CONFORMED COPY
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 March 31, 2000
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 March 31, 2000:
Class Number of Shares
----- ----------------
Common Stock, $.01 par value 11,508,518
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ECCS, INC.
TABLE OF CONTENTS
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, 1999
and March 31, 2000 (unaudited).....................................2
Consolidated Statements of Operations for the
three months ended March 31, 1999 and
March 31, 2000 (unaudited).........................................3
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and
March 31, 2000 (unaudited).........................................4
Notes to Consolidated Financial Statements (unaudited).............5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............10
Overview .........................................................10
Results of Operations.............................................11
Liquidity and Capital Resources...................................13
Impact of Year 2000...............................................15
PART II. OTHER INFORMATION..............................................16
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Item 5. Other Information...........................................16
Item 6. Exhibits and Reports on Form 8-K............................16
SIGNATURES..............................................................17
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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,
1999 2000
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(unaudited)
Assets:
Current Assets:
Cash and cash equivalents........................... $ 7,993 $ 8,073
Accounts receivable, less allowance for doubtful
accounts of $0 and $150 at December 31, 1999 and
March 31, 2000, respectively....................... 5,829 2,844
Inventories......................................... 5,570 7,175
Prepaid expenses and other receivables.............. 254 463
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19,646 18,555
Property, plant and equipment (net)................... 1,733 1,598
Capitalized software (net)............................ 1,790 1,908
Other assets.......................................... 62 67
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Total Assets .................................... $ 23,231 $ 22,128
========== =========
Liabilities and Shareholders' Equity
Current Liabilities:
Payable to Finova Capital........................... $ 968 $ 581
Current portion of capital lease obligations........ 158 163
Accounts payable.................................... 1,631 2,497
Accrued expenses and other.......................... 1,874 1,161
Warranty............................................ 746 746
Unearned revenue.................................... 69 210
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5,446 5,358
Capital lease-long term net of current portion........ 67 71
Deferred rent......................................... 17 13
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5,530 5,442
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Shareholders' Equity:
Preferred Stock $0.01 par value per share,
Authorized, 3,000,000 shares; None issued and
outstanding at December 31, 1999 and March 31,
2000, respectively................................. -- --
Common stock, $0.01 par value per share, Authorized,
20,000,000 shares; Issued and outstanding
11,341,318 shares and 11,508,518 shares at December 113 115
31, 1999 and March 31, 2000, respectively..........
Capital in excess of par value - common ............ 26,374 26,591
Accumulated Deficit................................. (8,786) (10,020)
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17,701 16,686
Total Liabilities and Shareholders' Equity....... $ 23,231 $ 22,128
========== =========
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,
----------------------
1999 2000
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Net sales.................................... $ 9,433 $ 4,607
Cost of sales................................ 6,494 2,737
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Gross profit............................... 2,939 1,870
Operating expenses:
Selling, general & administrative.......... 2,498 2,623
Research & development..................... 452 568
-------- --------
Operating loss............................... (11) (1,321)
Net interest income........................ 84 87
-------- --------
Net income (loss)............................ 73 (1,234)
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Net income (loss) applicable to
common shares.............................. $ 73 $ (1,234)
======== =========
Earnings (loss) per common share:
Net income (loss) per common
share - basic.............................. $ 0.01 $ (.11)
======== ==========
Earnings (loss) per common share -
assuming dilution:
Net income (loss) per common share
- diluted.................................. $ 0.01 $ (.11)
======== ==========
Weighted average number of common and
dilutive shares - basic.................... 11,027 11,404
======== =========
Weighted average number of common and
dilutive shares - diluted.................. 11,337 11,404
======== =========
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,
-------------------
1999 2000
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................... $ 73 $(1,234)
Adjustments to reconcile net income (loss) to net cash provided by
Operating activities:
Depreciation and amortization ..................................... 272 451
(Increase) decrease in accounts receivable ........................ (422) 2,985
Decrease (increase) in inventories ................................ 919 (1,605)
