<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 April 30, 2000.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ____ to ____.
Commission file number 000-26399
EON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 62-1482176
(State of incorporation) (I.R.S. Employer Identification No.)
4119 Willow Lake Blvd., Memphis, Tennessee 38118
(Address of principal executive office)
(901) 365-7774
(Telephone number)
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 issuer's classes of
Common Stock, as of the latest practicable date: 12,255,045 shares of Common
---------------------------
Stock, $.001 par value, as of May 31, 2000.
------------------------------------------
<PAGE>
EON COMMUNICATIONS CORPORATION
FORM 10-Q
QUARTER ENDED APRIL 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 1999 and
April 30, 2000................................................ 3
Consolidated Statements of Operations for the Three Months
and Nine months Ended April 30, 1999 and April 30,
2000.......................................................... 4
Consolidated Statements of Cash Flows for the Nine months
Ended April 30, 1999 and April 30, 2000....................... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 8
Item 3. Qualitative and Quantitative Disclosure about Market Risk........ 15
Part II: OTHER INFORMATION
Item 1. Legal Proceedings................................................... 16
Item 2. Changes in Securities............................................... 16
Item 6. Exhibits and Reports on Form 8-K.................................... 16
Signature 16
</TABLE>
2
<PAGE>
EON COMMUNICATIONS CORPORATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
eOn Communications Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
July 31, 1999 and April 30, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
At At
July 31, 1999 April 30, 2000
------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,874 $ 886
Marketable securities - 22,409
Trade accounts receivable, net of allowance for doubtful accounts of $1,803 and $2,035 12,135 12,851
Inventories 8,679 12,149
Other current assets 1,346 1,752
-------------- --------------
Total current assets 24,034 50,047
Property and equipment, net 1,419 1,995
Receivable from affiliate 9 -
Other assets:
Goodwill, net of accumulated amortization of $177 and $617 11,547 11,107
Intangible assets, net of accumulated amortization of $49 and $184 359 279
Other 1,657 621
-------------- --------------
Total other assets 13,563 12,007
-------------- --------------
Total $ 39,025 $ 64,049
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable $ 2,667 $ 67
Notes payable under revolving line of credit 3,137 -
Trade accounts payable 5,580 8,620
Accounts payable to CMC Industries, Inc. 3,278 648
Accrued expenses and other 2,958 3,117
Income tax payable 1,939 259
-------------- --------------
Total current liabilities 19,559 12,711
Payable to affiliate - 20
Long-term debt 2,314 -
Commitments and contingencies - -
Stockholders' equity:
Series A convertible preferred stock, $.001 par value (10,000,000 shares authorized,
1,463,206 and nil issued and outstanding) 660 -
Common Stock, $.001 par value (50,000,000 shares authorized, 7,639,932 and
12,254,826 shares issued and outstanding) 8 12
Additional paid-in capital 24,148 57,599
Accumulated deficit (4,380) (5,989)
Note receivable from affiliate (former parent) (3,284) (264)
Accumulated other comprehensive income - unrealized loss on marketable
securities (net of tax) (40)
-------------- --------------
Total stockholders' equity 17,152 51,318
-------------- --------------
Total $ 39,025 $ 64,049
============== ==============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For the Three Months and Nine Months Ended April 30, 1999 and 2000
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------------ --------------------------------
1999 2000 1999 2000
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 10,017 $ 11,959 $ 27,173 $ 39,666
Cost of revenues 5,339 6,648 15,280 22,641
-------- -------- -------- ---------
Gross profit 4,678 5,311 11,893 17,025
Operating expenses:
Selling, general and administrative 3,524 5,617 8,695 14,939
Research and development 572 1,086 1,489 2,859
Amortization of goodwill 28 144 28 440
-------- -------- -------- ----------
Total Operating Expenses 4,124 6,847 10,212 18,238
-------- -------- -------- ----------
Income (loss) from operations 554 (1,536) 1,681 (1,213)
Interest expense 172 28 584 281
Interest income - (283) - (446)
Other expense, net 98 14 117 109
-------- -------- -------- ----------
Income (loss) before income tax expense
(benefit) 284 (1,295) 980 (1,157)
Income tax expense (benefit) 20 (8) 82 168
-------- -------- -------- ----------
Income (loss) before extraordinary item 264 (1,287) 898 (1,325)
Extraordinary loss from early extinguishment of debt, net
of income taxes - 284 - 284
-------- -------- -------- ----------
Net income (loss) $ 264 $ (1,571) $ 898 $ (1,609)
========= ======== ======== ==========
Net income (loss) per common share:
Basic:
Net income (loss) before extraordinary
item $ 0.07 $ (0.11) $ 0.23 $ (0.15)
Extraordinary loss - (0.02) - (0.03)
-------- --------- -------- ----------
Net income (loss) $ 0.07 $ (0.13) $ 0.23 $ (0.18)
-------- --------- -------- ----------
Diluted:
Net income (loss) before extraordinary
item $ 0.05 $ (0.11) $ 0.17 $ (0.15)
Extraordinary loss - (0.02) - (0.03)
--------- --------- -------- ----------
Net income (loss) $ 0.05 $ (0.13) $ 0.17 $ (0.18)
--------- --------- -------- ----------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended April 30, 1999 and 2000
(Dollars in thousands)
Nine Months Ended
April 30, 2000
-------------------------------------
1999 2000
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 898 $(1,609)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 161 419
Amortization of intangibles 11 134
Amortization of goodwill 28 440
Amortization of deferred financing costs 110 46
Provision for the allowance for doubtful accounts 196 552
Extraordinary loss on extinguishment of debt - 146
Equity in earnings of joint venture (6) -
Changes in net assets and liabilities
Trade accounts receivable (1,570) (1,268)
Accounts receivable from (payable to) affiliates (87) 29
Inventories 545 (4,270)
Other current assets 490 (405)
