SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
OR
|_| Transition report pursuant to section 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-21600
ECCS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New Jersey 22-2288911
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Sheila Drive, Tinton Falls, New Jersey 07724
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(Address of Principal Executive Offices) (Zip Code)
(732) 747-6995
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(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
---- ----
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of June 30, 2000:
Class Number of Shares
----- ----------------
Common Stock, $0.01 par value 11,522,971
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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 June 30, 2000 (unaudited)
and December 31, 1999..............................................2
Consolidated Statements of Operations for the three months
ended June 30, 2000 and June 30, 1999 and for the six months
ended June 30, 2000 and June 30, 1999 (unaudited)..................3
Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and
June 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................11
Overview...........................................................11
Results of Operations..............................................13
Liquidity and Capital Resources....................................17
PART II. OTHER INFORMATION...................................................20
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Item 4. Submission of Matters to a Vote of Security Holders.............20
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, June 30,
1999 2000
----------- ----------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents............................................ $ 7,993 $ 5,799
Accounts receivable, less allowance for doubtful accounts of $0 and 2,596
$30 at December 31, 1999 and June 30, 2000,
respectively........................................................ 5,829
Inventories.......................................................... 5,570 6,197
Prepaid expenses and other receivables............................... 254 397
----------- -----------
19,646 14,989
Property, plant and equipment (net)..................................... 1,733 1,492
Capitalized software (net).............................................. 1,790 2,152
Other assets............................................................ 62 67
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Total Assets.................................................. $ 23,231 $ 18,700
============ ===========
Liabilities and Shareholders' Equity
Current Liabilities:
Loan payable......................................................... 0 832
Payable to Finova Capital............................................ 968 35
Current portion of capital lease obligations......................... 158 149
Accounts payable..................................................... 1,631 1,059
Accrued expenses and other........................................... 1,874 1,122
Warranty............................................................. 746 637
Customer deposits, advances and other credits........................ 69 170
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5,446 4,004
Capital lease obligations, net of current portions...................... 67 63
Deferred rent........................................................... 17 8
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5,530 4,075
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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 June
30, 2000, respectively.............................................. --
Common stock, $0.01 par value per share, Authorized, 20,000,000 115
shares; Issued and outstanding, 11,341,318
shares and 11,522,971 shares at December 31, 1999
and June 30, 2000, respectively..................................... 113
Capital in excess of par value - common ............................. 26,374 26,658
Accumulated Deficit.................................................. (8,786) (12,148)
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17,701 14,625
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Total Liabilities and Shareholders' Equity....................... $ 23,231 $ 18,700
=========== ===========
See notes to consolidated financial statements.
</TABLE>
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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 Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales................................ $ 8,909 $ 4,033 $18,342 $ 8,640
Cost of sales............................ 5,709 2,913 12,203 5,650
----- ----- ------ -----
Gross profit........................... 3,200 1,120 6,139 2,990
Operating expenses:
Selling, general & administrative...... 2,550 2,836 5,048 5,480
Research & development................. 475 432 927 979
----- ----- ----- -------
Operating income (loss).................. 175 (2,148) 164 (3,469)
Net interest income ................. (33) (20) (117) (107)
----- ------ ----- -------
Net income (loss) ....................... $ 208 $(2,128) $ 281 $(3,362)
----- ------ ------ ------
Earnings (loss) per common share:
Net income (loss) per common
share - basic.......................... $ 0.02 $ (0.18) $ 0.03 $ (0.29)
===== ====== ====== ======
Earnings (loss) per common share -
assuming dilution:
Net income (loss) per common share -
diluted................................ $ 0.01 $ (0.18) $ 0.02 $(0.29)
===== ====== ====== =====
Weighted average number of common
and dilutive shares - basic............ 11,029 11,510 11,028 11,457
====== ====== ====== ======
Weighted average number of common
and dilutive shares - diluted.......... 11,869 11,510 11,633 11,457
====== ====== ====== ======
</TABLE>
See notes to consolidated financial statements.
