CONFORMED COPY
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 September 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 September 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 December 31, 1999 and
and September 30, 2000 (unaudited)...................................2
Consolidated Statements of Operations for the three months
ended September 30, 2000 and September 30, 1999 and for the
nine months ended September 30, 2000 and September 30, 1999
(unaudited)..........................................................3
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and September 30, 2000 (unaudited)................4
Notes to Consolidated Financial Statements (unaudited)...............5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............12
Overview ...........................................................12
Results of Operations...............................................14
Liquidity and Capital Resources.....................................18
PART II. OTHER INFORMATION..............................................21
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Item 1. Legal Proceedings...........................................21
Item 2. Changes in Securities and Use of Proceeds...................22
Item 5. Other Information...........................................22
Item 6. Exhibits and Reports on Form 8-K............................23
SIGNATURES..............................................................24
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
ECCS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31, September 30,
1999 2000
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(unaudited)
Assets
Current Assets:
Cash and cash equivalents...................... $ 7,993 $ 3,374
Accounts receivable, less allowance for
doubtful accounts of $0 and $100 at December
31, 1999 and September 30, 2000,
respectively.................................. 5,829 3,877
Inventories.................................... 5,570 6,124
Prepaid expenses and other receivables......... 254 403
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19,646 13,778
Property, plant and equipment (net).............. 1,733 1,326
Capitalized software (net)....................... 1,790 2,387
Other assets..................................... 62 77
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Total Assets........................... $ 23,231 $ 17,568
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Loan payable................................... $ -- $ 688
Payable to Finova Capital...................... 968 865
Current portion of capital lease obligations... 158 121
Accounts payable............................... 1,631 1,138
Accrued expenses and other..................... 1,874 1,134
Warranty....................................... 746 571
Customer deposits, advances and other credits.. 69 210
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5,446 4,727
Capital lease obligations, net of current 67 45
portions.........................................
Deferred rent.................................... 17 4
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5,530 4,776
Shareholders' Equity:
Preferred Stock, $0.01 par value per share,
Authorized, 3,000,000 shares; None issued
and outstanding, at December 31, 1999 and
September 30, 2000, respectively............... -- --
Common stock, $0.01 par value per share,
Authorized, 50,000,000 shares; Issued and
outstanding, 11,341,318 shares and 11,522,971
shares at December 31, 1999 and September 30,
2000, respectively............................ 113 115
Capital in excess of par value - common ....... 26,374 26,658
Accumulated Deficit............................ (8,786) (13,981)
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17,701 12,792
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Total Liabilities and Shareholders' Equity.. $ 23,231 $ 17,568
========= =========
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
ECCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales...................... $ 11,737 $ 4,429 $ 30,079 $ 13,069
Cost of sales.................. 8,114 3,283 20,317 8,932
---------- ---------- ------- -------
Gross profit................. 3,623 1,146 9,762 4,137
Operating expenses:
Selling, general & 2,466 2,647 7,514 8,153
administrative.................
Research & development....... 488 373 1,415 1,352
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Operating income (loss)....... 669 (1,874) 833 (5,368)
Net interest income.......... (32) (41) (149) (173)
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Net income (loss).............. $ 701 $ (1,833) $ 982 $(5,195)
---------- ---------- ------- --------
Earnings (loss) per share:
Net income (loss) per common $ 0.06 $ (.16) $ 0.09 $ (.45)
share - basic.................. ========== ========== ======= =======
Earnings (loss) per common
share-assuming dilution:
Net income (loss) per common $ 0.06 $ (.16) $ 0.08 $ (.45)
share - diluted................ ========== ========== ======= =======
Weighted average number of
common shares - basic.......... 11,066 11,523 11,041 11,479
========== ========== ======= =======
Weighted average number of
common and common equivalent shares 12,274 11,523 11,828 11,479
- diluted......................... ========== ========== ======= =======
</TABLE>
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
ECCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Nine Months Ended September 30,
-------------------------------
1999 2000
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income (loss).................................. $ 982 $ (5,195)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization...................... 1,070 1,344
(Decrease) increase in accounts receivable......... (897) 1,952
Increase in inventories............................ (1,704) (554)
Increase in prepaid expenses and other............. (119) (164)
Increase (decrease)in accounts payable, accrued liab., 508 (1,421)
deferred rent and other............................