Other non-current assets (295) (412)
Trade accounts payable 1,362 3,040
Accounts payable to CMC Industries, Inc. (217) (2,630)
Accrued expenses and other 4 159
Income taxes payable 78 (1,680)
------------ -------------
Net cash provided by (used in) operating activities 1,708 (7,309)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (325) (1,018)
Cash acquired from business acquisition 3,126 -
Purchases of available for sale securities - (21,609)
Proceeds from sales of property and equipment - 23
Net repayments under notes receivable from employees 48 73
Purchase of patents, trademarks, and software technology - (54)
------------ -------------
Net cash provided by (used in) investing activities 2,849 (22,585)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving line of credit (187) (3,137)
Proceeds from offering - 33,937
Deferred offering costs (378) -
Net borrowings (repayments) of long-term debt (21) (2,314)
Repayment (advance) of note receivable from (to) former parent (1,950) 420
Repayment of note payable to former parent (100) -
Repayment of note payable to related party (250) -
------------ -------------
Net cash provided by (used in) financing activities (2,886) 28,906
------------ -------------
Net increase (decrease) in cash and cash equivalents 1,671 (988)
Cash and cash equivalents, beginning of period 103 1,874
------------ -------------
Cash and cash equivalents, end of period $ 1,774 $ 886
============ =============
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Item 1. Financial Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
eOn Communications Corporation (the "Company") without audit. It is management's
opinion that these statements include all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations, and cash flows as of April 30, 2000 and for all periods
presented. The results for the nine months ended April 30, 1999 and 2000 are not
necessarily indicative of the results that may be expected for the full year.
Certain information and footnote disclosures normally included in the
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto as of July 31, 1998 and 1999 and for each
of the three years in the period ended July 31, 1999, which are included in the
Registration Statement on Form S-1 (File No. 333-77021) filed with the
Securities and Exchange Commission.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging," which established standards
of accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The provisions of this statement are effective for fiscal years
beginning after June 15, 2000. Management has not evaluated what impact, if any,
the adoption of this statement will have on the disclosures in the Company's
financial statements.
2. EARNINGS PER SHARE
The computations of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION> Three Months Ended Nine Months Ended
April 30, April 30,
---------------------- ------------------
1999 2000 1999 2000
----------- ---------- -------- --------
(In thousands, except (In thousands, except
per share data) per share data)
<S> <C> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss) before extraordinary loss $ 264 $(1,287) $ 898 $(1,325)
Weighted average shares outstanding - basic 3,920 11,993 3,920 9,075
------ ------- ------ -------
Basic earnings (loss) per share $ 0.07 $ (0.11) $ 0.23 $ (0.15)
====== ======= ====== =======
Diluted earnings (loss) per share:
Income:
Net income (loss) before extraordinary loss $ 264 $(1,287) $ 898 $(1,325)
Interest on 8% convertible subordinated debt 10 - 50 -
------ ------- ------ -------
Income (loss) available to common shareholders 274 (1,287) 948 (1,325)
Weighted average shares:
Outstanding 3,920 11,993 3,920 9,075
Assumed conversion of preferred stock 1,435 - 1,435 -
Dilutive effect of stock options 225 - 185 -
------ ------- ------ -------
Weighted average shares outstanding - diluted 5,580 11,993 5,540 9,075
------ ------- ------ -------
Diluted earnings (loss) per share $ 0.05 $ (0.11) $ 0.17 $ (0.15)
====== ======= ====== =======
</TABLE>
Potential common shares related to assumed conversion of preferred stock and
outstanding stock options were excluded from the computation of diluted earnings
per share for periods ended April 30, 2000 because their inclusion would have
had an antidilutive effect on earnings per share.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, April 30,
1999 2000
------------ -----------
(In thousands)
<S> <C> <C>
Raw materials and purchased components $ 531 $ 1,176
Finished goods 8,222 11,047
LIFO reserve (74) (74)
--------- ---------
Total inventories $ 8,679 $ 12,149
========= =========
</TABLE>
6
<PAGE>
4. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Systems - Cellular
Communications Caribbean/ Airtime
Systems Latin America Services Other Reconciliations
-------------- ------------- -------- ----- ---------------
<S> <C> <C> <C> <C> <C>
Three months ended April 30, 1999:
Revenues $ 5,682 $3,064 $1,271 $ 152 $ (152)
Net income (loss) 18 237 9 9 (9)
Total assets 26,024 5,203 2,776 1,288 (1,288)
Three months ended April 30, 2000:
Revenues 7,369 3,323 1,267 58 (58)
Net income (loss) (1,554) (88) 71 (5) 5
Total assets 51,075 11,244 1,730 1,071 (1,071)
Nine months ended April 30, 1999:
Revenues 16,556 6,474 4,143 326 (326)
Net income (loss) 127 340 431 7 (7)
Nine months ended April 30, 2000:
Revenues 25,448 10,770 3,448 130 (130)
Net income (loss) (1,868) 88 171 (17) 17
<CAPTION>
Consolidated
Total
------------
<S> <C>
Three months ended April 30, 1999:
Revenues $10,071
Net income (loss) 264
Total assets 34,003
Three months ended April 30, 2000:
Revenues 11,959
Net income (loss) (1,571)
Total assets 64,049
Nine months ended April 30, 1999:
Revenues 27,173
Net income (loss) 898
Nine months ended April 30, 2000:
Revenues 39,666
Net income (loss) (1,609)
</TABLE>
There have been no differences from the last annual financial statements in
the basis of measuring segment profit or loss. The change in operating assets
since the last annual financial statement consists primarily of the proceeds
from the initial public offering discussed in Footnote 5. On April 12, 1999, the
Company acquired BCS Technologies, Inc., which represents total assets of
approximately $18 million at April 30, 2000 that are included in the
communications systems segment.
