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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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.)
4105 Royal Drive NW, Suite 100, Kennesaw, Georgia 30144
(Address of principal executive offices)
(770) 423-2200
(Telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the shares of common stock held by non-affiliates
of the registrant was approximately $22,531,000 based upon the closing sale
price as reported by the Nasdaq Stock Market on September 29, 2000. The number
of outstanding shares of the registrant's $0.001 par value common stock was
12,210,336 shares as of that date.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's Proxy Statement for the 2000 Annual Meeting
of Shareholders are incorporated by reference in Part III.
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................................. 2
Item 2. Properties................................................................ 10
Item 3. Legal Proceedings......................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ...................... 11
Executive Officers ....................................................... 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ................................................... 12
Item 6. Selected Financial Data................................................... 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk................ 22
Item 8. Financial Statements and Supplementary Data............................... 23
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure .............................................. 41
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 42
Item 11. Executive Compensation.................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 42
Item 13. Certain Relationships and Related Transactions............................ 42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 43
SIGNATURES................................................................................. 44
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PART I
ITEM 1. BUSINESS.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
federal securities laws. Forward-looking statements are those that express
management's views of future events, developments, and trends. In some cases,
these statements may be identified by terminology such as "may," "will,"
"should," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms and other
comparable expressions. Forward-looking statements include statements regarding
our anticipated or projected operating performance, financial results, liquidity
and capital resources. These statements are based on management's beliefs,
assumptions, and expectations, which in turn are based on the information
currently available to management. Information contained in these forward-
looking statements is inherently uncertain, and our actual operating
performance, financial results, liquidity, and capital resources may differ
materially due to a number of factors, most of which are beyond our ability to
predict or control. 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. We also direct your attention to the risk factors affecting our
business that are discussed elsewhere in Item 7. 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 our consolidated financial statements and the notes included
thereto in Item 8.
INTRODUCTION
eOn Communications Corporation ("eOn" or the "Company") designs, develops
and markets next-generation communications servers and software for the
integration and management of voice, e-mail and Internet communications for
customer contact centers and other applications. For small and medium-sized
installations, we also offer a traditional voice switching platform. Through our
wholly-owned subsidiary in Puerto Rico, we sell and service communications
systems and cellular telephones and resell cellular airtime. Our products help
enterprises communicate more effectively with customers, convert inquiries into
sales, and increase customer satisfaction and loyalty.
The Company's principal executive offices are located at 4105 Royal Drive
N.W., Suite 100, Kennesaw, Georgia 30144. The telephone number at that address
is (770) 423-2200. The Company was incorporated in Delaware in July 1991.
BACKGROUND AND GENERAL DEVELOPMENT OF BUSINESS
Our next-generation communications servers are easy and cost-effective to
customize, configure and integrate, because they use the Linux operating system
and Pentium-based computers. Linux is an open source code operating system which
means that the code can be accessed and modified by any software programmer. We
believe these characteristics allow for faster development of new applications.
We believe we are the first to adopt the Linux operating system for
communications servers and that our early use of Linux provides us with a
competitive advantage. Our communications servers have extensive voice
communications and call center capabilities, and also integrate Internet
communications such as e-mail, chat sessions and voice calls using Internet
Protocol. Our communications servers also integrate with PC applications and
databases to deliver immediate, personalized customer information to customer
service agents. These communications servers incorporate a comprehensive set of
real-time tools for monitoring and managing the performance of a customer
contact center and its agents and include numerous automated features that
increase the productivity of agents so that they can handle each customer
contact quickly and intelligently.
Our communications server products include the eQueue and the eNterprise.
The eQueue is primarily intended for customers who require open, standards-based
advanced contact center capabilities with integrated Web center features. The
eNterprise is an all-in-one PC platform that cost-effectively addresses the
evolving communications requirements of smaller installations. The eNterprise is
scalable for customers who require an open, standards-based voice communications
system with advanced features to integrate PC applications and database
information. Our use of the Linux operating system enables us to leverage the
rapid application development cycles of the open source community to reduce the
time to market for our new and innovative products. Our Millennium voice
switching platform is a private branch exchange which is based on our own
operating system. The Millennium has many features including automatic call
distribution
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capabilities and is intended for use in a wide range of small and medium-sized
installations.
THE EON SOLUTION
Our product line includes next-generation communications servers and
software that integrate voice, e-mail and Internet communications. Our solutions
help enterprises efficiently manage their customer relationships, thereby
increasing customer loyalty and satisfaction.
eOn solutions provide customers with key benefits, including:
- Integration of Voice and Internet Communications on One Platform. Our
integrated servers intelligently route inquiries arriving over the telephone
network or the Internet. Enterprises can interact with their customers more
effectively and lower communications costs by using both voice and Internet
networks. Our servers can seamlessly integrate PC applications and database
information for use with voice and Internet communications as enterprises
and their customers increasingly use a combination of these media.
- Mission-Critical Reliability. We offer highly reliable, integrated
communications servers for enterprises that have mission-critical
requirements. For example, our eQueue and eNterprise servers include
redundant Pentium PCs, redundant power supplies and fast-reaction hardware-
based fault detection.
- Conversion of Web Site Visitors into Customers. Using our communications
servers, enterprises can efficiently and seamlessly interact with visitors
on their Web sites through voice, e-mail, Web chat and other communications
media. We believe that this improved interaction will convert more Web site
visitors into actual customers, which is essential for enterprises that seek
to realize the profit potential of their investments in e-commerce and brand
building.
- Lower Total Cost of Ownership. Our use of open industry-standard hardware
and software reduces costs to enterprises to implement their communications
strategies. Our next-generation communications servers run on the open
source code Linux operating system, which improves interoperability with our
customers' existing applications and systems. This preserves our customers'
previous investments and reduces systems integration costs, thereby lowering
the total cost of ownership.
- Rapid, Low-cost Customization. Each enterprise must configure and customize
its communications system to meet its unique and changing organizational
needs. The open source code Linux operating system provides access to
program source code and development tools, which facilitates the rapid and
efficient addition of new features and systems customization for unique
enterprise needs.
- Scalability and Easy Upgrade Paths. Our open architecture, software-based
features and expandable hardware platforms provide enterprises with
flexibility to add e-commerce and other applications and to scale and
upgrade their systems to handle higher volumes of customer interactions.
STRATEGY
Our objective is to be a leading provider of next-generation communications
servers and related software. Key elements of our strategy are the following:
Offer a Broad Line of Hardware and Software Products
We have broadened our line of communications servers to address the varying
needs of different market segments. Our eQueue is designed to meet the needs of
customers with high volume contact centers or mission-critical operations. Our
eNterprise is a cost-effective comprehensive communications system that includes
many of the features and functionality of the eQueue for customers with advanced
integrated voice and data communications needs and less mission-critical
operations requirements. Our eOn Web Center Software Suite provides small to
medium-sized businesses engaged in e-commerce a solution for routing, tracking,
and responding to e-mail and Internet-based communications in real time. We
intend to continue to develop new features and applications common to each of
our Linux communications server hardware platforms.
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Capitalize Upon Our First-Mover Advantage of Using the Linux Operating System
for Communications Servers
We believe that we are the first company to use the Linux operating system
for communications servers. We believe the Linux operating system provides us
with important competitive advantages in the integrated communications server
arena. We also believe that we have a unique opportunity to gain new customers
among companies that wish to exploit the advantages of the Linux operating
system. In addition, potential partners may be interested in establishing
relationships with us to gain access to our Linux-based software for
communications server applications.
Target E-Commerce Installations and Customer Contact Centers
We intend to become a leader in the market for systems that manage blended
voice and Web-based customer interactions. We believe our extensive experience
in voice communications and call center systems provides us with a strategic
advantage for offering an integrated voice and Internet communications product
line. We will target enterprises that require integrated customer relationship
management systems to implement e-commerce strategies.
Expand Marketing and Sales and Distribution Channels
We are expanding our marketing in order to sell more of our next-generation
communications server products. We seek to increase brand awareness among
customers, dealers, value added resellers and original equipment manufacturers
through increased participation in trade shows, print and Web advertising,
direct mail and other marketing activities.
We are expanding our direct sales force. We also plan to increase our
existing network of 140 dealers and value added resellers, emphasizing value
added resellers with experience in both voice and data communications equipment
and services. We believe we can further expand the market for our Linux contact
server software applications by establishing relationships with companies that
have developed strategies to use the Linux operating system.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
Our products and products under development include a broad line of next-
generation communications servers and software. The eQueue and eNterprise
hardware platforms are modular, run on Pentium processors under the Linux
operating system and provide their features primarily as Linux software
applications. We also offer optional software features across our product line
based on other industry-standard interfaces and operating systems. In addition,
we offer the proprietary Millennium voice switching platform, which we
introduced in 1994. This platform incorporates a wide range of sophisticated
voice features, many of which are or will be offered on our next-generation
communications servers.
Communications Servers
Our Web-enabled next-generation communications servers are based on the
Linux operating system, use Pentium processors and are scaled and designed for
different sized installations. We also offer the eOn Web Center suite of web-
enabled applications. Separately priced software features available on our
eQueue and eNterprise platforms serve a broad range of customer needs ranging
from typical voice communications systems to advanced, Web-centric contact
center applications. Our eQueue products won "Best of Show" awards at the 1997
and 1998 CT Expo, "Product of the Year" awards in 1997 and 1998 from Call Center
magazine and in 1999 from Call Center Solutions magazine, and "Gold Best-in-
Class Users Choice Award" in 1999 from Customer Support Management magazine. Our
eNterprise communication server received the TMC Labs Innovation Award from
Communications Solutions magazine in Summer 2000, while our eOn Web Center
software suite was named "Best of Show" at the CT Expo 2000 and Spring 2000
Communications Solutions Expo.
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Our communications server products consist of the following:
- eQueue. The eQueue is designed for mission-critical contact center
applications. It has redundant fault tolerance with dual power supplies and
dual industrial-grade, Pentium processor-based computers with hot standby.
In addition, the eQueue has hardware-based fault monitoring intended to
provide continuous operation with no detectable interruption. The eQueue
architecture supports configurations up to 4,000 communication ports through
custom telephony and Voice-over-Internet Protocol boards. The eQueue is
primarily intended for customers who require open, standards-based advanced
contact center capabilities with integrated Web center features.
- eNterprise. The eNterprise is a next generation private communications
exchange (PCX) platform that enables businesses to consolidate and manage
voice, e-mail and Web applications in a single unified system. The
eNterprise is based on the open standards Linux operating system and
provides the exceptional reliability, flexibility, scalability and
interoperability required for the most demanding business applications. The
eNterprise combines the best features of conventional PBX, PC-based and IP-
based communications systems to provide complete solutions for growing
organizations, particularly those that rely on the Web for increasing sales
and customer service. Advanced tools for routing, tracking and responding to
multi-media messages in real time can all seamlessly integrate with the
eNterprise.
- eOn Web Center. The eOn Web Center is a software application suite for
routing, tracking and responding to customer e-mail and Web-based
communications in real-time and is primarily intended for customers engaged
in e-commerce who require advanced, Web-based customer interaction
capabilities in a single, easily managed queue.
Our communications servers have numerous software features, nearly all of
which are offered on both our eQueue and eNterprise platforms. These software
features can be broadly categorized into four different functional groups:
- integration of voice communications with Web-based communications to provide
enhanced responsiveness to customers or within an organization;
- comprehensive real-time tools for managing contact centers and agents;
- a broad suite of contact center productivity features that improve agent
efficiency; and
- a large number of interfaces with third-party systems and communications
protocols to provide versatility and customization.