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ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 2000
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ 281 $ (3,362)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................................ 669 875
(Increase) decrease in accounts receivable............................... (1,300) 3,233
Increase in inventories.................................................. (913) (627)
Increase in prepaid expenses and other................................... (40) (148)
Increase (decrease) in accounts payable, accrued liab., deferred rent
and other............................................................. 609 (1,442)
(Decrease) increase in customer deposits, advances and other credits..... (110) 101
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Net cash used in operating activities......................................... (804) (1,370)
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Cash flows from investing activities:
Additions to property, plant and equipment................................. (239) (282)
Additions to capitalized software.......................................... (492) (714)
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Net cash used in investing activities......................................... (731) (996)
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Cash flows from financing activities:
Borrowings under revolving credit agreement................................ 9,792 10,594
Repayments under revolving credit agreement................................ (9,792) (9,762)
Increase (decrease) in payable to Finova Capital........................... 1,630 (933)
Repayment of long term debt, capital lease obligations..................... (24) (13)
Net proceeds from exercise of employee stock options and issuance of
common stock............................................................... 49 286
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Net cash provided by financing activities..................................... 1,655 172
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Net increase (decrease) in cash and cash equivalents.......................... 120 (2,194)
Cash and cash equivalents at beginning of period.............................. 5,374 7,993
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Cash and cash equivalents at end of period.................................... $ 5,494 $ 5,799
========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................................. $ 80 $ 84
========== ===========
</TABLE>
See notes to consolidated financial statements.
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ECCS, Inc.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for June 30, 1999 and June 30, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
NOTE 1 - BASIS OF PRESENTATION
The information presented for June 30, 1999 and June 30, 2000, and for the
three month and six 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 June 30, 2000,
the results of its operations for the three-month and six-month periods ended
June 30, 1999 and June 30, 2000, and its cash flows for the six-month periods
ended June 30, 1999 and June 30, 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
inter-company 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
------------------------------------------
(Information for June 30, 1999 and June 30, 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, June 30,
1999 2000
------------ -----------
(unaudited)
Purchased parts............................... $ 1,497 $ 2,160
Finished goods................................ 5,047 5,056
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6,544 7,216
Less: inventory valuation reserve........ 974 1,019
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$ 5,570 $ 6,197
========== ===========
(d) Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation and
amortization are provided on a straight-line basis over their estimated useful
lives ranging from 3 to 5 years.
Equipment under capital leases is recorded at the lower of fair value or
present value of minimum lease payments at the inception of the lease.
Amortization of the leased property is computed using the straight-line method
over the term of the lease.
(e) Fair Value of Financial Instruments
The fair value amounts for cash, accounts receivable and short-term debt
approximate carrying amounts due to the short maturity of these instruments.
(f) Software Development Costs
The Company capitalizes software development costs in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 86. Such costs are
capitalized after technological feasibility has been demonstrated. Such
capitalized amounts are amortized commencing with product introduction on a
straight-line basis utilizing the estimated economic life ranging from one to
three years. Amortization of capitalized software development is charged to cost
of sales and aggregated $232 and $352 for the six-month periods ended June 30,
1999 and June 30, 2000, respectively. At
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ECCS, Inc.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(Information for June 30, 1999 and June 30, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
December 31, 1999, the Company had capitalized $4,736 of software development
costs of which $366 has been written off and $2,580 has been amortized. As of
June 30, 2000, the Company had capitalized $5,085 of software development costs
of which $2,933 has been amortized.
(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 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
------------------------------------------
(Information for June 30, 1999 and June 30, 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.
(n) Revenue Recognition
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 - Revenue Recognition in Financial Statements ("SAB
101"), which provides guidance on the accounting for revenue recognition. The
Company is currently evaluating the applicability of SAB 101 to its existing
sales and is currently awaiting further general guidance from the SEC. Should
the Company conclude that its approach is different from the approach described
in SAB 101, it will change its method of accounting. As amended, SAB 101 is
required to be implemented no later than the fourth fiscal quarter of 2000, for
companies with fiscal years beginning between December 16, 1999 and March 15,
2000.
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
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ECCS, Inc.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for June 30, 1999 and June 30, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
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.
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 $2,101 for the
six-months ended June 30, 2000. Sales to the U.S. Air Force through Federal
integrators for the six-months ended June 30, 2000 decreased by approximately
83% as compared to such sales for the six-months ended June 30, 1999.
NOTE 6 - FACTORING FACILITY
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 June 30, 2000, our
balance outstanding under this full recourse factoring facility was $832. On
June 16, 2000, the Company signed an amendment to the Factoring Agreement
between Bank of America and the Company extending the Agreement until July 30,
2003, and from year to year thereafter until terminated. Except as amended, the
Factoring Agreement remains unchanged.
NOTE 7 - PAYABLE TO FINOVA CAPITAL
The Company has a $4,000 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
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ECCS. INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for June 30, 1999 and June 30, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
Company. During 1999, Finova temporarily increased the 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. On April 17, 2000, Finova announced that it
had approved a permanent increase of $2,000, raising the total amount of funds
available to the Company under the general line of credit to $4,000.