(Decrease) increase in customer deposits, advances and
other credits...................................... (37) 141
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Net cash used in operating activities................. (197) (3,897)
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Cash flows from investing activities:
Additions to property, plant and equipment.......... (452) (400)
Additions to capitalized software................... (760) (1,134)
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Net cash used in investing activities................. (1,212) (1,534)
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Cash flows from financing activities:
Borrowings under revolving credit agreement......... 14,263 13,495
Repayments under revolving credit agreement......... (14,263) (12,807)
Decrease in payable to Finova Capital............... (535) (103)
Repayment of long term debt, capital lease
obligations......................................... (55) (59)
Net proceeds from exercise of employee stock options
and issuance of common stock........................ 119 286
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Net cash (used in) provided by financing activities... (471) 812
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Net decrease in cash and cash equivalents............. (1,880) (4,619)
Cash and cash equivalents at beginning of period...... 5,374 7,993
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Cash and cash equivalents at end of period............ $ 3,494 $ 3,374
=========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................... $ 92 $ 117
========== ========
See notes to consolidated financial statements.
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</TABLE>
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ECCS, Inc.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(Information for September 30, 1999 and September 30, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
NOTE 1 - BASIS OF PRESENTATION
The information presented for September 30, 1999 and September 30, 2000,
and for the three month and nine month periods then ended, is unaudited, but, in
the opinion of the management of ECCS, Inc. ("ECCS" or the "Company"), the
accompanying unaudited consolidated financial statements contain all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for the fair presentation of the Company's financial position as of
September 30, 2000, the results of its operations for the three-month and
nine-month periods ended September 30, 1999 and September 30, 2000, and its cash
flows for the nine-month periods ended September 30, 1999 and September 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 September 30, 1999 and September 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, September 30,
1999 2000
---- ----
(unaudited)
Purchased parts..................................$ 1,497 $ 1,964
Finished goods................................... 5,047 5,359
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6,544 7,323
Less: inventory valuation reserve.......... 974 1,199
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$ 5,570 $ 6,124
========== =========
(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 $411 and $537 for the nine-month periods ended September
30, 1999 and September 30, 2000, respectively. At December 31, 1999, the Company
had capitalized $4,736 of software
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ECCS, Inc.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1999 and September 30, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
development costs of which, $366 has been written off and $2,580 has been
amortized. As of September 30, 2000, the Company had capitalized $5,870 of
software development costs of which $366 has been written off and $3,117 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.
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. 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.
(i) Warranty
Estimated future warranty obligations related to ECCS products are provided
by charges to operations in the period the related revenue is recognized.
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ECCS, Inc.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1999 and September 30, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
(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.
(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, subpoenas have been received by several employees of the
Company, including certain officers, who are expected to testify before the
grand jury. Not all of such testimony has been provided. 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
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ECCS, Inc.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1999 and September 30, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
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.
In October 2000, one of the integrators to which the Company sells
products, KKP Corp., and its president pled guilty to federal charges of mail
fraud and conspiracy to defraud the United States in connection with the sale of
computer products and related services to the U.S. Air Force. The Company is
referred to in the court papers (known as the "Information") in such case. The
Information states that the defendants periodically issued invoices to the
Company for fictitious services to the U.S. Air Force that were never provided
and passed such payments along to coconspirators. The Information also states
that one of the coconspirators caused the Company "to pay a kickback of $500 for
each unit sold to the Air Force, with the proceeds going to the benefit of
Coconspirators." The Company is not identified as a coconspirator in the
Information. The Company believes that it had a reasonable basis to believe
these services to the U.S. Air Force were performed; that all payments made by
it to KKP Corp. were properly authorized; and that the Company has not violated
any federal laws in connection with the Company's sale of computer products to
KKP Corp. which were ultimately received by the U.S. Air Force.