Our communications servers provide comprehensive customer relationship
management features that improve the level of responsiveness to customers. These
features save customers time, facilitate transactions and build customer
loyalty. They support direct customer interactions for personalized service
through the customer's choice of communications media, including voice, e-mail
and the Internet. Our systems are designed to manage high volume and complex
customer communications using voice, e-mail and live interaction on the Web.
Contact Center Management Tools
We supply a comprehensive set of real-time tools for monitoring and
managing the performance of a contact center and its agents. These tools
integrate the management of both voice and Web communications. Supervisors use
our monitoring tools to set performance levels. Managers use our reporting
features to monitor workload, analyze trends in customer communications and
forecast resource needs.
Customer contact centers must operate efficiently in order to maximize
productivity of agents and provide improved customer service. Customer sales and
service agents use these features to handle each customer contact, whether via
telephone or the Internet, quickly and intelligently. We also provide the tools
and features required for virtual contact centers so that agents and supervisors
can operate from any location as if they were in one centralized location
supported by common management systems, communications links and databases. Our
contact center systems have numerous automated features that increase the
productivity of agents and centers.
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Enterprises demand customization, versatility and flexibility in their
communications systems. We have designed our products to be highly configurable
to adapt to our customers' diverse and constantly changing needs. Because we
offer flexible and configurable features and because Linux is an open source
code operating system, we are able to customize our products readily to suit
individual customers' needs.
The Linux operating system, our Ethernet connectivity and our integrated
Internet Protocol communications capabilities facilitate integration of e-mail
and Web-based communications and a wide variety of computer telephony functions.
These open standards support a wide range of interfaces and protocols.
Therefore, we can readily integrate functions based on third-party applications,
databases and Web servers.
We are enhancing and extending our communications platforms and providing
e-commerce enabling software. We routinely conduct market research and solicit
input from our customers and a select set of partners as an integral part of our
product planning.
Current research and development initiatives include:
- Enhancements for our eQueue and eNterprise communications servers
- Support for industry-standard application interfaces and protocols
- Additional features for our Web Center software suite
Millennium Voice Switching Platform
The Millennium voice switching platform is a fully-featured private branch
exchange with basic customer contact center and computer telephony integration
features, primarily for enterprises with small to medium-sized installations. It
can be expanded in a modular manner from 32 to 1,024 communications ports and
provides enterprises with the ability to increase the number of ports and add
new features through the simple installation of add-in cards and software.
The Millennium supports the voice switching needs of enterprises with small
to medium-sized installations and includes such features as voice mail,
interactive voice response and caller identification. The Millennium also offers
an advanced voice processing system with unified messaging that integrates e-
mail, voice mail and fax on a personal computer connected to a Millennium port;
Auto Attendant, which is an automated answering and routing service; and PC
Attendant Console, which provides customized computer telephony integration
features that support the needs of various vertical markets.
The Millennium can be used for multi-site networking by connecting
Millennium platforms in multiple locations, thereby creating a private
communications network that operates as if all sites were on a single system.
The Millennium may also be networked with our Linux communications servers for a
range of virtual private network applications. In addition, we offer our
customers the ability to add ISDN, circuit-switched data, CTI host links and
fiber remote virtual bus extenders to the Millennium platform. The Millennium
can also be used to perform a variety of system integration functions, such as:
a protocol converter between E1 trunks and T1 trunks; a channel bank that merges
multiple voice and data circuits into a single digital communications system;
and a hub serving as the enterprise entry port for fiber optic and T1 links.
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We also offer in-building wireless communications on our Millennium voice
switching platform. This feature provides private digital micro-cellular voice
and data communications within a building or campus to wireless handsets.
Caribbean/Latin American Operations
Our Caribbean/Latin American operations sell and service voice
communications systems and cellular telephones and resell cellular airtime
primarily in Puerto Rico. Voice communications systems sales and service consist
primarily of equipment from third-party manufacturers. In addition, our
Caribbean/Latin America operations serve as a dealer for our Millennium voice
switching platform and our eNterprise communication servers.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company is organized into two operating segments: (1) Communication
Systems - North America, (2) Caribbean/Latin America. Information regarding
these operating segments as well as geographic information regarding net
revenues is contained in Note 16 of the Notes to Consolidated Financial
Statements in Item 8. The Company has no long-lived assets outside the United
States and Canada.
SALES AND MARKETING
We target our marketing to increase brand awareness among customers,
dealers, value added resellers and original equipment manufacturers through
increased participation in trade shows, radio, print and Web advertisement,
direct mail and other marketing activities. We are increasing our direct sales
force and expanding our network of 140 dealers and value added resellers,
targeting value added resellers with experience in both voice and data
communications equipment and services.
We directly sell, install, maintain and support our eQueue communications
servers in the United States and through value added resellers internationally.
We sell our eNterprise communications servers directly and through our network
of dealers and value added resellers. We use a direct sales force for sales of
our Millennium voice switching platforms to national accounts and the federal
government. We also sell the Millennium domestically and internationally through
our network of dealers and value added resellers. The majority of the sales by
our Caribbean/Latin American operations are direct. For fiscal 2000, our direct
sales force accounted for approximately 69% of our revenues and our indirect
distribution channels accounted for approximately 31% of our revenues.
As of July 31, 2000, we had approximately 40 sales and marketing personnel
in our Communications Systems-North America operations and 43 in our
Caribbean/Latin American operations. We have increased our sales and marketing
personnel approximately 30% over the last twelve months, and we anticipate
further increases in the future.
RESEARCH AND DEVELOPMENT
The market for our products is characterized by rapidly changing
technology, evolving industry standards and frequent product introductions. We
believe that our future success depends in large part upon our ability to
continue to enhance the functionality and capabilities of our products. We plan
to extend the functionality of our hardware and software technology by
continuing to invest in research and development.
We substantially increased the number of employees engaged in research and
development since 1998 and, as of July 31, 2000, we had 41 research and
development employees, representing a 37% increase over the last twelve months.
We expect to continue to increase the number of our research and development
employees and to apply these additional resources to our new product development
initiatives. In particular, we will add more software engineers and programmers
to facilitate rapid development of our communications servers and software. We
intend to use independent contractors from time to time to assist with certain
product development and testing activities.
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Our success depends, in part, on our ability to enhance our existing
products and to develop functionality, technology and new products that address
the increasingly sophisticated and varied needs of our current and prospective
customers.
MANUFACTURING
We use various contract manufacturers for line cards, trunk cards,
components and subassemblies for our communications servers. We receive, inspect
and test components and subassemblies and then assemble and test each system.
Each eQueue communications server is custom-configured at our facility prior to
shipment.
We currently use two contract manufacturers to produce the Millennium, ACT
Manufacturing, Inc. and Innovative Circuits, Inc. Both contract manufacturers
perform printed circuit board assembly and soldering, in-circuit and functional
testing and packaging. We believe that ACT and Innovative Circuits have
sufficient capacity and technical capabilities to respond to foreseeable
increases in customer demand and advances in technology. After final assembly by
either manufacturer, we inspect and perform quality assurance testing prior to
shipment to our dealers or customers. Under our contract with ACT we negotiate
pricing annually for the next fiscal year. We make purchases from Innovative
Circuits through purchase orders.
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 could cause
delays and expenses.
COMPETITION
The competitive arena for our products is changing very rapidly. 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, 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.
We compete on the basis of providing a reliable integrated voice and data
communications system that can be customized and configured rapidly and at low
cost. Although we believe that we compete favorably with respect to these
factors, we may not be successful in this rapidly changing and highly
competitive market.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, customer service and other resources, greater
name 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.
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Our current and potential competitors can be grouped into the following
five categories:
Data Communications Equipment Suppliers
Many data communications equipment suppliers have a strategic objective of
penetrating the voice communications market, thereby substantially expanding
their total served market. Among data-centric companies pursuing this strategy
are Cisco Systems, 3Com and Sun Microsystems. Although data communications
companies generally do not have substantial experience with voice communications
systems, they could develop these capabilities internally or through
acquisitions. For example, Cisco has recently completed or announced a number of
acquisitions, which are intended to provide it with the capabilities to address
market opportunities for integrated voice and data communications systems. We
believe these companies face a substantial challenge in integrating their
acquisitions and product development plans due to their limited experience in
voice communications. Nevertheless, these companies can be expected to compete
intensely in this market.
Web Center Software and Services Suppliers
There are many competitors that supply software for managing the rapidly
increasing volumes of Web communications for e-commerce. These competitors'
products and services manage inbound and outbound e-mail and Web-based
communications, while facilitating the delivery of specific and personalized
information to each customer. They strive to enable e-businesses to enhance
customer relationships, generate additional revenue opportunities and reduce the
cost of online communications. Web center software competitors include eGain,
Kana Communications, Quintus, E.piphany, and WebLine Communications (acquired by
Cisco). We intend to compete in the Web center software and services market by
providing integrated voice and data communications in a contact center
environment or providing a direct upgrade path from a Web center to an
integrated contact center.
Contact Center Software and Services Suppliers
Some of our competitors, although not limited solely to contact center
applications, offer comprehensive customer relationship management and
communications software and services that include fully-integrated contact
center functions. These companies' product offerings help organizations to
reduce costs, increase revenues and transform the way they manage interactions
in the contact center and across their organizations. These competitors include
Clarify (acquired by Nortel Networks), Genesys Telecommunications Laboratories
(acquired by Alcatel), Interactive Intelligence, Kana Communications, and
Vantive (acquired by PeopleSoft). In addition, Aspect Communications,
historically a supplier of traditional call center products, has repositioned
its product line as a comprehensive contact center software and services
offering.
Emerging PCX Suppliers
A number of companies seek to provide all-in-one communications platforms
that reduce costs by using PC-based standards and data networks for voice
communications. A defining characteristic of PCX products is their open system
architecture, which, compared to the closed architecture of proprietary systems,
provides greater ease of use, more applications and expanded programmability.
Companies in this category include AltiGen Communications, Artisoft, NBX
Corporation (acquired by 3Com), and Cisco Systems. Our eNterprise products
compete with PCX products by providing integrated contact center features, high
reliability and scalability.
Voice Communications Equipment Suppliers
A number of companies provide products for the traditional voice
communications market. These products include PBXs, automatic call distributors
and related products that have generally been based on proprietary hardware and
software. These companies are expanding beyond voice communications into the
data communications market and migrating to standards-based software product
offerings to address customer contact centers and other applications. These
companies include Alcatel, Aspect Communications, Lucent Technologies, Mitel,
NEC, Nortel Networks, Rockwell Electronic Commerce and Siemens.
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INTELLECTUAL PROPERTY
We rely on patent, trademark, copyright, trade secret protection and
confidentiality and license agreements with our employees, clients, partners and
others to protect our proprietary rights. We currently have 17 patents issued in
the United States and additional patents pending. There can be no assurance that
any of our patent applications pending will result in patents being issued.
Our patent position, and that of technology companies in general, involves
complex legal and factual questions and, therefore, the validity and
enforceability of our patents cannot be predicted with certainty. The steps we
have taken to protect our proprietary rights might not be adequate. Third
parties might infringe or misappropriate our patents, trade secrets, trademarks
and similar proprietary rights. Furthermore, others might independently develop
or duplicate technologies similar to ours.
If we fail to protect our intellectual property, our business, financial
condition and results of operations could be harmed. In addition, we may have to
litigate to enforce our intellectual property rights, protect our trade secrets
or determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of management and
technical resources, which could harm our business, financial condition and
results of operations.
"eOn," "eQueue," "eNterprise" and "Millennium" are registered trademarks of
eOn.
