<PAGE>
As filed with the Securities and Exchange Commission on February 1, 2000
Registration No. 333-77021
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
eOn Communications Corporation
(Formerly Cortelco Systems, Inc.)
(Name of Registrant as specified in its charter)
---------------
Delaware 3661 62-1482176
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of in Industrial Classification Identification No.)
corporation or Code)
organization) 4119 Willow Lake Blvd.
Memphis, TN 38118
(901) 365-7774
(Address and telephone number of principal executive offices and principal
place of business)
J. Michael O'Dell
President and Chief Executive Officer
eOn Communications Corporation
4119 Willow Lake Blvd.
Memphis, TN 38118
(901) 365-7774
(Name, address and telephone number of agent for service)
Copies to:
James C. Kitch, Esq. COOLEY GODWARD LLP Victor A. Hebert, Esq. HELLER EHRMAN
Five Palo Alto Square 3000 El Camino WHITE & MCAULIFFE 601 S. Figueroa
Real Palo Alto, California 94036 (650) Street Los Angeles, California 90017
843-5000 (213) 689-0200
---------------
Approximate date of proposed sale to the public: As soon as practicable after
the registration statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Maximum
Aggregate Amount of
Title of Securities to be Registered Offering Price(1) Registration Fee(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par value............................... $41,400,000 $10,930
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act of
1933.
(2) A fee of $12,276 has been previously paid.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to completion, dated February 1, 2000
3,000,000 Shares
[LOGO OF EON(TM) COMMUNICATIONS CORPORATION]
Common Stock
-----------
We are offering 2,240,000 shares of our common stock. The selling
stockholders are offering an additional 760,000 shares. We will not receive any
of the proceeds from the sale of shares by the selling stockholders. This is
our initial public offering and no public market currently exists for our
common stock. We estimate that the initial public offering price will be
between $10.00 and $12.00 per share. We have filed an application to qualify
our common stock for quotation on the Nasdaq National Market under the symbol
"EONC."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 5.
-----------
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
Per Share Total
- --------------------------------------------------------------------------------
<S> <C> <C>
Public Price................................................... $ $
Underwriting Discounts......................................... $ $
Proceeds, before expenses, to eOn.............................. $ $
Proceeds to Selling Stockholders............................... $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
eOn has granted the underwriters the right to purchase up to an additional
300,000 shares of common stock to cover over-allotments and the selling
stockholders have granted the underwriters the right to purchase up to an
additional 150,000 shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise.
-----------
Needham & Company, Inc.
A.G. Edwards & Sons, Inc.
WR Hambrecht + Co
The date of this prospectus is , 2000
<PAGE>
[Inside Front Cover Graphic:]
In the upper left hand corner is a picture of a man at his computer talking on
a telephone. Below the picture is the title, "Customer Inquiry." To the right
of the picture is the following text: "eOn Unifies Voice and Web
Communications"
In the lower right corner is a picture of a customer service agent with a
headset and typing on a computer. Below the picture is the title, "Agent
Response." To the left of the picture is the following text: "Integration of
customer interactions over multiple communications channels."
Between the two pictures is eOn's corporate logo. Three lines link the
customer's picture with the agent's picture. The three lines are labeled Voice,
E-Mail and Internet.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Forward-Looking Statements............ 12
Company Background.................... 12
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Selected Pro Forma Consolidated
Financial Data....................... 16
Selected Consolidated Financial Data.. 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................ 19
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business............................ 29
Management.......................... 50
Principal and Selling Stockholders.. 59
Certain Transactions................ 61
Description of Capital Stock........ 63
Shares Eligible for Future Sale..... 65
Underwriting........................ 67
Legal Matters....................... 69
Experts............................. 69
Additional Information.............. 69
Index to Financial Statements....... F-1
</TABLE>
---------------
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
Until , 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
---------------
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements appearing elsewhere in this prospectus.
eOn Communications Corporation
We design, develop and market next-generation Linux communications servers
and software which integrate and manage voice, e-mail and Internet
communications for customer contact centers and other applications. We also
offer a traditional voice routing and control system for small and medium-sized
installations. Our products help enterprises communicate more effectively with
customers, convert inquiries into sales, and increase customer satisfaction and
loyalty.
Our next-generation Linux 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 we are the first to adopt the Linux operating system for
communications servers and that our use of Linux provides us with a competitive
advantage in applying this customizable, operating system to meet a broad range
of customer communications needs. In addition to extensive voice communications
and call center capabilities, our Linux communications servers 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.
We also offer the Millennium voice switching platform, which is a private
branch exchange with automatic call distribution capabilities based on our own
operating system.
Most of our Linux communications server customers to date have been operators
of customer contact centers that require the highest level of reliability. They
include outsourced customer service providers, catalog retailers, virtual
customer contact centers (which allow customer service agents to operate from
multiple remote locations as if in a single location) and emergency-911 contact
centers. Customers for our Millennium voice switching platform include a wide
range of small and medium-sized installations and number 5,400 end-users.
Our customer base is evolving as we broaden our Linux communications server
product line. Customer contact centers are demanding tightly integrated e-mail
and other Web-based communications features. We expect that our eOn Web Center
software application suite and our eNterprise communications servers will
significantly expand our customer base.
Our open, standards-based architecture allows our products to integrate
easily with applications, databases and Web servers. In addition to these
benefits, we believe that our next-generation communications solutions provide
our customers with other key benefits, including:
. integration of voice and Internet communications on one platform;
. a high level of reliability suitable for critical applications;
. conversion of Web site visitors into customers;
1
<PAGE>
. lower total cost of ownership;
. rapid, low-cost customization; and
. scalability and easy upgrade paths.
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;
. capitalize upon our first mover advantage of using the Linux operating
system for communications servers;
. target e-commerce installations and customer contact centers; and
. expand marketing, sales and distribution channels.
In April 1999, we acquired BCS Technologies, Inc., the source of our Linux
communications server product line. We have a wholly-owned subsidiary, Cortelco
Systems Puerto Rico, through which we sell and service communications systems
and cellular telephones and resell cellular airtime primarily in Puerto Rico.
Our principal executive offices are at 4119 Willow Lake Boulevard, Memphis,
Tennessee 38118, and our telephone number is (901) 365-7774. In November 1999,
we changed our name to "eOn Communications Corporation" from "Cortelco Systems,
Inc." Our Web site address is www.eoncc.com. The information on our Web site is
not part of this prospectus.
2
<PAGE>
The Offering
Unless otherwise indicated, the references to numbers and percentages of
shares of common stock in this prospectus assume that 1,463,206 shares of
Series A convertible preferred stock will convert into 1,434,894 shares of
common stock upon the closing of this offering, and no exercise of the
underwriters' over-allotment option.
<TABLE>
<C> <S>
Common stock offered by eOn....................... 2,240,000 shares
Common stock offered by the selling stockholders.. 760,000 shares
Common stock outstanding after the offering....... 11,314,826 shares
Use of proceeds................................... To repay debt and for
working capital and general
corporate purposes. See"Use
of Proceeds."
Proposed Nasdaq National Market symbol............ EONC
</TABLE>
The information above excludes (a) outstanding options to purchase up to
1,472,745 shares of common stock as of October 31, 1999, and (b) 1,204,943
shares of common stock reserved as of October 31, 1999 for future issuance
under our 1999 Equity Incentive Plan and 1999 Employee Stock Purchase Plan.
3
<PAGE>
Summary Financial Data
The following table contains summary pro forma and historical financial data
of eOn. The pro forma financial data reflects eOn's acquisition of BCS under
the purchase method of accounting as if the acquisition had occurred as of
August 1, 1998 and certain other non-recurring adjustments as described in the
notes to the pro forma financial data. The pro forma financial data summarizes
our Unaudited Pro Forma Consolidated Financial Information, eOn's consolidated
financial statements and BCS' financial statements. The historical financial
data summarizes eOn's consolidated financial statements. The table below and
the foregoing financial data should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The as adjusted balance sheet data reflects the sale of 2,240,000 shares of
common stock in this offering, estimated net proceeds of approximately $22.4
million after deducting underwriting discounts and estimated offering expenses
and reflects the intended repayment of $6.5 million of debt from the net
proceeds of the offering.
<TABLE>
<CAPTION>
Three Months
Ended
October 31,
Year Ended --------------
July 31, 1999 1998 1999
----------------------- ------ -------
(In thousands, except per share data) (proforma) (historical)
<S> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net revenues........................... $53,650 $42,374 $8,478 $14,343
Gross profit........................... 27,104 18,484 3,585 6,417
Operating expenses..................... 20,564 15,567 3,026 5,712
Income from operations................. 6,540 2,917 559 705
Net income............................. $ 4,315 $ 2,155 $ 340 $ 335
======= ======= ====== =======
Basic net income per share............. $ 0.55 $ 0.43 $ 0.09 $ 0.04
Diluted net income per share........... $ 0.46 $ 0.33 $ 0.07 $ 0.04
Weighted average shares outstanding:
Basic................................ 7,809 5,036 3,920 7,640
Diluted.............................. 9,424 6,651 5,355 9,358
</TABLE>
<TABLE>
<CAPTION>
October 31, 1999
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................................... $ 1,704 $ 17,168
Working capital............................................. 4,096 24,182
Goodwill, net............................................... 11,399 11,399
Total assets................................................ 43,170 57,062
Long-term debt.............................................. 2,314 --
Total stockholders' equity.................................. 17,487 38,315
</TABLE>
4
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock.
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;
. delayed deliveries from suppliers; and
. price decreases and other actions by our competitors.
Our quarterly operating results are also likely to fluctuate due to seasonal
factors. Some of our vertical markets, such as the U.S. government and
educational and retail buyers, follow seasonal buying patterns and do not make
substantial purchases during the quarter ending January 31. Thus, revenues in
the quarter ending January 31 are often lower than in the previous quarter.
Because of these and other factors, our operating results may not meet
expectations in some future quarters, which could cause our stock price to
decline.
We may not successfully introduce new products that are planned for the near
future which could harm our business and financial condition.
We plan to introduce new products in the near future to serve the evolving
contact center and e-commerce markets. These new products must achieve market
acceptance, maintain technological competitiveness and meet increasing customer
requirements. New products may require long development and testing periods.
Significant delays in the development, release, installation or implementation
of new products could harm our business and financial condition.
Planned increases in operating expenses to develop and sell new products may
result in operating losses.
We intend to increase our operating expenses substantially, particularly
expenses related to research and development, sales and marketing, and
development of new distribution channels. We will need to generate significant
additional revenue to remain profitable. If we incur losses, our stock price
could decline.
Our next-generation 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
5
<PAGE>
develop products to improve customer service in e-commerce. While the industry
remains fragmented, it is rapidly moving toward consolidation, driven by both
emerging companies' desires to expand product offerings and resources and
established companies' attempts to acquire new technology and reach new market
segments. A number of emerging companies have completed initial public
offerings in recent months, while many more remain private. Most established
competitors, as well as those emerging companies that have completed initial
public offerings, currently have greater resources and market presence than we
do. In addition, a number of our current and potential competitors have
recently been acquired by larger companies who seek to enter our markets.
We expect competition to intensify as competitors develop new products,
competitors gain additional financial resources from public offerings, new
competitors enter the market, and companies with complementary products enter
into strategic alliances.
Our current and potential competitors can be grouped into the following five
categories:
. data communications equipment suppliers, such as Cisco Systems, 3Com and
Sun Microsystems;
. web center software and services suppliers, such as eGain, Kana
Communications, Mustang.com and WebLine Communications (announced
acquisition by Cisco);
. contact center software and services suppliers, such as Clarify
(announced acquisition by Nortel), Genesys Telecommunications
Laboratories (announced acquisition by Alcatel), Interactive
Intelligence, Silknet Software and Vantive (announced acquisition by
PeopleSoft);
. emerging private communications exchange (PCX) suppliers, such as AltiGen
Communications, Artisoft, Picazo Communications, NBX Corporation
(acquired by 3Com), Selsius Systems (acquired by Cisco), and Calista
(announced acquisition by Cisco); and
. voice communications equipment suppliers, such as Alcatel, Aspect
Communications, Lucent Technologies, Mitel, NEC, Nortel Networks,
Rockwell Electronic Commerce and Siemens.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, customer service and other resources, greater
name and brand recognition and a larger installed customer base than we do.
Therefore, our competitors may be able to respond to new or emerging
technologies and changes faster than we can. They may also be able to devote
greater resources to the development, promotion and sale of their products.
Actions by our competitors could result in price reductions, reduced margins
and loss of market share, any of which would damage our business. We cannot
assure you that we will be able to compete successfully against these
competitors. Our principal competitors and the competitive nature of our market
are discussed in greater detail in "Business--Competition."
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.
6
<PAGE>
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 4000 communications servers directly. We intend to sell
our eNterprise 2000 and eNterprise 200 communications servers both directly and
indirectly through dealers and value added resellers that have experience in
data communications as well as voice. 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 large capacity
Linux communications servers, from one to six months for our Millennium
switching platform and are expected to be from one to six months for our small
to mid-range Linux communications servers. The purchase of our products may
involve a significant commitment of our customers' time, personnel, financial
and other resources. We generally recognize revenues on the date of shipment
for Millennium and eNterprise systems and upon acceptance for our eQueue 4000
due to the customized nature of these installations. Also, it is difficult to
predict the timing of indirect sales because we have little control over the
selling activities of our dealers and value added resellers.
We incur substantial sales and marketing expenses and spend significant
management time before customers place orders with us, if at all. Revenues from
a specific customer may not be recognized in the quarter in which we incur
related sales and marketing expense, which may cause us to miss our revenues or
earnings expectations.
If the acceptance of the Linux operating system does not continue, our ability
to market our products could be adversely affected.
Our next-generation communications servers run on the Linux operating system.
Our products also incorporate application software developed specifically for
the Linux operating system. Our ability to market our products could be
adversely affected and we may incur significant development costs if:
. the Linux operating system does not evolve to meet changing market needs;
. new applications are not developed for the Linux operating system; or
. other operating systems, such as Microsoft Windows NT, reduce the recent
growing acceptance of Linux.
In addition, any other factor that reduces acceptance of the Linux operating
system could also reduce acceptance of our products and harm our business,
results of operations and financial condition.
Our products must respond to rapidly changing market needs and integrate with
changing protocols to remain competitive.
The markets for our products are characterized by rapid technological change,
frequent new product introductions, uncertain product life cycles and changing
customer requirements. If we are
7
<PAGE>
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 40% of our total pro forma revenues for fiscal year
1999 from the sale of our Millennium products. We may not be able to grow or
sustain our Millennium revenues because growth of the traditional private
branch exchange (PBX) market, which accounts for a substantial portion of our
Millennium revenues, is expected to slow. One reason for the slowing growth
rate 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. The emergence of these products is
discussed under "Business--Competition--Emerging PCX Suppliers."
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.
Unanticipated difficulties in integrating our recent acquisition of BCS could
harm our business.
We have a limited combined operating history because we only recently
acquired BCS. Unanticipated difficulties or delays may arise as we integrate
sales, marketing and product development. Failure to integrate BCS could harm
our business, operating results and financial condition.
Delayed deliveries of components from our single source suppliers or third-
party manufacturers could reduce our revenues or increase our costs.
We depend on sole source suppliers for certain components, digital signal
processors and chip sets, voice processor boards, wireless handsets and base
stations. Interruptions in the availability of components from our key
suppliers could result in delays or reductions in product shipments, which
could damage our customer relationships and harm our operating results. Finding
alternate suppliers or modifying product designs to use alternative components
may cause delays and expenses. Further, a significant increase in the price of
one or more third-party components or subassemblies could reduce our gross
profit.
We depend upon our primary contract manufacturers, CMC Industries, Inc., a
wholly-owned subsidiary of ACT Manufacturing, Inc., and Pensar Corporation. We
may not be able to deliver our products on a timely basis if CMC or Pensar
fails to manufacture our products and deliver them to us on time. In addition,
it could be difficult to engage other manufacturers to build our products. Our
business, results of operations and financial condition could be harmed by any
delivery delays.
8
<PAGE>
We may be unable to hire and retain engineering and sales and marketing
personnel necessary to execute our business strategy.
We intend to substantially increase our engineering and sales and marketing
personnel over the next twelve months. Competition for highly qualified
personnel is intense due to the limited number of people available with the
necessary technical skills, and we may not be able to attract, assimilate or
retain such personnel. If we cannot attract, hire and retain sufficient
qualified personnel, we may not be able to successfully develop, market and
sell new products.
Our business could be harmed if we lose principal members of our management
team.
We are highly dependent on the continued service of our management team. The
loss of any key managers 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.
Upon completion of this offering, our executive officers, directors and
principal stockholders and their affiliates will own 5,159,281 shares, or
45.6%, of the outstanding shares of common stock, or 5,009,281 shares, or
43.1%, if the underwriters' over-allotment option is exercised in full. Thus,
they will 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, such as CMC. 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.
Our management may use the offering proceeds in ways that our stockholders may
not deem desirable.
A significant portion of the net proceeds of the offering are not allocated
for specific uses. Our management has broad discretion over the use of the net
proceeds from this offering and may use them in ways that our stockholders may
not deem desirable. In addition, we cannot predict that the proceeds will be
invested to yield a significant return, if any. See "Use of Proceeds."
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
9
<PAGE>
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.
This is our initial public offering and our stock price may be volatile.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price will be determined by negotiations among the
underwriters, the selling stockholders and us and may not be indicative of the
market price for the common stock after this offering. We do not know the
extent to which investor interest will lead to the development of a public
market. You may not be able to resell the common stock at or above the initial
public offering price. Many factors could cause the market price of the common
stock after this offering to fluctuate substantially, including future
announcements concerning us or our competitors, variations in operating
results, loss of key customers, changes in pricing policies, or changes in
earnings estimates by analysts. General economic, political and market
conditions may also decrease the price of our common stock.
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.
Our business may be disrupted if we have year 2000 problems in our systems or
the systems of our key suppliers, manufacturers or customers.
We depend heavily upon the ability of our own computer or data-dependent
systems to correctly interpret century data. This includes, but is not limited
to, our systems in information, business,
10
<PAGE>
finance, operations and service. Any failure or malfunctioning on the part of
these or other systems could harm us in ways that are not currently known,
discernible, quantifiable or otherwise anticipated by us. We currently have
only limited information on the year 2000 compliance of our key suppliers,
manufacturers and customers. Our business and operating results could be harmed
if our key suppliers or manufacturers were to experience year 2000 issues that
cause them to delay production or shipment of key components or systems. In
addition, our operating results could be damaged if any of our key customers
encounter year 2000 issues that cause them to delay or cancel substantial
purchase orders or delivery of our product. For a discussion of our year 2000
plans, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Compliance."
