 1999, respectively. Such percentage decrease represents a higher
level of revenue in 1999 combined with certain SG&A costs that have remained
consistent with the same period in 1998. SG&A expenses increased by $244, to
$2,466 in the three months ended September 30, 1999 from $2,222 in the three
months ended September 30, 1998. Such increase was primarily due to higher
commissions associated with higher sales levels in addition to the hiring of
additional sales and marketing personnel. Salaries, commissions, bonuses,
employee benefits and payroll taxes were the largest components of SG&A
expenses, accounting for 64.0% and 71.0% of such expenses the three months ended
September 30, 1998 and September 30, 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 September 30, 1999 by $245,
or 33.4%, from $733 in the corresponding 1998 period. This decrease is due
primarily to the Company's decision to discontinue its efforts to develop a
fiber controller and a controller design that incorporates Tandem's
ServerNet(TM) technology. Research and development expenses for the third
quarter of 1999 represented approximately 4.2% of the Company's net sales and
including the amount capitalized in accordance with SFAS No. 86, represented
approximately 5.8% 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.
Research and development products 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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<PAGE>
NET INTEREST (INCOME) EXPENSE
Net interest income was $103 and $32 for the three months ended September
30, 1998, and September 30, 1999, respectively. The $71 reduction in interest
income was due primarily to lower cash balances in 1999 compared to the same
period in 1998.
Nine Months Ended September 30, 1998 and 1999
---------------------------------------------
NET SALES
Net sales increased by approximately $9,053, or 43.0%, in the nine months
ended September 30, 1999, as compared to net sales in the nine months ended
September 30, 1998. Sales of the Company's proprietary mass storage enhancement
systems, including sales of certain third party component products, accounted
for 92.9% and 95.6% of net sales in the nine-month period ended September 30,
1998 and 1999, respectively. Sales by the Company in its capacity as a VAR
accounted for 2.1% and less than 1.0% of net sales in the nine months ended
September 30, 1998 and 1999, respectively. Services and other revenues accounted
for 5.0% and 4.4% of net sales in the nine months ended September 30, 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 the U.S.
Air Force through Federal integrators and to commercial end users, offset in
part by decreases in sales to the OEM market.
Sales to the U.S. Air Force through Federal integrators were $18,743 and
accounted for approximately 62.3% of net sales in the nine months ended
September 30, 1999. Sales to the U.S. Air Force in the nine months ended
September 30, 1999 increased by approximately 213.0% as compared to such sales
in the nine months ended September 30, 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 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 were $3,476 and accounted for
approximately 11.6% of net sales in the nine months ended September 30, 1999.
Such sales represent a decrease of $4,752, or 58.0%, as compared to sales to
alternate channel partners in the comparable period of 1998. Such decrease
represents a decrease in sales to Unisys Corporations, the Company's primary
alternate channel partner, of approximately $2,706 combined with a $2,046
decrease in sales to Tandem.
During the first quarter of 1997, the Company commenced selling products to
Tandem. Sales to Tandem accounted for approximately 2.1% of the Company's net
sales in the quarter ended September 30, 1999. In January 1998 Compaq, the
corporate owner of Tandem, announced its planned acquisition of Digital, a
competitor of the Company. Although Tandem purchased product from the Company
during 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
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<PAGE>
decided to focus its marketing efforts on its own products in lieu of outsourced
products. The Company was informed that Tandem intended to discontinue the
marketing of the Company's product after the second quarter of 1999.
Accordingly, the Company notified Tandem that it terminated the contract
effective February 15, 1999, which, pursuant to the reseller agreement, gave
Tandem an additional ninety days to purchase product from the Company.
During the first quarter of 1999, the Company informed Unisys that it would
be discontinuing the Synchronix 1000 product family. As such, Unisys would not
continue the marketing of the Company's Synchronix 1000 product after January
31, 2000. Unisys has also informed the Company that it does not intend to
initiate purchases of the Synchronix 2000. Unisys is under contractual
obligation, however, to purchase certain of the Company's product through
January 31, 2000.
The Company continues its efforts to establish additional OEM and alternate
channel relationships for specialized and standard versions of its Synchronix
product line offering. As a result of the consolidation of OEMs and the decrease
in demand of OEMs seeking new storage solutions/vendors the Company has shifted
its sales and marketing focus to end users, resellers and VARs. There can be no
assurance, however, that such additional relationships, including relationships
with end users and resellers, will be established, or if established, that they
will compensate for the adverse impact on Company sales to Tandem resulting from
Compaq's acquisition of Digital and the anticipated loss of the Company's OEM
relationship with Unisys in the Year 2000.