5. THE OFFERING
On February 4, 2000, the Company completed the initial public offering of
2,790,000 shares of common stock at a price of $12.00 per share resulting in net
proceeds to the Company of $28.6 million, net of underwriting commissions and
discounts and offering costs. On February 17, 2000, the underwriters exercised
their over-allotment option, resulting in the issuance of an additional 390,000
shares of common stock and additional net proceeds to the Company totaling $4.4
million. Simultaneous with the offering, all of the shares of the Company's
Series A convertible preferred stock were converted into shares of the Company's
common stock on approximately a 1 for .98 basis, resulting in the issuance of
1,434,894 shares of common stock. The Company used the proceeds from the
offering to repay $2.8 million of outstanding principal and interest on 8%
subordinated notes due in 2002 and $3.6 million of outstanding indebtedness
under a revolving credit facility. In connection with the repayment of the
debt, the Company recognized a charge of $0.3 million, net of income tax,
related to the early extinguishment of debt.
6. CHANGES IN STOCKHOLDERS' EQUITY
The following represents the changes in stockholders' equity for the nine
months ended April 30, 2000:
<TABLE>
<CAPTION>
(In thousands, except share date)
------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional Note
----------------------------------------------- Paid-in Accumulated Receivable
Shares Amount Shares Amount Capital Deficit From Parent
------ ------ ------ ------ ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
July 31, 1999 1,463,206 $660 7,639,932 $8 $24,148 $(4,380) $(3,284)
Comprehensive income (loss):
Net loss (1,609)
Other comprehensive income
-unrealized loss on
securities (net of tax)
Comprehensive loss
Collection of note
receivable from
former parent 420
Conversion of preferred
to common (1,463,206) (660) 1,434,894 1 659
Issuance of common stock
in the offering 3,180,000 3 32,792
Note receivable distributed
in lieu of dividend
payable 2,600
----------- ----- --------- -- ------ -------- -----
Balance at
April 30, 2000 - $ - 12,254,826 $12 $57,599 $(5,989) $(264)
=========== ===== ========== === ======= ======== =====
<CAPTION>
Accumulated
Other Total
Comprehensive Stockholders'
Income Equity (Deficit)
------------- ---------------
<S> <C> <C>
Balance at
July 31, 1999 $ - $17,152
Comprehensive income (loss):
Net loss (1,609)
Other comprehensive income
-unrealized loss on
securities (net of tax) (40) (40)
--------
(1,649)
Comprehensive loss
Collection of note
receivable from
former parent 420
Conversion of preferred
to common -
Issuance of common stock
in the offering 32,795
Note receivable distributed
in lieu of dividend
payable 2,600
---- ------
Balance at
April 30, 2000 $(40) $51,318
==== =======
</TABLE>
7
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements. In some cases, these
statements may be identified by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of such terms and other comparable
expressions. These statements involve known and unknown risks and uncertainties
that may cause the results, levels of activity, performance or achievements of
eOn or its industry to be materially different from those expressed or implied
by the forward-looking statements. Factors that may cause or contribute to such
differences include, but are not limited to, eOn's ability to compete
successfully in its industry and to continue to develop products for new and
rapidly changing markets. eOn disclaims any obligation to update any of the
forward-looking statements contained in this report to reflect any future events
or developments. The following discussions should be read in conjunction with
the unaudited condensed consolidated financial statements and notes included
elsewhere herein.
Overview
We design, develop and market next-generation Linux communications servers
and software which integrate and manage voice, e-mail and Internet
communications for customer contact centers and other applications. We also
offer a traditional voice-switching platform for small and medium-sized
installations. Through our Caribbean/Latin American operations, we sell and
service voice communications systems and cellular telephones and resell cellular
airtime.
Our Linux communications server product line was originally developed by
BCS, and was introduced initially in April 1997. We acquired BCS on April 12,
1999 and have since combined the eQueue 4000 Linux communications server and our
Millennium voice switching platform, which we introduced in fiscal 1994, into
our Communications Systems operations. We have recently concentrated our product
development efforts on extending and enhancing our Linux communications server
product line, introducing the eNterprise 2000 and Web Center communications
servers during the current fiscal year.
We recognize revenues from our eQueue 4000 and eNterprise 2000
communications server products upon completion of installation when they are
sold directly to end users, due to the customized nature of each installation.