In October 2000, two employees of a company which assisted the Air Force in
procuring computer-related products and other related parties were indicted on
multiple federal charges, including wire fraud, conspiracy to defraud the United
States and money laundering in connection with the sale of computer products and
related services from several vendors, including the Company, to the U.S. Air
Force. The defendants in the Indictment appear to be the coconspirators referred
to in the Information. The Company is referred to in the Indictment in terms
similar to the Information. The Company believes that it had a reasonable basis
to believe the services to the U.S. Air Force billed by some of the defendants
in the Indictment were performed; that all payments made by it to any of the
defendants in the Indictment were properly authorized; and that the Company has
not violated any federal laws in connection with the Company's sale of computer
products which were 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.
On October 19, 2000, the Company filed with the Securities and Exchange
Commission a preliminary proxy statement pursuant to which the Company intends
to solicit shareholder approval at a Special Meeting of Shareholders of the
Company scheduled to be held on November 20, 2000 for (a) a private placement
pursuant to which the Company shall issue up to 5,714,286 shares of 6%
Cumulative Convertible Preferred Stock, Series A, representing approximately 50%
of the issued and outstanding equity
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ECCS, Inc.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1999 and September 30, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
securities of the Company immediately prior to such issuance and (b) an
amendment to the Certificate of Incorporation of the Company to increase the
Company's authorized shares of Preferred Stock from 3,000,000 to 9,000,000, of
which 5,714,286 shall be designated 6% Cumulative Convertible Preferred Stock,
Series A. In connection with such private placement, the Company is seeking to
raise up to $10,000 in aggregate gross proceeds. The per share purchase price is
estimated to be $1.75 which is subject to change depending on various factors,
including the market price for the Company's Common Stock and negotiations with
purchasers.
It is contemplated that the Series A Preferred Stock will have certain
cumulative dividends and other rights and preferences, including, certain
liquidation preferences and a right of first offer on certain securities issued
by the Company.
NOTE 5 - TRANSACTION WITH A SIGNIFICANT CUSTOMER
Sales to the U.S. Air Force through Federal integrators were $4,060, or
31%, for the nine-months ended September 30, 2000. Sales to the U.S. Air Force
through Federal integrators for the nine-months ended September 30, 2000
decreased by approximately 78% as compared to such sales for the nine-months
ended September 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% 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. 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. As of September 30, 2000, the balance outstanding under this full
recourse factoring facility was $688.
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 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
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ECCS, Inc.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Information for September 30, 1999 and September 30, 2000 is unaudited)
(Dollars in Thousands except Per Share Information)
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 September 30, 2000, the Company had a balance of $865 outstanding
under this credit line, and available credit under such line towards future
inventory purchases was $3,135.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (DOLLARS IN THOUSANDS)
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 Value Added Resellers ("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
Original Equipment Manufacturers ("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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On June 13, 2000, we introduced SANStar, a network storage engine that
unifies disparate data, including NAS and 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 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 $7,860 or 26% of
total sales in the nine month period ended September 30, 1999 to $8,582 or 66%
of total sales in the nine month period ended September 30, 2000. In the nine
months ended September 30, 2000, our sales to e-commerce companies increased by
approximately 7% as compared to the nine months ended September 30, 1999. Such
sales constituted 38% of all sales to commercial customers in the nine months
ended September 30, 2000. We anticipate that sales to e-commerce customers will
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, changes in customer buying patterns and the
results of the investigation discussed in Note 3 to the Consolidated Financial
Statements set forth in Item 1 above.
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RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS)
Three Months Ended September 30, 1999 and 2000
----------------------------------------------
Net Sales
---------
Net sales decreased by approximately $7,308, or 62%, in the three months
ended September 30, 2000 as compared to net sales in the three months ended
September 30, 1999. Sales of our fault tolerant enterprise storage solutions
accounted for 94% and 85% of net sales in the quarters ended September 30, 1999
and 2000, respectively. Other revenues, including revenues derived from
services, accounted for 6% and 15% of net sales in the quarters ended September
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, lower sales to alternate channel partners, and a decrease in sales
to commercial customers.