EMPLOYEES
As of July 31, 2000, we employed 254 people, of whom 145 were in our
Communication Systems - North America operations and 109 were in our
Caribbean/Latin America operations. Our Communication Systems - North America
operations had 40 employees in sales and marketing, 41 in research and
development, 33 in service, technical support and training, 9 in manufacturing
operations and quality assurance and 22 in finance and administration. Our
Caribbean/Latin American operations had 43 employees in sales and marketing, 55
in service, technical support and training, and 11 in finance and
administration. We also employ independent contractors and temporary employees.
None of our employees is represented by a labor union, and we consider our
employee relations to be good.
ITEM 2. PROPERTIES
The Company leases property as detailed in the following table.
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APPROXIMATE EXPIRATION
LOCATION SIZE DATE INTENDED USE
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Kennesaw, Georgia 24,000 sq. ft. March 2005 Office, Manufacturing
Memphis, Tennessee 50,000 sq. ft. July 2010 Office
Englewood, Colorado 10,000 sq. ft. July 2001 Office
San Juan, Puerto Rico 20,000 sq. ft. March 2004 Office, Warehouse
Guelph, Ontario, Canada 5,000 sq. ft. September 2001 Office
</TABLE>
During fiscal 2000, the Company made the decision to relocate its
headquarters to Kennesaw, Georgia. It is anticipated that additional space will
be leased at our current location to accommodate the additional executives and
personnel who will relocate.
Effective July 31, 2000, the Company terminated the lease for manufacturing
and warehousing space in Corinth, Mississippi owned by Cortelco, Inc. (a related
company through common ownership). For fiscal 2001, we have contracted with
Cortelco, Inc. to provide warehousing, assembly, and order fulfillment services
for the Millennium product.
In October 2000, the Company vacated its previous 25,000 sq. ft. office in
Memphis, Tennessee to move to a new 50,000 sq. ft. location. The Company
anticipates that 25,000 sq. ft. of the new location will be sublet to another
tenant in the near future.
Aggregate monthly rental payments for the Company's facilities are
approximately $97,000. The Company's current facilities are generally adequate
for anticipated needs over the next 12 to 24 months. The Company does not own
any real property.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may be a party to legal proceedings incidental to our
business. We do not believe that any of these proceedings will have a material
adverse effect on our business or financial condition.
In July 1998, CBC Distribution & Marketing, Inc. filed an action against us
essentially alleging that a communications system purchased by CBC failed to
function as represented. The complaint, which also named Sprint International
Communications and our dealer, Technicom Communications, Inc., sought actual
damages of approximately $1.5 million due to disruption of its fantasy football
pool operations plus punitive damages and attorneys' fees. On July 27, 2000, we
settled the case with a payment of $51,500 to CBC, and CBC dismissed the lawsuit
against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS
The following table sets forth information about our executive officers:
<TABLE>
<CAPTION>
Name Age Position
---------------- ----- ----------------------------------------------------
<S> <C> <C>
David S. Lee 63 Chairman and Chief Executive Officer
Robert R. Cash 45 Vice President, Chief Marketing Officer
Troy E. Lynch 36 Executive Vice President, Chief Technology Officer
Stephen N. Samp 36 Vice President, Chief Financial Officer, Secretary
---------------- ----- ----------------------------------------------------
</TABLE>
DAVID S. LEE became the Chairman of eOn in 1991 and has served as the Chief
Executive Officer since May 2000. Mr. Lee is also a director of ACT
Manufacturing, Inc., a contract manufacturer; ESS Technology, Inc., a provider
of semiconductor and software solutions for multimedia applications; and Linear
Technology Corporation, a semiconductor company. Mr. Lee is also a Regent of the
University of California. From 1985 to 1988, Mr. Lee was President and Chairman
of Data Technology Corporation, a computer peripheral company. Prior to 1985, he
was Group Executive and Chairman of the Business Information Systems Group of
ITT Corporation, a diversified company, and President of ITT Qume, formerly Qume
Corporation, a computer systems peripherals company. In 1973, Mr. Lee co-founded
Qume and was its Executive Vice President until the company was acquired by ITT
Corporation in 1978. Mr. Lee received an M.S. from North Dakota State University
and a B.S. and honorary doctorate from Montana State University.
ROBERT R. CASH became Vice President and Chief Marketing Officer for eOn in
March 1998. From June 1996 to March 1998, he was Senior Vice President at
Coherent Communications Systems Corporation, a telephone apparatus company.
Prior to 1994, Mr. Cash held various management positions with AT&T, including
Vice President of Consumer Products, Vice President and General Manager of the
Wireless Terminal Strategic Business Unit and Vice President of New Business
Development. Mr. Cash received an M.B.A. from Rutgers University and a B.A. from
Lipscomb University.
TROY E. LYNCH became Vice President and Chief Technology Officer of eOn in
February 1999 and Executive Vice President in September 2000. From December 1997
to January 1999, he was Vice President of Research and Development for Hayes
Corporation, a manufacturer of cable, DSL, analog modems and remote access
equipment. Mr. Lynch joined Hayes Corporation via a merger with Access Beyond
Inc., where he served as Vice President of Engineering from September 1996 to
December 1997. Prior to 1996, Mr. Lynch served as Director of Engineering for
Penril Communications Inc., a telecommunications company. Mr. Lynch received a
M.S. from Johns Hopkins University and a B.S. from the University of Maryland.
STEPHEN N. SAMP became Vice President, Chief Financial Officer, and
Secretary of eOn in March 1998. From June 1995 to February 1998, Mr. Samp was
Vice President, Controller and Chief Accounting Officer at Guardsmark, Inc., a
private security services firm. Mr. Samp was previously with Deloitte, Haskins,
& Sells, an accounting firm. Mr. Samp received an M.B.A. from the Wharton
Graduate School of Business and a B.S. from The Ohio State University.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Our common stock began trading on the Nasdaq Stock Market under the symbol
EONC on February 4, 2000. Prior to that date, there was no public market for the
common stock. The following table sets forth, for the fiscal quarters indicated,
the high and low sales prices of our common stock as reported by the Nasdaq
National Market.
QUARTER ENDED
---------------------------------
April 30, 2000 July 31, 2000
---------------- ---------------
High ........................ $31.13 $ 11.00
Low ......................... $ 6.69 $ 3.00
As of September 30, 2000, there were 229 shareholders of record of our
common stock and, to the best of our knowledge, approximately 8,000 beneficial
owners whose shares of common stock were held in the names of brokers, dealers,
and clearing agencies.
During fiscal 2000, we did not declare any dividends on our capital stock.
We currently intend to retain any earnings to finance the operation and
expansion of our business and, therefore, do not expect to pay cash dividends
on our common stock in the foreseeable future.
USE OF PROCEEDS
We received $32.8 million from our initial public offering in February
2000, net of underwriting fees and discounts. The Company used the proceeds of
the offering to repay $6.4 million of outstanding indebtedness (see Note 3
to our Consolidated Financial Statements in Item 8). The remainder of the
proceeds were used to fund our working capital needs and to purchase auction-
rate municipal securities.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data represent the results of eOn and
its subsidiaries which include the operating results of BCS Technologies, Inc.
("BCS") beginning April 12, 1999, the date on which BCS was acquired. The
statement of operations data set forth below for each of the fiscal years ended
July 31, 2000, 1999, and 1998, and the selected balance sheet data at July 31,
2000 and 1999, are derived from consolidated financial statements audited by
Deloitte & Touche LLP, independent auditors, whose report appears in Item 8. The
consolidated statement of operations data for the years ended July 31, 1997 and
1996, and the consolidated balance sheet data at July 31, 1998, 1997, and 1996,
are derived from audited financial statements not included in this report. This
data should be read in conjunction with the consolidated financial statements,
including the notes thereto, appearing in Item 8 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7.
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues.................................. $50,438 $42,374 $30,172 $35,635 $38,518
Cost of revenues.............................. 29,173 23,890 17,530 24,312 26,501
------- ------- ------- ------- -------
Gross profit............................... 21,265 18,484 12,642 11,323 12,017
Operating expenses:
Selling, general and
administrative.............................. 20,271 13,056 9,931 10,103 7,853
Research and development..................... 3,914 2,334 1,407 1,310 1,256
Goodwill amortization........................ 586 177 - - -
------- ------- ------- ------- -------
Total operating expenses................... 24,771 15,567 11,338 11,413 9,109
Income (loss) from operations................. (3,506) 2,917 1,304 (90) 2,908
Interest income............................... (780) - - - -
Interest expense.............................. 278 687 826 915 1,004
Other (income) expense, net................... 971 (8) 162 678 124
------- ------- ------- ------- -------
Income (loss) before income taxes............. (3,975) 2,238 316 (1,683) 1,780
Income tax expense (benefit).................. (1,163) 83 - - 702
------- ------- ------- ------- -------
Income (loss) from continuing
operations................................... $(2,812) $ 2,155 $ 316 $(1,683) $ 1,078
======= ======= ======= ======= =======
Income (loss) from continuing
operations per share:
Basic...................................... $ (0.28) $ 0.43 $ 0.08 $ (0.44) $ 0.28
Diluted.................................... $ (0.28) $ 0.33 $ 0.07 $ (0.44) $ 0.28
Weighted average shares
outstanding:
Basic...................................... 9,885 5,036 3,918 3,825 3,825
Diluted.................................... 9,885 6,651 5,353 3,825 3,825
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 2,473 $ 1,874 $ 103 $ 320 $ 183
Marketable securities......................... 16,337 - - - -
Working capital............................... 35,839 4,475 1,820 3,964 5,824
Goodwill, net................................. 10,961 11,547 - - -
Total assets.................................. 59,892 39,025 16,430 17,699 21,104
Long-term debt................................ - 2,314 6,400 5,621 2,751
Total stockholders' equity (deficit).......... 49,954 17,152 (1,391) 893 4,341
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We design, develop and market next-generation 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 communications server product line was originally developed by BCS
Technologies, Inc. and was introduced initially in April 1997. We acquired BCS
on April 12, 1999 and have since combined the eQueue communications server and
our Millennium voice switching platform, which we introduced in fiscal 1994,
into our Communications Systems - North America operations. We have recently
concentrated our product development efforts on extending and enhancing our
communications server product line, introducing the eNterprise and Web Center
communications servers during the current fiscal year.
We recognize revenues from our eQueue 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.
14
<PAGE>
RESULTS OF OPERATIONS
The following table presents our operating ratios for fiscal years 2000,
1999, and 1998:
<TABLE>
<CAPTION>
Year Ended July 31,
---------------------------
2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
Net revenues.............................................. 100.0% 100.0% 100.0%
Cost of revenues.......................................... 57.8% 56.4% 58.1%
------- ------ ------
Gross margin.............................................. 42.2% 43.6% 41.9%
Operating expenses:
Selling, general, and administrative..................... 40.2% 30.8% 32.9%
Research and development................................. 7.8% 5.5% 4.7%
Amortization of goodwill................................. 1.2% 0.4% -
------- ------ ------
Total operating expenses.................................. 49.2% 36.7% 37.6%
------- ------ ------
Income (loss) from operations............................. (7.0%) 6.9% 4.3%
Interest (income) expense, net............................ (1.0%) 1.6% 2.7%
Other (income) expense, net............................... 1.9% 0.0% 0.6%
------- ------ ------
Income (loss) before income taxes and extraordinary loss (7.9%) 5.3% 1.0%
Income tax expense (benefit).............................. (2.3%) 0.2% 0.0%
------- ------ ------
Income (loss) before extraordinary loss................... (5.6%) 5.1% 1.0%
Extraordinary loss from early extinguishment of debt,
net of tax.............................................. 0.3% 0.0% 0.0%
------- ------ ------
Net income (loss)......................................... (5.9%) 5.1% 1.0%
======= ====== ======
</TABLE>
NET REVENUES
Our overall net revenues increased 19.0% to $50.4 million in fiscal 2000
from $42.4 million in fiscal 1999. The change was primarily due to increased
sales volume of Linux communications servers and third-party communications
systems. Fiscal 1999 net revenues represented a 40.4% increase from $30.2
million in fiscal 1998. The increase in 1999 was primarily due to the addition
of the Linux communications server line and additional Millennium sales volume
driven by Year 2000 upgrades.