We recognize revenues upon shipment for products shipped to dealers and for our
Millennium products sold to end-users. We recognize revenues from the resale of
cellular airtime and cellular telephones when these revenues are earned.
Net revenues in quarters ending January 31 usually decline from the
previous quarter, reflecting seasonal factors that affect some of our customers.
U.S. government customers typically make substantial purchases during the
quarters ending October 31, the last quarter of the government's fiscal year,
and these purchases decline significantly in the following quarter. Customers in
such markets as contact centers, education, and retail also have seasonal buying
patterns and do not purchase substantial amounts of equipment during the
quarters ending January 31.
Three Months Ended April 30, 2000 and 1999
Net Revenues. Total revenues increased 19.4% to $12.0 million in the three
months ended April 30, 2000 from $10.0 million in the three months ended April
30, 1999. The increase resulted primarily from increased Linux communications
server revenues of $2.0 million.
Cost of Revenues and Gross Profit. Cost of revenues consists primarily of
purchases from our contract manufacturers and other suppliers and costs incurred
for final assembly, quality assurance and installation of our systems. Gross
profit increased 13.5% to $5.3 million in the three months ended April 30, 2000
from $4.7 million in the three months ended April 30, 1999. The increase
resulted primarily from increased Linux communications server gross profit of
$1.7 million, offset by decreased Millennium gross profit of $(0.7) million and
decreased gross margin from our Carribbean/Latin American operations of $(0.4)
million. Our gross margin was 44.4% in the three months ended April 30, 2000 and
46.7% in the three months ended April 30, 1999.
Operating Expenses. Operating expenses increased 66.0% to $6.8 million in
the three months ended April 30, 2000 from $4.1 million in the three months
ended April 30, 1999. The increased expenses in the three months ended April 30,
2000 were due primarily to an increase of $2.6 million related to the growth of
Linux communications server revenues and the amortization of goodwill associated
with our purchase of BCS Technologies in April 1999. Operating expenses
increased as a percentage of revenues to 57.3% in the three months ended April
30, 2000 from 41.2% in the three months ended April 30, 1999.
8
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and benefit costs, advertising and trade
show related costs, and facilities and other overhead expenses incurred to
support the growth of our business. Selling, general and administrative expenses
increased 59.4% to $5.6 million in the three months ended April 30, 2000 from
$3.5 million in the three months ended April 30, 1999. The increase was due to
an increase of $2.1 million of selling, general and administrative expenses
related to the growth of our Linux communications server revenues. These
expenses as a percentage of revenues increased to 47.0% in the three months
ended April 30, 2000 from 35.2% in the three months ended April 30, 1999. We
expect selling, general and administrative expenses to increase in dollars as we
increase our investment in sales and marketing.
Research and Development. Research and development expenses consist
primarily of personnel and related expenses for our engineering staff and
depreciation of related equipment. Research and development expenses increased
89.9% to $1.1 million in the three months ended April 30, 2000 from $0.6 million
in the three months ended April 30, 1999. The increased expenses were primarily
due to the hiring of additional engineering personnel. These expenses as a
percentage of revenues increased to 9.1% in the three months ended April 30,
2000 from 5.7% in the three months ended April 30, 1999. We expect research and
development expenses to increase in dollars as we hire additional engineers to
support our new product initiatives.
Amortization of Goodwill. We recorded $11.7 million of goodwill related to
the acquisition of BCS in April 1999 and are amortizing the amount over a 20-
year period.
Income (Loss) from Operations. Income (loss) from operations decreased
377.3% to $(1.5) million in the three months ended April 30, 2000 from $0.6
million in the three months ended April 30, 1999. This was primarily due to
operating expenses increasing more quickly than gross profit due to the hiring
of additional sales and research and development personnel and the amortization
of goodwill during the three months ended April 30, 2000.
Nine months Ended April 30, 2000 and 1999
Net Revenues. Total revenues increased 46.0% to $39.7 million in the nine
months ended April 30, 2000 from $27.2 million in the nine months ended April
30, 1999. The increase resulted primarily from increased Linux communications
server revenues of $6.9 million, increased revenues from Caribbean/Latin
American operations of $4.8 million, and increased Millennium revenues of $0.8
million.
Cost of Revenues and Gross Profit. Gross profit increased 43.2% to $17.0
million in the nine months ended April 30, 2000 from $11.9 million in the nine
months ended April 30, 1999. The increase resulted primarily from increased
Linux communications server gross profit of $5.3 million, offset by lower
Millennium gross profit of $(0.2) million. Our gross margin was 42.9% in the
nine months ended April 30, 2000 and 43.8% in the nine months ended April 30,
1999.
Operating Expenses. Operating expenses increased 78.6% to $18.2 million in
the nine months ended April 30, 2000 from $10.2 million in the nine months ended
April 30, 1999. The increased expenses in the nine months ended April 30, 2000
were due primarily to $5.5 million in additional operating expenses related to
the growth of Linux communications servers, $2.1 million in additional expenses
related to the hiring of sales, research and development, and administrative
personnel to support our growth, and increased goodwill amortization of $0.4
million. Operating expenses increased as a percentage of revenues to 46.0% in
the nine months ended April 30, 2000 from 37.6% in the nine months ended April
30, 1999.