Future sales of shares may decrease our stock price.
Sales of substantial amounts of our common stock in the public market after
this 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.
Upon completion of this offering, we will have outstanding 11,314,826 shares
of common stock. All of the shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act of 1933, except for shares purchased by our "affiliates," as defined in
Rule 144 under the Securities Act. The remaining 8,314,826 shares of common
stock that will be outstanding upon completion of this offering are "restricted
securities" as defined in Rule 144. These restricted securities may be sold in
the future without registration under the Securities Act to the extent
permitted under Rule 144, Rule 701, or another exemption under the Securities
Act. eOn, our officers, directors and stockholders holding approximately
7,423,475 shares of common stock will agree not to, without the prior written
consent of Needham & Company, Inc., directly or indirectly sell, offer,
contract to sell, transfer the economic risk of ownership in, make any short
sale, pledge or otherwise dispose of any shares of common stock or any
securities convertible into, or exchangeable, or exercisable for, or any other
rights to purchase or acquire shares of common stock owned by them during the
180-day period commencing on the date of this prospectus.
11
<PAGE>
FORWARD-LOOKING STATEMENTS
Statements contained in this prospectus may be forward-looking statements
concerning our business, operations, financial performance and financial
condition. Forward-looking statements are included, for example, in the
discussions about: the timing and availability of products under development;
variations in operating results; our strategy; year 2000 issues; and the market
for voice and data communications equipment. Those forward-looking statements
involve risks and uncertainties and actual results may differ materially from
those expressed or implied in those statements. Factors that could cause
differences include, but are not limited to, those discussed under "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
COMPANY BACKGROUND
We were incorporated on July 23, 1991 as one of several corporations related
through common ownership that were formed to hold various telecommunications
equipment and other businesses that had been acquired primarily from Alcatel,
N.V. in 1990. In August 1993, we became a subsidiary of Cortelco Systems
Holding Corporation, a corporation formed to act as the holding company for the
telecommunications equipment businesses, while CMC Industries, Inc., a contract
manufacturer, became a separate company. See "Business--Manufacturing." In
March 1997, our subsidiary in the automatic call distribution products business
was spun off to the Cortelco Systems Holding Corporation stockholders, merged
with Business Communications Systems, Inc., and renamed "BCS Technologies,
Inc."
In April 1999:
. Cortelco Systems Holding Corporation distributed its shares of eOn common
stock in a spin-off transaction;
. we merged with Cortelco Systems Puerto Rico, Inc., another subsidiary of
Cortelco Systems Holding Corporation, in exchange for 553,880 shares of
our common stock; and
. we acquired BCS in exchange for 3,969,680 shares of our common stock.
BCS and Cortelco Systems Puerto Rico have been wholly-owned subsidiaries of
eOn since April 1999. In November 1999, we changed our name to "eOn
Communications Corporation" from "Cortelco Systems, Inc."
12
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 2,240,000 shares of common stock
offered by us are estimated to be approximately $22.4 million, or approximately
$24.9 million if the underwriters exercise the over-allotment option in full,
after deducting underwriting discounts and estimated offering expenses. We will
not receive any proceeds from the sale of common stock by the selling
stockholders.
We currently intend to use our net proceeds from this offering:
. to repay a $2.3 million long-term subordinated note that accrues interest
at an 8.0% annual rate and matures in July 2002;
. to repay $4.2 million of senior debt under two credit facilities, one of
which accrues interest at a rate equal to the prime rate plus 0.375% and
matures in July 2001, and the other of which accrues interest at a rate
equal to the prime rate plus 1.25% and matures in August 2001; and
. for working capital and general corporate purposes.
We may also use some of the proceeds to acquire other companies, technologies
or products that complement our business, although we have not yet developed
any plans regarding these transactions. Pending use of the net proceeds as
described above, we intend to invest the net proceeds from this offering in
short-term, investment-grade securities.
DIVIDEND POLICY
eOn currently plans to retain its earnings to finance the growth and
development of its business and does not plan to pay cash dividends for the
foreseeable future. Future dividends, if any, will be at the discretion of the
board of directors, which will base its decision on a number of factors,
including our operating results and financial requirements. We have declared
cash dividends in the past in connection with intercompany financing
transactions with our former parent company. See "Certain Transactions."
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of October 31, 1999 on
an actual basis and on an as-adjusted basis after giving effect to our sale of
2,240,000 shares of common stock in this offering at an assumed public offering
price of $11.00 per share, after deducting underwriting discounts, and
estimated offering expenses and repayment of outstanding debt. This table
should be read in conjunction with our consolidated financial statements
appearing elsewhere in this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The capitalization
on an actual basis excludes 1,472,745 shares of common stock issuable upon
exercise of options outstanding as of October 31, 1999 and 1,204,943 shares
reserved as of October 31, 1999 for future issuance under our 1999 Equity
Incentive Plan and 1999 Employee Stock Purchase Plan.
<TABLE>
<CAPTION>
As of October 31,
1999
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Long-term debt (excluding current portion)................ $ 2,314 $ --
Stockholders' equity (1):
Series A convertible preferred stock, $.001 par value,
10,000,000 shares authorized; 1,463,206 shares issued
and outstanding, actual; no shares issued and
outstanding, as adjusted............................... 660 --
Common stock, $.001 par value, 50,000,000 shares
authorized; 7,639,932 shares issued and outstanding,
actual; 11,314,826 shares issued and outstanding, as
adjusted............................................... 8 11
Additional paid-in capital.............................. 24,148 45,633
Accumulated deficit..................................... (4,045) (4,045)
Note receivable from affiliate (former parent).......... (3,284) (3,284)
------- -------
Total stockholders' equity............................ 17,487 38,315
------- -------
Total capitalization.................................. $19,801 $38,315
======= =======
</TABLE>
- --------
(1) 1,463,206 shares of Series A convertible preferred stock will automatically
convert into 1,434,894 shares of common stock upon the closing of this
offering.
14
<PAGE>
DILUTION
Our net tangible book value at October 31, 1999 was approximately $5.1
million, or $0.67 per common share. Net tangible book value represents the
amount of total assets, less goodwill and identifiable intangible assets, total
liabilities, and preferred stock.
After giving effect to the sale of 2,240,000 shares of common stock offered
to new investors by eOn at an assumed initial public offering price of $11.00
per share, and after deducting underwriting discounts and estimated offering
expenses, our pro forma net tangible book value at October 31, 1999 would have
been approximately $26.6 million, or $2.35 per share. This represents an
immediate increase in pro forma net tangible book value of $1.68 per share to
existing stockholders and an immediate dilution in net tangible book value of
$8.65 per share to new investors. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $11.00
Net tangible book value per share as of October 31, 1999.... $0.67
Pro forma increase in net tangible book value per share
attributable to new investors.............................. 1.68
-----
Pro forma net tangible book value per share after this
offering................................................... 2.35
------
Dilution per share to new investors........................... $ 8.65
======
</TABLE>
The following table summarizes, on a pro forma basis as of October 31, 1999,
the differences between the existing stockholders and the new investors with
respect to the number of shares of common stock purchased, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
As of October 31, 1999
----------------------------------------------------
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1)..................... 9,074,826 80.2% $ 6,025,000 19.6% $ 0.66
New investors............ 2,240,000 19.8 24,640,000 80.4 $11.00
---------- ----- ----------- -----
Total.................... 11,314,826 100.0% $30,665,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Excludes 1,472,745 shares of common stock issuable upon exercise of options
outstanding as of October 31, 1999 and 1,204,943 shares reserved as of
October 31, 1999 for future issuance under our 1999 Equity Incentive Plan
and 1999 Employee Stock Purchase Plan.
15
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following pro forma consolidated statement of operations data for the
year ended July 31, 1999 represent the unaudited pro forma operating results as
if the acquisition of BCS had occurred as of August 1, 1998. The pro forma
financial data reflects adjustments to our consolidated financial statements to
account for eOn's acquisition of BCS under the purchase method of accounting
and certain other non-recurring adjustments as described in the notes to the
pro forma financial data.
The pro forma financial data does not purport to represent what our results
of operations actually would have been had the transactions occurred on the
dates indicated, or to project our results of operations for any future period.
The following pro forma financial data should be read in conjunction with the
Unaudited Pro Forma Consolidated Financial Information, eOn's consolidated
financial statements and BCS' financial statements, which are included
elsewhere in this prospectus, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended
July 31, 1999
--------------
(in thousands,
except per
share data)
<S> <C>
Consolidated Statement of Operations Data:
Net revenues..................................................... $53,650
Cost of revenues................................................. 26,546
-------
Gross profit................................................... 27,104
Operating expenses:
Selling, general and administrative............................ 16,821
Research and development....................................... 3,157
Amortization of goodwill....................................... 586
-------
Total operating expenses..................................... 20,564
-------
Income from operations........................................... 6,540
Interest expense................................................. 411
Other expense, net............................................... 301
-------
Income before income taxes..................................... 5,828
Income tax expense............................................... 1,513
-------
Net income..................................................... $ 4,315
=======
Basic pro forma net income per share............................. $ 0.55
Diluted pro forma net income per share........................... $ 0.46
Weighted average shares outstanding:
Basic.......................................................... 7,809
Diluted........................................................ 9,424
</TABLE>
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data represent the results of eOn and
subsidiaries which include the operating results of 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, 1997, 1998 and 1999,
and the selected balance sheet data at July 31, 1998 and 1999, are derived from
consolidated financial statements audited by Deloitte & Touche LLP, independent
auditors, whose report appears elsewhere in this prospectus. The consolidated
statement of operations data for the year ended July 31, 1996 and the
consolidated balance sheet data at July 31, 1996 and July 31, 1997 are derived
from audited financial statements not included in this prospectus. The
statement of operations data for the three months ended October 31, 1998 and
1999 and the year ended July 31, 1995 and the balance sheet data as of July 31,
1995 and October 31, 1999 are derived from unaudited financial statements.
However, in the opinion of management, the selected financial data for such
periods include all adjustments, which include only normal recurring
adjustments, necessary for a fair presentation of the data. This data should be
read in conjunction with our consolidated financial statements appearing
elsewhere in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended July 31, October 31,
------------------------------------------ ---------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------- ------ -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net revenues............ $33,774 $38,518 $35,635 $30,172 $42,374 $8,478 $14,343
Cost of revenues........ 24,228 26,501 24,312 17,530 23,890 4,893 7,926
------- ------- ------- ------- ------- ------ -------
Gross profit........ 9,546 12,017 11,323 12,642 18,484 3,585 6,417
Operating expenses:
Selling, general and
administrative....... 7,235 7,853 10,103 9,931 13,056 2,583 4,664
Research and
development.......... 1,403 1,256 1,310 1,407 2,334 443 900
Amortization of
goodwill............. -- -- -- -- 177 -- 148
------- ------- ------- ------- ------- ------ -------
Total operating
expenses........... 8,638 9,109 11,413 11,338 15,567 3,026 5,712
------- ------- ------- ------- ------- ------ -------
Income (loss) from
operations............. 908 2,908 (90) 1,304 2,917 559 705
Interest expense........ 1,186 1,004 915 826 687 192 116
Other (income) expense,
net.................... 217 124 678 162 (8) (8) (9)
------- ------- ------- ------- ------- ------ -------
Income (loss) before
income taxes....... (495) 1,780 (1,683) 316 2,238 375 598
Income tax expense...... -- 702 -- -- 83 35 263
------- ------- ------- ------- ------- ------ -------
Income (loss) from
continuing
operations......... (495) 1,078 (1,683) 316 2,155 340 335
Discontinued
operations............. (958) (1,112) (515) -- -- -- --
------- ------- ------- ------- ------- ------ -------
Net income (loss)... $(1,453) $ (34) $(2,198) $ 316 $ 2,155 $ 340 $ 335
======= ======= ======= ======= ======= ====== =======
Basic net income (loss)
per share.............. $ (0.38) $ (0.01) $ (0.57) $ 0.08 $ 0.43 $ 0.09 $ 0.04
Diluted net income
(loss) per share....... $ (0.38) $ (0.01) $ (0.57) $ 0.07 $ 0.33 $ 0.07 $ 0.04
Weighted average shares
outstanding:
Basic................. 3,825 3,825 3,825 3,918 5,036 3,920 7,640
Diluted............... 3,825 3,825 3,825 5,353 6,651 5,355 9,358
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
July 31,
---------------------------------------- October 31,
1995 1996 1997 1998 1999 1999
------- ------- ------- ------- ------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............. $ 76 $ 183 $ 320 $ 103 $ 1,874 $ 1,704
Working capital.......... 4,159 5,824 3,964 1,820 4,475 4,096
Goodwill, net............ -- -- -- -- 11,547 11,399
Total assets............. 19,369 21,104 17,699 16,430 39,025 43,170
Long-term debt........... 2,903 2,751 5,621 6,400 2,314 2,314
Total stockholders'
equity (deficit)........ 4,375 4,341 893 (1,391) 17,152 17,487
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our results of operations and financial condition
should be read in conjunction with the consolidated financial statements and
other financial information included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may be materially different from those
anticipated in these forward-looking statements resulting from certain factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
Overview
We design, develop and market next-generation Linux communications servers
and software which integrate and manage voice, e-mail and Internet
communications for customer contact centers and other applications. We also
offer a traditional voice switching platform for small and medium-sized
installations. Through our Caribbean/Latin American operations, we sell and
service voice communications systems and cellular telephones and resell
cellular airtime.
Our Linux communications server product line was originally developed by BCS,
and was introduced initially in April 1997. We acquired BCS on April 12, 1999
and have since combined the eQueue 4000 Linux communications server and our
Millennium voice switching platform, which we introduced in fiscal 1994, into
our Communications Systems operations. We have recently concentrated our
product development efforts on extending and enhancing our Linux communications
server product line.
Our operating results for fiscal 1999 and for the first quarter of fiscal
2000 include Linux communications server revenues subsequent to the April 12,
1999 acquisition of BCS. Our pro forma operating results for the year ended
July 31, 1999 assume that the acquisition of BCS had occurred as of August 1,
1998. The acquisition of BCS has been accounted for using the purchase method
of accounting, and goodwill in the amount of $11.7 million was recorded in the
BCS acquisition and is being amortized over 20 years.
We recognize revenues from our eQueue 4000 communications server products
upon acceptance 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. Typical selling prices range from $75,000 to
$230,000 for our Linux communications server products currently being sold and
from $22,000 to $36,000 for our Millennium products, depending on the system
configuration.
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.
The uncertainty of our sales cycle makes the timing of sales difficult to
predict and may cause fluctuations in our quarterly net revenues and cost of
revenues. The purchase of our products may involve a significant commitment of
our customers' personnel, financial and other resources to
19
<PAGE>
conduct technical evaluations, to support installation and training and to fund
purchases. Therefore, our sales cycles generally vary from four to twelve
months for our large capacity Linux communications servers and from one to six
months for our Millennium voice switching platform and are expected to be from
one to six months for our small to mid-range Linux communications servers.
Pro Forma Net Revenues and Gross Profit
The following table presents the net revenues and gross profit for the seven
quarters ended April 30, 1999 on a pro forma basis as if the acquisition of BCS
had occurred as of August 1, 1997 and the quarters ended July 31, 1999 and
October 31, 1999 on an actual basis.
We believe that all necessary adjustments, consisting of only normal
recurring adjustments, have been included in the pro forma amounts stated
below. The pro forma net revenues and gross profit are presented for
illustrative purposes only and do not purport to represent what our net
revenues and cost of revenues actually would have been had the transactions
occurred on the dates indicated, or to project our net revenues and cost of
revenues for any future period. This data should be read in conjunction with
the Unaudited Pro Forma Consolidated Financial Information, our consolidated
financial statements and BCS' financial statements, all of which are included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Actual
---------------------
Pro Forma Three Months Ended Three Months Ended
----------------------------------------------------------------------------- ---------------------
October 31, January 31, April 30, July 31, October 31, January 31, April 30, July 31, October 31,
1997 1998 1998 1998 1998 1999 1999 1999 1999
----------- ----------- --------- -------- ----------- ----------- --------- -------- -----------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Net
Revenues:
FAA................... -- -- -- $ 1,583 $ 2,556 $ 2,618 $ 4,760 $ 1,166 $ 233
Communications Systems
excluding FAA........ $6,022 $5,036 $5,698 6,410 6,970 5,443 5,460 9,491 9,658
Caribbean/Latin
America.............. 2,983 3,069 2,768 3,049 2,787 3,497 4,358 4,544 4,452
------ ------ ------ ------- ------- ------- ------- ------- -------
Total................. $9,005 $8,105 $8,466 $11,042 $12,313 $11,558 $14,578 $15,201 $14,343
Consolidated Gross
Profit:
FAA................... -- -- -- $ 1,108 $ 1,789 $ 1,833 $ 3,332 $ 816 $ 149
Communications Systems
excluding FAA........ $2,957 $2,497 $2,872 2,872 3,744 2,853 3,495 4,238 4,964
Caribbean/Latin
America.............. 1,068 1,295 1,148 1,350 1,011 1,197 1,259 1,537 1,304
------ ------ ------ ------- ------- ------- ------- ------- -------
Total................. $4,025 $3,792 $4,020 $ 5,330 $ 6,544 $ 5,883 $ 8,086 $ 6,591 6,417
Consolidated Gross
Margin:
FAA................... -- -- -- 70.0% 70.0% 70.0% 70.0% 70.0% 63.9%
Communications Systems
excluding FAA........ 49.1% 49.6% 50.4% 44.8% 53.7% 52.4% 64.0% 44.7% 51.4%
Caribbean/Latin
America.............. 35.8% 42.2% 41.5% 44.3% 36.3% 34.2% 28.9% 33.8% 29.3%
Total................. 44.7% 46.8% 47.5% 48.3% 53.1% 50.9% 55.5% 43.4% 44.7%
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
--------------------
Year Ended July 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
(In thousands,
except percentages)
Consolidated Net Revenues:
FAA....................................................... $ 1,583 $ 11,100
Communications Systems excluding FAA...................... 23,166 27,364
Caribbean/Latin America................................... 11,869 15,186
--------- ---------
Total..................................................... $ 36,618 $ 53,650
Consolidated Gross Profit:
FAA....................................................... $ 1,108 $ 7,770
Communications Systems excluding FAA...................... 11,198 14,330
Caribbean/Latin America................................... 4,861 5,004
--------- ---------
Total..................................................... $ 17,167 $ 27,104
Consolidated Gross Margin:
FAA....................................................... 70.0% 70.0%
Communications Systems excluding FAA...................... 48.3% 52.4%
Caribbean/Latin America................................... 41.0% 33.0%
Total..................................................... 46.9% 50.5%
</TABLE>
Net Revenues. Our pro forma and actual revenues in the five quarters from May
1, 1998 to July 31, 1999 have been heavily affected by our large contract to
equip the FAA's nationwide network of 61 Automated Flight Service Stations with
our mission-critical next-generation Linux communications servers. These
installations were completed in June 1999. The FAA contract accounted for $11.1
million or 20.7% of our total pro forma revenues in the fiscal year ended July
31, 1999.