Sales to our commercial customers decreased by approximately $2,169, or
48%, in the three months ended September 30, 2000 as compared to net sales in
the three months ended September 30, 1999. Such decrease reflects the deferment
of sales from the Company's end-user customers pending the introduction of
SX3000 and SANStar products.
Sales to the U.S. Air Force through Federal integrators were $1,959 for the
three months ended September 30, 2000, and decreased by approximately $4,255, or
68%, as compared to the corresponding period in 1999. Such sales accounted for
approximately 53% and 44% of net sales in the quarters ended September 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 could 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 $884, or
91%, in the three months ended September 30, 2000 as compared to such sales in
the three months ended September 30, 1999. Such sales accounted for
approximately 8% and 2% of net sales in the quarters ended September 30, 1999
and 2000, respectively. Such decrease represents a decrease in sales to Unisys
of approximately $857 combined with a $27 decrease in sales to Tandem.
-14-
<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 $2,477 in the three months ended
September 30, 2000 to approximately $1,146 from $3,623 in the three months ended
September 30, 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, combined with a decrease in sales to commercial customers. In the
three months ended September 30, 2000, the gross margin percentage was 26% as
compared to 31% in the same period in 1999.
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 21% and 60% for the three months ended September 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 $181 to $2,647 in the three
months ended September 30, 2000 from $2,466 in the three months ended September
30, 1999. Such increase was primarily due to the hiring of additional sales and
marketing personnel. In addition, we incurred approximately $140 in legal 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 three months ended
September 30, 1999 and September 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 September 30, 2000 by $115, or 24%, from $488 in the corresponding
period in 1999. Such expenditures, before offsetting amounts to be capitalized
in accordance with SFAS No. 86, represented $676 and $745 for the three months
ended September 30, 1999 and 2000, respectively. Research and development
expenses for the third quarter of 2000 represented approximately 8% of our net
sales and, including the amount capitalized in accordance with SFAS No. 86,
represented approximately 17% 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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<PAGE>
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 $32 and $41 for the three months ended September
30, 1999 and September 30, 2000, respectively.
Nine Months Ended September 30, 1999 and 2000
---------------------------------------------
Net Sales
---------
Net sales decreased by approximately $17,010, or 57%, in the nine months
ended September 30, 2000 as compared to net sales in the nine months ended
September 30, 1999. Sales of our fault tolerant enterprise storage solutions
accounted for 96% and 85% of net sales in the nine months ended September 30,
1999 and September 30, 2000, respectively. Other revenues, including services,
accounted for 4% and 15% of net sales in the nine months ended September 30,
1999 and September 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, lower sales to alternate channel partners, offset by an increase in
sales to commercial customers.
Sales to our commercial customers increased by approximately $722, or 9%,
in the nine months ended September 30, 2000 as compared to net sales in the nine
months ended September 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 25% and 10% of total
net sales in the nine months ended September 30, 1999 and September 30, 2000,
respectively.
Sales to the U.S. Air Force through Federal integrators were $4,060 for the
nine months ended September 30, 2000, and decreased by approximately $14,683, or
78%, as compared to the corresponding period in 1999. Such sales accounted for
approximately 62% and 31% of net sales in the nine months ended September 30,
1999 and September 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 could 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 $3,049, or
88%, in the nine months ended September 30, 2000 as compared to such sales in
the nine months ended September 30, 1999. Such sales accounted for approximately
12% and 3% of net sales in the nine months ended September 30, 1999 and 2000,
respectively. Such
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<PAGE>
decrease represents a decrease in sales to Unisys of approximately $2,419
combined with a $629 decrease in sales to Tandem.