The Company uses its line of credit with Finova to augment its purchasing
ability with various vendors. The maximum amount, during the preceding twelve
months, that the Company has drawn under such general line of credit has been
approximately $3,295 as the Company was permitted to exceed the line of credit
by $295. As of June 30, 2000, the Company had a balance of $35 outstanding under
this credit line, and available credit under such line towards future inventory
purchases was $3,965.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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: Direct Attached Storage ("DAS"), in
which the storage device is connected directly to a server; Network Attached
Storage ("NAS"), in which the storage device is installed on a network; and
Storage Area Network ("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.
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<PAGE>
On June 13, 2000, we introduced SANStar, a network storage engine that
unifies disparate data, including Network Attached Storage (NAS) and Storage
Area Networks (SAN), for full, secure, file-aware storage, delivering continuous
access to shared data files and programs. The SANStar architecture gives users
access to data and files stored throughout their networks because it operates
within different networks, including SAN and NAS, as well as Direct Attached
Storage (DAS), and works within numerous environments such as Windows NT, UNIX
and Linux, all at the same time.
We anticipate that the commercial sector will continue to be our fastest
growing sales channel. Sales to commercial customers grew from $3,451 or 19% of
total sales in the first half of 1999 to $6,194 or 72% of total sales in the
first half of 2000. In the six months ended June 30, 2000, our sales to
e-commerce companies increased by approximately 179% as compared to the six
months ended June 30, 1999. Such sales constituted 35% of all sales to
commercial customers in the six months ended June 30, 2000. We anticipate that
sales to 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.
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<PAGE>
RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
Three Months Ended June 30, 1999 and 2000
-----------------------------------------
Net Sales
Net sales decreased by approximately $4,876, or 55%, in the three months
ended June 30, 2000 as compared to net sales in the three months ended June 30,
1999. Sales of our fault tolerant enterprise storage solutions accounted for 97%
and 80% of net sales in the quarters ended June 30, 1999 and 2000, respectively.
Other revenues, including revenues derived from services, accounted for 3% and
20% of net sales in the quarters ended June 30, 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 $1,296, or
78%, in the three months ended June 30, 2000 as compared to net sales in the
three months ended June 30, 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 18% and 73% of total
net sales in the quarters ended June 30, 1999 and 2000, respectively.
Sales to the U.S. Air Force through Federal integrators decreased by
approximately $5,286, or 84%, in the three months ended June 30, 2000 as
compared to net sales in the three months ended June 30, 1999. Such sales
accounted for approximately 71% and 25% of net sales in the quarters ended June
30, 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 $886, or
90%, in the three months ended June 30, 2000 as compared to net sales in the
three months ended June 30, 1999. Such sales accounted for approximately 11% and
2% of net sales in the quarters ended June 30, 1999 and 2000, respectively. Such
decrease represents a decrease in sales to Unisys of approximately $880 combined
with a $6 decrease in sales to Tandem.
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<PAGE>
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 $2,080, in the three months ended
June 30, 2000 to approximately $1,120 from $3,200 in the three months ended June
30, 1999. In the three months ended June 30, 2000, the gross margin percentage
was 28% as compared to 36% in the same period in 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.
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 29% and 70% for the three months ended June 30, 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 $286 to $2,836 in the three
months ended June 30, 2000 from $2,550 in the three months ended June 30, 1999.
Such increase was primarily due to the hiring of additional sales and marketing
personnel. In addition, we incurred approximately $45 associated with proposed
financing activities, and approximately $231 in legal and audit fees associated
with the Federal investigation. Salaries, commissions, bonuses, employee
benefits and payroll taxes were the largest components of SG&A expenses,
accounting for 71% and 55% of such expenses for the three months ended June 30,
1999 and June 30, 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 decreased in the three
months ended June 30, 2000 by $43, or 9%, from $475 in the corresponding 1999
period. Such expenditures, before offsetting amounts to be capitalized in
accordance with SFAS No. 86, represented $749 and $750 for the three months
ended June 30, 1999 and 2000, respectively. Research and development expenses
for the second quarter of 2000 represented approximately 11% of our net sales
and, including the amount capitalized in accordance with SFAS No. 86,
represented approximately 19% 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
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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 $33 and $20 for the three months ended June 30,
1999 and June 30, 2000, respectively. The $13 reduction in interest income was
due primarily to lower cash balances in 2000 compared to the same period in
1999.
