<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended October 31, 2000.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ____ to ____.
Commission file number 000-26399
EON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 62-1482176
(State of incorporation) (I.R.S. Employer Identification No.)
4105 Royal Drive NW, Suite 100, Kennesaw, Georgia 30144
(Address of principal executive office)
(770) 423-2200
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: 11,980,034 shares of Common
---------------------------
Stock, $.001 par value, as of November 30, 2000.
-----------------------------------------------
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EON COMMUNICATIONS CORPORATION
FORM 10-Q
QUARTER ENDED OCTOBER 31, 2000
INDEX
Page
----
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 2000 and
July 31, 2000..................................................... 2
Consolidated Statements of Operations for the Three Months
Ended October 31, 2000 and October 31, 1999....................... 3
Consolidated Statements of Cash Flows for the Three Months
Ended October 31, 2000 and October 31, 1999....................... 4
Notes to Consolidated Financial Statements......................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 7
Item 3. Qualitative and Quantitative Disclosure about Market Risk.... 13
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................ 13
Signature............................................................. 13
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EON COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, 2000 and July 31, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
October 31, 2000 July 31, 2000
---------------- -------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents .......................................... $ 1,503 $ 2,473
Marketable securities .............................................. 10,427 16,337
Trade accounts receivable, net ..................................... 15,274 12,381
Inventories ........................................................ 10,730 11,453
Income tax receivable .............................................. 1,650 1,200
Other current assets ............................................... 2,234 1,933
------- -------
Total current assets ............................................ 41,818 45,777
Property and equipment, net .......................................... 3,532 2,416
Other assets:
Goodwill, net ...................................................... 10,815 10,961
Intangible assets, net ............................................. 213 239
Other assets ....................................................... 431 499
------- -------
Total other assets .............................................. 11,459 11,699
------- -------
Total assets ......................................................... $56,809 $59,892
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable ................................................... $ 46 $ 46
Trade accounts payable ............................................. 4,853 5,049
Accounts payable to ACT Manufacturing .............................. 273 1,070
Payable to affiliate ............................................... 430 89
Accrued expenses and other ......................................... 3,312 3,684
------- -------
Total current liabilities ....................................... 8,914 9,938
Commitments and contingencies ........................................ - -
Stockholders' equity:
Common stock ....................................................... 12 12
Additional paid-in capital ......................................... 56,683 57,585
Accumulated deficit ................................................ (8,536) (7,379)
Note receivable from affiliate ..................................... (264) (264)
------- -------
Total stockholders' equity ...................................... 47,895 49,954
------- -------
Total liabilities and stockholders' equity: .......................... $56,809 $59,892
======= =======
</TABLE>
See notes to consolidated financial statements.
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EON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended October 31, 2000 and 1999
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
<S> <C> <C> <C>
2000 1999
--------------- --------------
Net revenues ........................................... $12,338 $14,343
Cost of revenues ....................................... 7,446 7,926
--------- ---------
Gross profit .................................... 4,892 6,417
Operating expenses:
Selling, general and administrative ............. 5,200 4,664
Research and development ........................ 1,235 900
Amortization of goodwill ........................ 147 148
--------- ---------
Total operating expenses .................... 6,582 5,712
Income (loss) from operations .......................... (1,690) 705
Interest expense ....................................... - 116
Interest income ........................................ (242) -
Other expense (income), net ............................ 79 (9)
--------- ---------
Income (loss) before income tax expense (benefit) (1,527) 598
Income tax expense (benefit) ........................... (370) 263
--------- ---------
Net income (loss) ............................... $(1,157) $ 335
========= =========
Net income per common share:
Basic ........................................... $(0.09) $0.04
Diluted ......................................... $(0.09) $0.04
See notes to consolidated financial statements
</TABLE>
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EON COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended October 31, 2000 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: 2000 1999
Net income (loss) ............................................................................... $(1,157) $ 335
Adjustments to reconcile net income(loss) to net cash
used in operating activities:
Depreciation .................................................................................. 220 125
Amortization of intangibles ................................................................... 26 34
Amortization of goodwill ...................................................................... 146 148
Amortization of deferred financing costs ...................................................... --- 23
Provision for the allowance for doubtful accounts ............................................. 271 222
Equity in earnings of joint venture ........................................................... (3) (7)
Changes in net assets and liabilities:
Trade accounts receivable ................................................................ (3,164) (848)
Accounts receivable from/payable to affiliate ............................................ 341 (85)
Inventories .............................................................................. 723 (2,875)
Other current assets ..................................................................... (301) (100)
Other non-current assets ................................................................. 71 (284)
Trade accounts payable ................................................................... (196) 2,515
Accounts payable to ACT Manufacturing, Inc. .............................................. (797) 1,026
Accrued expenses and other ............................................................... (372) 438
Income taxes receivable/payable .......................................................... (450) (1,233)
------- -------
Net cash used in operating activities ........................................... (4,642) (566)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................................. (1,336) (388)
Sales of available for sale securities .......................................................... 5,910 -
Net repayments under notes receivable from employees ............................................ - 2
------- -------
Net cash provided by (used in) investing activities ................................ 4,574 (386)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving line of credit ...................................... - 1,065
Deferred offering costs ......................................................................... - (283)
Proceeds from ESPP and stock option exercises ................................................... 181 -
Purchase of treasury stock ...................................................................... (1,083) -
------- -------
Net cash provided by (used in) financing activities .............................. (902) 782
Net decreased in cash and cash equivalents ............................................. (970) (170)
Cash and cash equivalents, beginning of period ..................................................... 2,473 1,874
------- -------
Cash and cash equivalents, end of period .......................................................... $ 1,503 $ 1,704
======= =======
See notes to consolidated financial statements.