Increase in prepaid expenses, other receivables and other assets .. (39) (214)
Increase in accounts payable, accrued liabilities, deferred rent
and other liabilities ...................................... 369 153
(Decrease) Increase in unearned revenue ........................... (74) 141
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Net cash provided by operating activities .............................. 1,098 677
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Cash flows from investing activities:
Additions to property, plant and equipment .......................... (122) (144)
Additions to capitalized software ................................... (185) (294)
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Net cash used in investing activities .................................. (307) (438)
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Cash flows from financing activities:
Borrowings under revolving credit agreement ......................... 5,163 5,692
Repayments under revolving credit agreements ........................ (4,678) (5,692)
Decrease in payable to Finova Capital ............................... (312) (387)
Net proceeds from long term debt, capital lease obligations ......... 6 9
Net proceeds from exercise of employee stock options and issuance
of common stock ................................................... 7 219
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Net cash provided by (used in) financing activities ................. 186 (159)
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Net increase in cash and cash equivalents ........................... 977 80
Cash and cash equivalents at beginning of period ....................... 5,374 7,993
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Cash and cash equivalents at end of period ............................. $ 6,351 $ 8,073
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 25 $ 21
======= =======
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 March 31, 1999 and March 31, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements for March 31,
1999 and March 31, 2000 and for the three month periods then ended, is
unaudited, but, in the opinion of the management of ECCS, Inc. ("ECCS" or the
"Company"), 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, 2000, the results of its
operations and cash flows for the three month periods ended March 31, 1999 and
March 31, 2000. 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, 1999,
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. None of the subsidiaries are active. 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
------------------------------
The Company designs, manufactures, sells and supports fault tolerant
enterprise storage solutions that protect and ensure access to an organization's
critical data. The Company's products include high performance storage
subsystems that meet a wide range of customer applications for Open
Systems-based networks, such as NT, UNIX and Linux operating systems. The
Company's enterprise storage solutions address all three storage markets: DAS,
in which the storage device is connected directly to a server; NAS, in which the
storage device is installed on a network; and SAN, in which the storage device
is used in a specialized network. These connectivity options provide storage
users the flexibility to choose and deploy a particular storage solution to meet
their needs.
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(Information for March 31, 1999 and March 31, 2000 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,
1999 2000
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(unaudited)
Purchased parts.................................. $1,497 $ 2,613
Finished goods................................... 5,047 5,606
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6,544 8,219
Less: inventory valuation reserve.............. 974 1,044
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$5,570 $ 7,175
====== ========
(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
Statement of Financial Accounting Standards ("SFAS") No. 86. Such costs are
capitalized after technological feasibility has been demonstrated. Such
capitalized amounts are amortized commencing with product introduction on a
straight-line basis utilizing the estimated economic life ranging from one to
three years. Amortization of capitalized software development is charged to cost
of sales
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(Information for March 31, 1999 and March 31, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
and aggregated $30 and $176 for the three month periods ended March 31, 1999 and
March 31, 2000, respectively. At December 31, 1999 and March 31, 2000, the
Company had capitalized $4,736 and $5,030 of software development costs, of
which $2,580 and $2,755 had been amortized, respectively.
(g) Impairment of Long-Lived Assets
------------------------------------
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
records impairment losses on long-lived assets used in operations or expected to
be disposed of when indicators of impairment exist and 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 as indicated 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 March 31, 1999 and March 31, 2000 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 generally is measured as the excess, if any, of the quoted market
price of the Company's stock over the amount an employee must pay to acquire the
stock on the date that both the exercise price and the number of shares to be
acquired pursuant to the option are fixed.
(m) Per Share Information
--------------------------
Per share information is presented in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share
includes the dilutive effect of all such securities.