Gross Profit
------------
Our gross profit decreased by approximately $5,625 in the nine months ended
September 30, 2000 to approximately $4,137 from $9,762 in the nine months ended
September 30, 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
nine months ended September 30, 2000, the gross margin percentage was 32% as
compared to 33% in the same period in 1999.
Operating Expenses
------------------
SG&A expenses increased as a percentage of net sales from 25% for the nine
months ended September 30, 1999 to 62% for the nine months ended September 30,
2000. 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 $639 to $8,153 in the nine months ended
September 30, 2000 from $7,514 in the nine months ended September 30, 1999. Such
increase was primarily due to the hiring of additional sales and marketing
personnel, coupled with enhanced efforts to market the Company's current and new
products offerings. In addition, we incurred approximately $194 associated with
proposed financing activities, and approximately $446 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 nine months ended
September 30, 1999 and September 30, 2000, respectively.
Research and development expenses decreased in the nine months ended
September 30, 2000 by $63, or 4%, from the corresponding period in 1999. Such
expenditures before offsetting amounts capitalized in accordance with SFAS No.
86 represented $1,922 and $2,281 for the nine months ended September 30, 1999
and September 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 in the nine months ended September 30, 2000 represented
approximately 10% 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 $149 and $173 for the nine months ended September
30, 1999 and September 30, 2000, respectively.
-17-
<PAGE>
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
September 30, 2000, our cash balance was approximately $3,374.
Net cash used in operating activities was $197 and $3,897 for the nine
months ended September 30, 1999 and September 30, 2000, respectively. Such use
of cash in 2000 resulted primarily from the net loss from operations, in
addition to an increase in inventories and prepaid expenses, coupled with a
decrease 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 $452 and $400 for the acquisition of equipment by direct purchase
during the nine months ended September 30, 1999 and September 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 the full
amount is 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 activities under our
revolving credit agreement were zero for the nine months ended September 30,
1999 and were net borrowings of $688 for the nine months ended September 30,
2000.
Net cash used in financing activities for the nine months ended September
30, 1999 was $471. Such use was primarily caused by payments to Finova Capital
offset by net proceeds received from the exercise of employee stock options and
the issuance of common stock. Net cash provided by financing activities for the
nine months ended September 30, 2000 was $812. 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 and
repayment of capital lease obligation.
Our working capital was $14,200 and $9,051 at December 31, 1999 and
September 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% 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
-18-
<PAGE>
days prior written notice) beginning on July 30, 1997. Our obligations under
such agreement are collateralized by substantially all of our assets. As of
September 30, 2000, our balance outstanding under this full recourse factoring
facility was $688. 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.
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
September 30, 2000, we had a balance of $865 outstanding under this credit line,
and available credit under such line towards future inventory purchases was
$3,135.
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.
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<PAGE>
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.
On October 19, 2000, the Company filed with the Securities and Exchange
Commission a preliminary proxy statement pursuant to which the Company intends
to solicit shareholder approval at a Special Meeting of Shareholders of the
Company scheduled to be held on November 20, 2000 for (a) a private placement
pursuant to which the Company shall issue up to 5,714,286 shares of 6%
Cumulative Convertible Preferred Stock, Series A, representing approximately 50%
of the issued and outstanding equity securities of the Company immediately prior
to such issuance and (b) an amendment to the Certificate of Incorporation of the
Company to increase the Company's authorized shares of Preferred Stock from
3,000,000 to 9,000,000, of which 5,714,286 shall be designated 6% Cumulative
Convertible Preferred Stock, Series A. In connection with such private
placement, the Company is seeking to raise up to $10,000 in aggregate gross
proceeds. The per share purchase price is estimated to be $1.75 which is subject
to change depending on various factors, including the market price for the
Company's Common Stock and negotiations with purchasers.
Subject to the risks discussed in this Quarterly Report on Form 10-Q, we
believe that our existing available cash, credit facilities, proceeds from the
proposed private placement of preferred stock described above 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 the next 12 months. Our 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
the shareholders will approve the proposed private placement or that the
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.