Sales to the Company's commercial customers represented $7,860 and
accounted for approximately 26.1% of net sales in the nine months ended
September 30, 1999. Such sales represent a 15.0% increase as compared to sales
to commercial customers in the nine months ended September 30, 1998. During the
latter part of 1998, the Company shifted its sales and marketing focus to end
user and reseller accounts. In addition, during the first quarter of 1999, the
Company introduced Synchronix 2000 and Synchronection 2 in support of this new
sales and marketing strategy. With the investment in both the sales and
marketing infrastructure, including additional sales personnel, as well as the
investment in new product offerings introduced during the first part of 1999,
the Company expects that sales to the commercial market should improve on a long
term basis. To that end, the Company announced in June 1999, that it had
received a five-terabyte, $1.1 million order for its fault tolerant
Synchronection 2 network attached storage device. There can be no assurance,
however, that sales to commercial accounts will continue at such levels, if at
all.
GROSS PROFIT
The Company's gross profit increased by approximately $3,450 in the nine
months ended September 30, 1999 to approximately $9,762 from $6,312 in the nine
months ended September 30, 1998. Such increase in gross profit is due primarily
to the higher level of sales in 1999, coupled with favorable gross margin
percentages. The Company's gross profit percentage increased to 32.5% the nine
months ended September 30, 1999, as compared to 30.0% in the
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<PAGE>
corresponding period in the prior year. The 2.5% increase is mainly attributable
to the higher content of proprietary product sales in addition to favorable
costs attributable to the quantity discounts received for third party component
products that are integrated with the Company's proprietary mass storage
enhancement products.
OPERATING EXPENSES
SG&A expenses increased by $1,387 to $7,514 in the nine months ended
September 30, 1999 from $6,127 in the nine months ended September 30, 1998. Such
increase was due primarily to higher commissions associated with higher sales
levels, in addition to the hiring of additional sales and marketing personnel,
coupled with enhanced efforts to market the Company's current and new product
offerings. SG&A expenses as a percentage of net sales represented 29.1% and
25.0% for the nine months ended September 30, 1998 and 1999, respectively. Such
percentage decrease represents a higher level of revenue in 1999 combined with
certain SG&A costs that have remained consistent with the same period in 1998.
Salaries, commissions, bonuses, employee benefits and payroll taxes were the
largest components of SG&A expenses, accounting for 64.0% and 71.0% of such
expenses in the nine months ended September 30, 1998 and September 30, 1999,
respectively.
Research and development expenses decreased in the nine months ended
September 30, 1999 by $634, or 30.9%, from $2,049 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 fibre controller
design that incorporates Tandem's Server Net technology. Such expenses for the
nine months ended September 30, 1999 represented approximately 4.7% of the
Company's net sales and, including the amount capitalized in accordance with
SFAS No. 86, represented approximately 6.4% of the Company's net sales.
NET INTEREST (INCOME) EXPENSE
Net interest income was $319 and $149 for the nine months ended September
30, 1998 and September 30, 1999, respectively. The reduction in interest income
was due primarily to lower cash balances in 1999 compared to the same period in
1998.
LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
The Company funds 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 September 30, 1999, the Company's cash balance was approximately $3,494.
Net cash used in operating activities was $1,619 and $732 for the nine
months ended September 30, 1998 and September 30, 1999, respectively. Such use
of cash in 1999 resulted primarily from an increase in accounts receivable and
inventory levels coupled with a net payment to Finova Capital, offset by net
income from operations after adding back depreciation
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<PAGE>
and amortization. Net cash provided by financing activities was $791 and $64 for
the nine months ended September 30, 1998 and 1999, respectively. Such net
proceeds in 1999 primarily represents cash received from the exercise of stock
options partially offset by payments of capital lease obligations.
The Company used $1,112 and $452 for the acquisition of equipment by direct
purchase during the nine months ended September 30, 1998 and September 30, 1999
respective periods. Such expenditures in 1999 primarily consisted of computer
equipment associated with the Company's research and development efforts. 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 activities,
under the Company's revolving credit agreement were zero for the nine months
ended September 30, 1999 and were net borrowings of $379 for the nine months
ended September 30, 1998.
The Company's working capital was $12,000 and $12,687 at December 31, 1998
and September 30, 1999, respectively.
On July 9, 1997, the Company entered into a full recourse factoring
facility with Bank of America ("BOA"), formerly known as NationsBanc Commercial
Corporation, which provides for aggregate advances not to exceed the lesser of
$7,000 or up to 85.0% 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 BOA by providing the Company sixty days
prior written notice) beginning on July 30, 1997. The obligations of the Company
under such agreement are collateralized by substantially all of the assets of
the Company. As of September 30, 1999, the Company's balance outstanding under
this full recourse factoring facility was zero.
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, 2000, on the same terms and conditions. During the
third quarter, however, the Company was allowed to exceed such amount by $295.
After such date, the amount available under such general line of credit shall
revert back to the original line of credit of $2,000.
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
31.6% of its inventory acquisitions, the majority of which were purchased from
Bell Micro Corporation in the nine months ended September 30, 1999. The maximum
amount, during the preceding twelve months, that the Company has drawn under
such general line of credit has been approximately $3,295.
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<PAGE>
As of September 30, 1999, the Company had a balance of $696 outstanding under
this credit line, and available credit under such line towards future inventory
purchases was $1,304.
BOA and Finova had entered into an intercreditor subordination agreement
with respect to their relative interest in substantially all of the Company's
assets.