Communications Systems revenues, excluding the FAA, increased 38.6% to $9.7
million in the quarter ended October 31, 1999 on an actual basis from $7.0
million in the quarter ended October 31, 1998 on a pro forma basis.
Communications Systems revenues, excluding the FAA, increased 18.1% to $27.4
million in fiscal 1999 from $23.2 million in fiscal 1998. Within Communication
Systems revenues, excluding the FAA, the Linux communications servers and
related products accounted for 27% of the $9.7 million of actual revenues for
the quarter ended October 31, 1999, compared to 30% of the $9.5 million of
actual revenues for the quarter ended July 31, 1999, and 17% of the $5.5
million pro forma revenues for the quarter ended April 30, 1999. Our Millennium
product line and related products accounted for the balance of such revenues in
these periods. For the fiscal year ended July 31, 1999, our Linux
communications servers accounted for 32% of our pro forma revenues and our
Millennium products accounted for 40% of our pro forma revenues.
Caribbean/Latin American operations revenues increased 59.7% to $4.5 million
in the quarter ended October 31, 1999 from $2.8 million in the quarter ended
October 31, 1998 primarily because we became a distributor for another
manufacturer in November 1998. Caribbean/Latin American operations accounted
for 28% of our pro forma revenues for the fiscal year ended July 31, 1999.
Gross Profit. The FAA contract carried a relatively high gross margin
primarily because the systems being supplied included extensive computer
telephony integration and other high margin software features. Gross margins of
our other Communications Systems revenues are influenced by
21
<PAGE>
the mix between our Linux communications servers and our Millennium voice
switching platform. Our Linux communications servers carry our highest gross
margins due to their extensive software features and because they were sold
directly.
Historical Results
The consolidated financial data represent the results of eOn and subsidiaries
which includes the operating results of BCS beginning April 12, 1999, the date
on which BCS was acquired.
The following table presents the operating ratios for fiscal years 1997, 1998
and 1999:
<TABLE>
<CAPTION>
Year Ended July
31,
--------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net revenues.............................................. 100.0% 100.0% 100.0%
Cost of revenues.......................................... 68.2 58.1 56.4
----- ----- -----
Gross margin.............................................. 31.8 41.9 43.6
Operating expenses:
Selling, general and administrative..................... 28.4 32.9 30.8
Research and development................................ 3.7 4.7 5.5
Amortization of goodwill................................ -- -- 0.4
----- ----- -----
Total operating expenses.................................. 32.1 37.6 36.7
----- ----- -----
Income (loss) from operations ............................ (0.3) 4.3 6.9
Interest expense.......................................... 2.6 2.7 1.6
Other (income) expense, net............................... 1.9 0.6 0.0
----- ----- -----
Income (loss) before income taxes......................... (4.8) 1.0 5.3
Income tax expense........................................ 0.0 0.0 0.2
----- ----- -----
Net income (loss)......................................... (4.8)% 1.0% 5.1%
===== ===== =====
</TABLE>
Three Months Ended October 31, 1999 and 1998
Net Revenues. Total revenues increased 69.2% to $14.3 million in the three
months ended October 31, 1999 from $8.5 million in the three months ended
October 31, 1998. The increase resulted primarily from Linux communications
server revenues of $2.8 million, an increase in revenues from Caribbean/Latin
American operations of $1.6 million, and an increase in Millennium revenues of
$1.4 million.
Cost of Revenues and Gross Profit. Cost of revenues consists primarily of
purchases from our contract manufacturers and other suppliers and costs
incurred for final assembly, quality assurance and installation of our systems.
Gross profit increased 79.0% to $6.4 million in the three months ended
October 31, 1999 from $3.6 million in the three months ended October 31, 1998.
The increase resulted primarily from Linux communications server gross profit
of $2.0 million, an increase in Millennium gross profit of $0.7 million, and an
increase in gross profit from Caribbean/Latin American operations of
$0.2 million. Our gross margin was 44.7% in the three months ended October 31,
1999 and 42.3% in the three months ended October 31, 1998.
Operating Expenses. Operating expenses increased 88.8% to $5.7 million in the
three months ended October 31, 1999 from $3.0 million in the three months ended
October 31, 1998. The
22
<PAGE>
increased expenses in the three months ended October 31, 1999 were due
primarily to $1.4 million in operating expenses related to Linux communications
servers and the hiring of additional engineering and sales personnel. Operating
expenses increased as a percentage of revenues to 39.8% in the three months
ended October 31, 1999 from 35.7% in the three months ended October 31, 1998.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and benefit costs, advertising and trade
show related costs, and facilities and other overhead expenses incurred to
support the growth of our business. Selling, general and administrative
expenses increased 80.6% to $4.7 million in the three months ended October 31,
1999 from $2.6 million in the three months ended October 31, 1998. The
increased expense was due primarily to $1.1 million of selling, general and
administrative expenses related to our Linux communications server revenues and
the growth of the business including the hiring of additional sales personnel.
In addition, bad debt expense increased $0.2 million in the three months ended
October 31, 1999 compared to the three months ended October 31, 1998 due to
higher sales in Caribbean/Latin American operations. Caribbean/Latin American
operations have experienced higher bad debt expense as a percent of sales than
our other operations due to a lack of credit and collection resources in Puerto
Rico. We have recently hired additional credit personnel and enhanced our
collection procedures in an effort to reduce bad debts. These expenses as a
percentage of revenues increased to 32.5% in the three months ended October 31,
1999 from 30.5% in the three months ended October 31, 1998. We expect selling,
general and administrative expenses to increase in dollars and as a percentage
of revenue as we invest in sales and marketing.
Research and Development. Research and development expenses consist primarily
of personnel and related expenses for our engineering staff and depreciation of
related equipment. Research and development expenses increased 103.2% to
$0.9 million in the three months ended October 31, 1999 from $0.4 million in
the three months ended October 31, 1998. The increased expenses were primarily
due to the hiring of additional engineering personnel, additional equipment
purchases, and $0.2 million of expenses incurred in conjunction with our Linux
communications servers during the three months ended October 31, 1999. These
expenses as a percentage of revenues increased to 6.3% in the three months
ended October 31, 1999 from 5.2% in the three months ended October 31, 1998. We
expect research and development expenses to increase in dollars as we hire
additional engineers to support our new product initiatives.
Amortization of Goodwill. We recorded $11.7 million of goodwill related to
the acquisition of BCS in April 1999 and are amortizing the amount over a 20-
year period.
Income from Operations. Income from operations increased 26.1% to
$0.7 million in the three months ended October 31, 1999 from $0.6 million in
the three months ended October 31, 1998. This was primarily due to revenues
from our Linux communications servers during the three months ended October 31,
1999. Operating expenses increased more quickly than gross profit due to the
hiring of additional sales and research and development personnel and the
amortization of goodwill during the three months ended October 31, 1999.
Years Ended July 31, 1999 and July 31, 1998
Net Revenues. Total revenues increased 40.4% to $42.4 million in fiscal 1999
from $30.2 million in fiscal 1998. The increase resulted primarily from Linux
communications server revenues of $5.1 million subsequent to the April 12, 1999
merger with BCS, an increase in Millennium revenues of $3.7 million, and an
increase in revenues in Caribbean/Latin American operations of $3.3 million.
23
<PAGE>
Cost of Revenues and Gross Profit. Gross profit increased 46.2% to $18.5
million in fiscal 1999 from $12.6 million in fiscal 1998. The increase resulted
primarily from Linux communications server gross profit of $3.8 million
subsequent to the April 12, 1999 merger with BCS, an increase an Millennium
gross profit of $1.7 million, and an increase in gross profit in
Caribbean/Latin American operations of $0.1 million. Our gross margin was 43.6%
in fiscal 1999 and 41.9% in fiscal 1998.
Operating Expenses. Operating expenses increased 37.3% to $15.6 million in
fiscal 1999 from $11.3 million in fiscal 1998. The increase was primarily due
to the hiring of additional engineering and sales personnel during the period.
Results for fiscal 1999 include $1.8 million in operating expenses related to
Linux communications servers incurred subsequent to the April 12, 1999 merger
with BCS. Operating expenses decreased as a percentage of revenues to 36.7% in
fiscal 1999 from 37.6% in fiscal 1998.
Selling, General and Administrative. Selling, general and administrative
expenses increased 31.5% to $13.1 million in fiscal 1999 from $9.9 million in
fiscal 1998. The increased expense was primarily due to $1.8 million of
selling, general and administrative expenses related to Linux communications
server revenues subsequent to the April 12, 1999 merger with BCS, and the
growth of the business including the hiring of additional sales personnel and
an increased bad debt provision due mainly to higher system sales in
Caribbean/Latin American operations. These expenses as a percentage of revenues
decreased to 30.8% in fiscal 1999 from 32.9% in fiscal 1998. We expect selling,
general and administrative expenses to increase in dollars and as a percentage
of revenues as we invest in sales and marketing.
Research and Development. Research and development expenses increased 65.9%
to $2.3 million in fiscal 1999 from $1.4 million in fiscal 1998. The increased
expenses were primarily due to the hiring of additional engineering personnel,
additional equipment purchases, and research and development expenses related
to Linux communications server development subsequent to the April 12, 1999
merger with BCS. These expenses as a percentage of revenues increased from 4.7%
for fiscal 1998 to 5.5% for fiscal 1999. We expect research and development
expenses to continue to increase in dollars in future periods as we hire
additional engineers to support our new product initiatives.
Amortization of Goodwill. We recorded $11.7 million of goodwill related to
the acquisition of BCS in April 1999 and began amortizing the amount over a 20-
year period on April 12, 1999. The amortization will be $0.6 million annually
in future years.
Income from Operations. Income from operations increased 123.7% to $2.9
million in fiscal 1999 from $1.3 million in fiscal 1998. This was primarily due
to the inclusion of Linux communications server revenues subsequent to the
merger with BCS and an increase in revenues in Caribbean/Latin American
operations. While operating expenses on an absolute basis for fiscal 1999
increased primarily because of additions to sales and engineering staff,
operating expenses grew more slowly than revenues and gross profit for the
period.
Years Ended July 31, 1998 and July 31, 1997
Net Revenues. Revenues were $30.2 million in fiscal 1998 and $35.6 million in
fiscal 1997. The decrease from fiscal 1997 to fiscal 1998 was primarily due to
a $2.6 million decrease in Caribbean/Latin American operations revenues and a
$2.8 million decrease in Millennium revenues from an OEM customer.
24
<PAGE>
Cost of Revenues and Gross Profit. Gross profit was $12.6 million in fiscal
1998 and $11.3 million in fiscal 1997. The increase in gross profit in fiscal
1998 from fiscal 1997 was primarily due to the increased sale of higher margin
Millennium switching platform products. Gross margin was 41.9% in fiscal 1998
and 31.8% in fiscal 1997.
Operating Expenses. Operating expenses were $11.3 million in fiscal 1998 and
$11.4 million in fiscal 1997. Research and development expenses increased in
fiscal 1998 mainly due to hiring of additional engineering personnel, while
selling, general and administrative expenses decreased during fiscal 1998
primarily due to increased administrative efficiencies.
Income (loss) from Operations. Income (loss) from operations increased to
$1.3 million for fiscal 1998 from $(0.1) million for fiscal 1997 primarily due
to the $1.3 million increase in gross profit that resulted from the increased
sales of higher margin products.
Discontinued Operations. Discontinued operations represent the results of
operations of a former subsidiary of eOn that was spun off in March 1997 to the
stockholders of our former parent, merged with Business Communications Systems,
Inc. and renamed "BCS Technologies, Inc." At the time of spin-off, the
subsidiary had experienced substantial net losses and our former parent decided
to concentrate on developing and marketing the Millennium product line.
Quarterly Results
The following tables present our quarterly results of operations and
quarterly operating ratios for fiscal 1999 and the first quarter of fiscal
2000.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------
April July
October 31, January 31, 30, 31, October 31,
1998 1999 1999 1999 1999
----------- ----------- ------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net revenues.............. $8,478 $8,678 $10,017 $15,201 $14,343
Cost of revenues.......... 4,893 5,048 5,339 8,610 7,926
------ ------ ------- ------- -------
Gross profit.............. 3,585 3,630 4,678 6,591 6,417
Operating expenses:
Selling, general and
administrative......... 2,583 2,588 3,524 4,361 4,664
Research and
development............ 443 474 572 845 900
Amortization of
goodwill............... -- -- 28 149 148
------ ------ ------- ------- -------
Total operating expenses.. 3,026 3,062 4,124 5,355 5,712
------ ------ ------- ------- -------
Income from operations.... 559 568 554 1,236 705
Interest expense.......... 192 220 172 103 116
Other (income) expense,
net...................... (8) 27 98 (125) (9)
------ ------ ------- ------- -------
Income before income
taxes.................... 375 321 284 1,258 598
Income tax expense........ 35 27 20 1 263
------ ------ ------- ------- -------
Net income................ $ 340 $ 294 $ 264 $ 1,257 $ 335
====== ====== ======= ======= =======
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
October 31, January 31, April 30, July 31, October 31,
1998 1999 1999 1999 1999
----------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
Percentage of Net
Revenues:
Net revenues............ 100.0% 100.0% 100.0% 100.0 % 100.0 %
Cost of revenues........ 57.7 58.2 53.3 56.6 55.3
----- ----- ----- ----- -----
Gross margin............ 42.3 41.8 46.7 43.4 44.7
Operating expenses:
Selling, general and
administrative....... 30.5 29.8 35.2 28.7 32.5
Research and
development.......... 5.2 5.5 5.7 5.6 6.3
Amortization of
goodwill............. -- -- 0.3 1.0 1.0
----- ----- ----- ----- -----
Total operating
expenses............... 35.7 35.3 41.2 35.3 39.8
----- ----- ----- ----- -----
Income from operations.. 6.6 6.5 5.5 8.1 4.9
Interest expense........ 2.3 2.5 1.7 0.7 0.8
Other (income) expense,
net.................... (0.1) 0.3 1.0 (0.9) (0.1)
----- ----- ----- ----- -----
Income before income
taxes.................. 4.4 3.7 2.8 8.3 4.2
Income tax expense...... 0.4 0.3 0.2 0.0 1.8
----- ----- ----- ----- -----
Net income.............. 4.0% 3.4% 2.6% 8.3 % 2.4 %
===== ===== ===== ===== =====
</TABLE>
Liquidity and Capital Resources
We have funded our operations primarily through cash generated from
operations, periodic borrowings under our existing credit facilities, a $3.0
million subordinated convertible note financing and acquisition financing
provided by Alcatel in connection with the purchase of our business from
Alcatel in 1990.
Net cash provided by (used in) operating activities was $1.1 million in
fiscal 1997, $0.9 million in fiscal 1998, $3.1 million in fiscal 1999, ($0.4)
million for the three months ended October 31, 1998 and ($0.6) million for the
three months ended October 31, 1999. Cash provided by operating activities in
fiscal 1997 and fiscal 1998 primarily resulted from improved collections during
those years while the increase during fiscal 1999 was mainly due to an increase
in net income and accounts payable during the year. Cash used in operating
activities for the three months ended October 31, 1999 resulted primarily from
an increase in inventories and the payment of income taxes.
Net cash provided by (used in) investing activities was ($0.9) million in
fiscal 1997, ($0.2) million in fiscal 1998, $2.2 million for fiscal 1999,
($0.1) million for the three months ended October 31, 1998 and ($0.4) million
for the three months ended October 31, 1999. In fiscal years 1997 and 1998,
cash used in investing activities was primarily attributable to purchases of
equipment and, in fiscal 1997, to the purchase of $0.3 million of software
applications for the Millennium. The $2.2 million provided by investing
activities in fiscal 1999 was primarily due to the $3.1 million cash balance of
BCS on the date of the acquisition. Cash used in investing activities for the
three months ended October 31, 1999 resulted primarily from equipment purchases
of $0.4 million. To the extent that we continue to grow our research and
development activities and invest in new technologies in the future, we expect
net cash used in investing activities will increase.
Net cash provided by (used in) financing activities was ($0.2) million in
fiscal 1997, ($0.9) million in fiscal 1998, ($3.6) million in fiscal 1999, $0.6
million for the three months ended October 31, 1998 and $0.8 million for the
three months ended October 31, 1999. The primary source
26
<PAGE>
of cash from financing activities in fiscal 1997 was a $3.0 million
subordinated convertible note financing. Cash used in financing activities in
the year ended July 31, 1998 consisted primarily of a decrease in outstanding
checks, repayments under the revolving credit line and partial repayment of a
note to our former parent company, Cortelco Systems Holding Corporation. The
net cash used in financing transactions in fiscal 1999 was primarily due to the
$2.6 million loan made to Cortelco Systems Holding Corporation to retire the
acquisition financing provided by Alcatel and the $1.1 million of capitalized
offering costs. The source of cash flows from financing activities in the three
months ended October 31, 1999 was a $1.1 million increase in the revolving line
of credit reduced by $0.3 million of capitalized offering costs.
In July and August 1997, we entered into two credit facilities which allow us
to borrow up to an aggregate of $9.0 million based on accounts receivable and
inventory levels. As of October 31, 1999, there was $4.2 million outstanding
under these credit facilities which will be repaid using the net proceeds from
this offering. See Note 9 to our consolidated financial statements.
We believe that the proceeds from this offering, together with available
funds, anticipated cash flows from operations and our line of credit, will
satisfy our projected working capital and capital expenditure requirements at
least through calendar 2000. 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.