Net revenues for our Communications Systems - North America operations
increased 9.3% to $29.7 million for the fiscal year ended July 31, 2000 from
$27.2 million for fiscal 1999. The increase was due primarily to increased Linux
communication servers revenues of $5.1 million, offset by a decline in
Millennium revenues of $2.3 million. We believe that our Millennium revenues
will decline in the future as the market for traditional private branch exchange
(PBX) switching platforms continues to shrink. Net revenues for the
Communications Systems - North America segment increased 48.2% during fiscal
1999 from $18.3 million in fiscal 1998. This increase was due primarily to
increased Millennium revenues and the addition of the Linux communications
servers product line resulting from the purchase of BCS.
Net revenues for our Caribbean/Latin America operations increased 36.5% to
$20.7 million during fiscal 2000 from $15.2 million for fiscal 1999. The 1999
results represented a 28.4% increase from $11.8 million in fiscal 1998. The
increase in both years resulted from an increase in sales volume of third-party
communications systems.
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 15.0% to $21.3
million for the year ended July 31, 2000 from $18.5 million in fiscal 1999. The
increase was due primarily to increased Linux communications server gross
profit. Fiscal 1999 represented an increase in gross profit of 46.2% from $12.6
million in fiscal 1998. The increase in gross profit in 1999 was
15
<PAGE>
primarily due to the addition of the Linux communications server product line,
as well as increased sales of Millennium voice switching platforms.
Gross profit for our Communications Systems - North America operations
increased 16.5% to $15.7 million for the year ended July 31, 2000 from $13.5
million in fiscal 1999. The increase in gross profit resulted from additional
sales of higher-margin communication servers, offset by a decline in Millennium
sales. Fiscal 1999 represented an increase of 70.9% from $7.9 million in fiscal
1998. The increase was primarily due to an increase in sales from the addition
of the Linux communications products line.
Gross profit for our Caribbean/Latin America operations increased 11.1% to
$5.6 million in fiscal 2000 from $5.0 million in fiscal 1999. Fiscal 1999
represented an increase of 3.0% from $4.9 million in fiscal 1998. The increases
in both years were primarily due to increased sales of third-party
communications systems.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses were $20.3 million in fiscal
2000, an increase of 55.3% from $13.1 million in fiscal 1999. Fiscal 1999
represented a 31.5% increase from $9.9 million in fiscal 1998. The increases in
both years were primarily due to the addition of the communications server
product line, increased marketing expenses, and the hiring of additional sales
and customer service personnel to support growth of the business.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses consist primarily of personnel and
related expenses for our engineering staff. All our research and development
efforts are currently concentrated in the Communications Systems - North America
segment. Research and development expenses increased 67.7% to $3.9 million in
the year ended July 31, 2000 from $2.3 million in fiscal 1999. Fiscal 1999
represented a 65.9% increase from $1.4 million in fiscal 1998. The increases in
both years were primarily due to the hiring of additional engineers to support
the development efforts of our communication server products and related
software applications.
AMORTIZATION OF GOODWILL
We recorded $11.7 million of goodwill related to the acquisition of BCS in
April 1999, and are amortizing this amount over a 20-year period.
INTEREST INCOME AND EXPENSE
Interest expense decreased 59.5% to $0.3 million in fiscal 2000 from $0.7
million in fiscal 1999. The decrease was primarily due to the retirement of all
outstanding debt in February 2000 in connection with our initial public
offering. Fiscal 1999 represented a 16.8% decrease from $0.8 million in fiscal
1998. The decrease was due reduced borrowings under our credit facilities and
the conversion of subordinated debt to preferred stock in fiscal 1999.
Interest income was $0.8 million for the year ended July 31, 2000. We had
no interest income in fiscal 1999 and 1998. The increase was primarily due to
the investment of funds from our initial public offering in interest-bearing
available for sale securities.
OTHER INCOME AND EXPENSE, NET
Other (income) and expense was $1.0 million in fiscal 2000, compared to
$0.0 million in fiscal 1999 and $0.2 million in fiscal 1998. The significant
increase in fiscal 2000 was primarily due to the recognition of a loss on
marketable securities of $0.8 million from an investment in equity securities of
a publicly traded company. At July 31, 2000, the market value of the securities
had declined significantly below the cost basis. The Company determined that the
decline was other than temporary and a charge was reflected in earnings to
writedown the securities.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense (benefit) for the year ended July 31, 2000 was $(1.2)
million, a decrease of 1,501.2 % from $0.1 million in fiscal 1999. The benefit
in 2000 resulted from the carryback of operating losses to prior periods to
realize a tax refund of approximately $1.3 million. We had no income tax expense
for fiscal 1998. Fiscal 1999 and
16
<PAGE>
1998 income tax expense were affected by the utilization of consolidated
operating loss carryforwards from previous periods. See Note 12 of the Notes to
Consolidated Financial Statements in Item 8.
EXTRAORDINARY LOSS
We used a portion of the net proceeds from our initial public offering to repay
$6.4 million of outstanding debt in February 2000. In connection with the
repayment of debt, the Company paid pre-payment penalties and wrote off deferred
financing costs totaling $0.3 million. The Company recognized an extraordinary
loss from the early extinguishment of debt of $0.2 million net of an income tax
benefit of $0.1 million.
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
$32.8 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 net 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 and for
working capital and general corporate purposes. See Note 3 of the Notes to
Consolidated Financial Statements in Item 8.
Net cash provided by (used in) operating activities was ($9.9) million,
$3.1 million, and $0.9 million for fiscal 2000, 1999, and 1998, respectively.
The decrease from the prior years is due primarily to lower net income, an
increase in inventories, and the reduction in income taxes payable and increase
in income taxes receivable during 2000.
Net cash provided by (used in) investing activities was ($17.8) million,
$2.2 million, and ($0.2) million for fiscal 2000. 1999, and 1998 respectively.
Cash used in investing activities in the current year consisted primarily of
purchases of short-term available-for-sale debt securities.
Net cash provided by (used in) financing activities was $28.3 million,
($3.6) million, and ($0.9) million for fiscal 2000, 1999, and 1998,
respectively. Cash provided by financing activities in fiscal 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
The following risk factors and other information contained in this report
should be carefully considered. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties that are not
currently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occurs, our
business, financial condition, and operating results could be materially
adversely affected.
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;
- increasing expenses without commensurate revenue increases;
- variations in the mix of products sold;
17
<PAGE>
- 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 quarters ending January 31. Thus, revenues in
the quarters ending January 31 are often lower than in the previous quarters.
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. More established competitors, as well as those emerging companies that
have completed initial public offerings, currently have greater resources and
market presence than we do. Additionally, a number of our current and potential
competitors have recently been acquired by larger companies who seek to enter
our markets.
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, Quintus, E.piphany, and WebLine Communications (acquired by
Cisco);
- contact center software and services suppliers, such as Aspect
Communications, Clarify (acquired by Nortel Networks), Genesys
Telecommunications Laboratories (acquired by Alcatel), Interactive Intelligence,
Kana Communications, and Vantive (acquired by PeopleSoft);
- emerging private communications exchange (PCX) suppliers, such as AltiGen
Communications, Artisoft, Cisco Systems, NBX Corporation (acquired by 3Com); and
18
<PAGE>
- 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 our eQueue communications servers directly and our eNterprise 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.
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 eQueue communications
servers and from one to six months for our Millennium voice switching platform
and eNterprise 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 and eNterprise 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.
19
<PAGE>
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 39% of our total revenues for the year ended July
31, 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 declining. 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.
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 ACT manufacturing, Inc.,
Innovative Circuits, and Clover Electronics. We may not be able to deliver our
products on a timely basis if any of these manufacturers fail 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.
20
<PAGE>
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 September 30, 2000, our executive officers, directors and principal
stockholders and their affiliates owned 4,700,130 shares, or 38.0% 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 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.
21
<PAGE>
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.