The Company's agreement with BOA restricts the Company's ability to pay
certain dividends without BOA's prior written consent. The Company's agreement
with Finova prohibits the payment of dividends.
During 1998, 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 2009. The Company
also has research and development tax credit carryovers for Federal income tax
purposes of approximately $226 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 offset the Company's net deferred tax assets because 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.
The Company's operating results are affected by seasonal factors,
particularly the spending fluctuations of its largest customers including the
U.S. Air Force through Federal interrogators and Unisys. 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.
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<PAGE>
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 fields 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, 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
re-tested 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.
With respect to external matters, ECCS has distributed questionnaires and
requests for certification to its mission critical vendors and has obtained and
reviewed 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 September 30, 1999, ECCS has incurred approximately $1,300 in costs
(excluding in-house labor and hardware), which includes installation of the ERP
system in 1998, in connection with Year 2000 compliance matters.
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<PAGE>
RISKS RELATING TO YEAR 2000 COMPLIANCE MATTERS
ECCS' goal has been to become Year 2000 compliant with respect to internal
matters during calendar year 1999. Although ECCS has tested 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.
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<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 5. OTHER INFORMATION. (DOLLARS IN THOUSANDS)
(A) IN HOUSE MANUFACTURING.
----------------------
The primary outside manufacturer for the Synchronix system, Unisys, closed
its Winnipeg computer storage systems manufacturing plant on or about July 31,
1999. The Company has commenced manufacturing the Synchronix 1000 and Synchronix
2000 in-house and plans to locate another third party manufacturer and/or
continue to manufacture such systems in-house. Although the Company has achieved
ISO 9000 certification in February, 1999 and anticipates that it has sufficient
facilities and expertise to manufacture such systems 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.
(B) RESIGNATION OF RICK RICE.
------------------------
On September 24, 1999 Rick Rice, Vice President, Software Development and
Advanced Solutions resigned from his position with the Company. Since the date
of Mr. Rice's resignation the Company has been actively seeking his replacement.
(C) REPAYMENT OF LOAN BY GREGG AZCUY
--------------------------------
On June 6, 1997, the Company entered into a loan transaction with Gregg M.
Azcuy, its President and Chief Executive Officer (the "Borrower") pursuant to a
$250 promissory note in favor of the Company. Interest on the outstanding
principal balance of such promissory note is payable monthly at the prime
lending rate. The promissory note is payable over a five-year period which began
on May 31, 1999. In connection with such promissory note, the Borrower granted
the Company a security interest in the Borrower's interests in the Company's
1997 Executive Compensation Plan and any and all future executive compensation
bonuses or similar compensation to be received by the Borrower. The Borrower
also pledged to the Company all of his right, title and interest to 25,000
restricted shares of the Company's Common Stock and options to purchase 131,000
shares of the Company's Common Stock as security for the promissory note.
Subsequent to the end of the quarter ended September 30, 1999, on November 2,
1999, the Company received payment from the Borrower in the amount of $227
representing full payment of the balance on such certain promissory note.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
11 Calculation of Earnings per Share.
27 Financial Data Schedule for the period ended 9/30/99.
(b) Reports on Form 8-K.
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECCS, Inc.
DATE: November 15, 1999 By: /s/ Gregg M. Azcuy
-----------------------------------------
Gregg M. Azcuy, President
and Chief Executive Officer
(Principal Executive Officer)
DATE: November 15, 1999 By: /s/ Louis J. Altieri
-----------------------------------------
Louis J. Altieri, Vice President,
Finance and Administration (Principal
Financial and Accounting Officer)
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<PAGE>
EXHIBIT 11
Calculation of Earnings per Share
(In Thousands) except for per Share Amount
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- ---------------------------
1998 1999 1998 1999
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net (loss) income $ (937) $ 701 $ (1,545) $ 982
Net (loss) income per share - Basic $ (.09) $ .06 $ (0.14) $ .09
Net (loss) income per share - Diluted $ (.09) $ .06 $ (0.14) $ .08
Weighted average number of common shares -
Basic 10,998 11,066 10,959 11,041
Weighted average number of common and
common equivalent shares - Diluted 10,998 12,274 10,959 11,828
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's unaudited consolidated financial statements contained in this Form
10-Q for the period ended September 30, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000900619
<NAME> ECCS, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,494
<SECURITIES> 0
<RECEIVABLES> 9,645
<ALLOWANCES> 104
<INVENTORY> 7,267
<CURRENT-ASSETS> 18,617
<PP&E> 7,034
<DEPRECIATION> 5,324
<TOTAL-ASSETS> 22,356
<CURRENT-LIABILITIES> 5,930
<BONDS> 0
0
0
<COMMON> 111
<OTHER-SE> 16,222
<TOTAL-LIABILITY-AND-EQUITY> 16,333
<SALES> 30,079
<TOTAL-REVENUES> 30,079
<CGS> 20,317
<TOTAL-COSTS> 7,514
<OTHER-EXPENSES> 1,415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (149)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 833
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 982
<EPS-BASIC> .09
<EPS-DILUTED> .08
</TABLE>