Selling, General and Administrative. Selling, general and administrative
expenses increased 71.8% to $14.9 million in the nine months ended April 30,
2000 from $8.7 million in the nine months ended April 30, 1999. The increased
expense was due primarily to $4.5 million of selling, general and administrative
expenses related to our Linux communications server revenues and an increase of
$1.7 million due primarily to the growth of the business including the hiring of
additional sales and customer service personnel. These expenses as a percentage
of revenues increased to 37.7% in the nine months ended April 30, 2000 from
32.0% in the nine months ended April 30, 1999. We expect selling, general and
administrative expenses to increase in dollars as we increase our investment in
sales and marketing.
9
<PAGE>
Research and Development. Research and development expenses increased 92.0%
to $2.9 million in the nine months ended April 30, 2000 from $1.5 million in the
nine months ended April 30, 1999. The increased expenses were primarily due to
the hiring of additional engineering personnel and additional equipment
purchases. These expenses as a percentage of revenues increased to 7.2% in the
nine months ended April 30, 2000 from 5.5% in the nine months ended April 30,
1999. We expect research and development expenses to increase in dollars as we
hire additional engineers to support our new product initiatives.
Amortization of Goodwill. We recorded $11.7 million of goodwill related to
the acquisition of BCS in April 1999 and are amortizing the amount over a 20-
year period.
Income (Loss) from Operations. Income (loss) from operations decreased
172.3% to ($1.2) million in the nine months ended April 30, 2000 from $1.7
million in the nine months ended April 30, 1999. This was primarily due to
operating expenses increasing more quickly than gross profit due to the hiring
of additional sales and research and development personnel and the amortization
of goodwill during the nine months ended April 30, 2000.
Liquidity and Capital Resources
Prior to our initial public offering, we funded our operations primarily
through cash generated from operations, periodic borrowings under former
revolving credit facilities, a $3.0 million subordinated convertible note
financing and acquisition financing provided by Alcatel in connection with
purchase of our business from Alcatel in 1990. In February 2000, we received
$33.0 million, net of underwriting fees, commissions, and offering costs, upon
the issuance of 3,180,000 shares of common stock in our initial public offering.
The proceeds from the offering were used to retire $2.8 million of outstanding
principal and interest on 8% subordinated notes due in 2002 and $3.6 million of
outstanding indebtedness under a revolving credit facility. See Note 5 to our
consolidated financial statements.
Net cash provided by (used in) operating activities was ($7.3) million and
$1.7 million for the nine months ended April 30, 2000 and 1999, respectively.
The decrease from the prior year is due primarily to the lower net income in the
current fiscal year, an increase in inventories, and the reduction in income
taxes payable during the nine months ended April 30, 2000.
Net cash provided by (used in) investing activities was ($22.6) million and
$2.8 million for the nine months ended April 30, 2000 and 1999, respectively.
Cash used in investing activities in the current period consisted primarily of
purchases of short-term available-for-sale debt securities.
Net cash provided by (used in) financing activities was $28.9 million and
($2.9) million for the nine months ended April 30, 2000 and 1999, respectively.
Cash provided by financing activities in the nine months ended April 30, 2000
consisted primarily of the proceeds from our initial public offering, offset by
the early retirement of our outstanding long-term debt and amounts borrowed
under our former revolving credit facilities.
We believe that the proceeds from our initial public offering, together
with available funds and anticipated cash flows from operations will satisfy our
projected working capital and capital expenditure requirements at least through
fiscal 2001. To the extent that we grow more rapidly than expected in the
future, we may need additional cash to finance our operating and investing
activities.
ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
In addition to the other information included in this report, the following
factors should be considered in evaluating our business and future prospects.
Fluctuations in our quarterly operating results could cause our stock price to
decline.
Future operating results are likely to fluctuate significantly from quarter
to quarter. Factors that could affect our quarterly operating results include:
. delays or difficulties in introducing new products;
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. increasing expenses without commensurate revenue increases;
. variations in the mix of products sold;
. variations in the timing or size of orders from our customers;
. declining market for traditional private branch exchange (PBX) equipment
. delayed deliveries from suppliers; and
. price decreases and other actions by our competitors.
Our quarterly operating results are also likely to fluctuate due to
seasonal factors. Some of our vertical markets, such as the U.S. government and
educational and retail buyers, follow seasonal buying patterns and do not make
substantial purchases during the quarter ending January 31. Thus, revenues in
the quarter ending January 31 are often lower than in the previous quarter.
Because of these and other factors, our operating results may not meet
expectations in some future quarters, which could cause our stock price to
decline.
We may not successfully introduce new products that are planned for the near
future which could harm our business and financial condition.
We plan to introduce new products in the near future to serve the evolving
contact center and e-commerce markets. These new products must achieve market
acceptance, maintain technological competitiveness and meet increasing customer
requirements. New products may require long development and testing periods.
Significant delays in the development, release, installation or implementation
of new products could harm our business and financial condition.
Planned increases in operating expenses to develop and sell new products may
result in operating losses.
We intend to increase our operating expenses substantially, particularly
expenses related to research and development, sales and marketing, and
development of new distribution channels. We will need to generate significant
additional revenue to attain profitability. If we incur losses, our stock price
could decline.
Our Linux communications servers and software face intense competition from many
companies that have targeted our markets.