Year 2000 Compliance
The year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Computer programs that
have such date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
We are heavily dependent upon the proper functioning of our own computer or
data-dependent systems. This includes, but is not limited to, our systems in
information, business, finance, operations and service. Any failure or
malfunctioning on the part of these or other systems could damage us in ways
that are not currently known, discernible, quantifiable or otherwise
anticipated by us.
Our operations are also dependent on the year 2000 readiness of third parties
that do business with us. We are dependent on third-party suppliers of
infrastructure elements such as electric power and banking facilities. We do
not depend to any significant degree upon electronic transaction processing
with individual vendors for merchandise purchases, however, many of our
customers pay their invoices via electronic payment.
We are currently evaluating those areas of our business that may be affected
by the year 2000 issue and have devised a plan to become year 2000 compliant in
a timely manner which includes:
. assessment of our own computer systems and the products we sell;
. communications with all our key suppliers, manufacturers and customers to
determine the extent to which we are vulnerable to their failure to
remedy their own year 2000 issues;
. correction, upgrade, replacement or retirement of our computer systems
which are affected by the year 2000 issue;
. testing for and validation of our year 2000 compliance; and
. development of contingency plans to address situations that may result if
we are unable to achieve year 2000 compliance of our critical operations.
27
<PAGE>
Based on our assessment to date, we determined that we were required to
upgrade a portion of our software so that our computer systems would function
properly with respect to dates in the year 2000 and thereafter. Our information
systems were year 2000 compliant by November 1999. Costs associated with the
upgrade of existing computer software were less than $75,000. Costs incurred
and expensed in fiscal 1999 were less than $50,000. These costs related
entirely to modifications of existing software and represented approximately
10% of our information systems budget for information technology in fiscal
1999. Approximately $20,000 of the costs were incurred in the fiscal quarter
ended October 31, 1999. We may address non-critical year 2000 issues beyond the
year 2000. There is no assurance that total costs will not exceed our
estimates.
We are in communication with key suppliers, manufacturers and customers to
determine the extent to which we would be vulnerable to such parties' failure
to remedy their own year 2000 issues. We currently have only limited
information on the year 2000 compliance of our key suppliers, manufacturers and
customers. Our business and results of operations could be harmed if our key
suppliers or manufacturers were to experience year 2000 issues that caused them
to delay production or shipment of key components or systems. In addition, our
operations could be harmed if any of our key customers encounter year 2000
issues that cause them to delay or cancel substantial purchase orders or
delivery of our product.
There can be no assurance that we will be able to upgrade any or all of our
major systems in accordance with our plan to address the year 2000 issue. In
addition, there can be no assurance that any such upgrades will effectively
address the year 2000 issue. If required upgrades are not completed or are
unsuccessful, our operations would be harmed. Furthermore, if we or another
company cannot convert the systems of other companies on which our own systems
rely, or if the conversion is incompatible with our systems, our business might
be harmed.
28
<PAGE>
BUSINESS
We design, develop and market next-generation Linux 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. Our products help enterprises communicate more effectively with
customers, convert inquiries into sales, and increase customer satisfaction and
loyalty.
Our next-generation Linux 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 Linux 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 Linux Communications server products and products under development
include the eQueue 4000, the eNterprise 2000 and the eNterprise 200. The eQueue
4000 is primarily intended for customers who require open, standards-based
advanced contact center capabilities with integrated Web center features. The
eNterprise 2000 is primarily intended for customers who require an open,
standards-based voice communications system with advanced features to integrate
PC applications and database information. We are currently developing several
new products, including the eNterprise 200, an all-in-one PC platform, to cost-
effectively address the evolving communications requirements of smaller
installations. 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 capabilities and is intended for use in a wide range of small and
medium-sized installations.
Industry Overview
Enterprises of all sizes are increasingly demanding advanced communications
systems utilizing both voice and data networks to attract and service customers
and otherwise efficiently support their operations. Factors affecting their
communications systems decisions include the following:
Demand for Unified Voice and Internet Communications
Enterprises can achieve efficiencies and improve their customer service by
integrating voice and Internet communications. Enterprises usually support two
separate, incompatible networks to handle their communications needs: a
circuit-switched network primarily used for voice communications and a packet-
switched network primarily used for Internet and data communications. Circuit-
switched networks maintain a dedicated line between parties for the duration of
a connection providing high reliability without signal delays. Packet-switched
networks divide data, voice, video or images into
29
<PAGE>
small digital packets that are simultaneously routed over different paths to a
common final destination where they are recombined. Packet switched networks
are less reliable and have inherent and unpredictable signal delays depending
on traffic volume. Therefore, to date, the Internet has been unusable for high
quality voice communications. Consequently, there is a need for a unified
communication system that can integrate communications over both the packet-
switched Internet and circuit-switched voice networks.
Integration of PC Applications and Data with Communications
To quickly and intelligently interact with customers, customer service
agents need immediate access to relevant data, such as customer profile
information, transaction history information and status of inventory and
prices. Integration of PC applications and database information with voice
communications is already well developed, and integration with Internet
communications has recently been developed. However, there is now a need for
systems that can seamlessly integrate PC applications and database information
with either voice or Internet communications interchangeably as customers
increasingly use a combination of these media.
Need for Fully-Featured Voice Quality PC Server Private Communication Exchanges
(PCXs)
PC-based PCXs are beginning to penetrate the markets served by traditional
private branch exchange (PBX) voice switching platforms. Frost and Sullivan
estimates the market for PCXs will grow from approximately $73 million in 1998
to $999 million in 2002.
Traditional PBXs typically rely on proprietary hardware and software and
have switching architectures that are not easily integrated with Internet
communications and database information. In contrast, PCXs based on PC servers
benefit from the relatively low cost of standards-based PC hardware and
software, the large number of applications that are available inexpensively for
PCs and the ease of integrating Internet communications and database functions.
The PCX typically provides greater ease of use and levels of programmability
than proprietary systems. Existing PCX products typically use the Microsoft
Windows NT operating system. Some PCXs are being designed to support voice-
over-Internet Protocol packet-switched networks.
Despite their advantages relative to most traditional PBXs, PCXs suffer from
important limitations that are retarding their mainstream market acceptance.
Currently available PCXs generally do not offer the reliability of traditional
PBXs, and they usually cannot be scaled beyond several hundred ports.
Furthermore, many of the sophisticated voice communication features available
on PBXs, such as integrated automatic call distributor capabilities and
advanced digital telephones, have yet to be implemented on PCXs, primarily
because PCX vendors do not have sufficient experience with the requirements of
high quality voice communications. Consequently, there is a need for a next-
generation, feature-rich and scalable PCX that meets rigorous voice quality
standards.
Need for Standards-Based Integrated Contact Center Systems
Call centers, which are used to manage customer relationships over the
telephone, provide services to a broad range of industries such as catalog
sales, financial services and travel. Today's call centers utilize
sophisticated call routing, advanced voice communications and integrated access
to database information. Traditional communication systems used by call centers
have been based on proprietary hardware and software. With the rapid growth of
e-mail and the Internet, call centers now
30
<PAGE>
must interact with customers not only by voice, but also by e-mail and other
Web-based communications. Therefore, a new generation of communications
systems, known as contact centers, is needed to integrate voice call center
functions with Web-based customer interactions.
Many vendors now offer software to manage e-mail and other Web
communications in customer contact centers. These applications, however, have
been difficult and time-consuming to integrate with voice communications
systems and often lack sophisticated contact center management tools.
Consequently, there is a need for a unified all-in-one, standards-based contact
center communications system that avoids costly systems integration and
implements a full range of productivity and management tools for both voice and
Internet communications.
Need for Better Customer Service in E-Commerce
IDC estimates that the number of customers buying goods and services over
the Internet worldwide will grow from approximately 30 million in 1998 to 182
million in 2003 and that the value of goods and services purchased over the
Internet will increase from approximately $50 billion in 1998 to $1.3 trillion
in 2003. The Gartner Group estimates that companies will receive 25% of all
customer inquiries via e-mail and Web communications by 2001.
In general, the means to deliver quality customer service for e-commerce are
still being developed, which often results in missed opportunities for
transactions. A survey conducted by Jupiter Communications in late 1998 found
that 42% of the surveyed companies' Web sites took longer than five days to
reply to e-mail inquiries, never replied or were not accessible by e-mail.
According to a recent survey by Net Effect Systems, two-thirds of all online
commercial transactions are abandoned by the consumer before completion. By
improving responsiveness to e-mail, by providing supplemental voice
communications and by facilitating seamless customer interactions over multiple
communications channels, companies may convert more of these Web site visitors
into actual customers.
The need for better customer service in e-commerce is creating a rapidly
growing market for solutions to customer service problems. IDC estimates that
worldwide license revenues for e-commerce customer service and support
applications will grow from $42 million in 1998 to $1.6 billion in 2002.
Need for Customization and Flexibility
Communications servers must be flexible and easy to customize, because
requirements vary greatly from customer to customer and most installations are
constantly changing to respond to organizational growth. Traditional
proprietary communications systems, such as PBXs or automatic call
distributors, are not readily customizable and usually require integration with
third-party products to provide a complete solution. In addition, even
communications systems that are based on standard hardware and software
typically have customization limitations because they have used closed source
code operating systems such as Microsoft Windows NT and Solaris. As the
complexity of customer requirements increases, systems with fixed sets of
capabilities and proprietary interfaces are less likely to be able to satisfy
each customer's specific, changing and often unique needs.
Emergence of Linux as a Leading Operating System for Servers
Companies are increasingly adopting the open source code Linux operating
system for servers, particularly Web site servers. The rapid growth of Linux
reflects its robust, reliable and flexible
31
<PAGE>
features, ease of application development and low cost of installation,
customization and maintenance. Linux-based servers currently account for one-
third of all Internet host servers in use, according to an April 1999 study by
Internet Operating System Count, and an estimated 57% of new Web servers being
shipped, according to InfoWorld. According to IDC, Linux accounted for 16% of
server shipments of all types in 1998, a 129% increase compared to 1997, nearly
surpassing the combined shipments of servers using all other versions of Unix.
Linux is an open source code operating system which means that any
information technology professional can access and modify the code on which the
operating system itself is built. This allows faster development and
implementation of new applications that are tightly integrated with the
operating system's kernel. In recent years, demands on communications servers
have increased dramatically. Today's communications servers must integrate many
more complex functions than ever before. They also must have increased
flexibility so that enterprises can add, combine and customize important
features and functions to suit each of their unique and changing needs. For
these reasons, Linux's advantages over closed source code operating systems are
particularly important for communications servers.
We believe that these trends are leading towards a unified communications
server solution. The following diagram depicts this evolution from earlier
classes of products.
[DIAGRAM OF EVOLUTION FROM EARLIER CLASSES OF PRODUCTS.]
32
<PAGE>
The eOn Solution
Our product line includes next-generation Linux communications servers and
software that integrate voice, e-mail and Internet communications. The
solutions we provide through these products 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 4000 includes 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 are broadening our line of Linux communications servers to address the
varying needs of different market segments. Our eQueue 4000 is designed to meet
the needs of customers with high
33
<PAGE>
volume contact centers or mission-critical operations. Our eNterprise 2000 will
include many of the features and functionality of the eQueue 4000 for customers
with advanced integrated voice and data communications needs and less mission-
critical operations requirements. In first half of 2000, we plan to introduce
our eOn Web Center software application suite for small to medium-sized
businesses engaged in e-commerce. In early 2001, we plan to introduce the
eNterprise 200 for smaller customers who need a cost-effective comprehensive
communications system.
We also intend to continue to develop new features and applications common to
each of our Linux communications server hardware platforms.
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 Linux 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
which are based on other industry-standard interfaces and operating systems.
34
<PAGE>
In addition to our next-generation Linux communications servers, 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 Linux communications servers.
Linux 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 intend to offer the eOn Web Center as a
software-only application suite. Separately priced software features available
on our eQueue and eNterprise platforms serve a broad range of customer needs
spanning from typical voice communications systems to advanced, Web-centric
contact center applications. While we have not yet entered into any contracts
with customers with regard to our products under development, our customers
have provided suggestions and requested features which are being incorporated
in the development of our new products. 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 Linux communications server products and products under development
consist of the following:
. eQueue 4000. The eQueue 4000 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 4000 has hardware-based fault
monitoring intended to provide continuous operation with no detectable
interruption. The eQueue 4000 bus and cage structure supports
configurations of up to 4,000 communications ports through custom
telephony and voice-over-Internet Protocol boards. The eQueue 4000 is
primarily intended for customers who require open, standards-based
advanced contact center capabilities with integrated Web center features.
. eNterprise 2000. The eNterprise 2000 is designed for less mission-
critical applications than the eQueue 4000. In its base configuration,
the eNterprise 2000 is not redundant and utilizes a Pentium-based
computer. A dual computer configuration is available as an option to meet
redundancy requirements. In addition, the eNterprise 2000 has a software-
based fault monitoring system. The eNterprise 2000 bus and cage structure
supports configurations of up to 2,000 communications ports through
custom high-density telephony and voice-over-Internet Protocol boards.
The eNterprise 2000 is primarily intended for customers who require an
open, standards-based voice communications system with advanced features
to integrate PC applications and database information. The eNterprise
2000 is scheduled for introduction in January 2000.
. eNterprise 200. The eNterprise 200, which is under development as our
entry-level communications server for installations requiring up to 200
ports, will integrate Web center functionality with extensive voice
capabilities. The eNterprise 200 will offer many of the features of the
4000 and eNterprise 2000 on an all-in-one PC platform, to cost-
effectively address the evolving communications requirements of smaller
installations. We intend to introduce the eNterprise 200 in the first
calendar quarter of 2001.
. eOn Web Center. The eOn Web Center is a Linux-based software application
suite for routing, tracking and responding to customer e-mail and Web-
based communications in real-
35
<PAGE>
time. The eOn Web Center is primarily intended for smaller customers
engaged in e-commerce who require advanced, Web-based customer interaction
capabilities. We intend to introduce the initial version of our eOn Web
Center product in the second calendar quarter of 2000.
Communications Server Software Features
Our Linux communications servers have numerous software features, most of
which will be offered on each of 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.
Integration of Communications Responses to Customers
Our Linux 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.
36
<PAGE>
The following table summarizes the features of our products that enhance
responsiveness to customers.
<TABLE>
<CAPTION>
Feature Description Benefit
- ---------------------------------------------------------------------------------------
<S> <C> <C>
E-mail Queuing Manages flow of e-mail . Enhances quality of
messages and routes e-mail customer service
to agents based on specified
routing algorithms
- ---------------------------------------------------------------------------------------
Web Callback Immediately notifies an .Increases probability that
agent to call customer when Web visitors become
customers click Web button customers
.Personalized customer
service
- ---------------------------------------------------------------------------------------
Agent Callback Automatic routing of .Personalized customer
customers to the same agent service
he or she spoke with .Saves time
previously
- ---------------------------------------------------------------------------------------
Tailored Greeting Automatic customer . Personalized customer
identification with service
automated answers to
frequent questions
- ---------------------------------------------------------------------------------------
</TABLE>
Products Under Development
<TABLE>
- ------------------------------------------------------------------------------------
<S> <C> <C>
Text Chat Provides real-time text-based . Rapid interaction with
(first half 2000) interaction between customers agents in text chat
and agents when customers environment reduces
click Web button mistakes and provides
written record
- ------------------------------------------------------------------------------------
Instant Messaging Provides immediate alert on .Saves time
(first half 2000) screen to initiate interaction .Facilitates rapid response
between customer and agents
- ------------------------------------------------------------------------------------
Collaboration Enables agents to walk .Personalized customer
(first half 2000) customers through problems on- service
line .Saves time
.Increases probability
of a completed transaction
- ------------------------------------------------------------------------------------
H.323 Standard Voice- Provides Web-based voice .Necessary for universal
Over-Internet Protocol communications independent of voice communication over
(second half 2000) specific vendor equipment the Internet
.Reduces communications
costs
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Feature Description Benefit
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Enhanced Collaboration with Enables customers and agents .Helps customers complete a
H.323 Standard and Web to carry on voice transaction that might
Displays communications while sharing otherwise be abandoned
(second half 2000) documents over a single link .Supports interactive
using voice-over-Internet transmission of Web screens
Protocol and applications .Speeds collaboration
such as Microsoft NetMeeting
- ----------------------------------------------------------------------------------------
Enhanced E-mail Adds the capability to . Allows customers and
(second half 2000) create templates so that agents to communicate via
agents can provide quicker medium of choice in a
responses. Also leverages seamless way
unified messaging for
response to voice and fax
via a single e-mail
interface
- ----------------------------------------------------------------------------------------
Integrated Voice Processing Provides voice mail, fax .Saves time
System support and unified .Reduces calls required to
(second half 2000) messaging which ties retrieve messages
together voice, fax and e- .Reduces separate equipment
mail in a single interface requirements by running
directly on the server
- ----------------------------------------------------------------------------------------
Unified Messaging Presents voice mail, fax and .Saves time
(second half 2000) e-mail together on a single .Easy access to all message
user interface forms without multiple
calls
</TABLE>
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.
38
<PAGE>
The following table summarizes the features of our products which support
enhanced contact center management.
<TABLE>
<CAPTION>
Feature Description Benefit
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Real-Time Agent Reporting Real-time reporting that . Identifies under-utilized
describes agent activity agents for timely
reallocation of workloads
- ---------------------------------------------------------------------------------------
Custom Display Tools for customizing . Contact center can
information displayed to emphasize information to
agents agent that is deemed most
important
- ---------------------------------------------------------------------------------------
Agent Service Observation Real-time monitoring of . Improves quality control
agents
. Timely customer service
and training improvement
- ---------------------------------------------------------------------------------------
Enterprise Management Reports for analysis and . Facilitates managing and
Reports forecasting analyzing customer trends
</TABLE>
Contact Center Productivity Features
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.
39
<PAGE>
The following table summarizes the features of our products which support
enhanced contact center productivity.