</TABLE>
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EON COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
Three Months Ended October 31, 2000 and 1999
(Dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by eOn
Communications Corporation (the "Company") without audit. It is management's
opinion that these statements include all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations, and cash flows as of October 31, 2000 and for all periods
presented.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto as of July 31, 2000 and 1999 and for each
of the three years in the period ended July 31, 2000, which are included in the
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging," which established standards of accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
provisions of this statement are effective for fiscal years beginning after June
15, 2000. Management has determined the adoption of this statement will not have
a material impact on the results of operations or financial position of the
Company.
2. EARNINGS PER SHARE
The computations of basic and diluted earnings per share were as follows:
<TABLE>
<S> <C> <C>
Three Months Ended
October 31,
2000 1999
(In thousands, except per share data)
Basic earnings (loss) per share:
Net income (loss)...................................... $ (1,157) $ 335
Weighted average shares outstanding - basic............ 12,213 7,640
------------- ----------
Basic earnings per share................................... $ (0.09) $ 0.04
============= ==========
Diluted earnings (loss) per share:.........................
Net income (loss)...................................... $ (1,157) $ 335
Weighted average shares:...................................
Outstanding............................................ 12,213 7,640
Assumed conversion of preferred stock.................. - 1,435
Dilutive effect of stock options....................... - 283
------------- ----------
Weighted average shares outstanding - diluted.......... 12,213 9,358
------------- ----------
Diluted earnings (loss) per share.......................... $ (0.09) $ 0.04
============= ==========
</TABLE>
Potential common shares related to assumed exercise of outstanding stock options
were excluded from the computation of diluted earnings per share for period
ended October 31, 2000 because their inclusion would have had an antidulitive
effect on earnings per share.
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3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31, July 31,
2000 2000
---------- --------
(In thousands)
<S> <C> <C>
Raw materials and purchased components............. $ 4,414 $ 4,126
Finished goods..................................... 6,364 7,375
LIFO reserve....................................... (48) (48)
------- -------
Total inventories.............................. $10,730 $11,453
======= =======
</TABLE>
4. STATEMENT INFORMATION
<TABLE>
<CAPTION>
Communications
Systems-
North America Caribbean/Latin Consolidated
(In thousands) America Other Reconciliations Total
-------------- --------------- ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended October 31, 2000:
Revenues............................. $ 6,312 $ 6,026 $ 179 $ (179) $ 12,338
Income from continuing operations.... (1,099) (61) 8 (5) (1,157)
Total assets......................... 47,342 9,467 891 (891) 56,809
Three months ended October 31, 1999:
Revenues............................. $ 9,912 $ 4,431 $ 72 $ (72) $ 14,343
Income from continuing operations.... 98 237 (12) 12 335
Total assets......................... 31,432 11,738 1,133 (1,133) 43,170
</TABLE>
There have been no differences from the last annual financial statements in the
basis of measuring segment profit or loss. There have been no material changes
in the amount of assets for any operating segment since the last annual
financial statements.
5. CHANGES IN STOCKHOLDERS' EQUITY
The following represents the changes in stockholders' equity for the three
months ended October 31, 2000:
In thousands, except share data
<TABLE>
<CAPTION>
Note
Receivable
from
Common Stock Additional Affiliate
---------------------- Paid in Accumulated (former Stockholders'
Shares Amount Capital Deficit parent) Equity
---------- ------ ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance as of July 31, 2000..... 12,264,446 $12 $57,585 $(7,379) $(264) $49,954
Net income (loss) and
comprehensive income (loss).... - - - (1,157) - (1,157)
Repurchase of common stock...... (323,500) - (1,083) - - (1,083)
Issuance of common stock
under employee stock plan...... 59,431 - 174 - - 174
Exercise of stock options....... 3,567 - 7 - - 7
---------- --- ------- ------- ----- -------
Balance at October 31, 2000..... 12,003,944 $12 $56,683 $(8,536) $(264) $47,895
========== === ======= ======= ===== =======
</TABLE>
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2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 below. 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.