NOTE 3 - LEGAL PROCEEDINGS
In late January 2000, the Company received a subpoena from the United
States Attorney's Office in Boston, Massachusetts for the production of
documents in connection with an investigation into Federal government
purchasing. The Company has been and intends to continue cooperating with the
investigation and is complying fully, and intends to continue to comply fully,
with the subpoena. The Company sells computer products to companies which are
used by the Federal government to supply computer products to the U.S. Air
Force. In addition, a subpoena has been received by an officer of the Company
who is expected to testify before the grand jury. Such testimony has not yet
been provided. Although the investigation is still in its early stages, it
appears that one avenue of inquiry involves the relationships and transactions
of various suppliers, manufacturers (including the Company), and other
companies, with companies that provide product and product-related services to
the U.S. Air Force. The Company understands that the government's inquiry
includes a review of the conduct of such companies and their officers and
employees. The Company believes that it has not violated any federal laws in
connection with the Company's sale of computer products ultimately received by
the U.S. Air Force.
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ECCS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------
(Information for March 31, 1999 and March 31, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
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 $1,113 and
accounted for approximately 24% of net sales in the three months ended March 31,
2000. Sales to the U.S. Air Force through Federal integrators in the three
months ended March 31, 2000 decreased by approximately 81.3% as compared to such
sales in the three months ended March 31, 1999.
NOTE 6 - PAYABLE TO FINOVA CAPITAL 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. On January 31, 2000,
the amount of the line was returned to $2,000 and the line was extended through
January 31, 2001.
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 $3,295 as the Company was allowed to exceed the line of credit by
$295. As of March 31, 2000, the Company had a balance of $581 outstanding under
this credit line, and available credit under such line towards future inventory
purchases was $1,419.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
OVERVIEW
We design, manufacture, sell and support fault tolerant enterprise
storage solutions that protect and ensure access to an organization's critical
data. Our products include high performance, fault tolerant storage subsystems
that meet a wide range of customer applications for Open Systems-based networks,
such as NT, UNIX and Linux operating systems. Our fault tolerant enterprise
storage solutions address all three storage markets: DAS, in which the storage
device is connected directly to a server; NAS, in which the storage device is
installed on a network; and SAN, in which the storage device is used in a
specialized network. These connectivity options provide our customers the
flexibility to choose and deploy a particular storage solution to meet their
needs. As data requirements change, customers can migrate their existing storage
investments to different connectivity options.
During 1998, we shifted our sales and marketing focus to the development
of our direct sales channel from our previous use of alternate channel partners.
Our direct sales force concentrates on sales to e-commerce and other commercial
end users, and the U.S. Air Force and other Federal government end users. Our
direct sales force also recruits VARs and assists them in their sales to
commercial end users. During the three years prior to 1998, we had focused our
sales and marketing efforts through our primary alternate channel partners,
Unisys Corporation and Tandem Computers, Inc. As a result of industry
consolidation and competitive factors, sales to Unisys and Tandem declined
significantly in 1999. We do not expect sales to these alternate channel
partners to constitute a significant part of our net sales in 2000. Although our
product development efforts are focused on commercial end users, we believe that
several of our products under development could attract the interest of large
data users and alternate channel partners, including OEMs, as the significant
software component of these products will allow them to be easily integrated
into other storage solutions. We are presently undertaking a software
development effort to create a file aware storage architecture for our future
products. File aware storage products possess embedded intelligence that
obviates the need for a server which, in turn, provides for increased
performance and lower costs. Our software-based implementation of a file aware
storage architecture will also incorporate our fault tolerance expertise, allow
users to integrate our products with those from other vendors and provide for
the migration of our storage to DAS, NAS and SAN architectures as a customer
requires. We believe our planned software-based offering provides many features
and capabilities not currently available in the storage marketplace.
We anticipate that the commercial sector will continue to be our fastest
growing sales channel. Sales to commercial customers grew from $2,271 or 24.1%
of total sales in the first quarter of 1999 to $3,245 or 70.4% of total sales in
the first quarter of 2000. In the three months ended March 31, 2000, our sales
to e-commerce companies increased by approximately 984% as compared to the three
months ended March 31, 1999. Such sales constituted 45.7% of all sales to
commercial customers in the three months ended March 31, 2000. We anticipate
that sales to
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e-commerce customers will continue to grow rapidly as the data storage needs of
these companies expand and we develop our direct sales channel to target this
market.