<TABLE>
<CAPTION>
Feature Description Benefit
- -------------------------------------------------------------------------------
<S> <C> <C>
CTI Features
- -------------------------------------------------------------------------------
Caller ID Support & Provides selected . Real-time access to
Screen Pops information about the caller customer information
. Delivers database
information onto agent
display
. Shorter and more efficient
customer communications
- -------------------------------------------------------------------------------
PC Phone Control Provides a Windows-based PC . Easy to use interface
application for controlling improves agent
an agent's telephone and productivity
status
- -------------------------------------------------------------------------------
Virtual Contact Centers
- -------------------------------------------------------------------------------
Home Agent Integrates agents into a . Employee flexibility
contact center from a remote . Increases pool of
location potential agents
. Decreases need for large
call centers
. Reduces costs
- -------------------------------------------------------------------------------
Multi-site Permits groups of agents in . Provides efficient routing
Networking multiple locations to to available agents (load
operate as an integrated balancing)
customer contact center
- -------------------------------------------------------------------------------
Automated Features
- -------------------------------------------------------------------------------
Skills-based Utilizes multiple algorithms . Ensures calls and Web
Routing to route calls to contacts are routed
appropriate agent promptly and properly
- -------------------------------------------------------------------------------
Voice Mail and Handles and directs calls . Reduces the need for agent
Automated Attendant that do not require interaction
sophisticated call routing
- -------------------------------------------------------------------------------
Intelligent Presents customers with . Provides callers with
Announcement System interactive, prerecorded useful automated
information, estimated wait information
times, number of agents
available and other
statistics
- -------------------------------------------------------------------------------
Automatic Agent Prerecorded agent greetings . Improves customer
Greeting and notification to agents interaction
</TABLE>
40
<PAGE>
Versatility and Ease of Customization
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.
The following table summarizes the features of our products that support
versatility and ease of customization.
<TABLE>
<CAPTION>
Feature Description Benefit
- -------------------------------------------------------------------------------
<S> <C> <C>
Embedded SQL/ODBC Database interface . Accesses call center data
Server in a data base
. Leverages existing
customer information
- -------------------------------------------------------------------------------
Configuration Network-based remote system . Reduces system management
Manager configuration tool time and costs
- -------------------------------------------------------------------------------
CTI Links (CSTA, Combination of voice . Data and commands flow
TSAPI, IBM communications and computing between the communications
CallPath, TAPI, and capabilities which link server and multiple host
Dialogic CT telephony equipment to voice computers, permitting a
Connect) mail services, telephone network implementation of
directories, customer a variety of enhanced
information databases and PC applications such as
applications screen synchronization,
automated outbound
dialing, automatic number
identification, screening
and call routing
- -------------------------------------------------------------------------------
Active X Component Provides tools for . Develop customer
developers of call center applications without the
applications to use a need to understand complex
variety of programming computer telephony
languages including C, C++, integration protocols
Borland Delphi, Visual Basic
and Java
- -------------------------------------------------------------------------------
Voice-over-Internet Permits transmission of . Reduces communications
Protocol voice communications over cost
(first half of Internet Protocol networks
2000)
</TABLE>
41
<PAGE>
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, available in
the first quarter of 2000, 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.
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.
We believe the Millennium product line addresses small and medium-sized
installations that commonly do not have a need to implement e-commerce
solutions and that such installations will continue to represent a significant
market opportunity for the foreseeable future. We believe that we can continue
to be successful in this market segment due to the flexibility, ease of
configuration and customization, scalability and range of features and
functionality, provided by the Millennium as compared to other PBXs.
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
American operations serve as a dealer for our Millennium voice switching
platform and our Linux communications servers.
Customers
Linux Communications Servers
Our Linux communications server product line is designed for customers in
most major segments of the voice communications and the integrated voice and
Web communications markets.
42
<PAGE>
Our current eQueue 4000 customer base reflects our position in the high-
capacity and mission-critical segments of the market. Our newly introduced
eNterprise 2000 and our eNterprise 200 under development are designed to
address the voice and Internet communications needs of small and medium-sized
installations, which are large market segments.
To date, most of our Linux communications server customers are operators of
large customer contact centers that require mission-critical reliability. They
include outsourced customer service providers, catalog retailers, virtual
customer contact centers (where customer service agents operate from any
location as if they were in a centralized location), emergency-911 contact
centers and other government agencies. Examples of our Linux communications
server customers include: CallTech and The Product Line among outsourced
customer contact service providers; Alpine Access, an outsourced virtual
customer contact center; Fairfax County 911 and the FAA's Automated Flight
Service Centers among mission-critical government services; and Appleseed's and
Current among catalog retailers. Except for the FAA, which accounted for 20.7%
of our $53.7 million in pro forma revenues for fiscal 1999, sales to these
customers represented approximately 1.8% of our pro forma revenues for the same
period.
The following are examples of our Linux communications server customers.
CallTech. CallTech Communications, Inc. is a leading outsourced customer
contact service provider to such clients as Priceline.com, CompuServe and Bell
South. CallTech has approximately 1,000 agents in two contact centers that use
the eQueue 4000 and has ordered two more eQueue 4000 communications servers
with e-mail routing and Web callback features to offer e-commerce support for
their clients. CallTech is replacing its e-mail and Web callback management
software from other vendors with our eQueue 4000, which can integrate Internet
and telephone communications within a single system.
Alpine Access. Alpine Access is a customer relations outsourcing provider
that has a nationwide home agent network that function as a large virtual call
center. Our eQueue 4000 system allows Alpine Access agents to work remotely
from home and provides the agents with full multi-button agent phone
functionality. The eQueue 4000 system also provides agents with immediate
access on their personal computers through the Internet to database information
which enables them to service customers effectively.
FAA. The FAA has a nationwide network of 61 Automated Flight Service
Stations (AFSS) that provides services to pilots, including processing flight
plans, pre-flight weather briefings, broadcasts of aviation weather and
national airspace information, search and rescue communications and lost
aircraft orientation. The FAA decided to upgrade its pilot contact management
systems with new mission-critical, year 2000 compliant systems that also
improved performance and added computer telephony capabilities. Calls to the
FAA nationwide pilot weather briefing number are routed by our Linux
communications servers to an AFSS. Our communications servers support the FAA's
service goal of answering a minimum of 80% of all calls within 30 seconds by
providing real-time three-dimensional graphs and tables on contact center
performance so that management of the AFSS can react quickly to changing
contact center conditions.
Our pro forma and actual revenues in the five quarters ended July 31, 1999
have been heavily affected by our FAA contract. These installations were
completed in June 1999. The FAA contract accounted for $11.1 million or 20.7%
of our total pro forma revenues in the fiscal year ended July 31, 1999.
43
<PAGE>
Millennium Voice Switching Platform
Customers for our Millennium voice switching platform number over 5,400 end-
users and include a broad cross-section of small and medium-sized
installations. Examples of our Millennium customers are Budget Rent-A-Car,
Circuit City, Florida Power, Hartz Mountain, Los Angeles Dodgers, Pennsylvania
State School Systems, PETsMART, St. Cloud Minnesota School District, U-Haul,
United States Coast Guard and United States Customs Service. An example of a
major Millennium customer is described below.
Circuit City. Circuit City is one of the largest retailers of brand name
consumer electronics equipment in the United States. Circuit City has
implemented our Millennium switching platform and our voice processing system
in approximately 450 stores nationwide. Circuit City's regional customer
service centers use the Millennium switching platform and the Millennium Real-
Time Automatic Call Distributor package to intelligently route calls within the
center and to provide management reports. Circuit City selected the Millennium
because of its flexible call routing and automatic call distributor
capabilities and easy installation and configuration.
As e-mail and Web-based communications gain broad acceptance, we believe
that some of our Millennium customers will decide to integrate these forms of
communications into their communications systems and that they will then become
potential customers for our Linux communications servers.
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 4000
communications servers in the United States and through value added resellers
internationally. We plan to 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.
All sales by our Caribbean/Latin American operations are direct. For fiscal
1999, our direct sales force accounted for approximately 79% of our pro forma
revenues and our indirect distribution channels accounted for approximately 21%
of our pro forma revenues.
As of October 31, 1999, we had approximately 38 sales and marketing
personnel in our Communications Systems operations and 35 in our
Caribbean/Latin American operations. We have increased our Communication
Systems sales and marketing personnel approximately 31% 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
44
<PAGE>
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 October 31, 1999, we had 33 research and
development employees, representing a 43% 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 Linux communications servers
and software. We intend to use independent contractors from time to time to
assist with certain product development and testing activities.
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:
. Product Line Enhancements. We are currently developing a number of
enhancements for our eQueue 4000 and eNterprise 2000 communications
servers to provide for better integration of voice and data capabilities
and e-commerce capabilities, such as a voice-over-Internet Protocol and
Web-based configuration and management. We also will continue to add
support for industry-standard application interfaces and protocols for
enhanced interoperability with other vendors' equipment and software.
. E-Commerce Enabling Software. The eOn Web Center, a Web-based contact
center, is a Linux software applications suite for routing, tracking and
responding to customer e-mail and Web-based communications in real-time.
Other features of this product under development include instant
messaging, Web-based collaboration, and Web-based chat.
. Product Family Expansion. The eNterprise 200 communications server will
integrate Web functionality with extensive voice capabilities on a PC
platform. This product will integrate PBX, automatic call distribution,
voice mail, unified messaging, and data communications and database
applications on a single PC-based platform. We plan to offer next-
generation Internet Protocol-based telephones with this product.
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 Linux communications servers. We receive, inspect and
test components and subassemblies and then assemble and test each system. Each
eQueue 4000 communications server is custom-configured at our facility prior to
shipment.
We currently use two contract manufacturers to produce the Millennium, CMC
Industries, Inc. and Pensar Corporation. Both contract manufacturers perform
printed circuit board assembly and soldering, in-circuit and functional testing
and packaging. We believe that CMC and Pensar have
45
<PAGE>
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 CMC we
negotiate pricing annually for the next fiscal year. We make purchases from
Pensar 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 in recent
months, while many more remain private. Most established competitors, as well
as those emerging companies that have completed initial public offerings,
currently have greater resources and market presence than we do. In addition, a
number of our current and potential competitors have recently been acquired by
larger companies who seek to enter our markets.
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.
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.
46
<PAGE>
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, Mustang.com and WebLine Communications (announced
acquisition 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 (announced acquisition by Nortel Networks), Genesys Telecommunications
Laboratories (announced acquisition by Alcatel), Interactive Intelligence,
Silknet Software and Vantive (announced acquisition by PeopleSoft). In
addition, Aspect Communications, historically a supplier of traditional call
center products, is repositioning 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, Picazo Communications, NBX Corporation (acquired by 3Com), Selsius
Systems (acquired by Cisco), and Calista (announced acquisition by Cisco). 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.
47
<PAGE>
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 23 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 trademarks of eOn.
Facilities
Our corporate offices occupy approximately 25,000 square feet in Memphis,
Tennessee, under a lease expiring May 31, 2000. We expect to relocate our
headquarters to a larger facility in Memphis in 2000. We also lease office,
manufacturing and related space in the following cities: Kennesaw, Georgia; San
Juan, Puerto Rico; Corinth, Mississippi; Engelwood, Colorado; and Guelph,
Ontario, Canada.
Employees
As of October 31, 1999, we employed 249 people, of whom 149 were in our
Communication Systems operations and 100 were in our Caribbean/Latin American
operations. Our Communication Systems operations had 38 employees in sales and
marketing, 33 in research and development, 32 in service, technical support and
training, 25 in manufacturing operations and quality assurance and 21 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.
Legal Proceedings
In the ordinary course of our business, we may from time to time be involved
in litigation with employees, customers and others.
In 1997, Cellu-Tel, Inc. filed an action against us essentially alleging that
we breached the terms of our contract by ceasing to supply services to the
plaintiffs. The complaint seeks damages of approximately $854,430. We believe
that this litigation is without merit and will not have a material adverse
effect on our business.
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,
48
<PAGE>
which also names Sprint International Communications and our dealer, Technicom
Communications, Inc., seeks actual damages of approximately $1.5 million due to
disruption of its fantasy football pool operations plus punitive damages and
attorneys' fees. A trial date has been set for March 6, 2000. We believe that
this litigation is without merit and will not have a material adverse effect on
our business.
In November 1998, WSI, Inc., a distributor of telecommunications systems
filed an action against Cortelco Puerto Rico, Cortelco Systems Holding
Corporation and David S. Lee, one of our directors. The complaint essentially
alleges that the defendants misused confidential information and otherwise
engaged in unfair competition with WSI by attempting to hire WSI employees and
to discredit WSI with a supplier and with customers. The complaint seeks
damages in excess of $15 million plus costs and attorneys' fees. We believe
that this litigation is without merit and will not have a material adverse
effect on our business.
49
<PAGE>
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of eOn, and their ages as of October 31,
1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
J. Michael O'Dell........... 51 President, Chief Executive Officer and
Director
Stephen N. Samp............. 35 Chief Financial Officer, Vice President of
Finance and Administration and Secretary
Robert R. Cash.............. 44 Vice President of Sales and Marketing
Troy E. Lynch............... 35 Vice President of Engineering
David M. Fredrick........... 46 Vice President of Strategic Accounts
Sergio R. Moren............. 54 Vice President/General Manager of
Caribbean/Latin American Operations
David S. Lee (1)............ 62 Chairman of the Board
Stephen R. Bowling (1) (2).. 57 Director
Robert P. Dilworth (2)...... 58 Director
W. Frank King (1)........... 59 Director
Jenny Hsui Theleen (1) (2).. 47 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
J. Michael O'Dell became Chief Executive Officer and a director of eOn in
April 1998 and became President in October 1997. He was Chief Operating Officer
of eOn from October 1997 to April 1998. From May 1993 to October 1997, Mr.
O'Dell held management positions at VTEL Corporation, a visual communications
company, most recently as Vice President and General Manager for the Enterprise
Systems Division. Prior to VTEL, Mr. O'Dell was Vice President, PC Products at
Dell Computer Corporation, and held management positions at IBM. Mr. O'Dell
received an M.S. from the United States Naval Postgraduate School and a B.S.
from the United States Naval Academy.
Stephen N. Samp became Chief Financial Officer, Vice President of Finance and
Administration 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.
Robert R. Cash became Vice President of Sales and Marketing 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.
50
<PAGE>
Troy E. Lynch became Vice President of Engineering for eOn in February 1999.
From December 1997 to January 1999, he was Vice President of Research and
Development at 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.
David M. Fredrick became Vice President of Strategic Accounts in December
1999 and was previously Vice President/General Manager beginning in April 1999
upon eOn's acquisition of BCS Technologies. From 1988 until April 1999, Mr.
Fredrick was President and director of BCS Technologies. Prior to 1988, Mr.
Fredrick was Vice President and Chief Operating Officer of Big O Tire Dealers,
a retail tire and auto service company. Mr. Fredrick received an M.B.A. and a
B.A. from the University of Denver.
Sergio R. Moren became Vice President/General Manager of Caribbean/Latin
American operations in April 1999. From February 1998 until April 1999, Mr.
Moren was President of Cortelco Puerto Rico. From January 1996 to February
1998, he was Vice President of Integrated Technologies, a contract
manufacturer. Prior to 1996, Mr. Moren held executive positions in
manufacturing, sales and marketing at ITT Industries, Inc., an engineering and
manufacturing company, including President and General Manager of ITT Qume
Caribe, a division of ITT Industries. Mr. Moren received a masters degree from
Harvard University and a B.S. from Santa Maria University.
David S. Lee became the Chairman of eOn in 1991. Mr. Lee is also a director
of ACT Manufacturing, Inc., a contract manufacturer; Centigram Communications
Corporation, a communications management system company; 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 Corporation 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 an honorary doctorate from Montana State
University.
Stephen R. Bowling became a director of eOn in September 1993. From 1994 to
October 1997, he was the President of eOn and, from 1994 to April 1998, he was
the Chief Executive Officer of eOn. In September 1993, Mr. Bowling became
President, Chief Executive Officer and a director of Cortelco Systems Holding
Corporation. Mr. Bowling is the President and Chief Executive Officer of
eManage.com, an Internet Web site service company. From 1978 to 1984, Mr.
Bowling held executive positions with Qume Corporation, including Executive
Vice President and General Manager. Mr. Bowling received an M.B.A. from
Stanford University and a B.A. from Williams College.
Robert P. Dilworth became a director of eOn in July 1998. He is the Chairman
of Metricom, Inc., a wireless data communications company, and was its
President from 1987 to 1997 and its Chief Executive Officer from 1987 to 1998.
Mr. Dilworth is also Chairman of GraphOn Corporation, a computer software
company. Mr. Dilworth received a B.S. from Los Angeles State University.
51
<PAGE>
W. Frank King became a director of eOn in September 1998. Mr. King is a
director of PSW Technologies, Inc., a software integration consulting firm, and
was its President and Chief Executive Officer from 1992 to 1998. He is also a
director of Excalibur Technologies Corporation, a software company; Auspex
Systems Inc., a computer server manufacturer; Best Software, Inc., an
application software company; and Natural Microsystems Corporation, a
telecommunications company. Dr. King earned a Ph.D. from Princeton University,
an M.S. from Stanford University and a B.S. from the University of Florida.
Jenny Hsui Theleen became a director of eOn in July 1997. She is the Chairman
of CV Transportation Services, an integrated transportation and distribution
company. In 1984, Ms. Theleen co-founded ChinaVest, a private equity investment
firm, and is a managing director of ChinaVest. Ms. Theleen earned her post-
graduate degree from L'Institut d'Etudes Politiques and a bachelor's degree
from the University of Singapore.
Committees of the Board of Directors
Our board of directors consists of six members, including our Chief Executive
Officer. In accordance with our certificate of incorporation, our board of
directors will be divided into three classes: Class I, whose term will expire
at the annual meeting of stockholders to be held in 2000, Class II, whose term
will expire at the annual meeting of stockholders to be held in 2001, and Class
III, whose term will expire at the annual meeting of stockholders to be held in
2002. Currently, the Class I directors are Stephen R. Bowling and Jenny Hsui
Theleen, the Class II directors are Robert P. Dilworth and David S. Lee, and
the Class III directors are W. Frank King and J. Michael O'Dell. At each annual
meeting of stockholders after the initial classification, the successors to
directors whose terms will then expire will be elected to serve from the time
of election and qualification until the third annual meeting following
election. Any additional directorships resulting from an increase in the number
of directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors.
Our board of directors has established an audit committee and a compensation
committee. The audit committee consists of independent directors Stephen R.
Bowling, Robert P. Dilworth and Jenny Hsui Theleen. The audit committee makes
recommendations to the board regarding the selection of independent auditors,
reviews the results and scope of the audit and other services provided by eOn's
independent auditors, and reviews and evaluates eOn's internal control
functions. The compensation committee consists of Stephen R. Bowling, W. Frank
King, David S. Lee and Jenny Hsui Theleen.