The competitive arena for our products is changing very rapidly and we face
intense competition in our markets. Well-established companies and many emerging
companies are scrambling to develop products to improve customer service in e-
commerce. While the industry remains fragmented, it is rapidly moving toward
consolidation, driven by both emerging companies' desires to expand product
offerings and resources and established companies' attempts to acquire new
technology and reach new market segments. A number of emerging companies have
completed initial public offerings in recent months, while many more remain
private. Most established competitors, as well as those emerging companies that
have completed initial public offerings, currently have greater resources and
market presence than we do. In addition, a number of our current and potential
competitors have recently been acquired by larger companies who seek to enter
our markets.
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We expect competition to intensify as competitors develop new products,
competitors gain additional financial resources from public offerings, new
competitors enter the market, and companies with complementary products enter
into strategic alliances.
Our current and potential competitors can be grouped into the following
five categories:
. data communications equipment suppliers, such as Cisco Systems, 3Com and
Sun Microsystems;
. web center software and services suppliers, such as eGain, Kana
Communications, Mustang.com (acquired by Quintus) and WebLine
Communications (acquired by Cisco);
. contact center software and services suppliers, such as Clarify (acquired
by Nortel Networks), Genesys Telecommunications Laboratories (acquired by
Alcatel), Interactive Intelligence, Silknet Software (acquired by Kana
Communications) and Vantive (acquired by PeopleSoft);
. emerging private communications exchange (PCX) suppliers, such as AltiGen
Communications, Artisoft, Picazo Communications (acquired by
Intel/Dialogic), NBX Corporation (acquired by 3Com), Selsius Systems
(acquired by Cisco), and Calista (acquired by Cisco); and
. voice communications equipment suppliers, such as Alcatel, Aspect
Communications, Lucent Technologies, Mitel, NEC, Nortel Networks,
Rockwell Electronic Commerce and Siemens.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, customer service and other resources, greater
name and brand recognition and a larger installed customer base than we do.
Therefore, our competitors may be able to respond to new or emerging
technologies and changes faster than we can. They may also be able to devote
greater resources to the development, promotion and sale of their products.
Actions by our competitors could result in price reductions, reduced margins and
loss of market share, any of which would damage our business. We cannot assure
you that we will be able to compete successfully against these competitors.
If we are unable to increase our sales capability, we may not be able to grow or
sustain our business.
We must expand our sales force in order to increase our revenues. If we
fail to do so, our business, operating results and financial condition could be
harmed. We must recruit, train and retain additional direct sales personnel. It
may take a new sales person months to become a productive member of our direct
sales force, if ever. New sales personnel, dealers and value added resellers
might not be effective in increasing sales.
If we cannot develop a new indirect sales channel to sell our eNterprise
communications servers our ability to generate revenue would be harmed.
We sell eQueue 4000 communications servers directly. We currently sell our
eNterprise 2000 and intend to sell our eNterprise 400 and Web Center
communications servers both directly and indirectly through dealers and value
added resellers that have experience in data as well as voice communications. We
may not be able to develop this new indirect sales channel. In addition, these
new distribution partners may devote fewer resources to marketing and supporting
our products than to our competitors' products and could discontinue selling our
products at any time in favor of our competitors' products or for any other
reason.
The lengthy sales cycles of some of our products, and the difficulty in
predicting the timing of our sales may cause fluctuations in our quarterly
operating results.
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The uncertainty of our sales cycle makes the timing of sales difficult to
predict and may cause fluctuations in our quarterly operating results. Our sales
cycles generally vary from four to twelve months for our large capacity Linux
communications servers, from one to six months for our Millennium switching
platform and are expected to be from one to six months for our small to mid-
range Linux communications servers. The purchase of our products may involve a
significant commitment of our customers' time, personnel, financial and other
resources. We generally recognize revenues on the date of shipment for
Millennium and eNterprise systems shipped to dealers and upon completion of
installation for our eQueue 4000 and eNterprise 2000 communications servers sold
directly to end users due to the customized nature of these installations. Also,
it is difficult to predict the timing of indirect sales because we have little
control over the selling activities of our dealers and value added resellers.
We incur substantial sales and marketing expenses and spend significant
management time before customers place orders with us, if at all. Revenues from
a specific customer may not be recognized in the quarter in which we incur
related sales and marketing expense, which may cause us to miss our revenues or
earnings expectations.
If the acceptance of the Linux operating system does not continue, our ability
to market our products could be adversely affected.
Our next-generation communications servers run on the Linux operating
system. Our products also incorporate application software developed
specifically for the Linux operating system. Our ability to market our products
could be adversely affected and we may incur significant development costs if:
. the Linux operating system does not evolve to meet changing market needs;
. new applications are not developed for the Linux operating system; or
. other operating systems, such as Microsoft Windows NT, reduce the recent
growing acceptance of Linux.
In addition, any other factor that reduces acceptance of the Linux
operating system could also reduce acceptance of our products and harm our
business, results of operations and financial condition.
Our products must respond to rapidly changing market needs and integrate with
changing protocols to remain competitive.
The markets for our products are characterized by rapid technological
change, frequent new product introductions, uncertain product life cycles and
changing customer requirements. If we are not able to rapidly and efficiently
develop new products and improve existing products to meet the changing needs of
our customers and to adopt changing communications standards our business,
operating results and financial condition would be harmed.