The statements contained in this Quarterly Report on Form 10-Q that are
not historical facts are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995). Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
These forward-looking statements, such as statements regarding anticipated
future revenues, capital expenditures, selling, general and administrative
expenditures, research and development expenditures and other statements
regarding matters that are not historical facts, involve predictions. Our 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, changes in
our sales strategy and product development plans, changes in the data storage or
network marketplace, competition between us and other companies that may be
entering the data storage host/network attached markets, competitive pricing
pressures, continued market acceptance of our open systems products, delays in
the development of new technology and changes in customer buying patterns.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 2000
------------------------------------------
Net Sales
---------
Net sales decreased by approximately $4,826, or 51.2%, in the three months
ended March 31, 2000 as compared to net sales in the three months ended March
31, 1999. Sales of our fault tolerant enterprise storage solutions accounted for
96.3% and 90.4% of net sales in the quarters ended March 31, 1999 and 2000,
respectively. Other revenues accounted for 3.7% and 9.6% of net sales in the
quarters ended March 31, 1999 and 2000, respectively. The decrease in net sales
in the 2000 period resulted primarily from lower sales to the U.S. Air Force
through Federal integrators and lower sales to alternate channel partners,
offset in part by an increase in sales to commercial customers.
Sales to our commercial customers increased by approximately $974, or
42.9%, in the three months ended March 31, 2000 as compared to net sales in the
three months ended March 31, 1999. Such increase reflects the shift in our sales
and marketing focus to direct sales and the resulting success of sales into the
e-commerce market. Such sales accounted for approximately 1.5% and 32.2% of
total net sales in the quarters ended March 31, 1999 and 2000, respectively.
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Sales to the U.S. Air Force through Federal integrators decreased by
approximately $4,830, or 81.3%, in the three months ended March 31, 2000 as
compared to net sales in the three months ended March 31, 1999. Such sales
accounted for approximately 63.0% and 24.2% of net sales in the quarters ended
March 31, 1999 and 2000, respectively. Although we do not anticipate that the
U.S. Air Force will continue to purchase from us at historical levels, either in
absolute dollars or as a percentage of net sales, we believe that sales to the
U.S. Air Force will continue to comprise a significant portion of our net sales.
Quarterly fluctuations in sales to the U.S. Air Force are the result of several
factors over which we have no control, including funding appropriations and
departmental approvals. We cannot be certain that our sales to the U.S. Air
Force through Federal integrators will not be adversely affected by the
investigation discussed in Note 3 to the Consolidated Financial Statements set
forth in Item 1 above.
Sales to alternate channel partners decreased by approximately $970, or
79.6%, in the three months ended March 31, 2000 as compared to net sales in the
three months ended March 31, 1999. Such sales accounted for approximately 12.9%
and 5.4% of net sales in the quarters ended March 31, 1999 and 2000,
respectively. Such decrease represents a decrease in sales to Unisys of
approximately $374 combined with a $596 decrease in sales to Tandem.
Gross Profit
------------
Our cost of sales includes primarily the cost of purchased material, direct
labor and related overhead expenses, and amortization of capitalized software.
Our gross profit decreased by approximately $1,069, in the three months ended
March 31, 2000 to approximately $1,870 from $2,939 in the three months ended
March 31, 1999. Such decrease in gross profit is due primarily to the lower
sales to the U.S. Air Force through Federal integrators and alternate channel
partners, offset in part by an increase in sales to commercial customers. In the
three months ended March 31, 2000, the gross margin percentage was 40.6% as
compared to 31.2% in the same period in 1999. Such increase in percentage is due
primarily to the higher proprietary content of product sales and a higher level
of commercial sales, which typically provide for higher gross margins.