We 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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We are required to adopt SFAS No. 133, as
amended by SFAS No. 138, for the year ending July 31, 2001. SFAS No. 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. Because we currently hold no derivative financial instruments and do
not currently engage in hedging activities, adoption of SFAS No. 133 is expected
to have no material impact on our financial condition or results of operation.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes specific areas of
the Staff's view in applying generally accepted accounting principles to revenue
recognition in financial statements. We believe that our current revenue
recognition policy complies with SAB 101.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Substantially all of our cash equivalents and available-for-sale securities
are invested in variable rate instruments with frequent rate resets. Because
these securities have short effective maturities, we believe the market risk for
such holdings is insignificant. In addition, the vast majority of the Company's
sales are made in U.S. dollars, and consequently, we believe that our foreign
exchange rate risk is immaterial. We do not have any derivative instruments and
do not engage in hedging transactions.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report .................................................................... 24
Consolidated Balance Sheets as of July 31, 2000 and 1999 ........................................ 25
Consolidated Statements of Operations for the Years ended July 31, 2000,
1999, and 1998 ................................................................................ 26
Consolidated Statements of Cash Flows for the Years ended July 31, 2000,
1999, and 1998 ................................................................................ 27
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended July 31, 2000, 1999, and 1998 ........................................................... 29
Notes to Consolidated Financial Statements ...................................................... 30
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of eOn Communications Corporation
We have audited the accompanying consolidated balance sheets of eOn
Communications Corporation and subsidiaries (the "Company") as of July 31, 2000
and 1999 and the related consolidated statements of operations, cash flows, and
stockholders' equity (deficit) for each of the three years in the period ended
July 31, 2000. Our audits also included the financial statement schedules listed
in the Index at Item 14. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of eOn Communications Corporation and
its subsidiaries at July 31, 2000 and 1999 and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Memphis, Tennessee
September 7, 2000
24
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Balance Sheets
July 31, 2000 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
July 31,
-----------------
2000 1999
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 2,473 $ 1,874
Marketable securities................................. 16,337 -
Trade accounts receivable, net of allowance for
doubtful accounts of $1,110 and $1,803............... 12,381 12,135
Inventories........................................... 11,453 8,679
Income tax refund receivable.......................... 1,200 -
Other current assets.................................. 1,933 1,346
------- -------
Total current assets.................................... 45,777 24,034
Property and equipment, net............................. 2,416 1,419
Receivable from affiliate............................... - 9
Other assets:
Goodwill, net of accumulated
amortization of $763 and $177........................ 10,961 11,547
Intangible assets, net of accumulated
amortization of $172 and $49......................... 239 359
Other................................................. 499 1,657
------- -------
Total other assets...................................... 11,699 13,563
------- -------
Total................................................... $59,892 $39,025
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable...................................... $ 46 $ 2,667
Current portion of debt............................... - 3,137
Trade accounts payable and checks outstanding......... 5,049 5,580
Accounts payable to ACT Manufacturing, Inc............ 1,070 3,278
Payable to affiliate.................................. 89 -
Accrued expenses and other............................ 3,684 2,958
Income tax payable.................................... - 1,939
------- -------
Total current liabilities............................... 9,938 19,559
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 issued and
outstanding at July 31, 1999).......................... - 660
Common Stock, $.001 par value (50,000,000 shares
authorized, 12,264,446 and 7,639,932 shares issued
and outstanding)....................................... 12 8
Additional paid-in capital.............................. 57,585 24,148
Accumulated deficit..................................... (7,379) (4,380)
Note receivable from affiliate (former parent).......... (264) (3,284)
------- -------
Total stockholders' equity.............................. 49,954 17,152
------- -------
Total................................................... $59,892 $39,025
======= =======
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Operations
For the Years Ended July 31, 2000, 1999, and 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------
2000 1999 1998
------- -------- --------
<S> <C> <C> <C>
Net revenues .......................................... $ 50,438 $42,374 $30,172
Cost of revenues....................................... 29,173 23,890 17,530
------- ------- -------
Gross profit........................................ 21,265 18,484 12,642
Operating expenses:
Selling, general and administrative.................. 20,271 13,056 9,931
Research and development............................. 3,914 2,334 1,407
Amortization of goodwill............................. 586 177 -
------- ------- -------
Total operating expenses............................ 24,771 15,567 11,338
Income (loss) from operations.......................... (3,506) 2,917 1,304
Interest expense....................................... 278 687 826
Interest income........................................ (780) - -
Loss on marketable securities.......................... 752 - -
Other (income) expense, net............................ 219 (8) 162
------- ------- -------
Income (loss) before income
tax expense (benefit)................................ (3,975) 2,238 316
Income tax expense (benefit)........................... (1,163) 83 -
------- ------- -------
Income (loss) before extraordinary item................ (2,812) 2,155 316
Extraordinary loss from early
extinguishment of debt, net
of income tax benefit............................... 187 - -
------- ------- -------
Net income (loss) and comprehensive
income (loss)........................................ $(2,999) $ 2,155 $ 316
======= ======= =======
Net income (loss) per common share:
Basic:
Income (loss) before extraordinary item.............. $ (0.28) $ 0.43 $ 0.08
Extraordinary loss................................... (0.02) - -
------- ------- -------
Net income (loss) per common share................... $ (0.30) $ 0.43 $ 0.08
======= ======= =======
Net income (loss) per common share
Diluted:
Income (loss) before extraordinary item.............. $(0.28) $ 0.33 $ 0.07
Extraordinary loss................................... (0.02) - -
------- ------- -------
Net income (loss) per common share.................. $ (0.30) $ 0.33 $ 0.07
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2000, 1999, and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $(2,999) $ 2,155 $ 316
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation...................................................... 656 351 326
Amortization of intangibles....................................... 123 45 4
Amortization of goodwill.......................................... 586 177 -
Amortization of deferred financing costs.......................... 46 148 -
Extraordinary loss on early extinguishment........................ 146 - -
Provision for the allowance for doubtful accounts................. 648 698 65
Loss on sales of property and equipment........................... 6 9 2
Equity in earnings of joint venture............................... 38 6 (66)
Write-off of investment........................................... - 67 -
Loss on marketable securities..................................... 752 - -
Change in deferred income taxes................................... 279 (445) -
Changes in net assets and liabilities (net of effects of
acquisition):
Trade accounts receivable....................................... (915) (3,775) 1,600
Accounts receivable from/payable to affiliates.................. 98 (132) (474)
Inventories..................................................... (3,613) (1,039) 218
Other current assets............................................ (698) 75 (226)
Other noncurrent assets......................................... 41 - -
Trade accounts payable.......................................... (375) 2,444 (122)
Accounts payable to ACT Manufacturing, Inc...................... (2,208) 1,073 (731)
Accrued expenses and other...................................... 636 755 31
Income taxes payable (refund receivable)........................ (3,139) 528 -
------ ------- ------
Net cash provided by (used in) operating activities.............. (9,892) 3,140 943
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from business acquisition........................... - 3,126 -
Purchases of property and equipment............................... (1,659) (891) (256)
Purchase of patents, trademarks, and software technology (3) (77) (15)
Maturities of certificates of deposits............................ - - 174
Net repayments (advances) under notes receivable from employees... 73 65 (138)
Sales of available for sale securities............................ 31,235 - -
Purchases of available for sale securities ....................... (47,495) - -
------- ------- ------
Net cash provided by (used in) investing activities.............. (17,839) 2,223 (235)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving line
of credit........................................................ (3,137) 398 (202)
Increase (decrease) in checks outstanding......................... (156) 100 (1,560)
Net borrowings (repayments) of long-term debt..................... (2,314) (21) 1,073
Proceeds from issuance (repayment) of note payable
to related party................................................. - (250) 250
Repayment of note payable to parent company....................... - (100) (391)
Debt issuance costs............................................... - - (95)
Collection (issuance) of note receivable from affiliate/former
parent........................................................... 420 (2,600) -
Deposit of collateral for letter of credit........................ (383) - -
Proceeds from offering............................................ 32,774 -
Exercises of stock options........................................ 7 - -
Deferred offering costs........................................... 1,119 (1,119) -
------- ------- ------
Net cash provided by (used in) financing activities ............. 28,330 (3,592) (925)
</TABLE>
27
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
For the Years Ended July 31, 2000, 1999, and 1998
Year Ended July 31,
---------------------
2000 1999 1998
------ ------ -----
Net increase (decrease) in cash and cash equivalents.. 599 1,771 (217)
Cash and cash equivalents, beginning of year.......... 1,874 103 320
------ ------ -----
Cash and cash equivalents, end of year................ $2,473 $1,874 $ 103
====== ====== =====
Supplemental cash flow information:
Interest paid........................................ $ 885 $ 635 $ 585
Income taxes paid.................................... 1,672 110 86
Noncash activity:
2000:
Simultaneous with the offering on February 4, 2000, 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 distributed a $2,600,000 note receivable from CSHC to CSHC in
payment of $2,600,000 in dividends previously declared and payable.
The Company sold inventory in exchange for common stock of a publicly-traded
company. The Company recorded the $839,000 sale at the estimated fair value of
the securities received.
1999:
The Company issued 1,463,206 shares of preferred stock in connection with the
conversion of $686,000 of subordinated debt.
On February 24, 1999, the Company's Board of Directors declared a dividend of
$2,216,514 payable to the stockholders of record on February 26, 1999.
Approximately $1,957,000 of the dividend was payable upon certain events
occurring in the future. The remaining amount of the dividend declaration
relates to the distribution of a non-interest bearing note receivable from an
officer/director to Cortelco Systems Holding Corporation ("CSHC"). On April 8,
1999, prior to the merger discussed in Note 1, Cortelco Systems Puerto Rico
("CSPR") declared a dividend of $700,000 payable to the stockholder (CSHC) of
record on April 8, 1999. The dividends have been reflected in the financial
statements as if declared on July 31, 1998.
On April 5, 1999, the Company received 250,000 shares of its common stock from
CSHC in exchange for a $2,500,000 reduction of the outstanding note receivable
balance.
1998:
The Company issued 95,343 shares of common stock in exchange for a 55%
interest in a joint venture in mainland China.
Additionally, the Company entered into a barter transaction whereby they
exchanged inventory and installation services valued at approximately $135,000
for advertising and promotional services.
See notes to consolidated financial statements.
28
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended July 31, 2000, 1999, and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Note
Receivable From
----------------------
Total
Preferred Stock Common Stock Additional Affiliate/ Stockholders'
------------------ ----------------- Paid-In Accumulated Officer/ Former Equity
Shares Amount Shares Amount Capital Deficit Director Parent (Deficit)
----------- ------ --------- ------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1997 - $ - 3,629,224 $ 4 $9,217 $(4,894) $(250) $(3,184) $ 893
Issuance of common stock
to acquire interest in
joint venture - - 95,343 - 67 - - - 67
Stock dividend - - 195,685 - 1,957 (1,957) - - -
Dividend declaration (eOn) - - - - (2,217) - 250 - (1,967)
Dividend declaration (CSPR) - - - - (700) - - - (700)
Net income and
comprehensive income - - - - - 316 - - 316
----------- ------- --------- ------- ----------- --------- -------- --------- ----------
Balance at July 31, 1998 - - 3,920,252 4 8,324 (6,535) - (3,184) (1,391)
Issuance of common stock
to acquire business - - 3,969,680 4 16,796 - - - 16,800
Capital contribution from
parent - - - - 1,528 - - - 1,528
Conversion of debt to
preferred stock 1,463,206 660 - - - - - - 660
Shares exchanged for
note retirement - - (250,000) - (2,500) - - 2,500 -
Loan to affiliate (former
parent) - - - - - - - (2,600) (2,600)
Net income and
comprehensive income - - - - - 2,155 - - 2,155
---------- ------- --------- ------- ----------- --------- -------- --------- ----------
Balance at July 31, 1999 1,463,206 660 7,639,932 8 24,148 (4,380) - (3,284) 17,152
Collection of note from
former parent - - - - - - - 420 420
Conversion of preferred
stock to common stock (1,463,206) (660) 1,434,894 1 659 - - - -
Issuance of common stock
in the offering - - 3,180,000 3 32,771 - - - 32,774
Note receivable distributed
in payment of dividend
payable - - - - - - - 2,600 2,600
Exercise of stock options - - 9,620 - 7 - - - 7
Net income (loss) and
comprehensive income (loss) - - - - - (2,999) - - (2,999)
---------- ----- ---------- ------- ----------- --------- -------- --------- ----------
Balance at July 31, 2000 - $ - 12,264,446 $ 12 $57,585 $(7,379) $ - $ (264) $ 49,954
========== ===== ========== ======= =========== ========= ======== ========= ==========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended July 31, 2000, 1999, and 1998
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business - eOn Communications Corporation (the "Company" or
"eOn") designs, develops and markets communication products that include next
generation communications servers and software which integrate and manage voice,
e-mail and Internet communications for customer contact centers and other
applications. The Company also offers a traditional voice-switching platform
which addresses the voice communication needs of small and medium-sized
installations. In addition, the Company also resells cellular airtime, cellular
telephones, and third-party voice communications systems in Puerto Rico.
Basis of Presentation - The consolidated financial statements of eOn
include the accounts of its wholly-owned subsidiaries, Cortelco Systems Puerto
Rico, Inc. ("CSPR") for all periods presented and eOn Communications Corporation
of Colorado (formerly BCS Technologies, Inc.) which was acquired April 12, 1999,
for the period April 12, 1999 through July 31, 2000. All significant
intercompany balances and transactions have been eliminated.
The Company is also affiliated with the following entities through common
stockholder ownership:
Cortelco Systems Holding Corporation ("CSHC")
Cortelco International, Inc. ("CII", subsidiary of CSHC)
Cortelco Puerto Rico, Inc. ("CPR", subsidiary of CSHC)
Cortelco Canada ("CC", subsidiary of CSHC)
CMC Industries, Inc., a subsidiary of ACT Manufacturing, Inc.
In April 1999, a series of transactions occurred whereby CSHC distributed the
common stock of the Company to the CSHC stockholders and CPR formed a new
wholly-owned subsidiary in the Commonwealth of Puerto Rico, CSPR, in
contemplation of a merger between the Company and the newly formed subsidiary.