Overview
We design, develop and market 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 offer a traditional voice-switching platform.
Through our Caribbean/Latin American operations, 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.
We recognize revenues from our eQueue and eNterprise communications server
products upon completion of installation when they are sold directly to end
users, due to the customized nature of each installation. We recognize revenues
upon shipment for products shipped to dealers and for our Millennium products
sold to end-users. We recognize revenues from the resale of cellular airtime and
cellular telephones when these revenues are earned.
Net revenues in quarters ending January 31 usually decline from the previous
quarter, reflecting seasonal factors that affect some of our customers. U.S.
government customers typically make substantial purchases during the quarters
ending October 31, the last quarter of the government's fiscal year, and these
purchases decline significantly in the following quarter. Customers in such
markets as contact centers, education, and retail also have seasonal buying
patterns and do not purchase substantial amounts of equipment during the
quarters ending January 31.
Three Months Ended October 31, 2000 and 1999
Net Revenues. Total revenues decreased 14.0% to $12.3 million in the quarter
ended October 31, 2000 from $14.3 million in the quarter ended October 31, 1999.
Sales of communications systems in the U.S. declined $3.6 million, which were
offset by increased revenues in our Caribbean and Latin America operations of
$1.6 million. The volume decline in the U.S. from Q1 2000 to Q1 2001 resulted
primarily from purchases by customers in Q1 2000 related to Year 2000 upgrades.
The increase in Caribbean and Latin America was due primarily to increased
revenues from the sale of wireless phones.
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 decreased 23.8% to $4.9 million in the quarter ended October 31, 2000
from $6.4 million in the quarter ended October 31, 1999. The decrease resulted
primarily from decreased communications systems gross profit of $1.7 million,
offset by increased gross margin from our Carribbean/Latin American operations
of $0.2 million. Our gross margin was 39.6% in the quarter ended October 31,
2000 and 44.7% in the quarter ended October 31, 1999. The lower gross margin in
the current quarter was due primarily to the increase in the sale of lower
margin wireless products in the Caribbean and Latin America.
Operating Expenses. Operating expenses increased 15.2% to $6.6 million in
the quarter ended October 31, 2000 from $5.7 million in the quarter ended
October 31, 1999. The increased expenses in the current quarter were due
primarily to increased expenditures for research and development, as well as
increased marketing and sales expenses. Operating expenses increased as a
percentage of revenues to 53.3% in the quarter ended October 31, 2000 from 39.8%
in the quarter ended October 31, 1999.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and benefit costs, advertising and trade
show related costs, and facilities and other overhead expenses incurred to
support our business. Selling, general and administrative
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expenses increased 11.5% to $5.2 million in the quarter ended October 31, 2000
from $4.7 million in the quarter ended October 31, 1999. The increase was
primarily due to increased marketing expenses and the hiring of additional sales
and customer service personnel to support anticipated growth of the business.
These expenses as a percentage of revenues increased to 42.1% in the quarter
ended October 31, 2000 from 32.5% in the quarter ended October 31, 1999.
Research and Development. Research and development expenses consist
primarily of personnel and related expenses for our engineering staff and
depreciation of related equipment. Research and development expenses increased
37.2% to $1.2 million in the quarter ended October 31, 2000 from $0.9 million in
the quarter ended October 31, 1999. The increased expenses were primarily due to
the hiring of additional engineers to support the development efforts of our
communication server products and related software applications. These expenses
as a percentage of revenues increased to 10.0% in the quarter ended October 31,
2000 from 6.3% in the quarter ended October 31, 1999.
Amortization of Goodwill. We recorded $11.7 million of goodwill related to
the acquisition of BCS Technologies, Inc. in April 1999 and are amortizing the
amount over a 20-year period.
Interest income and expense. We had no interest expense in the current
quarter. Interest expense was $0.1 million in the quarter ended October 31,
1999. Interest expense declined due to the retirement of all outstanding debt in
connection with our initial public offering in February 2000. Interest income
was $0.2 million in the current quarter. We had no interest income in the
quarter ended October 31, 1999. The increase was due to the investment of funds
from our initial public offering in interest-bearing available for sale
securities.
Other income and expense. Other expense was $0.1 million and $0.0 million in
the quarters ended October 31, 2000 and 1999, respectively. The increase in the
current quarter included the recognition of a loss on marketable securities from
an investment in equity securities of a publicly traded company.
Income tax expense and benefit. Income tax expense (benefit) for the quarter
ended October 31, 2000 was ($0.4) million, a decrease of 240.7% from $0.2
million for the quarter ended October 31, 1999. The benefit in the current
quarter resulted primarily from the carryback of operating losses to prior
periods to realize a tax refund.