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<PAGE>
PART II. OTHER INFORMATION
--------------------------
ITEM 1. 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, subpoenas have been received by several employees of the
Company, including certain officers, who are expected to testify before the
grand jury. Not all of such testimony has been provided. 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.
In October 2000, one of the integrators to which the Company sells
products, KKP Corp., and its president pled guilty to federal charges of mail
fraud and conspiracy to defraud the United States in connection with the sale of
computer products and related services to the U.S. Air Force. The Company is
referred to in the court papers (known as the "Information") in such case. The
Information states that the defendants periodically issued invoices to the
Company for fictitious services to the U.S. Air Force that were never provided
and passed such payments along to coconspirators. The Information also states
that one of the coconspirators caused the Company "to pay a kickback of $500 for
each unit sold to the Air Force, with the proceeds going to the benefit of
Coconspirators." The Company is not identified as a coconspirator in the
Information. The Company believes that it had a reasonable basis to believe
these services to the U.S. Air Force were performed; that all payments made by
it to KKP Corp. were properly authorized; and that the Company has not violated
any federal laws in connection with the Company's sale of computer products to
KKP Corp. which were ultimately received by the U.S. Air Force.
In October 2000, two employees of a company which assisted the Air Force in
procuring computer-related products and other related parties were indicted on
multiple federal charges, including wire fraud, conspiracy to defraud the United
States and money laundering in connection with the sale of computer products and
related services from several vendors, including the Company, to the U.S. Air
Force. The defendants in the Indictment appear to be the coconspirators referred
to in the Information. The Company is referred to in the Indictment in terms
similar to the Information. The Company believes that it had a reasonable basis
to believe the services to the U.S. Air Force billed by
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<PAGE>
some of the defendants in the Indictment were performed; that all payments made
by it to any of the defendants in the Indictment were properly authorized; and
that the Company has not violated any federal laws in connection with the
Company's sale of computer products which were ultimately received by the U.S.
Air Force.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
At the Annual Meeting of Shareholders of the Company, held on June 22,
2000, the shareholders of the Company approved a proposal to amend the
Certificate of Incorporation of the Company to increase the authorized Common
Stock from 20,000,000 shares to 50,000,000 shares. On September 19, 2000, the
Company filed with the Secretary of State of the State of New Jersey a
Certificate of Amendment to the Restated and Amended Certificate of
Incorporation, thereby increasing the number of authorized shares of Common
Stock from 20,000,000 shares to 50,000,000 shares.
ITEM 5. OTHER INFORMATION (DOLLARS IN THOUSANDS).
On October 19, 2000, the Company filed with the Securities and Exchange
Commission a preliminary proxy statement pursuant to which the Company intends
to solicit shareholder approval at a Special Meeting of Shareholders of the
Company scheduled to be held on November 20, 2000 for (a) a private placement
pursuant to which the Company shall issue up to 5,714,286 shares of 6%
Cumulative Convertible Preferred Stock, Series A, representing approximately 50%
of the issued and outstanding equity securities of the Company immediately prior
to such issuance and (b) an amendment to the Certificate of Incorporation of the
Company to increase the Company's authorized shares of Preferred Stock from
3,000,000 to 9,000,000, of which 5,714,286 shall be designated 6% Cumulative
Convertible Preferred Stock, Series A. In connection with such private
placement, the Company is seeking to raise up to $10,000 in aggregate gross
proceeds. The per share purchase price is estimated to be $1.75 which is subject
to change depending on various factors, including the market price for the
Company's Common Stock and negotiations with purchasers.
It is contemplated that the Series A Preferred Stock will have certain
cumulative dividends and other rights and preferences, including, certain
liquidation preferences and a right of first offer on certain securities issued
by the Company.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3 Certificate of Amendment to the Restated and Amended Certificate
of Incorporation of the Company filed with the State of New
Jersey on September 19, 2000.
11 Calculation of Earnings Per Share
27 Financial Data Schedule for the period ended September 30, 2000.
(b) Reports on Form 8-K.