Key features of our products include integration with standard protocols,
computer telephony integration and automatic call distribution applications and
protocols, operating systems and databases. If our products cannot be integrated
with third-party technologies or if they do not respond to changing market
needs, we could be required to redesign our products. Redesigning any of our
products may require significant resources and could harm our business,
operating results and financial condition.
If we are not be able to grow or sustain our Millennium voice switching platform
revenues, our business, operating results and financial condition could be
harmed.
We derived approximately 41% of our total revenues for the nine months
ended April 30, 2000 from the sale of our Millennium products. We may not be
able to grow or sustain our Millennium revenues because the traditional private
branch exchange (PBX) market, which accounts for a substantial portion of our
Millennium revenues, is expected to decline. One reason for the decline of the
traditional PBX market is the emergence of voice switching platforms based on
standard PCs. If we are not able to grow or sustain our Millennium voice
switching platform revenues, our business, operating results and financial
condition could be harmed.
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In addition, approximately half of Millennium revenues are derived from
dealers and value added resellers who have no obligation to sell our products.
Therefore, dealers and value added resellers could discontinue selling our
products at any time in favor of our competitors' products or for any other
reason. A reduction or loss of orders from our dealers and value added resellers
could harm our business, operating results and financial condition.
Delayed deliveries of components from our single source suppliers or third-party
manufacturers could reduce our revenues or increase our costs.
We depend on sole source suppliers for certain components, digital signal
processors and chip sets, voice processor boards, wireless handsets and base
stations. Interruptions in the availability of components from our key suppliers
could result in delays or reductions in product shipments, which could damage
our customer relationships and harm our operating results. Finding alternate
suppliers or modifying product designs to use alternative components may cause
delays and expenses. Further, a significant increase in the price of one or more
third-party components or subassemblies could reduce our gross profit.
We depend upon our primary contract manufacturers, CMC Industries, Inc., a
wholly-owned subsidiary of ACT Manufacturing, Inc., and Pensar Corporation. We
may not be able to deliver our products on a timely basis if CMC or Pensar fails
to manufacture our products and deliver them to us on time. In addition, it
could be difficult to engage other manufacturers to build our products. Our
business, results of operations and financial condition could be harmed by any
delivery delays.
We may be unable to hire and retain engineering and sales and marketing
personnel necessary to execute our business strategy.
We intend to substantially increase our engineering and sales and marketing
personnel over the next twelve months. Competition for highly qualified
personnel is intense due to the limited number of people available with the
necessary technical skills, and we may not be able to attract, assimilate or
retain such personnel. If we cannot attract, hire and retain sufficient
qualified personnel, we may not be able to successfully develop, market and sell
new products.
Our business could be harmed if we lose principal members of our management
team.
We are highly dependent on the continued service of our management team.
The loss of any key member of our management team may substantially disrupt our
business and could harm our business, results of operations and financial
condition. In addition, replacing management personnel could be costly and time
consuming.
We are effectively controlled by our principal stockholders and management,
which may limit your ability to influence stockholder matters.
As of April 30, 2000, our executive officers, directors and principal
stockholders and their affiliates owned 4,847,329 shares, or 39.6% of the
outstanding shares of common stock. Thus, they effectively control us and direct
our affairs, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of our company and some
transactions may be more difficult or impossible without the support of these
stockholders. The interests of these stockholders may conflict with those of
other stockholders. We also conduct transactions with businesses in which our
principal stockholders maintain interests. We believe that these transactions
have been conducted on an arm's length basis, but we cannot assure you that
these transactions would have the same terms if conducted with unrelated third
parties.
We may not be able to protect our intellectual property, and any intellectual
property litigation could be expensive and time consuming.
Our business and competitive position could be harmed if we fail to
adequately protect our intellectual property. Although we have filed patent
applications, we are not certain that our patent applications will result in the
issuance of patents, or that any patents issued will provide commercially
significant protection to our technology. In addition, as we grow and gain brand
recognition, our products are more likely to be subjected to infringement
litigation. We could incur substantial costs and may have to divert management
and technical resources in order to respond to, defend against, or bring claims
related to our intellectual property rights. In addition, we rely on a
combination of patent, trademark, copyright and trade secret laws and
contractual restrictions to establish and protect our proprietary rights. These
statutory and contractual arrangements may not provide sufficient protection to
prevent misappropriation of our technology or to deter independent
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third-party development of similar technologies. Any litigation could result in
our expenditure of funds, management time and resources.
Our products may have undetected faults leading to liability claims, which could
harm our business.
Our products may contain undetected faults or failures. Any failures of our
products could result in significant losses to our customers, particularly in
mission-critical applications. A failure could also result in product returns
and the loss of, or delay in, market acceptance of our products. In addition,
any failure of our products could result in claims against us. Our purchase
agreements with our customers typically contain provisions designed to limit our
exposure to potential product liability claims. However, the limitation of
liability provisions contained in our purchase agreements may not be effective
as a result of federal, state or local laws or ordinances or unfavorable
judicial decisions in the United States or other countries. We maintain
insurance to protect against certain claims associated with the use of our
products, but our insurance coverage may not adequately cover all possible
claims asserted against us. In addition, even claims that ultimately are
unsuccessful could be expensive to defend and consume management time and
resources.
Our charter contains certain anti-takeover provisions that may discourage take-
over attempts and may reduce our stock price.