Previous to the merger, CPR contributed substantially all of the operations and
certain assets and liabilities to the newly formed CSPR. CPR retained certain
real estate assets and the related mortgage note payable resulting in a capital
contribution to the Company of $1,528,000. In April 1999, CPR transferred all
issued and outstanding stock of CSPR to CSHC, the Company issued 553,880 shares
of common stock to CSHC in exchange for the 100% interest in CSPR, and CSPR
assumed the CPR Credit Facility described in Note 10. The business combination
was between entities under common control as CSHC owned 100% of CSPR and 97% of
the Company; therefore, the merger was accounted for in a manner similar to a
pooling of interests and accordingly, all periods presented in the accompanying
financial statements reflect the results of operations on an "as if pooled"
basis. The common stock issued to effect the business combination has been
reflected as outstanding for all periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents - All highly liquid investments with an original
maturity of three months or less are considered to be cash equivalents.
Marketable Securities - Marketable securities are classified as available
for sale and are reported at fair value. Unrealized holding gains and losses,
net of the related income tax effect, are excluded from income and are reported
in other comprehensive income. Realized gains and losses are included in income
on the specific identification method. During 2000, the Company determined that
an other-than-temporary impairment had occurred related to an equity investment.
The cost basis of the security was written down and a loss of $752,000 was
recognized.
Inventories - Inventories are valued at the lower of cost or market. Cost
is determined by the last-in, first out ("LIFO") method for approximately 40%
and 38% of the inventories at July 31, 2000 and 1999, respectively. The first-
in, first-out ("FIFO") method is principally used for the remainder.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method for financial reporting
purposes and accelerated method for income tax reporting purposes over the
estimated useful lives of the assets, generally five to thirty years.
30
<PAGE>
Goodwill - Goodwill represents the cost in excess of the fair value of net
assets acquired. These costs are being amortized on a straight line basis over
twenty years. The Company reviews the carrying value for impairment based on
undiscounted cash flows whenever events or changes in circumstances occur which
might indicate that the amount might not be recoverable.
Investments - Investments in affiliates and corporate joint ventures which
represent greater than a 20% equity interest but which the Company does not
exercise control are accounted for under the equity method. Investments
representing less than a 20% interest are carried at the lower of cost or net
realizable value.
Intangible Assets - Intangible assets primarily represent costs incurred to
acquire and/or establish patents, trademarks, and software technology. These
costs are being amortized on a straight-line basis over the estimated useful
lives of the assets, generally five years. The amortization period begins with
the initial introduction of the underlying product to the market in order to
properly match revenue and expense. The Company reviews the carrying value of
intangible assets for impairment based on undiscounted cash flows whenever
events or changes in circumstances occur which might indicate that the carrying
amount might not be recoverable.
Deferred Financing Costs - Deferred financing costs represent costs
associated with the issuance of debt. These costs are amortized using the
effective interest method over the life of the related debt issue.
Product Warranties - The Company provides the customer with a warranty from
the date of purchase. Estimated warranty obligations are recorded based on
actual claims experience.
Income Taxes - Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Prior
to the distribution of the Company's common stock to the CSHC stockholders, the
Company's results were included in the consolidated U.S. income tax return of
CSHC. The consolidated provision or benefit was allocated proportionately
between the subsidiaries of CSHC based on the contribution of each company in
the consolidated federal tax return as if each company calculated its tax on a
separate return basis. Income taxes are not provided on the unremitted earnings
of the Company's foreign subsidiaries and foreign joint ventures since it is the
Company's intention to continue to reinvest these earnings.
Revenue Recognition - In December 1999, The Securities and Exchange
Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements". SAB No. 101 summarized the staffs' various
views in applying generally accepted accounting principles to revenue
recognition in financial statements. Management has evaluated the Company's
revenue recognition policies and concluded that they comply with this SAB.
Revenues are recognized at the time products are shipped or when title and risk
of loss passes. Net sales is comprised of sales reduced by related sales
allowances. Revenues from cellular airtime are recognized when earned based on
cellular airtime contracts.
Medical Care and Disability Benefit Plans - The Company is self-insured
with respect to a portion of the medical and disability benefits offered to
substantially all employees. These costs are charged against earnings in the
period in which claims are incurred. The Company does not provide benefits to
retired employees.
Earnings Per Share - The Company follows Statement of Financial Accounting
Standard ("SFAS") No. 128, "Earnings Per Share"," which requires disclosure of
basic and diluted earnings per share ("EPS"). Basic EPS is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding during the year. Diluted EPS is similar to basic EPS except
that the weighted average number of common shares outstanding is increased to
include the number of additional common shares that would have been outstanding
if the potentially dilutive common shares, such as options, had been issued.
Reverse Stock Split - On February 24, 1999, the Company's board of
directors authorized a 1-for-10 reverse stock split of its common and preferred
stock effective for stockholders of record on March 1, 1999. The Company's board
of directors also approved an amendment to the Company's certificate of
incorporation to decrease the authorized common and preferred shares to
50,000,000 and 10,000,000, respectively, and to increase the par value per
common share from $.0001 to $.001. Shares outstanding and all per share
31
<PAGE>
amounts in the accompanying financial statements have been restated to give
effect to the reverse stock split.
Fair Value of Financial Instruments - The carrying amounts of financial
instruments such as cash, accounts receivable, accounts payable, and borrowings
under the revolving credit agreement approximate their fair value due to the
short term nature of the instruments. Additionally, the carrying value of the
Company's investment in the foreign joint venture approximates fair value. The
fair value of the Company's subordinated debt was estimated to be $2,176,000 at
July 31, 1999 based upon available market information.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive Income - In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income and its
components and requires a separate statement to report the components of
comprehensive income for each period reported. For the years ended July 31,
2000, 1999, and 1998, net income (loss) equaled comprehensive income (loss).
New Accounting Standards - In June 1998, FASB issued SFAS 133, "Accounting
for Derivative Instruments and Hedging," which established accounting and
reporting standards for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities. The
provisions of this statement, as amended by SFAS No. 138, are effective for
fiscal years beginning after June 15, 2000. Management has determined that the
adoption of this statement will not have a material impact on the disclosures in
the Company's financial statements.
3. 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
proceeds to the Company, net of underwriting commissions and discounts and
offering costs, of $28,400,000. On February 17, 2000, the underwriters exercised
their over-allotment right resulting in the issuance of an additional 390,000
shares of common stock and additional proceeds to the Company totaling
$4,400,000. 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 a 1 for .98 basis, resulting in the issuance of 1,434,894 shares
of common stock. The Company used the net proceeds from the offering to repay
$2,800,000 of outstanding principal and interest on 8% subordinated notes due in
2002 and $3,600,000 of outstanding indebtedness under a revolving credit
facility and for working capital and general corporate purposes. In connection
with the repayment of debt, the Company recognized a charge of $187,000, net of
income tax benefit of $97,000, related to the early extinguishment of debt.
4. ACQUISITION OF BCS TECHNOLOGIES, INC.
On April 12, 1999, the Company acquired BCS Technologies, Inc. ("BCS") in
exchange for 3,969,680 common shares. The purchase price was determined based on
the fair value of the BCS equity. The parties agreed to the merger and the
purchase price was determined in November 1998. The acquisition was accounted
for using the purchase method and, accordingly, the operating results of BCS
have been included in the Company's consolidated financial statements since the
date of acquisition. The purchase price, including direct costs of acquisition,
was $17,089,000 and it exceeded the fair value of net assets acquired by
$11,724,000, which is being amortized on a straight-line basis over twenty
years.
32
<PAGE>
The following summarized unaudited pro forma consolidated results of operations
for the years ended July 31, 1999 and 1998 assumes the acquisition had occurred
as of August 1 of each year:
1999 1998
------- --------
(In thousands, except
per share data)
Pro forma information:
Net revenues........................... $53,650 $36,618
Net income (loss)...................... 4,315 (98)
Earnings per share:
Basic............................. $ 0.55 $ (0.01)
Diluted........................... $ 0.46 $ (0.01)
The pro forma results do not necessarily represent results which would have
occurred if the acquisition had taken place as of the beginning of each of the
periods presented nor are they necessarily indicative of future results.
5. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a concentration
of credit risk consist principally of cash, marketable securities, trade
accounts receivable, and notes receivable. The Company maintains its cash
balances with large regional financial institutions and has not experienced
losses. The marketable securities are invested in accounts at large national
brokerages which maintain insurance coverage. The Company's products are sold
principally to dealers, value added resellers, national accounts, and the U.S.
government. Approximately 41% of the Company's revenues in 2000 were generated
within the Commonwealth of Puerto Rico. The Company's credit risk is limited
principally to trade accounts receivable. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. No
additional risk beyond amounts provided for collection losses is believed
inherent in the Company's trade accounts receivable.
6. MARKETABLE SECURITIES
Marketable securities consists of the following at July 31, 2000:
Cost Market value
-------- ------------
(In thousands)
Municipal bonds......................... $16,250 $16,250
Equity securities....................... 87 87
------- -------
Total $16,337 $16,337
======= =======
The municipal bond investments are comprised solely of taxable auction-rate
securities with stated maturities ranging from 24-30 years. The cost basis of
the investment in equity securities reflects a writedown of $752,000 for a
decline that was deemed to be other-than-temporary. Due to the nature of the
investments, the Company did not have any gross unrealized gains or losses at
July 31, 2000. The Company has classified all investments as available for sale
and as current assets since it has the intent and ability to liquidate the
portfolio to fund working capital requirements and/or pursue alternate
investment opportunities.
7. INVENTORIES
Inventories consist of the following:
2000 1999
------- ------
(In thousands)
Raw materials and purchased components............ $ 4,126 $ 531
Finished goods.................................... 7,375 8,222
LIFO reserve...................................... (48) (74)
------- ------
Total inventories $11,453 $8,679
======= ======
33
<PAGE>
In 1999 and 1998, the liquidation of LIFO inventories decreased cost of revenues
and therefore increased the net income from continuing operations before taxes
by $40,000 and $84,000, respectively.
8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
2000 1999
------- -------
(In thousands)
Leasehold improvements................................. $ 544 $ 134
Equipment and automobiles.............................. 3,425 2,101
Furniture and fixtures................................. 772 577
------- -------
Total................................................. 4,741 2,812
Less accumulated depreciation.......................... (2,325) (1,393)
------- -------
Property and equipment, net........................... $ 2,416 $ 1,419
======= =======
9. ACCRUED EXPENSES AND OTHER
Accrued expenses and other consists of the following:
2000 1999
------- -------
(In thousands)
Employee compensation.................................. $ 428 $ 344
Commissions............................................ 230 242
Vacation............................................... 621 523
Warranty............................................... 395 450
Interest............................................... - 395
Deferred income........................................ 984 404
Employee withholdings related to ESPP.................. 221 -
Other.................................................. 805 600
------- -------
Total................................................. $ 3,684 $ 2,958
======= =======
10. LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES
During 2000, the Company used the proceeds from the initial public offering to
retire all outstanding debt. Debt consisted of the following at July 31, 1999:
1999
--------------
(In thousands)
eOn revolving credit facility expiring July 2001, interest rate
of 8.375% (prime rate plus margin of 0.375%) at July 31, 1999,
collateralized by substantially all the assets of eOn including
the common stock of CSPR .......................................... $ 2,825
CSPR revolving credit facility, expiring August 27, 2001, interest
rate of 9.25% (prime rate plus 1.25%) at July 31, 1999,
collateralized by accounts receivable and inventories as well as
a pledge of CSPR's common stock ................................... 312
8% subordinated note due July 2002 ................................. 2,314
--------
Total ............................................................. 5,451
Less current portion ............................................... (3,137)
--------
Long-term debt, less current portion .............................. $ 2,314
========
The weighted average interest rate on the credit facilities was 8.51% as of July
31, 1999.
The Company had one outstanding letter of credit totaling $375,000 at July 31,
2000. The letter of credit was issued in order to secure payments under a new
operating lease for office facilities and is fully collateralized by cash
deposited with the issuer.