Director Compensation
Directors currently do not receive any cash compensation for services
provided as a board member but are reimbursed for out-of-pocket expenses they
incur in connection with attendance at board meetings. Pursuant to our 1997
Equity Incentive Plan, Robert P. Dilworth and W. Frank King were each granted
an option to purchase 18,000 shares of common stock at an exercise price of
$0.70 per share in July 1998 and September 1998, respectively, and an option to
purchase 17,027 shares of common stock at an exercise price of $6.50 per share
in December 1998. Directors are eligible to receive discretionary option grants
pursuant to the 1999 Equity Incentive Plan and employee directors will also be
eligible to participate in the 1999 Employee Stock Purchase Plan. See "Stock
Incentive Plans."
52
<PAGE>
Compensation Committee Interlocks and Insider Participation
In April 1998, our board of directors established a compensation committee.
The compensation committee is responsible for approving all compensation
arrangements for our officers and for administering our employee stock option
and stock purchase plans. In the last fiscal year, the compensation committee
was composed of Stephen R. Bowling, David S. Lee and Jenny Hsui Theleen. W.
Frank King joined the compensation committee in February 1999. Other than
Stephen R. Bowling, who served as eOn's President from 1994 to October 1997 and
as eOn's Chief Executive Officer from 1994 to April 1998, none of the members
of the compensation committee are, or have ever been, officers or employees of
eOn. Prior to the formation of the compensation committee, our board of
directors made all decisions regarding our officers' compensation arrangements.
See "Certain Transactions."
Executive Compensation
The following table sets forth certain information concerning the
compensation earned for the fiscal year ended July 31, 1999 for (a) eOn's Chief
Executive Officer and (b) each other executive officer of eOn whose total
salary and bonus exceeded $100,000 for services rendered to eOn and its
subsidiaries during the fiscal year 1999. For information regarding terms of
the stock options, see "Stock Incentive Plans."
The annual compensation of Messrs. Fredrick and Lynch each exceed $100,000.
However, because they were hired during fiscal year 1999 and their total
compensation earned as of the end of fiscal year 1999 did not exceed $100,000,
they are not included in the following table as named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------------- ------------
Securities
Other Annual Underlying
Name and Principal Position Salary Bonus Compensation Options
- --------------------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
J. Michael O'Dell, President,
Chief Executive Officer and
Director......................... $208,106 $ -- $ -- 217,000
Robert R. Cash, Vice President of
Sales and Marketing.............. 143,077 34,925 38,979(1) 58,750
Sergio R. Moren, Vice
President/General Manager of
Caribbean/Latin America.......... 107,500 1,506 12,225(2) 49,000
</TABLE>
- --------
(1) Represents reimbursement of relocation expenses.
(2)Represents an automobile allowance.
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during fiscal
year 1999 to each of the named executive officers. Options generally vest at
either a rate of 12.5% (beginning six months after the vesting commencement
date and vesting in equal monthly installments over a three and one-half year
period thereafter) or at a rate of 25% (beginning one year after the vesting
commencement date and vesting in equal monthly installments over a three year
period thereafter). These options have a term of 10 years.
53
<PAGE>
The potential realizable value is calculated based on the term of the option
at the time of grant, which is 10 years. Stock price appreciation of 5% and 10%
is assumed pursuant to rules promulgated by the SEC and does not represent our
prediction of our stock price performance. The potential realizable value at 5%
and 10% appreciation is calculated by assuming that the exercise price on the
date of grant appreciates at the indicated rate for the entire term of the
option and that the option is exercised at the exercise price and sold on the
last day of its term at the appreciated price.
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
Potential
Realizable Value
Percentage at Assumed Annual
Number of of Total Rates of Stock
Securities Options Exercise Price Appreciation
Underlying Granted in Price for Option Term
Options Fiscal Per Expiration ------------------
Name Granted 1999 (1) Share Date 5% 10%
---- ---------- ---------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
J. Michael
O'Dell........... 67,000 5.4% $6.50 12/21/08 $273,884 $ 694,075
150,000 12.1 10.38 04/07/09 979,189 2,481,457
Robert R. Cash.... 8,750 0.7 6.50 12/21/08 35,768 90,644
50,000 4.0 10.38 04/07/09 326,396 827,152
Sergio R. Moren... 19,000 1.5 6.50 12/21/08 77,668 196,827
30,000 2.4 10.38 04/07/09 195,838 496,291
</TABLE>
- --------
(1) Based on an aggregate of 1,240,153 shares subject to options granted to
employees of eOn under the 1997 Equity Incentive Plan and 1999 Equity
Incentive Plan in fiscal 1999, including the named executive officers.
Aggregated Options Exercised in Fiscal 1999 and Year-End Option Values
The following table sets forth, for the named executive officers, the shares
acquired and the value realized on each exercise of stock options during the
year ended July 31, 1999, and the number and value of securities underlying
unexercised options held by the named executive officers at July 31, 1999.
Options generally vest at either a rate of 12.5% (beginning six months after
the vesting commencement date and vesting in equal monthly installments over a
three and one-half year period thereafter) or at a rate of 25% (beginning one
year after the vesting commencement date and vesting in equal monthly
installments over a three year period thereafter). These options have a term of
10 years. There was no public trading market for the common stock as of July
31, 1999. Accordingly, the value of unexercised in-the-money options have been
calculated assuming the shares of common stock have a value of $11.00 per
share.
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-
Acquired Options The-Money Options
On ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Michael O'Dell....... -- -- 46,953 255,047 $415,795 $828,704
Robert R. Cash.......... -- -- 6,275 67,475 57,232 167,643
Sergio R. Moren......... -- -- 2,770 46,230 12,465 91,635
</TABLE>
54
<PAGE>
Stock Incentive Plans
1999 Equity Incentive Plan
In April 1999, our board of directors adopted, and the stockholders approved,
the 1999 Equity Incentive Plan. There is currently an aggregate of 2,000,000
shares of common stock authorized for issuance under the plan. The plan
provides for the grant of incentive stock options, as defined under the
Internal Revenue Code of 1986, as amended, to employees and nonstatutory stock
options, restricted stock purchase awards, stock bonuses and stock appreciation
rights to employees, directors and consultants of eOn and its affiliates. The
plan is administered by a committee appointed by the board of directors which
determines recipients and types of awards to be granted, including the exercise
price, the number of shares subject to the award, the vesting rate and the
exercisability of awards.
The terms of options granted under the plan may not exceed 10 years. The
exercise price is determined by the board of directors, provided that the
exercise price for an incentive stock option cannot be less than 100% of the
fair market value of the common stock on the date of the option grant, and the
exercise price for a nonstatutory stock option cannot be less than 85% of the
fair market value of the common stock on the date of the option grant.
Generally, the optionee may not transfer a stock option other than by will or
the laws of descent or distribution unless the optionee holds a nonstatutory
stock option that provides for transfer in the stock option agreement. However,
an optionee may designate a beneficiary who may exercise the option following
the optionee's death. An optionee whose service relationship with eOn or any
affiliate ceases for any reason may exercise vested options for the term
provided in the option agreement.
No incentive stock option may be granted to any person who, at the time of
the grant, owns, or is deemed to own, stock possessing more than 10% of the
total combined voting power of eOn or any affiliate of eOn, unless the option
exercise price is at least 110% of the fair market value of the stock subject
to the option on the date of grant and the term of the option does not exceed
five years from the date of grant. In addition, the aggregate fair market
value, determined at the time of grant, of the shares of common stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year, under all eOn stock plans and its
affiliates, may not exceed $100,000.
When eOn becomes subject to Section 162(m) of the Internal Revenue Code,
which denies a deduction to publicly held corporations for certain compensation
paid to specified employees in a taxable year to the extent that the
compensation exceeds $1,000,000, no person may be granted options under the
plan covering more than 500,000 shares of common stock in any calendar year.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the plan. Restricted stock purchase awards granted under the plan
may be granted pursuant to a repurchase option in favor of eOn in accordance
with a vesting schedule and at a price determined by the board of directors.
Stock bonuses may be awarded in consideration of past services without a
purchase payment. Unless otherwise specified, rights under a stock bonus or
restricted stock bonus agreement generally may not be transferred other than by
will or the laws of descent and distribution during such period as the stock
awarded pursuant to such an agreement remains subject to the agreement.
55
<PAGE>
If there is any sale of substantially all of eOn's assets, any merger,
reverse merger or any consolidation in which eOn is not the surviving
corporation, or any acquisition by certain persons, entities or groups of 50%
or more of eOn's stock, all outstanding awards under the plan either will be
assumed or substituted by any surviving entity. If the surviving entity
determines not to assume or substitute such awards, the vesting provisions of
such stock awards will be accelerated and the awards terminated if not
exercised prior to such transaction.
As of October 31, 1999, no stock bonuses or restricted stock awards had been
granted, options to purchase 1,045,057 shares of common stock were outstanding,
no options had been exercised and 954,943 shares remained available for future
grants pursuant to the plan. The plan will terminate in April 2009.
1997 Equity Incentive Plan
In April 1998, our board of directors and stockholders approved the 1997
Stock Incentive Plan, which provides for the grant of incentive stock options,
nonqualified stock options and restricted stock awards to employees and
consultants. A maximum of 450,000 shares of common stock have been reserved for
issuance under the plan. In addition, the aggregate fair market value,
determined at the time of grant, of the shares of common stock with respect to
which incentive stock options are exercisable for the first time by an optionee
during any calendar year, under all stock plans of eOn and its affiliates, may
not exceed $100,000.
The plan is administered by the board of directors, which has the authority
to determine which eligible individuals are to receive options or restricted
stock awards, the terms of such options or awards, the status of such options
as incentive or nonqualified stock options under the federal income tax laws,
including the number of shares, exercise or purchase prices and exercisability,
vesting schedule and the time, manner and form of payment upon exercise of an
option. The exercise price of options granted under the plan is determined by
the compensation committee. The options expire after a specified period that
may not exceed ten years or in the case of a stockholder holding greater than
10% of the voting power, five years. As of October 31, 1999, options to
purchase 333,409 shares were outstanding, no options had been exercised, and
116,591 shares remained available for future grants pursuant to the plan. The
plan will terminate in April 2008. Our board of directors has determined that
no further options will be granted under the plan after the completion of this
offering.
1997 Equity Incentive Plan of BCS Technologies, Inc.
In April 1999, in connection with the acquisition of BCS, we assumed the 1997
Stock Incentive Plan of BCS, which provides for the grant of incentive stock
options, nonqualified stock options and restricted stock awards to employees
and consultants. A maximum of 96,495 shares of our common stock have been
reserved for issuance under the plan. As of October 31, 1999, options to
purchase 94,279 shares were outstanding, no options had been exercised, and
2,216 shares remained available for future grants pursuant to the plan. The
plan will terminate in January 2007. Our board of directors has determined that
no further options will be granted under the plan after the completion of this
offering.
1999 Employee Stock Purchase Plan
In April 1999, our board of directors and stockholders approved the 1999
Employee Stock Purchase Plan, which enables eligible employees to acquire
shares of common stock through payroll
56
<PAGE>
deductions. The plan is intended to qualify as an "employee stock purchase
plan" under Section 423 of the Code. Each offering under the plan after the
initial offering will run for one year, unless otherwise determined by the
board of directors prior to the beginning of such offering. During each
offering period, an eligible employee may select a rate of payroll deduction of
up to 15% of compensation. The purchase price for the common stock purchased
under the plan is 85% of the lesser of the fair market value of the shares on
the first day or the purchase date. An aggregate of 250,000 shares of common
stock have been reserved for issuance under the plan.
Employment Agreement
With the exception of David M. Fredrick, Vice President/General Manager, none
of our executive officers has an employment agreement, and each of such
executive officers serves at the discretion of our board of directors. On April
12, 1999, eOn entered into an employment agreement with Mr. Fredrick. Pursuant
to the terms of such agreement, Mr. Fredrick received a salary of $165,000 in
1999 and is to receive an annual salary of $175,000 in 2000. Mr. Fredrick
received an option to purchase 70,000 shares of common stock, 60,000 shares of
which vest on January 2, 2001 and 10,000 shares of which vest on January 2,
2002.
401(k) Plan
Effective July 15, 1990, as amended on October 1, 1995, our board of
directors adopted an employee savings and retirement plan covering certain of
our employees. Pursuant to the 401(k) plan, eligible employees may elect to
reduce their current compensation by up to the lesser of 16% of such
compensation or the statutorily prescribed annual limit ($10,000 in 1999) and
have the amount of such reduction contributed to the plan. eOn may make
contributions equal to 50% of the first 6% of the total of an employee's
elective contribution and/or their after-tax employee contribution up to a
maximum of $2,000 to the plan on behalf of eligible employees. Additionally, we
may make an additional non-matching contribution on a discretionary basis on
behalf of all eligible employees. The plan is intended to qualify under Section
401 of the Internal Revenue Code so that contributions by employees or by eOn
to the plan, and income earned on the plan contributions, and so that
contributions by eOn, if any, will be deductible by us when made. The trustee
under the plan, at the direction of each participant, invests the plan employee
salary deferrals in selected investment options. We made monthly contributions
to the plan in fiscal 1999. We expect to continue to make monthly contributions
at least through fiscal 2000.
Limitation of Liability and Indemnification Matters
Our bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and agents to the
fullest extent permitted by Delaware law. We are also empowered under our
bylaws to enter into indemnification contracts with our directors and executive
officers and to purchase insurance on behalf of any person we are required, or
permitted, to indemnify. Pursuant to this provision, we expect to enter into
indemnity agreements with each of our directors and executive officers.
In addition, our certificate of incorporation provides that, to the fullest
extent permitted by Delaware law, our directors will not be liable for monetary
damages for breach of the directors' fiduciary duty of care to us and our
stockholders. This provision in the certificate of incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available under Delaware law. Each
57
<PAGE>
director will continue to be subject to liability for breach of the director's
duty of loyalty to us, acts or omissions not in good faith or involving
intentional misconduct, knowing violations of law, any transaction from which
the director derived an improper personal benefit, improper transactions
between the director and us and improper distributions to stockholders and
loans to directors and officers. This provision also does not affect a
director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
We expect to enter into agreements with our directors and officers that
require us to indemnify them against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred (including expenses of a
derivative action) in connection with any proceeding, whether actual or
threatened, to which any such person may be made a party by reason of the fact
that such person is or was a director or officer of eOn or any of its
affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in, or not opposed to, the best
interests of eOn and, with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
58
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of eOn's outstanding common stock as of December 31, 1999
and as adjusted to reflect the sale of the common stock being offered hereby
by:
. each person (or group of affiliated persons) who is known by eOn to own
beneficially more than 5% of the common stock;
. each of the named executive officers;
. each of the directors;
. all directors and executive officers of eOn as a group; and
. each of eOn's current stockholders who is expected to sell shares in the
offering.
Unless otherwise specified, the address of the stockholder is the address of
eOn set forth in this prospectus.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally means sole or shared power to vote or direct the voting or to
dispose or direct the disposition of any common stock. Except as indicated by
footnote, and subject to community property laws where applicable, the persons
named in the table below have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. The percentage
of beneficial ownership is based on 9,074,826 shares of common stock
outstanding as of December 31, 1999 and 11,314,826 shares of common stock
outstanding after completion of this offering assuming no exercise of the
underwriters' over-allotment option. If the underwriters' over-allotment option
is exercised in full, 11,614,826 shares of common stock will be outstanding
after the completion of this offering and the following stockholders will sell
the following additional number of shares: ChinaVest (100,000) and Cortelco
Systems Holding Corporation (50,000).
<TABLE>
<CAPTION>
Beneficial
Ownership Beneficial Ownership
Prior to Offering After Offering
----------------- Number ----------------------
Number of Shares Number
Beneficial Owner of Shares Percent Offered of Shares Percent
- ---------------- --------- ------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
David S. Lee (1)........... 3,526,318 38.9% -- 2,876,318 25.4%
ChinaVest and affiliated
entities (2).............. 1,888,457 20.8 -- 1,888,457 16.7
Cortelco Systems Holding
Corporation (3)........... 768,445 8.5 75,000 693,445 6.1
CMC Industries, Inc. (4)... 612,530 6.7 575,000 37,530 *
J. Michael O'Dell (5)...... 69,116 * -- 69,116 *
Jenny Hsui Theleen (6)..... 1,888,457 20.8 -- 1,888,457 16.7
Stephen R. Bowling (7)..... 835,605 9.2 -- 760,605 6.7
Robert P. Dilworth (8)..... 12,090 * -- 12,090 *
W. Frank King (9).......... 11,340 * -- 11,340 *
Robert R. Cash............. 9,737 * -- 9,737 *
Sergio R. Moren............ 5,541 * -- 5,541 *
All directors and executive
officers as a group (11
persons) (10) ............ 5,987,656 66.0 -- 5,337,656 47.2
Other selling stockholders
(11)...................... 220,839 2.4 110,000 110,839 1.0
</TABLE>
- --------
* Represents beneficial ownership of less than 1%.
59
<PAGE>
(1) Includes 2,145,343 shares held directly by David S. Lee, 768,445 shares
held by Cortelco Systems Holding Corporation and 612,530 shares held by
CMC prior to this offering. CMC was acquired by ACT Manufacturing, Inc. on
July 29, 1999. David S. Lee is both Chairman and a principal stockholder
of Cortelco Systems Holding Corporation and a director and principal
stockholder of ACT Manufacturing. David S. Lee disclaims beneficial
ownership of the shares held by Cortelco Systems Holding Corporation and
the shares held by CMC.
(2) Consists entirely of 1,624,073 shares held by ChinaVest IV, L.P., 188,392
shares held by ChinaVest IV-A, L.P. and 75,992 shares held by ChinaVest
IV-B, L.P. (collectively, "ChinaVest"). The address for ChinaVest is 19/F
Dina House, 11 Duddell Street, Central, Hong Kong.
(3) The address for Cortelco Systems Holding Corporation is 1703 Sawyer Road,
Corinth, Mississippi.
(4) The address for CMC Industries, Inc. is 4950 Patrick Henry Drive, Santa
Clara, California. CMC was acquired by ACT Manufacturing, Inc. on July 29,
1999.
(5) Consists entirely of 69,116 shares issuable upon the exercise of options
that will become exercisable within 60 days of December 31, 1999.