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECCS, Inc.
Date: November 3, 2000 By: /s/ Gregg M. Azcuy
--------------------------
Gregg M. Azcuy, President
and Chief Executive Officer
(Principal Executive Officer)
Date: November 3, 2000 By: /s/ Louis J. Altieri
--------------------------
Louis J. Altieri, Vice President,
Finance and Administration
(Principal Financial and
Accounting Officer)
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<PAGE>
EXHIBIT 3
CERTIFICATE OF AMENDMENT TO THE
RESTATED AND AMENDED CERTIFICATE OF INCORPORATION
OF ECCS, INC.
Pursuant to Section 14A:9-4 of the New Jersey Business Corporation Act, the
undersigned corporation executes this Certificate of Amendment to its Restated
and Amended Certificate of Incorporation.
1. The name of the corporation is ECCS, Inc. (the "Corporation").
2. The first paragraph of Article IV of the Corporation's Restated and
Amended Certificate of Incorporation is amended to read in its entirety as
follows:
"IV. Authorized Capital. The total number of shares of all classes of stock
which the Corporation shall have authority to issue is fifty three million
(53,000,000) shares. The Corporation is authorized to issue two classes of stock
designated "Common Stock" and "Preferred Stock", respectively. The total number
of shares of Common Stock authorized to be issued by the Corporation is fifty
million (50,000,000), each such share of Common Stock having a par value of
$.01. The total number of shares of Preferred Stock authorized to be issued by
the Corporation is three million (3,000,000), each such share of Preferred Stock
having a par value of $.01. Such shares of Preferred Stock shall be undesignated
Preferred Stock."
3. The foregoing amendment to the Restated and Amended Certificate of
Incorporation of the Corporation was adopted by the shareholders of the
Corporation at a meeting of such shareholders held on June 22, 2000.
4. The number of shares of the Corporation entitled to vote on the
amendment was 11,509,768 shares of Common Stock. 10,661,259 of such shares voted
for the foregoing amendment. 257,068 of such shares voted against the foregoing
amendment. 19,443 of such shares abstained from voting on the foregoing
amendment.
<PAGE>
IN WITNESS WHEREOF, this Certificate of Amendment is made this 10th day of
July, 2000.
ATTEST: ECCS, INC.
By: David J. Sorin By: Gregg M. Azcuy
------------------------- -----------------------------
David J. Sorin, Secretary Gregg M. Azcuy, President and
Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
Calculation of Earnings per Share
(In Thousands, except for per Share Amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
1999 2000 1999 2000
---- ---- ---- ----
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) .................. $ 701 $ (1,833) $ 982 $ (5,195)
Preferred stock dividends........... -- -- -- --
----- ----- ----- -----
Numerator for basic earnings (loss)
per share - income (loss) available
to common shareholders............... 701 (1,833) 982 (5,195)
Effect of dilutive securities:
Preferred stock dividends........... -- -- -- --
Interest on unpaid preferred stock
dividends........................... -- -- -- --
----- ----- ----- -----
Numerator for dilutive earnings
loss per share - income (loss)
available to common shareholders
after assumed conversion........... $ 701 $ (1,833) $ 982 $ (5,195)
Denominator:
Denominator for basic earnings (loss)
per share - weighted-average
shares............................. 11,066 11,523 11,041 11,479
Effect of dilutive securities:
Employee stock options and warrants. -- -- -- --
Convertible preferred stock......... -- -- -- --
----- ----- ----- -----
-- -- -- --
Dilutive potential common shares
Denominator for diluted earnings
(loss) per share - Adjusted
weighted-average shares and assumed
conversion.......................... 12,274 11,523 11,828 11,479
====== ====== ====== ======
Basic earnings (loss) per share..... $ 0.06 $ (.16) $ 0.09 $ (.45)
======== ======== ======== =======
Diluted earnings (loss) per share... $ 0.06 $ (.16) $ 0.08 $ (.45)
======== ======== ======== =======
</TABLE>