34
<PAGE>
11. LEASE COMMITMENTS
The Company leases its primary warehouse and office facilities, as well as
certain office equipment and vehicles, under operating leases.
The following is a schedule of future minimum lease payments required under
operating leases that have remaining initial or noncancellable lease terms in
excess of one year as of July 31, 2000:
Year Ending
(In thousands)
--------
2001 ......................................... $ 1,344
2002 ......................................... 1,145
2003 ......................................... 1,059
2004 ......................................... 931
2005 ......................................... 683
Thereafter ................................... 3,150
--------
Total ........................................ $ 8,312
========
Rent expense for the years ended July 31, 2000, 1999, and 1998 totaled
$1,262,000 $568,000, and $446,000, respectively, which included $146,000,
$137,000, and $137,000 charged by CII for the sharing of warehouse space and
$304,000, $126,000, and $NIL charged by Cortelco Puerto Rico for office space.
12. INCOME TAXES
The components of income tax expense (benefit) for 2000 and 1999 are as follows:
2000 1999
------- ------
(In thousands)
Current:
Federal................................................. $(1,402) $ 415
State................................................... (70) 22
Puerto Rico............................................. 30 91
------- ------
Total current.......................................... (1,442) 528
Deferred:
Federal................................................. 250 (423)
State................................................... 29 (22)
------- ------
Total deferred......................................... 279 (445)
------- ------
Total income tax expense (benefit)..................... $(1,163) $ 83
======= ======
The financial statements of the Company do not include a provision (benefit) for
income taxes for 1998 due to the cumulative net operating losses.
A reconciliation between the income tax expense (benefit) from continuing
operations recognized in the Company's consolidated statement of operations and
the income tax expense (benefit) computed by applying the domestic federal
statutory income tax rate to income from continuing operations before income
taxes is as follows:
2000 1999 1998
------- ----- -----
(In thousands)
Income tax at Federal statutory rate (34%) $(1,350) $ 761 $ 107
State income taxes, net of federal benefit (162) 22 13
Change in valuation allowance............... 106 (808) (169)
Amortization of goodwill.................... 205 62 -
Other, net.................................. 38 46 49
------- ----- -----
Total income tax expense (benefit)......... $(1,163) $ 83 $ -
======= ===== =====
35
<PAGE>
Income taxes are not provided for the undistributed earnings of the foreign
joint venture as such earnings are intended to be permanently reinvested. Such
earnings would become taxable upon the sale or liquidation or upon the
remittance of dividends. Accumulated undistributed earnings on which U.S. taxes
have not been provided are approximately $27,000.
The deferred tax effects of the Company's principal temporary differences at
July 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 Assets Liabilities Total
-------- ------------- -------
(In thousands)
<S> <C> <C> <C>
Allowance for doubtful receivables........... $ 448 $ - $ 448
Inventories.................................. 161 - 161
Basis difference in property and equipment - (91) (91)
Accrued warranty costs....................... 153 - 153
Accrued expenses and other................... 366 - 366
Net operating loss carryforwards............. 103 - 103
Capital loss carryforward.................... 285 - 285
Minimum tax credits.......................... 42 - 42
Valuation allowance.......................... (1,036) - (1,036)
-------- ----------- -------
Total deferred asset (liability)........ $ 522 $ (91) $ 431
======== =========== =======
</TABLE>
<TABLE>
<CAPTION>
1999 Assets Liabilities Total
-------- ------------- -------
(In thousands)
<S> <C> <C> <C>
Allowance for doubtful receivables........... $ 697 $ - $ 697
Inventories.................................. 332 (45) 287
Basis difference in property and equipment - (26) (26)
Accrued warranty costs....................... 174 - 174
Accrued expenses and other................... 251 - 251
Net operating loss carryforwards............. 103 - 103
Minimum tax credits.......................... 154 - 154
Valuation allowance.......................... (930) - (930)
-------- ----------- -------
Total deferred asset (liability)........ $ 781 $ (71) $ 710
======== =========== =======
</TABLE>
At July 31, 2000, net operating loss carryforwards of approximately $295,000,
which expire at various dates through July 2019, are available to reduce future
taxable income. During the year ended July 31, 2000, the Company generated
approximately $3,900,000 of operating losses which were carried back to previous
years to realize an income tax refund of approximately $1,300,000.
13. EQUITY INCENTIVE PLANS
The Company's Equity Incentive Plans, adopted in fiscal years 1997 and 1999,
authorize the granting of incentive stock options, supplemental stock options,
stock bonuses, and restricted stock purchase agreements to officers, directors,
and employees of the Company and to non-employee consultants. Incentive stock
options are granted only to employees and are issued at prices not less than
100% of the fair market value of the stock at the date of grant. The options
generally vest over a four-year period and the term of any option cannot be
greater than ten years from the date of grant. Stock bonuses and restricted
stock purchase agreements are issued at prices not less than 85% of the fair
market value of the stock at the date of grant.
No grants were made under the 1997 Equity Incentive plan during 2000. The board
of directors has declared that no future grants will be made under this plan.
During 1999 and 1998, 288,402 and 139,311 options, respectively, were granted
with exercise prices ranging from $.70 to $6.50 per share.
The board of directors has authorized up to an aggregate of 2,000,000 shares of
the Company's common stock for issuance under the 1999 Equity Incentive Plan.
During 2000 and 1999, 652,531 and 989,314 options, respectively, were issued
with exercise prices ranging from $4.25 to $24.25 per share.
36
<PAGE>
The status of the Company's Equity Incentive Plans is summarized below:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.................... 1,408,093 $ 8.30 139,311 $ 0.89 - $ 0.00
Granted......................................... 652,531 5.25 1,277,716 9.11 139,311 0.89
Exercised....................................... (9,620) 0.72 - - - 0.00
Cancelled (270,660) 8.89 (8,934) 8.17 - 0.00
---------- -------- ---------- -------- --------- --------
Outstanding, end of year.......................... 1,780,344 $ 7.13 1,408,093 $ 8.30 139,311 $ 0.89
========== ======== ========== ======== ========= ========
Exercisable, end of year.......................... 530,404 $ 6.55 85,368 $ 2.62 7,904 $ 0.95
========== ======== ========== ======== ========= ========
Exercise price range.............................. $0.24 - $24.25 $0.24 - $10.38 $0.70 - $1.00
Options available for grant, end of year.......... 627,466 1,041,907 310,689
Weighted average fair value of options granted
during the year.................................. $ 5.34 $ 7.61 $ 0.74
</TABLE>
The following table summarizes information about the options outstanding as of
July 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Outstanding Average Weighted Exercisable Weighted
Range of at Remaining Average at Average
Exercise July 31, Contractual Exercise July 31, Exercise
Prices 2000 Life Price 2000 Price
--------------- ---------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.00 - $ 5.00 710,563 8.7 years $ 3.35 167,947 $ 0.94
$ 5.01 - $10.00 743,307 8.4 years $ 8.90 268,712 $ 8.72
$10.01 - $15.00 308,374 8.9 years $10.57 93,745 $10.38
$15.01 - $25.00 18,100 9.6 years $24.25 - $ 0.00
--------------- ---------- ----------- -------- ----------- --------
1,780,344 8.6 years $ 7.13 530,404 $ 6.55
========== =========== ======== =========== ========
</TABLE>
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", under which no compensation cost for stock options
is recognized for options granted at or above fair market value. No compensation
expense related to stock options was recorded during 2000, 1999, or 1998 as the
option exercise prices were equal to or greater than fair market value on the
date of the grant. Had compensation expense been determined based upon fair
values at the grant date in accordance with SFAS No. 123, "Accounting for Stock-
Based Compensation", the Company's net income (loss) and earnings per share
would have been as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income (loss):
As reported.................. $(2,999) $2,155 $ 316
Pro forma.................... (5,234) 1,724 306
Earnings per share:
As reported - basic........ $ (0.30) $ 0.43 $0.08
Pro forma - basic.......... $ (0.53) $ 0.34 $0.07
As reported - diluted...... $ (0.30) $ 0.33 $0.07
Pro forma - diluted........ $ (0.53) $ 0.26 $0.07
</TABLE>
37
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate................. 6.00% 6.25% 6.25%
Dividend yield.......................... - - -
Expected volatility..................... 75% 75% 75%
Expected option life in years........... 10 10 10
</TABLE>
Additionally, during 1999, the board of directors adopted an Employee Stock
Purchase Plan which permits the granting of up to 250,000 shares of the
Company's common stock. The plan qualifies as a noncompensatory plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." No shares have been granted under this plan as of July 31, 2000.
14. RELATED PARTIES
The following represent related party transactions:
<TABLE>
<CAPTION>
Year Ended July 31,
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Purchases from ACT Manufacturing, affiliate
through common ownership....................... $ 13,571 $ 8,835 $ 9,351
Sales to ACT Manufacturing....................... 101 161 154
Sales to BCS prior to acquisition................ - 985 353
Purchases from CSHC and subsidiaries............. 1,588 244 188
Sales to CSHC and subsidiaries................... 187 79 85
Rental expense to CPR............................ 304 94 -
</TABLE>
The following represent related party balances:
<TABLE>
<CAPTION>
July 31,
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
Receivable from CSHC....................................... $ 66 $ 37
Receivable from (payable to) CII........................... (51) (28)
Receivable from (payable to) CPR........................... (105) -
Receivable from officers/employees (included in other
assets).................................................. - 65
</TABLE>
In addition, at July 31, 1998 the Company had a $3,184,000 note receivable from
CSHC that was reflected as a reduction of stockholder's equity in the
accompanying balance sheet. The note matures on or before December 31, 2002.
During 1999, the Company received 250,000 shares of its common stock from CSHC
in exchange for a $2,500,000 reduction of the outstanding note balance.
Additionally, the Company loaned the former parent $2,600,000. The loan is due
and payable on demand and provides for interest at a rate equal to prime plus
1.5% (11.0% at July 31, 2000). During 2000, the Company received $420,000 in
principal payments against the note receivable and distributed the $2,600,000
note to CSHC in payment of a dividend payable.
The accompanying financial statements as of July 31, 1999 and prior periods
include the assets, liabilities, revenues, and expenses specifically
identifiable with the Company as well as certain allocated expenses for services
provided by CSHC and CII. The costs have been allocated using formulas including
estimates of effort expended and sales, and management believes the allocation
method to be reasonable. The financial statements may not necessarily reflect
the assets and liabilities and results of operations of the Company had it been
operated as a stand-alone entity. These allocations include insurance, computer
maintenance, warehousing expenses, and sales expenses. Additionally, eOn
incurred certain administrative costs on behalf of CSHC and the consolidated
group.
38
<PAGE>
The management fees for the years 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Year Ended July 31,
1999 1998
-------- --------
<S> <C> <C>
Management fee (income) expense incurred by eOn..... $ (53) $ (80)
Management fee expense incurred by CSPR............. 40 265
-------- ---------
Net management fee (income) expense................. $ (13) $ 185
======== =========
</TABLE>
Management estimates that the costs that would have been incurred on a stand-
alone basis would have approximated $0 and $100,000 for the years ended July 31,
1999 and 1998, respectively.
15. EMPLOYEE SAVINGS PLAN
Substantially all employees of the company can participate in the eOn
Communications Corporation Profit Sharing Savings Plan, which is qualified under
Section 401 of the Internal Revenue Code. Under the provisions of the plan, all
participants may contribute up to 16% of their compensation, subject to
limitations established by the Internal Revenue Service. The Company may
contribute a matching contribution of not less than 50% of the employee
contributions up to 6% of the employee's compensation. The Company may also
provide special discretionary contributions equal to a percentage of an
employee's annual compensation and/or an amount determined by management. During
2000, 1999, and 1998, contributions allocated to the Company totaled $140,000,
$144,000 and $110,000 respectively.