Our board of directors has the authority to issue up to 10,000,000 shares
of preferred stock and to determine the preferences, rights and privileges of
those shares without any further vote or action by the stockholders. The rights
of the holders of common stock may be harmed by the rights of the holders of any
preferred stock that may be issued in the future. Certain provisions of our
certificate of incorporation and bylaws may make it more difficult for a third
party to acquire control of us without the consent of our board of directors,
even if such changes were favored by a majority of the stockholders. These
include provisions that provide for a staggered board of directors, prohibit
stockholders from taking action by written consent and restrict the ability of
stockholders to call special meetings.
Future sales of shares may decrease our stock price.
Sales of substantial amounts of our common stock in the public market after
our initial public offering, including shares issued upon the exercise of
outstanding options, or the perception that such sales could occur, could reduce
the market price of our common stock. These sales also might make it more
difficult for us to raise funds through future offerings of common stock. eOn
may have a contingent liability arising out of a possible violation of Section 5
of the Securities Act in connection with the posting of materials on an
underwriter's website with respect to eOn's initial public offering.
Prior to January 10, 2000, a copy of the registration statement for eOn's
initial public offering was posted on the website of W.R. Hambrecht + Co., Inc.,
an underwriter for our initial public offering, which included a prospectus that
did not contain preliminary pricing information as required by Section 10 of the
Securities Act. We urge all persons to read and base their investment decision
only on the preliminary prospectus dated January 10, 2000, which contained the
preliminary pricing information, and the final prospectus.
If this posting did constitute a violation of the Securities Act, then any
purchasers in this offering who viewed this posting would have the right, for a
period of one year from the date of their purchase of the common stock, to bring
an action for rescission or for damages resulting from their purchase of common
stock. We believe that any exposure we may have will not be material.
Item 3. Qualitative and Quantitative Disclosure About Market Risk.
Substantially all of our cash equivalents and investment securities are
invested in variable rate instruments and, therefore, are affected by changes in
market interest rates. Because substantially all of these holdings have short
effective maturities, we believe that the market risk for such holdings is
immaterial. In addition, substantially all of our sales are made in U.S. dollars
and, consequently, we believe that our foreign currency exchange rate risk is
also immaterial. We do not have any derivative instruments and do not engage in
hedging transactions.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In November 1998, WSI, Inc., a distributor of telecommunications systems
filed an action against Cortelco Puerto Rico, Cortelco Systems Holding
Corporation and David S. Lee, one of our directors. The complaint essentially
alleged that the defendants misused confidential information and otherwise
engaged in unfair competition with WSI by attempting to hire WSI employees and
to discredit WSI with a supplier and with customers. The complaint sought
damages in excess of $15 million plus costs and attorneys' fees. This case was
dismissed without prejudice by final and unappealable judgment of the United
States District Court on February 9, 2000.
Item 2. Changes In Securities.
Our initial public offering pursuant to Registration Statement on Form S-1
(Registration No. 333-77021) under the Securities Act of 1933, as amended,
covering the registration and sale of an aggregate of 4,140,000 shares of our
common stock, including 540,000 shares of common stock pursuant to the exercise
of the underwriter's overallotment option, became effective on February 4, 2000.
In the offering, we sold an aggregate of 3,180,000 shares of our common stock,
including 390,000 shares pursuant to the exercise of the underwriters' over-
allotment option, at a price per share of $12.00 for an aggregate purchase price
of $38,160,000, and the selling stockholders sold an aggregate of 960,000 shares
of our common stock, including 150,000 shares pursuant to the exercise of the
underwriters' over-allotment option, at a price per share of $12.00 for an
aggregate purchase price of $11,520,000. Our net proceeds from the offering were
approximately $33.0 million. The managing underwriters were Needham & Company,
Inc., A.G. Edwards & Sons, Inc. and WR Hambrecht & Co., LLC. The aggregate
underwriting fees were approximately $3.5 million and offering costs totaled
approximately $2.6 million, including approximately $0.8 million in the three
months ended April 30, 2000. Upon the closing of the initial public offering in
February 2000, 1,463,206 shares of Series A Preferred Stock, representing all of
the outstanding shares of Preferred Stock were automatically converted into
1,434,894 shares of common stock. Concurrent with the closing of the initial
public offering in February 2000, we filed an amendment to our Amended and
Restated Certificate of Incorporation with the Delaware Secretary of State that
authorizes 10,000,000 shares of undesignated preferred stock. For additional
information about out capital stock, please refer to "Description of Capital
Stock" in our Registration Statement (SEC File No. 333-77021) filed with the
Securities and Exchange Commission.
The net offering proceeds from the initial public offering were used to
repay $2.8 million of outstanding principal and interest on a long-term
subordinated note and $3.6 million of senior debt under a revolving credit
facility including early payment penalties, and for working capital and general
corporate purposes. The remaining net proceeds were invested in short-term,
investment grade securities.
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits.
27.1 Financial Data Schedule
(B) Reports On Form 8-K.
We did not file any reports on Form 8-K during the quarter ended April 30,
2000.
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto authorized.
EON COMMUNICATIONS CORPORATION
Date: June 9, 2000 /s/ Stephen N. Samp
------------ --------------------------------
Stephen N. Samp
Chief Financial Officer, Vice President of
Finance and Administration and Secretary
(Principal Financial and Accounting Officer)
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Exhibit Index
27.1 Financial Data Schedule
17