Operating Expenses
------------------
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries, commissions, and travel costs for sales and marketing personnel,
including trade shows, and expenses associated with our management, accounting,
contract and administrative functions. SG&A expenses increased as a percentage
of net sales representing 26.5% and 56.9% for the three months ended March 31,
1999 and 2000, respectively. Such percentage increase represents a lower level
of revenue in 2000 combined with certain SG&A costs that have increased over the
same period in 1999. SG&A expenses increased by $125 to $2,623 in the three
months ended March 21, 2000 from $2,498 in the three months ended March 31,
1999. Such increase was primarily due to the hiring of additional sales and
marketing personnel. In addition, we incurred approximately $150 associated with
proposed financing activities. Salaries, commissions, bonuses, employee benefits
and payroll taxes were the largest
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components of SG&A expenses, accounting for 70% and 65% of such expenses for the
three months ended March 31, 1999 and March 31, 2000, respectively.
Research and development expenses consist primarily of salaries and
benefits paid to engineers and programmers and other related overhead expenses
paid to software and hardware engineers. These expenses increased in the three
months ended March 31, 2000 by $116, or 25.7%, from $452 in the corresponding
1999 period. This increase is due primarily to an increase in engineering staff
associated with our efforts to create a file aware storage architecture for our
future products. Research and development expenses for the first quarter of 2000
represented approximately 12.3% of our net sales and, including the amount
capitalized in accordance with SFAS No. 86, represented approximately 17.1% of
our net sales. Research and development expenses are anticipated to increase in
the near future to enable the Company to update and expand upon its existing
product offerings.
Research and development products for which we expect 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. We believe that the anticipated increase in the Company's research and
development investment could adversely affect our earnings in the next twelve
months.
Net Interest (Income) Expense
-----------------------------
Net interest income was $84 and $87 for the three months ended March 31,
1999, and March 31, 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We fund our operations primarily from cash generated by operations
augmented with funds from borrowings under a line of credit and inventory
financing and through private and public sales of equity securities. On March
31, 2000, our cash balance was approximately $8,073.
Net cash provided by operating activities was $1,098 and $677 for three
months ended March 31, 1999 and 2000, respectively. Such source of cash in 2000
resulted primarily from the decrease in accounts receivable, in addition to
depreciation and amortization offset by the net loss for the quarter and
increased inventory levels.
We used $122 and $144 for the acquisition of equipment by direct purchase
during the three months ended March 31, 1999 and March 31, 2000, respectively.
Such expenditures in 2000 primarily consisted of computer equipment associated
with our research and development efforts. Total capital expenditures for 2000
are expected to be approximately $600, although such amounts are not subject to
formal commitments. We anticipate 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.
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Net cash provided by financing activities was $186 for the three months
ended March 31, 1999 and net cash used in financing activities was $159 for the
three months ended March 31, 2000. Such use of cash in 2000 resulted primarily
from net payments to Finova Capital, offset by the net proceeds from the
exercise of employee stock options and issuance of common stock.
Net activities under our revolving credit agreement were net borrowings of
$485 and zero for each of the three months ended March 31, 1999 and March 31,
2000, respectively.
Our working capital was $14,200 and $13,197 at December 31, 1999 and March
31, 2000, respectively.
On July 9, 1997, we 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 we are obligated to pay
certain annual fees. The factoring facility is for a period of three years
(unless terminated by BOA by providing us sixty days prior written notice)
beginning on July 30, 1997. Our obligations under such agreement are
collateralized by substantially all of our assets. As of March 31, 2000, our
balance outstanding under this full recourse factoring facility was zero.
We also have 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. Our obligations under the
agreement with Finova are collateralized by substantially all of our assets.
Finova increased such general line of credit to $3,000 through January 31, 2000,
on the same terms and conditions. On January 31, 2000, the amount of the line
was returned to $2,000 and the line was extended through January 31, 2001.
We use our line of credit with Finova to augment our purchasing ability
with various vendors. The maximum amount, during the preceding twelve months,
that we have drawn under such general line of credit has been approximately
$3,295 as the Company was allowed to exceed the line of credit by $295. As of
March 31, 2000, we had a balance of $581 outstanding under this credit line, and
available credit under such line towards future inventory purchases was $1,419.
BOA and Finova entered into an intercreditor subordination agreement with
respect to their relative interest in substantially all of our assets.