Liquidity and Capital Resources
Net cash used in operating activities was ($4.6) million and ($0.6) million
for the three months ended October 31, 2000 and 1999, respectively. The decrease
from the prior year was due primarily to lower net income in the current fiscal
quarter of ($1.5) million and an increase in accounts receivable of $3.2
million. The majority of the increase in accounts receivable resulted from an
expansion of our sales of wireless phones and airtime for third-party carriers
in our Caribbean/Latin America operations. We do not anticipate further growth
of accounts receivable in the near future as we expect collections in our
wireless business and Communications Systems - North America operations to
improve.
Net cash provided by (used in) investing activities was $4.6 million and
($0.4) million for the three months ended October 31, 2000 and 1999,
respectively. Cash provided by investing activities in the current period
consisted primarily of $5.9 million from sales of short-term available-for-sale
debt securities, offset by purchases of property and equipment of ($1.3)
million. The majority of the property and equipment purchases were non-recurring
expenditures for leasehold improvements and related equipment at our facility in
Memphis, Tennessee.
Net cash provided by (used in) financing activities was ($0.9) million and
$0.8 million for the three months ended October 31, 2000 and 1999, respectively.
Cash used in financing activities in the current quarter consisted primarily of
purchases of common stock under the Company's stock repurchase program.
We believe that our available funds will satisfy our projected working
capital and capital expenditure requirements at least through calendar year
2001. To the extent future revenues are not realized or we grow more rapidly
than expected, 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.
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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;
. 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 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.
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We expect competition to intensify as competitors develop new products,
competitors gain additional financial resources from public offerings, new
competitors enter the market, and companies with complementary products enter
into strategic alliances.
Our current and potential competitors can be grouped into the following five
categories:
. data communications equipment suppliers, such as Cisco Systems, 3Com and Sun
Microsystems;
. web center software and services suppliers, such as eGain, Kana
Communications, 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
. 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.
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Our next-generation communications servers run on the Linux operating system.
Our products also incorporate application software developed specifically for
the Linux operating system. Our ability to market our products could be
adversely affected and we may incur significant development costs if:
. the Linux operating system does not evolve to meet changing market needs;
. new applications are not developed for the Linux operating system; or
. other operating systems, such as Microsoft Windows NT, reduce the recent
growing acceptance of Linux.
In addition, any other factor that reduces acceptance of the Linux operating
system could also reduce acceptance of our products and harm our business,
results of operations and financial condition.
Our products must respond to rapidly changing market needs and integrate with
changing protocols to remain competitive.
The markets for our products are characterized by rapid technological
change, frequent new product introductions, uncertain product life cycles and
changing customer requirements. If we are not able to rapidly and efficiently
develop new products and improve existing products to meet the changing needs of
our customers and to adopt changing communications standards, our business,
operating results and financial condition would be harmed.
Key features of our products include integration with standard protocols,
computer telephony integration and automatic call distribution applications and
protocols, operating systems and databases. If our products cannot be integrated
with third-party technologies or if they do not respond to changing market
needs, we could be required to redesign our products. Redesigning any of our
products may require significant resources and could harm our business,
operating results and financial condition.
If we are not be able to grow or sustain our Millennium voice switching platform
revenues, our business, operating results and financial condition could be
harmed.
We derived approximately 36% and 39% of our total revenues from the sale of
Millennium products for the quarter ended October 31, 2000 and for the year
ended July 31, 2000, respectively. 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.
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.
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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 November 30, 2000, our executive officers, directors and principal
stockholders and their affiliates owned 4,710,463 shares, or 38.75% 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.
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.
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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
established accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. We have determined that the adoption of this statement will
not have a material impact on the results of operations of financial position of
the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements. SAB No. 101 summarizes the staff's various views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We have evaluated our revenue recognition policies and concluded
that they comply with this SAB.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE 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 our 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits.
See Exhibit Index following the signature section of this report.
(B) Reports On Form 8-K.
We did not file any reports on Form 8-K during the quarter ended
October 31, 2000.
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto authorized.
EON COMMUNICATIONS CORPORATION
Date: December 15, 2000 \s\ Lanny Lambert
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Lanny Lambert
Chief Accounting Officer
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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* Reference is made to Exhibits 3.1 and 3.2
10.1* Promissory Note issued by Cortelco Systems Holding Corporation in favor
of eOn, dated as of July 31, 1997.
10.2* Form of Indemnity Agreement between eOn and its officers and directors.
10.3* Manufacturing Agreement between eOn and CMC Manufacturing, Inc., dated
as of August 1, 1998.
10.4* Employment Agreement, dated as of April 12, 1999, by and between eOn
and each of David M. Fredrick and Frank Naso.
10.5* eOn's 1999 Equity Incentive Plan and related documents.
27 Financial Data Schedule - Quarter Ended October 31, 2000.
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(*) 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.
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