16. SEGMENT INFORMATION
The Company's reportable segments are Communication Systems - North America and
Caribbean/Latin America, each of which offers different products and services.
Each segment requires different technology and marketing strategies. The
Communication Systems - North America segment offers communications solutions
that address voice, data, and video network switching. The Caribbean/Latin
America operation sells eOn brand communications systems, third-party switching
platforms, and wireless telephones and airtime through our subsidiary in Puerto
Rico. The other category includes the Company's investment in a joint venture in
China which is accounted for under the equity method and items not specifically
allocated to any segment.
During fiscal 2000, the Company combined the Communications Systems -
Caribbean/Latin America and Cellular Airtime Services segments into one segment.
The segment information for 1999 and 1998 has been restated to be consistent
with this presentation.
The accounting policies of the segments are those described in the summary of
significant accounting policies in Note 2.
<TABLE>
<CAPTION>
2000
Communications
Systems - Caribbean/Latin Consolidated
North America America Other Reconciliations Total
-------------- --------------- --------- --------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues $29,705 $20,733 $ 190 $(190) $50,438
Operating income (loss) (4,079) 573 (69) 69 (3,506)
Interest expense 211 67 - - 278
Income tax expense (benefit) (1,193) 30 - - (1,163)
Net income (loss) (3,434) 473 (70) 32 (2,999)
Total assets 48,163 11,729 1,012 (1,012) 59,892
Capital expenditures 1,322 337 3 (3) 1,659
Depreciation and
amortization 1,254 157 9 (9) 1,411
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
1999
Communications
Systems - Caribbean/Latin Consolidated
North America America Other Reconciliations Total
-------------- --------------- --------- --------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues $27,186 $15,188 $557 $(557) $42,374
Operating income (loss) 1,372 1,545 (28) 28 2,917
Interest expense 616 71 - - 687
Income tax expense - 83 - - 83
Net income (loss) 754 1,407 (11) 5 2,155
Total assets 36,490 2,535 1,142 (1,142) 39,025
Capital expenditures 844 47 32 (32) 891
Depreciation and amortization 436 137 22 (22) 573
</TABLE>
<TABLE>
<CAPTION>
1998
Communications
Systems - Caribbean/Latin Consolidated
North America America Other Reconciliations Total
-------------- --------------- --------- --------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues $18,346 $11,826 $771 $(771) $30,172
Operating income (loss) 751 553 138 (138) 1,304
Interest expense 524 302 - - 826
Income tax expense - - - - -
Net income (loss) 226 24 120 (54) 316
Total assets 13,880 2,550 1,269 (1,269) 16,430
Capital expenditures 185 71 8 (8) 256
Depreciation and amortization 154 176 24 (24) 330
</TABLE>
Financial information relating to the Company's revenues by geographic area was
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
United States and Canada..................... $ 49,635 $ 41,353 $ 29,404
Central America and South America............ 668 547 440
Europe, Middle East, and Africa.............. 132 468 214
Asia......................................... 3 6 114
-------- -------- --------
Consolidated.............................. $ 50,438 $ 42,374 $ 30,172
======== ======== ========
</TABLE>
17. COMMITMENTS AND CONTINGENCIES
At July 31, 2000, the Company had outstanding commitments for inventory
purchases under open purchase orders of approximately $2,622,000.
The Company is involved in various matters of litigation, claims, and
assessments arising in the ordinary course of business. In the opinion of
management, the eventual disposition of these matters will not have a material
adverse effect on the financial statements.
40
<PAGE>
18. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for each year were as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------ ------
(In thousands, except per share data)
<S> <C> <C> <C>
Basic earnings (loss) per share:
Income (loss) before extraordinary item......... $(2,812) $2,155 $ 316
Weighted average shares outstanding - basic..... 9,885 5,036 3,918
------- ------ ------
Basic earnings (loss) per share before
extraordinary item.......................... $ (0.28) $ 0.43 $ 0.08
======= ====== ======
Diluted earnings (loss) per share:
Income:
Income (loss) before extraordinary item......... $(2,812) $2,155 $ 316
Interest on 8% convertible subordinated debt.... - 38 55
------- ------ ------
Income (loss) before extraordinary item
available to common shareholders................ (2,812) 2,193 371
Weighted average shares:
Outstanding..................................... 9,885 5,036 3,918
Assumed conversion of convertible debt/
preferred stock............................. - 1,435 1,435
Dilutive effect of stock options................. - 180 -
------- ------ ------
Weighted average shares outstanding - diluted.... 9,885 6,651 5,353
------- ------ ------
Diluted earnings (loss) per share before
extraordinary item.......................... $ (0.28) $ 0.33 $ 0.07
======= ====== ======
</TABLE>
Potential common shares related to the assumed conversion of 1,463,206 shares of
preferred stock prior to the offering and options outstanding at July 31, 2000
to purchase 1,780,344 shares of common stock were excluded from the computation
of diluted earnings (loss) per share for the year ended July 31, 2000 because
their inclusion would have had an antidulitive effect on earnings per share.
Options to purchase 139,311 shares of common stock were outstanding at July 31,
1998 but were not included in the computation of diluted earnings (loss) per
share because the options' exercise prices were equal to or greater than the
average market price of the common shares. Additionally, at July 31, 1998,
$686,000 of convertible subordinated debt was convertible into 1,463,206 shares
of convertible preferred stock which was convertible into 1,434,894 shares of
common stock.
19. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of fiscal 2000, the Company recorded a $752,000 charge to
reflect an other than temporary decline in marketable securities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
41
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information set forth under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive Proxy Statement for the 2000 Annual Meeting of Shareholders to be
held on December 20, 2000 (the "Proxy Statement"), which will be filed with the
Securities and Exchange Commission not later than 120 days after July 31, 2000,
are incorporated herein by reference in response to this item.
Information with respect to executive officers is set forth under the
caption "Executive Officers" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION.
Information set forth under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information set forth under the caption "Stock Ownership" in the Proxy
Statement is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Information set forth under the caption "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
42
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K.
(A) (1) Financial Statements
The following information appears in Item 8 of Part II of this Report:
- Independent Auditors' Report
- Consolidated Balance Sheets as of July 31, 2000 and 1999
- Consolidated Statements of Operations for the Years Ended July 31,
2000, 1999, and 1998
- Consolidated Statements of Cash Flows for the Years Ended July 31,
2000, 1999, and 1998
- Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended July 31, 2000, 1999, and 1998
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
The following financial statement schedule is included in this report:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not applicable,
or the required information is otherwise shown in the consolidated financial
statements or the notes thereto.
(B) Reports on Form 8-K
On May 24, 2000, the Company filed with the Securities and Exchange Commission a
report on Form 8-K announcing the resignation of J. Michael O'Dell as President
and Chief Executive Officer and the appointment of David S. Lee as interim Chief
Executive Officer.
(3) Exhibits
The exhibits listed in the Exhibit Index following the signature page of this
report are filed as part of this report or are incorporated by reference herein.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
EON COMMUNICATIONS CORPORATION
Date: October 27, 2000 By /s/ Stephen N. Samp
------------------------------
Stephen N. Samp, Vice President,
Chief Financial Officer, Secretary
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
----------------------------- --------------------------------------- ----------------
<S> <C> <C>
/s/ David S. Lee Chairman, Chief Executive Officer and October 27, 2000
----------------------------- Director (Principal Executive Officer)
David S. Lee
/s/ Robert R. Cash Vice President, Chief October 27, 2000
----------------------------- Marketing Officer
Robert R. Cash
/s/ Troy E. Lynch Executive Vice President, Chief October 27, 2000
----------------------------- Technology Officer
Troy E. Lynch
/s/ Stephen N. Samp Vice President, Chief October 27, 2000
----------------------------- Financial Officer, Secretary
Stephen N. Samp (Principal Financial Officer)
/s/ Stephen R. Bowling Director October 27, 2000
-----------------------------
Stephen R. Bowling
/s/ Robert P. Dilworth Director October 27, 2000
-----------------------------
Robert P. Dilworth
/s/ W. Frank King Director October 27, 2000
-----------------------------
W. Frank King
/s/ Jenny Hsui Theleen Director October 27, 2000
-----------------------------
Jenny Hsui Theleen
</TABLE>
44
<PAGE>
eOn Communications Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-----------------------------------------------------------------------------------------------------------
Additions
---------------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
of Period Expenses Accounts Deductions of Period
------------ ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
1998:
Allowance for doubtful
accounts and sales
allowance $ 3,089,762 $ 3,045 $ - $ 1,212,927 $ 1,879,880
Warranty reserve 340,628 231,257 - 322,275 249,610
1999:
Allowance for doubtful
accounts and sales
allowance 1,879,880 770,057 - 846,992 1,802,945
Warranty reserve 249,610 249,762 - 50,028 449,344
2000:
Allowance for doubtful
accounts and sales
allowance 1,802,945 648,316 - 1,341,005 1,110,256
Warranty reserve 449,344 386,510 - 441,319 394,535
</TABLE>
45
<PAGE>
EXHIBIT INDEX
Documents listed below are being filed as exhibits herewith. Exhibits identified
by asterisks (*) are being incorporated herein by reference and, pursuant to
Rule 12b-32 of the General Rules and Regulations promulgated by the Commission
under the Securities Exchange Act of 1934, reference is made to such documents
as previously filed exhibits with the Commission.
Exhibit
Number Description of Document
------- ----------------------------------------------------------------------
3.1* Amended and Restated Certificate of Incorporation of eOn as filed with
the Secretary of State of Delaware on November 16, 1999.
3.2* Amended and Restated Bylaws of eOn
4.1* Reference is made to Exhibits 3.1 and 3.2
4.2* Investor Rights Agreement between eOn, Cortelco Systems Holding
Corporation and ChinaVest, dated as of July 31, 1997.
4.3* Registration Rights Agreement between CMC Industries, Inc. and eOn,
dated as of March 15, 1999.
10.1* Promissory Note issued by Cortelco Systems Holding Corporation in
favor of eOn, dated as of July 31, 1997.
10.2* Assumption Agreement between eOn and Cortelco Systems Puerto Rico,
dated as of April 12, 1999, and Loan and Security Agreement between
Cortelco Systems Puerto Rico, Inc. and Foothill Capital Corporation,
dated as August 28, 1997.
10.3* Promissory Note issued by Cortelco Systems Holding Corporation in
favor of BCS Technologies, Inc., dated as of May 28, 1999.
10.4* Form of Indemnity Agreement to be entered into between eOn and its
officers and directors.
10.5* Manufacturing Agreement between eOn and CMC Manufacturing, Inc., dated
as of August 1, 1998.
10.6* Lease Agreement between Cortelco Systems Puerto Rico, Inc. and
Cortelco Puerto Rico, Inc. dated as of March 1, 1999.
10.7*# Employment Agreement, dated as of April 12, 1999, by and between eOn
and each of David M. Fredrick and Frank Naso.
10.8*# eOn's 1999 Equity Incentive Plan and related documents.
21* Subsidiaries of Registrant.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule - Fiscal Year Ended July 31, 2000.
__________________
(*) Incorporated by reference to the Company's Registration Statement on
Form S-1 (No. 333-77021) or amendments thereto, filed with the Securities
and Exchange Commission on April 26, 1999.
(#) Executive compensation plan or arrangement filed as an exhibit pursuant to
Item 14(c) of Form 10-K.
46