Six Months Ended June 30, 1999 and 2000
---------------------------------------
Net Sales
Net sales decreased by approximately $9,702, or 53%, in the six months
ended June 30, 2000 as compared to net sales in the six months ended June 30,
1999. Sales of our fault tolerant enterprise storage solutions accounted for 97%
and 86% of net sales in the six months ended June 30, 1999 and June 30, 2000,
respectively. Other revenues, including services, accounted for 3% and 14% of
net sales in the six months ended June 30, 1999 and June 30, 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 $2,743, or
80%, in the six months ended June 30, 2000 as compared to net sales in the six
months ended June 30, 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 18% and 72% of total
net sales in the six months ended June 30, 1999 and June 30, 2000, respectively.
Sales to the U.S. Air Force through Federal integrators decreased by
approximately $10,220, or 83%, in the six months ended June 30, 2000 as compared
to net sales in the six months ended June 30, 1999. Such sales accounted for
approximately 68% and 24% of net sales in the six months ended June 30, 1999 and
June 30, 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.
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 $2,225, or
87%, in the six months ended June 30, 2000 as compared to net sales in the six
months ended
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June 30, 1999. Such sales accounted for approximately 14% and 4% of net sales in
the six months ended June 30, 1999 and 2000, respectively. Such decrease
represents a decrease in sales to Unisys of approximately $1,623 combined with a
$602 decrease in sales to Tandem.
Gross Profit
Our gross profit decreased by approximately $3,149 in the six months ended
June 30, 2000 to approximately $2,990 from $6,139 in the six months ended June
30, 1999. In the six months ended June 30, 2000, the gross margin percentage was
35% as compared to 34% in the same period in 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.
Operating Expenses
SG&A expenses increased as a percentage of net sales representing 28% and
63% for the six months ended June 30, 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 $432 to $5,480 in the six months ended June 30, 2000 from
$5,048 in the six months ended June 30, 1999. Such increase was primarily due to
the hiring of additional sales and marketing personnel. In addition, we incurred
approximately $194 associated with proposed financing activities, and
approximately $306 in legal and audit fees associated with the Federal
investigation. Salaries, commissions, bonuses, employee benefits and payroll
taxes were the largest components of SG&A expenses, accounting for 71% and 60%
of such expenses for the six months ended June 30, 1999 and June 30, 2000,
respectively.
Research and development expenses increased in the six months ended June
30, 2000 by $52, or 6%, from $927 in the corresponding 1999 period. Such
expenditures before offsetting amounts capitalized in accordance with SFAS No.
86 represented $1,379 and $1,536 for the six months ended June 30, 1999 and June
30, 2000, respectively. This increase is due primarily to an increase in
engineering staff associated with our efforts to create a fault-tolerant file
aware storage architecture for our future products. Research and development
expenses for the first quarter of 2000 represented approximately 11% of our net
sales and, including the amount capitalized in accordance with SFAS No. 86,
represented approximately 18% 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.
Net Interest (Income) Expense
Net interest income was $117 and $107 for the six months ended June 30,
1999 and June 30, 2000, respectively. The $10 reduction in interest income was
due primarily to lower cash balances in 2000 compared to the same period in
1999.
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LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS)
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 June 30,
2000, our cash balance was approximately $5,800.
Net cash used in operating activities was $804 and $1,370 for the six
months ended June 30, 1999 and June 30, 2000. Such use of cash in 2000 resulted
primarily from the net loss from operations, in addition to an increase in
inventories and prepaid expenses and other expenses, as well as decreases in
accounts payable, accrued liabilities, deferred rent and other expenses. Such
use of cash was offset in part by depreciation and amortization and a decrease
in accounts receivable.
We used $239 and $282 for the acquisition of equipment by direct purchase
during the six months ended June 30, 1999 and June 30, 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.
Net cash provided by financing activities was $1,655 and $172 for the six
months ended June 30, 1999 and June 30, 2000, respectively. Such cash was
generated by net proceeds from the exercise of employee stock options and
issuance of common stock, coupled with net borrowings received under the
Company's revolving credit agreement with Bank of America, offset in part by
payments to Finova Capital.
Net activities under our revolving credit agreement were net borrowings of
zero and $832 for each of the six months ended June 30, 1999 and June 30, 2000,
respectively.
Our working capital was $14,200 and $10,985 at December 31, 1999 and June
30, 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 June 30, 2000, our
balance outstanding under this full recourse factoring facility was $832. On
June 16,
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2000, the Company signed an amendment to the Factoring Agreement between Bank of
America and the Company extending the Agreement until July 30, 2003, and from
year to year thereafter until terminated. Except as amended, the Factoring
Agreement remains unchanged.