(6) Consists entirely of 1,888,457 shares held by ChinaVest. ChinaVest
Partners IV is a general partner of ChinaVest IV, L.P. and ChinaVest IV-A,
L.P. ChinaVest Management Ltd. is a general partner of ChinaVest IV-B,
L.P. Jenny Hsui Theleen is a general partner of ChinaVest Partners IV and
a stockholder of ChinaVest Management Ltd. Jenny Hsui Theleen disclaims
beneficial ownership of these shares except to the extent of her
proportional partnership interest therein.
(7) Includes 7,988 shares held directly by Stephen R. Bowling and 768,445
shares held by Cortelco Systems Holding Corporation prior to this offering
which includes 83,165 shares of common stock held by Cortelco Systems
Holding Corporation which are issuable to Stephen R. Bowling upon the
exercise of options to purchase shares of Cortelco Systems Holding
Corporation that will become exercisable within 60 days of December 31,
1999. Also includes 59,172 shares issuable upon the exercise of options
that will become exercisable within 60 days of December 31, 1999. Stephen
R. Bowling is the President, Chief Executive Officer and a director of
Cortelco Systems Holding Corporation. Other than his option for 83,165
shares of common stock, Stephen R. Bowling disclaims beneficial ownership
of the shares held by Cortelco Systems Holding Corporation.
(8) Consists entirely of 12,090 shares issuable upon the exercise of options
that will become exercisable within 60 days of December 31, 1999.
(9) Consists entirely of 11,340 shares issuable upon the exercise of options
that will become exercisable within 60 days of December 31, 1999.
(10) Includes 178,375 shares issuable upon the exercise of options that will
become exercisable within 60 days of December 31, 1999.
(11) Consists entirely of 110,420 shares held by David M. Fredrick prior to
this offering and 110,419 shares held by Frank Naso prior to this
offering, all of which are subject to purchase by certain current and
former employees of BCS pursuant to options exercisable upon this
offering. These persons are Mary Ann Alderman, Ed Barker, Michael
Carothers, Jim Coker, Michael Countryman, Tom Fiore, Dale Goulette, Robert
Havens, Willie Humbert, Dave Kelly, Kevin Kormandy, Tom McNeese, Keith
Nansteel, John Nicholson, Wojciech Pawlowski, Barbara Putnam, Gary Spears
and Robert Van De Steeg.
60
<PAGE>
CERTAIN TRANSACTIONS
Prior to April 1999, eOn was a subsidiary of Cortelco Systems Holding
Corporation and from time to time engaged in intercompany transactions with its
parent and affiliates. See note 13 to our consolidated financial statements.
The eOn common stock held by our parent company was pledged to secure a debt
obligation in the amount of $3,600,000 as of December 31, 1998. In order to
release this stock from the pledge so that Cortelco Systems Holding Corporation
could distribute it to the holders of its capital stock and facilitate the
acquisition of BCS, an agreement was entered into with the lender on February
25, 1999 to repay the remaining principal of this obligation in several
installments, the last of which was paid on May 28, 1999. We loaned $2,600,000
at an interest rate equal to the prime rate plus 1.5% to Cortelco Systems
Holding Corporation to be used for these payments. As of November 15, 1999, the
remaining principal balance of this loan was $2,450,000. At or about the time
of this loan, we also declared dividends in the amount of $2,657,000, payable
upon completion of this offering, a portion of which will be used to repay the
remaining principal of the loan outstanding on the date the dividend is paid.
Following release of the pledge, Cortelco Systems Holding Corporation
distributed a total of 2,856,944 shares of our common stock to its stockholders
in April 1999. In connection with this distribution, Cortelco Systems Holding
Corporation distributed: 1,137,364 shares of common stock to David S. Lee,
chairman of eOn; 612,530 shares to CMC; and 4,667 shares to Stephen R. Bowling,
a director of eOn. David S. Lee is also Chairman and a principal stockholder of
Cortelco Systems Holding Corporation. Stephen R. Bowling is also President,
Chief Executive Officer and a director of Cortelco Systems Holding Corporation.
CMC is affiliated with eOn through common stock ownership and was acquired by
ACT Manufacturing Inc. on July 29, 1999. David S. Lee is a director of ACT.
Pursuant to a Convertible Note Purchase Agreement dated as of July 31, 1997,
we sold a convertible promissory note in the aggregate principal amount of
$3,000,000 to ChinaVest, a principal stockholder. The note matures on July 31,
2002 and accrues interest at the rate of 8.0%, payable on the maturity date or
60 days following the date of conversion. On April 12, 1999, in accordance with
the terms of the note, ChinaVest converted $686,000 of outstanding principal
into 1,463,206 shares of Series A Convertible Preferred Stock. The Series A
Convertible Preferred Stock automatically converts into 1,434,894 shares of our
common stock upon completion of this offering. The remaining principal amount
of $2,314,000, plus accrued interest, outstanding under the note will be paid
from the net proceeds of this offering. Jenny Hsui Theleen, a director of eOn,
is a managing director of ChinaVest.
In July 1997, we loaned Cortelco Systems Holding Corporation the principal
amount of $3,184,000. The note accrues interest at the rate of 8.0% per annum.
In April 1999, we repurchased 250,000 shares of our common stock from Cortelco
Systems Holding Corporation in exchange for the cancellation of $2,500,000 of
the principal amount of the note. The remaining principal amount of $684,000,
plus accrued interest, is due in November 2000.
In October 1997, we loaned J. Michael O'Dell, our Chief Executive Officer and
a director, the principal amount of $132,000 in connection with relocation
expenses. J. Michael O'Dell repaid $61,000 of principal on the note in October
1998 and all of the remaining balance in November 1999.
In April 1998, we sold a Millennium system to a public television station for
$210,000. The funding for the purchase was based on a directed donation from
David S. Lee through the Asia Cultural Teachings Corporation, a charitable
foundation. David S. Lee is the honorary president of Asia Cultural Teachings
Corporation.
61
<PAGE>
In April 1998, David S. Lee loaned eOn the principal amount of $250,000,
payable on demand. The note was non-interest bearing and was repaid in full in
October 1998. In February 1999, we distributed a note receivable from David S.
Lee in the amount of $250,000, which had been recorded as an offset to
stockholders equity, to Cortelco Systems Holding Corporation as a dividend.
In April 1999, we declared and paid a stock dividend of 195,685 shares of
common stock.
In connection with the BCS acquisition, we issued 1,036,014 shares of our
common stock to David S. Lee, 636,518 shares to David M. Fredrick, 616,445
shares to Frank Naso, 453,562 shares to ChinaVest and 3,321 shares to Stephen
R. Bowling in exchange for their stockholdings in BCS. See "Company
Background." We also entered into employment agreements with David M. Fredrick
and Frank Naso. See "Management--Employment Agreements."
Since 1993, CMC Industries, Inc., a principal stockholder, has provided
certain manufacturing services on a non-exclusive basis. The current agreement
with CMC, dated as of August 1, 1998, expired on July 31, 1999, and is
renewable annually by eOn. David S. Lee was Chairman and a principal
stockholder of CMC until CMC was acquired by ACT Manufacturing Inc. on July 29,
1999. David S. Lee is currently a director of ACT Manufacturing, Inc.
We purchase single line phones from, and sell Millennium related products to,
Cortelco International, Inc., a wholly-owned subsidiary of Cortelco Systems
Holding Corporation. David S. Lee and Stephen R. Bowling are directors of
Cortelco International, Inc. In fiscal 1999, our purchases from Cortelco
International, Inc. totaled $244,000 and our sales totaled $79,000.
eOn believes that all of the transactions set forth above were made on terms
no less favorable to eOn than could have been otherwise obtained from
unaffiliated third parties. As a matter of policy, all future transactions
between eOn and any of its officers, directors or principal stockholders will
be approved by a majority of the board of directors, including a majority of
the independent and disinterested members of the board.
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our
certificate of incorporation and bylaws is a summary and is qualified in its
entirety by the provisions of our certificate of incorporation and bylaws,
which have been filed as exhibits to our registration statement, of which this
prospectus is a part.
Upon the closing of this offering, our authorized capital stock will consist
of 50,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of preferred stock, $.001 par value per share. As of December 31, 1999,
there were 9,074,826 shares of common stock outstanding held of record by
approximately 140 stockholders.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
common stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of preferred
stock, holders of common stock are entitled to receive ratably such dividends
as may be declared by the board of directors out of funds legally available for
dividends. In the event of our liquidation, dissolution or winding up, holders
of the common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference of the preferred stock,
if any, then outstanding. Holders of common stock have no preemptive rights and
no right to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock.
Preferred Stock
The board of directors has the authority, without further action by the
stockholders, to issue any undesignated shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions of
any shares of preferred stock, including dividend rights, conversion rights,
voting rights, terms of redemption, liquidation preferences, sinking fund terms
and the number of shares constituting any series or the designation of such
series, without any further vote or action by stockholders. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of eOn. We have no present plan to issue any
shares of preferred stock.
Registration Rights
After this offering, the holders of approximately 2,619,432 shares of common
stock will be entitled to rights to require the registration of such shares
under the Securities Act. If we propose to register any of our securities under
the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled, subject to certain limitations,
to include their shares to be registered. The holders may also require us to
file a registration statement under the Securities Act with respect to their
shares, and we are required to use our best efforts to effect up to two such
registrations. Furthermore, the holders may require us to register their shares
on Form S-3 when we become
63
<PAGE>
eligible to use such form. Generally, we are required to bear all registration
and selling expenses incurred in connection with any registrations except for
underwriting discounts and commissions. These rights are subject to conditions
and limitations, including the right of the underwriters of an offering to
limit the number of shares included in such registration.
Delaware Anti-Takeover Law and Certain Charter Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the business combination is approved in a prescribed manner. For purposes of
Section 203, a "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder,
and an "interested stockholder" is a person who, together with affiliates and
associates, owns or within three years prior did own, 15% or more of the
corporation's voting stock.
Our certificate of incorporation, effective upon the closing of this
offering, also requires that:
. the terms of the board of directors will be staggered into three classes;
. any action required or permitted to be taken by stockholders of eOn must
be effected at a duly called annual or special meeting of the
stockholders and may not be effected by written consent;
. the stockholders may amend our bylaws or adopt new bylaws only by the
affirmative vote of 66 2/3% of the outstanding voting securities; and
. special meetings of our stockholders may be called only by the board of
directors, the Chairman of the Board or the Chief Executive Officer.
These provisions may have the effect of delaying, deferring or preventing a
change in control of eOn.
Transfer Agent and Registrar
American Securities Transfer and Trust has been appointed as the transfer
agent and registrar for our common stock. Its telephone number is (303) 298-
5370.
64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of common stock in the public market could reduce
market prices prevailing from time to time. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering because
of contractual and legal restrictions on resale described below, sales of
substantial amounts of common stock in the public market after the restrictions
lapse could reduce the prevailing market price of our stock and our ability to
raise equity capital in the future.
Upon completion of the offering, we will have 11,314,826 shares of common
stock outstanding, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options and warrants and based upon the
number of shares outstanding as of December 31, 1999. Of these shares, the
3,000,000 shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless such
shares are purchased by our "affiliates," as that term is defined in Rule 144
under the Securities Act. The remaining 8,314,826 shares held by existing
stockholders, and any shares purchased by affiliates in this offering, will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act. Our affiliates will hold 5,159,281 of the restricted shares.
Restricted shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
under the Securities Act, which are summarized below.
Upon completion of this offering, the holders of 2,619,432 shares of common
stock, or their transferees, will be entitled to rights to require the
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act, except for shares
purchased by our affiliates, immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
We, our officers, directors and stockholders holding approximately 7,414,198
shares of common stock will agree under written lock-up agreements not to,
without the prior written consent of Needham & Company, Inc., sell any shares
of common stock for 180 days after the date of this prospectus. See
"Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, stockholders who have beneficially owned
restricted shares for at least one year will be entitled to sell in any three-
month period a number of shares that does not exceed the greater of one percent
of the then outstanding shares of our common stock or the average weekly
trading volume of our common stock in the Nasdaq National Market during the
four calendar weeks immediately preceding the date on which notice of the sale
is filed with the SEC. Sales pursuant to Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about eOn. A person, or person whose shares may be
aggregated, who is not deemed to have been one of our affiliates at any time
during the 90 days immediately preceding the sale and who has beneficially
owned restricted shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Any of our employees, directors or consultants who purchased, or was awarded
shares or options to purchase shares pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701 under the
Securities Act, which permits stockholders to sell their Rule 701 shares
without having to comply with Rule 144's holding period restrictions, in each
case
65
<PAGE>
commencing 90 days after the date of this prospectus. In addition, holders who
are not affiliates may sell Rule 701 shares without complying with the public
information, volume and notice provisions of Rule 144.
We intend to file a registration statement under the Securities Act covering
shares of common stock reserved for issuance under our Stock Incentive Plans
and the Purchase Plan. Based on the number of options outstanding and options
and shares reserved for issuance at October 31, 1999, such registration
statement will cover approximately 2,677,688 shares. Such registration
statement is expected to be filed and to become effective as soon as
practicable after the date of this prospectus. Shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with eOn or the lock-up agreements described
above.
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 2000, the underwriters named below, for whom Needham & Company,
Inc., A.G. Edwards & Sons, Inc. and WR Hambrecht + Co., LLC are acting as
representatives, have severally agreed to purchase, and we and the selling
stockholders have severally agreed to sell to them, an aggregate of
shares of common stock. We are selling 2,240,000 shares and the selling
stockholders are selling an aggregate of 760,000 shares. The number of shares
of common stock that each underwriter has agreed to purchase is set forth
opposite its name below.
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Needham & Company, Inc. ........................................
A.G. Edwards & Sons, Inc. ......................................
WR Hambrecht + Co., LLC.........................................
---------
Total........................................................... 3,000,000
=========
</TABLE>
The underwriters are offering the common stock subject to their acceptance of
the common stock and subject to prior sale. The underwriting agreement provides
that the obligations of the underwriters to purchase shares of common stock are
subject to the approval of certain legal matters by counsel and to certain
other conditions. If any of the shares of common stock are purchased by the
underwriters pursuant to the underwriting agreement, all of the shares, other
than the shares of common stock covered by the over-allotment option described
below, must be purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus and to dealers at such price less a concession not in excess of $
per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other dealers. After the initial
public offering of the common stock, the offering price and other selling terms
may be changed from time to time by the underwriters.
We and certain selling stockholders have granted to the underwriters an
option to purchase up to 450,000 additional shares of common stock on the same
terms and conditions solely to cover over-allotments. We have agreed to sell up
to 300,000 additional shares and the selling stockholders have agreed to sell
up to 150,000 additional shares. The option may be exercised during the 30-day
period after the date of this prospectus. If the underwriters' option is
exercised in full, the total price to public would be $ , the total
underwriting discounts and commissions would be $ , and total proceeds to us
would be $ , before deducting $ in expenses.
We and the selling stockholders have agreed to indemnify the underwriters
against specified liabilities, including liabilities under the Securities Act,
and to contribute to payments that the underwriters may be required to make in
connection with such liabilities.
We, our officers, directors and stockholders holding an aggregate of
7,423,475 shares of common stock will agree not to, without the prior written
consent of Needham & Company, Inc., (1) offer, pledge, announce the intention
to sell, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any
shares of common stock or any securities of eOn which are substantially similar
to the common stock, including but not limited to any
67
<PAGE>
securities that are convertible into or exercisable or exchangeable for, or
that represent the right to receive common stock or any such substantially
similar securities or (2) enter into any swap, option, future, forward or other
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of common stock or any securities substantially similar to the
common stock. We may, however, issue shares of common stock upon the exercise
of stock options that are currently outstanding, and may grant additional
options under our stock option plans, provided that, without the prior written
consent of Needham & Company, Inc., for 180 days after the date of this
prospectus, such additional options shall not be exercisable during such
period.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot the offering, creating a
syndicate short position. In addition, the underwriters may bid for, and
purchase, shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
the common stock in the offering, if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price for the shares of common stock offered in
this offering will be determined by negotiation among eOn, the selling
stockholders and the underwriters. Among the factors to be considered in
determining the initial public offering price are our revenues and earnings,
market valuations of other companies engaged in activities similar to ours,
estimates of our business potential and prospects, the present state of our
business operations, our management, the general condition of the securities
markets at the time of the offering and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions
and other factors. There can be no assurance that an active trading market will
develop for our common stock or that our common stock will trade in the public
market at or above the initial public offering price.
A limited number of shares allocated to WR Hambrecht + Co will be distributed
in this offering through the use of the Internet. WR Hambrecht + Co will post
on its Web site (www.wrhambrecht.com) a brief description of the offering which
contains only the information permitted under Rule 134. Visitors to this Web
site will have access to the preliminary prospectus by links on the Web site.
WR Hambrecht + Co will accept conditional offers to purchase shares from
account holders that are determined eligible to participate. In the event that
the demand for shares exceeds the amount of shares allocated to it, WR
Hambrecht + Co will, at the request of eOn, first allocate shares to persons
with an established relationship with eOn. If any shares remain, WR Hambrecht +
Co will allocate them to individual and institutional account holders,
considering the following criteria: trading history of the account with respect
to initial public offerings, post-offering activity in previous offerings and
tenure of the account.
68
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for eOn by Cooley Godward LLP, Palo Alto, California and Baker, Donelson,
Bearman and Caldwell, a Professional Corporation. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Heller Ehrman White & McAuliffe, Los Angeles, California.
EXPERTS
The consolidated financial statements of eOn Communications Corporation
(formerly Cortelco Systems, Inc.) as of July 31, 1998 and 1999 and for each of
the three years in the period ended July 31, 1999, included in this prospectus
and the related financial statement schedule included elsewhere in this
registration statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and elsewhere in this
registration statement and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of BCS Technologies, Inc. as of July 31, 1997 and
1998 and for the year ended July 31, 1998 and the eleven months ended July 31,
1997 included in this prospectus have been audited by Brock and Company, CPAs,
P.C., independent auditors, as stated in their report appearing in this
prospectus and have been included in reliance upon the report of that firm
given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
A registration statement on Form S-1 relating to the common stock offered has
been filed by eOn with the SEC. This prospectus, which constitutes a part of
the registration statement, does not contain all of the information set forth
in the registration statement and the exhibits and schedules thereto. If a
contract or document has been filed as an exhibit to the registration
statement, we refer you to the copy of such contract or other document that has
been filed. Each statement in this prospectus relating to a contract or
document filed as an exhibit is qualified in all respects by the filed exhibit.