Our agreement with BOA restricts our ability to pay certain dividends
without BOA's prior written consent. Our agreement with Finova prohibits the
payment of dividends.
We have net operating loss ("NOL") carryovers for Federal income tax
purposes of
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<PAGE>
approximately $9,134, which will begin to expire in 2009. We also have research
and development tax credit carryovers for Federal income tax purposes of
approximately $490, which will begin to expire in 2009. In addition, we have
alternative minimum tax credits of approximately $83. These credits can be
carried forward indefinitely. We experienced a change in ownership in 1996 as
defined by Section 382 of the Internal Revenue Code. Accordingly, future use of
some of these NOLs and income tax credits may be limited.
We have approximately $4,820 of state NOL carryforwards which will begin to
expire in 2001 and state research and development tax credit carryforwards of
$272 as of December 31, 1999.
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 our net deferred tax assets since we are in a
cumulative loss position. We will periodically reassess the valuation allowance.
We believe that our existing available cash, credit facilities and the cash
flow expected to be generated from operations will be adequate to satisfy our
current and planned operations for at least the next 12 months.
Our operating results are affected by seasonal factors, particularly the
spending fluctuations of our largest customers including the U.S. Air Force
through Federal integrators. Due to the relatively fixed nature of certain of
our costs, a decline in net sales in any fiscal quarter will have a material
adverse effect on that quarter's results of operations. We do not expect such
spending fluctuations to be altered in the future. A significant reduction in
orders from any of our largest customers could have a material adverse effect on
our results of operations. There can be no assurance that our largest customers
will continue to place orders with us or that orders of its customers will
continue at their previous levels.
Impact of the Year 2000
- -----------------------
In prior years, we discussed the nature and progress of the Company's plans
to become Year 2000 ready. In late 1999, we completed the remediation and
testing of systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and we believe those systems
successfully responded to the Year 2000 date change. Through December 31, 1999,
we capitalized approximately $1,275 in connection with software and hardware
acquired to address the Year 2000. We are not aware of any material problems
resulting from Year 2000 issues, either with our products, our internal systems,
or the products and services of third parties. We will continue to monitor our
mission critical computer applications and those of our suppliers and vendors
throughout the Year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION. (DOLLARS IN THOUSANDS)
IN HOUSE MANUFACTURING.
In September 1999, we entered into a Master Sale Agreement with Hitachi
Computer Products (America), Inc. Pursuant to such agreement, Hitachi began
manufacturing certain of our products in January 2000 for use in our fault
tolerant enterprise storage solutions. The agreement does not contain specific
quantity commitments and purchases are made on a purchase order basis. The
agreement does not include any long-term commitment by either party.
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 3/31/00.
(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: May 12, 2000 By: /s/ Gregg M. Azcuy
---------------------
Gregg M. Azcuy, President
and Chief Executive Officer
(Principal Executive Officer)
DATE: May 12, 2000 By: /s/ Louis J. Altieri
---------------------
Louis J. Altieri, Vice President,
Finance and Administration (Principal
Financial and Accounting Officer)
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EXHIBIT 11
Calculation of Earnings per Share
(Dollars in Thousands Except Per Share Information)
Three Months
-----------------------
Ended March 31,
1999 2000
---- ----
Net income (loss) $ 73 $ (1,234)
Net income (loss) per share - Basic $ .01 $ (.11)
Net income (loss) per share - Diluted $ .01 $ (.11)
Weighted average number of common
shares - Basic 11,027 -----------
11,404
Weighted average number of common and
common equivalent shares - Diluted 11,337 11,404
<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>
<CIK> 0000900619
<NAME> ECCS, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-1-2000
<PERIOD-END> Mar-31-2000
<EXCHANGE-RATE> 1
<CASH> 8,073
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<RECEIVABLES> 2,994
<ALLOWANCES> 150
<INVENTORY> 7,175
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<PP&E> 7,442
<DEPRECIATION> 5,844
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<CURRENT-LIABILITIES> 5,358
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0
0
<COMMON> 115
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<SALES> 4,607
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