We have a $4,000 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 the assets of
the Company. During 1999, Finova temporarily increased the 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. On April 17, 2000, the line of credit
extended to us by Finova was permanently increased by $2,000, raising the total
amount of funds available to us under the Finova general line of credit to
$4,000.
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
June 30, 2000, we had a balance of $35 outstanding under this credit line, and
available credit under such line towards future inventory purchases was $3,965.
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") carryforwards for Federal income tax
purposes of approximately $9,134, which will begin to expire in 2009. We also
have research and development tax credit carryforwards 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
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net deferred tax assets since we are in a cumulative loss position. We will
periodically reassess the valuation allowance.
Subject to the risks discussed in this Quarterly Report on Form 10-Q, 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. There can be no
assurance, however, that our operating results will achieve profitability or
adequate cash flow in 2000. Our 2000 operating plan contains assumptions
regarding revenue and expenses. The achievement of the operating plan depends
heavily on the timing of sales and our ability to gain new customers and make
additional sales to current customers. The continuation of operating losses,
together with the risks associated with our business, and other changes in our
operating assets and liabilities, may have a material adverse affect on the
Company's future liquidity. Inability to improve operating results may require
the Company to seek equity financing, which, if required, would cause dilution
to our current stockholders. There can be no assurance that additional financing
will be available, if at all on terms acceptable to us.
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 our 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. 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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PART II. OTHER INFORMATION
--------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Shareholders of the Company (the "Meeting") was held
on June 22, 2000.
There were present at the Meeting either in person or by proxy common
shareholders holding an aggregate of 10,937,770 shares out of a total number of
11,509,768 shares issued, outstanding and entitled to vote at the Meeting. The
following is a complete list of the current Directors of the Company, each of
whom were elected at the meeting:
Michael E. Faherty
Gale R. Aguilar
Gregg M. Azcuy
James K. Dutton
Donald E. Fowler
Frank R. Triolo
Thomas I. Unterberg
The proposals and results of the vote of the shareholders taken at the
Meeting by ballot and proxy were as follows:
(A) The results of the vote taken at the Meeting with respect to the
election of the nominees for the Board of Directors of the Company were as
follows:
Nominee For Withheld
------- --- --------
Michael E. Faherty 10,849,519 Shares 88,251 Shares
Gale R. Aguilar 10,849,519 Shares 88,251 Shares
Gregg M. Azcuy 10,849,519 Shares 88,251 Shares
James K. Dutton 10,849,519 Shares 88,251 Shares
Donald E. Fowler 10,849,519 Shares 88,251 Shares
Frank R. Triolo 10,849,519 Shares 88,251 Shares
Thomas I. Unterberg 10,849,519 Shares 88,251 Shares
(B) A vote was taken at the Meeting on the proposal to amend the
Certificate of Incorporation of the Company to increase the Common Stock from
20,000,000 to 50,000,000. The results of the vote taken at the Meeting with
respect to amending the Company's Certificate of Incorporation were as follows:
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For Against Abstain
--- ------- -------
10,661,259 257,068 19,443
(C) A vote was taken at the Meeting on the proposal to amend the 1996
Non-Employee Directors Stock Option Plan to increase the maximum number of
shares of Common Stock available for issuance under the Non-Employee Plan from
150,000 to 500,000 shares and to reserve an additional 350,000 shares of Common
Stock of the Company for issuance upon exercise of stock options granted under
the Non-Employee Plan. The results of the vote taken at the Meeting with respect
to such amendment were as follows:
For Against Abstain
--- ------- -------
10,452,354 449,742 35,674
(D) A vote was taken at the Meeting on the proposal to ratify the
appointment of Ernst & Young, LLP as the independent auditors of the Company for
the fiscal year ending December 31, 2000. The results of the vote taken with
respect to such appointment were as follows:
For Against Abstain
--- ------- -------
10,545,902 371,325 20,543
ITEM 5. OTHER INFORMATION.
The Company appointed Michael J. Sheehan as Vice President of Federal
Sales, a newly created position within the organization.
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 June 30, 2000.
(b) Reports on Form 8-K.
None.
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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: August 14, 2000 By: /s/ Gregg M. Azcuy
---------------------------------
Gregg M. Azcuy, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 By: /s/ Louis J. Altieri
---------------------------------
Louis J. Altieri, Vice President,
Finance and Administration
(Principal Financial and
Accounting Officer)
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