For further information with respect to our company and the common stock
offered by this prospectus, we refer you to the registration statement,
exhibits and schedules that we have filed. A copy of the registration statement
may be inspected by anyone without charge at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and copies of material filed may be obtained from the SEC upon the
payment of certain fees prescribed by the SEC. The SEC also maintains a Web
site that contains registration statements, reports, proxy and information
statements and other information regarding registrants that file
electronically. The address of the site is www.sec.gov.
Following this offering, we will become subject to the information and
reporting requirements of the SEC and will be required to file periodic
reports, proxy statements and other information with the SEC. We intend to
furnish to our stockholders annual reports containing audited financial
statements and quarterly reports containing unaudited interim financial
information for the first three quarters of each fiscal year.
69
<PAGE>
eOn Communications Corporation
Index To Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Consolidated Financial Information:
Unaudited Pro Forma Consolidated Financial Information.................... F-2
Pro Forma Consolidated Statement of Operations for the Year Ended July 31,
1999 (Unaudited)......................................................... F-3
Notes to Pro Forma Consolidated Financial Statements (Unaudited).......... F-4
eOn Communications Corporation and Subsidiaries:
Independent Auditors' Report.............................................. F-6
Consolidated Balance Sheets at July 31, 1998 and 1999..................... F-7
Consolidated Statements of Operations for the Years Ended July 31, 1997,
1998 and 1999............................................................ F-8
Consolidated Statements of Cash Flows for the Years Ended July 31, 1997,
1998 and 1999............................................................ F-9
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended July 31, 1997, 1998 and 1999....................................... F-11
Notes to Consolidated Financial Statements for the Years Ended July 31,
1997, 1998 and 1999...................................................... F-12
BCS Technologies, Inc.:
Independent Auditors' Report.............................................. F-34
Balance Sheets at July 31, 1997 and 1998 and April 12, 1999 (Unaudited)... F-35
Statements of Operations for the Eleven Months Ended July 31, 1997, the
Year Ended July 31, 1998 and the Period from August 1, 1998 through April
12, 1999 (Unaudited)..................................................... F-36
Statements of Cash Flows for the Eleven Months Ended July 31, 1997, the
Year Ended July 31, 1998 and the Period from August 1, 1998 through April
12, 1999 (Unaudited)..................................................... F-37
Statements of Stockholders' Equity (Deficit) for the Eleven Months Ended
July 31, 1997, the Year Ended July 31, 1998 and the Period from August 1,
1998 through April 12, 1999 (Unaudited).................................. F-38
Notes to Financial Statements............................................. F-39
</TABLE>
F-1
<PAGE>
Unaudited Pro Forma Consolidated Financial Information
The following pro forma consolidated statement of operations data for the
year ended July 31, 1999 present the unaudited pro forma operating results as
if the acquisition of BCS Technologies, Inc. had occurred as of August 1, 1998.
The pro forma financial data reflects adjustments to the historical financial
statements of eOn and BCS Technologies, Inc., that (1) reflect the purchase
method of accounting for the acquisition of BCS, and (2) eliminate the results
of operations related to a building and the related mortgage not acquired from
the merger with Cortelco Systems Puerto Rico.
The pro forma, as adjusted, consolidated statement of operations data gives
effect to (1) the conversion of convertible preferred stock into 1,434,894
shares of common stock upon the closing of this offering, and (2) the offering
and the uses of proceeds from the offering.
The pro forma financial data does not purport to represent what the company's
results of operations actually would have been had the transactions occurred on
the dates indicated, or to project the company's results of operations at any
future date or for any future period. The following pro forma financial data
should be read in conjunction with eOn's consolidated financial statements, BCS
Technologies' financial statements, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" which is included elsewhere.
F-2
<PAGE>
Pro Forma Consolidated Statement of Operations Data
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Year Ended July 31, 1999
------------------------------------------------------------------------
Historical Pro Forma
----------------------- Pro Forma Offering
BCS Through Adjustments Adjustments Pro Forma
eOn April 12, 1999 (Note 2) Pro Forma (Note 3) As Adjusted
------- -------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $42,374 $12,263 $ (987)(a) $53,650 $53,650
Cost of revenues........ 23,890 3,628 (972)(a) 26,546 26,546
------- ------- ------ ------- -------
Gross profit.......... 18,484 8,635 (15) 27,104 27,104
Operating expenses:
Selling, general and 207 (d)
administrative....... 13,056 3,626 (68)(f) 16,821 16,821
Research and
development.......... 2,334 823 3,157 3,157
Amortization of
goodwill............. 177 -- 409 (b) 586 586
------- ------- ------ ------- -------
Total operating
expenses........... 15,567 4,449 548 20,564 20,564
------- ------- ------ ------- -------
Income (loss) from
operations............. 2,917 4,186 (563) 6,540 6,540
Interest expense........ 687 -- (276)(e) 411 $(411)(a) --
Other (income) expense,
net.................... (8) (50) 359 (c) 301 301
------- ------- ------ ------- ----- -------
Income (loss) before
income taxes......... 2,238 4,236 (646) 5,828 411 6,239
Income tax expense...... 83 1,430 -- 1,513 140 (b) 1,653
------- ------- ------ ------- ----- -------
Net income (loss)..... $ 2,155 $ 2,806 $ (646) $ 4,315 $ 271 $ 4,586
======= ======= ====== ======= ===== =======
Net income (loss) per
common share:
Basic................. $ 0.43 $ 0.55 $ 0.40
======= ======= =======
Diluted............... $ 0.33 $ 0.46 $ 0.39
======= ======= =======
</TABLE>
See notes to unaudited pro forma consolidated financial information
F-3
<PAGE>
Notes to Pro Forma Consolidated Financial Information (Unaudited)
1. Basis of Presentation
The pro forma consolidated statement of operations data for the year ended July
31, 1999 present the unaudited pro forma operating results as if the
acquisition of BCS Technologies, Inc. had occurred as of August 1, 1998. The
pro forma financial data reflects adjustments to the historical financial
statements of eOn (the "Company") and BCS, that (1) reflect the purchase method
of accounting for the acquisition of BCS, and (2) eliminate the results of
operations related to a building and related mortgage not acquired from the
merger with Cortelco Systems Puerto Rico.
The pro forma, as adjusted, consolidated statement of operations data gives
effect, additionally, to (1) the conversion of convertible preferred stock debt
into 1,434,894 shares of common stock upon the closing of the offering, and (2)
the offering and the uses of proceeds from the offering.
The pro forma financial data does not purport to represent what the Company's
results of operations actually would have been had the transactions occurred on
the dates indicated, or to project the Company's results of operations at any
future date or for any future period. The following pro forma financial data
should be read in conjunction with eOn's consolidated financial statements,
BCS's financial statements, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which is included elsewhere.
2. Pro Forma Adjustments
(a) To reflect the elimination of revenues and cost of revenues between eOn and
BCS.
(b) To reflect the goodwill amortization related to the BCS acquisition.
Goodwill is amortized over a 20 year period, resulting in annual
amortization of $586.
(c) To reflect the elimination of rental income related to the building
retained by Cortelco Puerto Rico, Inc. and not acquired by the Company.
(d) To reflect the rental expense to be incurred by the Company in connection
with lease agreement negotiated by Cortelco Puerto Rico, Inc. for building
space.
(e) To reflect the elimination of interest expense and amortization of deferred
financing costs related to the mortgage payable not assumed from Cortelco
Puerto Rico, Inc.
(f) To reflect the elimination of the depreciation for building improvements
not acquired from Cortelco Puerto Rico, Inc.
3. Pro Forma Offering Adjustments
(a) To record the decrease in interest expense, including the amortization of
deferred financing costs, resulting from the repayment of the subordinated
note and bank debt and the conversion of debt to common stock. The effects
of this offering adjustment for the three months ended October 31, 1999
would increase net income by approximately $75,000 after reducing interest
expense by $116,000 and recording the income tax effect of $41,000.
(b) To record the income tax effect of the above adjustment at 34%, the
Company's estimated effective tax rate.
F-4
<PAGE>
Notes to Pro Forma Consolidated Financial Information (Unaudited)--(Continued)
4. Pro Forma Earnings Per Share Data
The computations of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
Year Ended
July 31, 1999
---------------------
Pro Forma
Pro Forma As Adjusted
--------- -----------
(Dollars in
thousands, except per
share data)
<S> <C> <C>
Basic earnings per share:
Income from continuing operations....................... $4,315 $4,586
Weighted average shares outstanding--basic:
Historical shares outstanding......................... 5,036 5,036
Stock issued to acquire BCS........................... 2,773 2,773
Stock issued in offering.............................. -- 2,240
Conversion of preferred stock......................... -- 1,435
------ ------
Weighted average shares outstanding--basic.............. 7,809 11,484
------ ------
Basic earnings per share.............................. $ 0.55 $ 0.40
====== ======
Diluted earnings per share:
Income from continuing operations....................... $4,315 $4,586
Interest on convertible subordinated debt............... 38 --
------ ------
Income available to common shareholders............... 4,353 4,586
Weighted average shares--basic.......................... 7,809 11,484
Assumed conversion of preferred stock................... 1,435 --
Dilutive effect of stock options........................ 180 180
------ ------
Weighted average shares outstanding--diluted............ 9,424 11,664
------ ------
Diluted earnings per share............................ $ 0.46 $ 0.39
====== ======
</TABLE>
F-5
<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 (formerly Cortelco Systems, Inc.)
(the "Company"), as of July 31, 1998 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, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1999 and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1999 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Memphis, Tennessee
September 16, 1999
F-6
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Balance Sheets
July 31, 1998 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
At July 31,
----------------
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 103 $ 1,874
Trade accounts receivable, net of allowance for doubtful
accounts of $1,880 and $1,803............................. 6,630 12,135
Inventories................................................ 5,631 8,679
Other current assets....................................... 877 1,346
------- -------
Total current assets..................................... 13,241 24,034
Property and equipment, net.................................. 1,250 1,419
Receivable from affiliate.................................... 657 9
Other assets:
Goodwill, net of accumulated amortization of $nil and
$177...................................................... -- 11,547
Intangible assets, net of accumulated amortization of $4
and $49................................................... 327 359
Other...................................................... 955 1,657
------- -------
Total other assets....................................... 1,282 13,563
------- -------
Total.................................................... $16,430 $39,025
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Dividend payable........................................... $ 2,667 $ 2,667
Note payable to related party.............................. 250 --
Current portion of debt.................................... 2,771 3,137
Trade accounts payable and checks outstanding.............. 2,227 5,580
Accounts payable to CMC Industries, Inc.................... 2,205 3,278
Accrued expenses and other................................. 1,301 2,958
Income tax payable......................................... -- 1,939
------- -------
Total current liabilities................................ 11,421 19,559
Payable to affiliate......................................... 359 --
Long-term debt............................................... 6,041 2,314
Commitments and contingencies................................ -- --
Stockholders' equity (deficit):
Series A convertible preferred stock, $.001 par value,
(10,000,000 shares authorized, 1,463,206 outstanding)..... -- 660
Common stock, $.001 par value (50,000,000 shares
authorized, 3,920,252 and 7,639,932 shares issued and
outstanding).............................................. 4 8
Additional paid-in capital................................... 8,324 24,148
Accumulated deficit.......................................... (6,535) (4,380)
Note receivable from affiliate (former parent)............... (3,184) (3,284)
------- -------
Total stockholders' equity (deficit)..................... (1,391) 17,152
------- -------
Total.................................................... $16,430 $39,025
======= =======
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Operations
Years Ended July 31, 1997, 1998 and 1999
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended July 31,
------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net revenues......................................... $35,635 $30,172 $42,374
Cost of revenues..................................... 24,312 17,530 23,890
------- ------- -------
Gross profit....................................... 11,323 12,642 18,484
Operating expenses:
Selling, general and administrative................ 10,103 9,931 13,056
Research and development........................... 1,310 1,407 2,334
Amortization of goodwill........................... -- -- 177
------- ------- -------
Total operating expenses......................... 11,413 11,338 15,567
------- ------- -------
Income (loss) from operations........................ (90) 1,304 2,917
Interest expense..................................... 915 826 687
Other (income) expense, net.......................... 678 162 (8)
------- ------- -------
Income (loss) from continuing operations before
income taxes ..................................... (1,683) 316 2,238
Income tax expense................................... -- -- 83
------- ------- -------
Income (loss) from continuing operations........... (1,683) 316 2,155
Discontinued operations--loss from operations of
Cortelco, Inc....................................... (515) -- --
------- ------- -------
Net income (loss) and comprehensive income (loss).. $(2,198) $ 316 $ 2,155
======= ======= =======
Net income (loss) per common share--basic
Net income (loss) from continuing operations....... $ (0.44) $ 0.08 $ 0.43
Net income (loss) from discontinued operations (0.13) -- --
------- ------- -------
Net income (loss) per common share--basic:......... $ (0.57) $ 0.08 $ 0.43
======= ======= =======
Net income (loss) per common share--diluted:
Income (loss) from continuing operations........... $ (0.44) $ 0.07 $ 0.33
Income (loss) from discontinued operations......... (0.13) -- --
------- ------- -------
Net income (loss) per common share--diluted........ $ (0.57) $ 0.07 $ 0.33
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended July 31, 1997, 1998 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended July 31,
------------------------
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $(2,198) $ 316 $ 2,155
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation....................................... 368 326 351
Amortization of intangibles........................ -- 4 45
Amortization of goodwill........................... -- -- 177
Amortization of deferred financing costs........... -- -- 148
Provision for the allowance for doubtful accounts.. 985 65 698
Loss from discontinued operations.................. 515 -- --
Loss on sales of property and equipment............ -- 2 9
Equity in earnings of joint venture................ -- (66) 6
Write-off of investment............................ -- -- 67
Change in deferred income taxes.................... -- -- (445)
Changes in net assets and liabilities (net of
effects of acquisition):
Trade accounts receivable......................... 976 1,600 (3,775)
Accounts receivable from/payable to affiliates.... (465) (474) (132)
Inventories....................................... 726 218 (1,039)
Other current assets.............................. 461 (226) 75
Trade accounts payable............................ 606 (122) 2,444
Accounts payable to CMC Industries, Inc........... (903) (731) 1,073
Accrued expenses and other........................ 78 31 755
Income taxes payable.............................. -- -- 528
------- ------ -------
Net cash provided by operating activities....... 1,149 943 3,140
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from business acquisition............. -- -- 3,126
Purchases of property and equipment................. (537) (256) (891)
Purchase of patents, trademarks and software
technology......................................... (315) (15) (77)
Maturities of certificates of deposit............... (6) 174 --
Net repayments (advances) under notes receivable
from employees..................................... -- (138) 65
------- ------ -------
Net cash provided by (used in) investing
activities..................................... (858) (235) 2,223
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving line of
credit............................................. (3,232) (202) 398
Increase (decrease) in checks outstanding........... 1,615 (1,560) 100
Net borrowings (repayments) of long-term debt....... (1,120) 1,073 (21)
Proceeds from issuance (repayment) of note payable
to related party................................... -- 250 (250)
Proceeds from issuance of subordinated note......... 3,000 -- --
Repayment of note payable to parent company......... -- (391) (100)
Debt issuance costs................................. (417) (95) --
Loan to affiliate/former parent..................... -- -- (2,600)
Deferred offering costs............................. -- -- (1,119)
------- ------ -------
Net cash used in financing activities........... (154) (925) (3,592)
------- ------ -------
Net increase (decrease) in cash and cash
equivalents......................................... 137 (217) 1,771
Cash and cash equivalents, beginning of year......... 183 320 103
------- ------ -------
Cash and cash equivalents, end of year............... $ 320 $ 103 $ 1,874
======= ====== =======
Supplemental cash flow information:
Interest paid...................................... $ 923 $ 585 $ 635
Income taxes paid.................................. Nil 86 110
</TABLE>
See notes to consolidated financial statements
F-9
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows--(Continued)
Years Ended July 31, 1997, 1998 and 1999
Noncash activity:
1997:
All noncash transactions, primarily transfers of assets to/from
companies affiliated through common ownership, are discussed in the
accompanying notes.
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.
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 is 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, previous 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.
See notes to consolidated financial statements
F-10
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended July 31, 1997, 1998 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Note
Preferred Stock Common Stock Receivable From
---------------- ----------------- ------------------- Total
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,
1996................... 3,629,224 $ 4 $ 9,217 $(1,446) $(250) $(3,184) $ 4,341
Distribution of eOn
common stock........... -- -- -- (1,250) -- -- (1,250)
Net loss and
comprehensive loss..... -- -- -- (2,198) -- -- (2,198)
--------- --- ------- ------- ----- ------- -------
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
Net income and
comprehensive income... -- -- -- 316 -- -- 316
Stock dividend.......... 195,685 -- 1,957 (1,957) -- -- --
Dividend declaration
(eOn).................. -- -- (2,217) -- 250 -- (1,967)
Dividend declaration
(CSPR)................. -- -- (700) -- -- -- (700)
--------- --- ------- ------- ----- ------- -------
Balance at July 31,
1998................... 3,920,252 4 8,324 (6,535) NIL (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) $ NIL $(3,284) $17,152
========= ===== ========= === ======= ======= ===== ======= =======
</TABLE>
See notes to consolidated financial statements
F-11
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended July 31, 1997, 1998, and 1999
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business--eOn Communications Corporation (formerly Cortelco
Systems, Inc.) (the "Company" or "eOn") designs, develops and markets
communications products that include next-generation Linux 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. 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. for all periods presented and BCS Technologies, Inc. which was acquired
April 12, 1999, for the period April 12 through July 31, 1999. The financial
statements also included its subsidiary, Cortelco, Inc. through March 31, 1997
(see Note 4). 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.
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, Cortelco Systems
Puerto Rico, Inc. ("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. Cortelco Puerto Rico, Inc. 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 an 100% interest in CSPR, and CSPR
assumed the CPR Credit Facility described in Note 9. The business combination
was between entities under common control as CSHC owned 100% of CSPR and 97% of
the Company, therefore, the merger has been 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 a maturity of
three months or less are considered to be cash equivalents.
F-12
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
Inventories--Inventories are valued at the lower of cost or market. Cost is
determined by the last-in, first-out ("LIFO") method for approximately 81% and
38% of the inventories at July 31, 1998 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.
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 being 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.
Previous 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.
F-13
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
Revenue Recognition--Revenues are recognized at the time products are shipped
or when title 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 certain medical and disability benefits offered to substantially all
employees through participation in an insurance plan with an affiliated
company. 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 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 the
outstanding 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 and was based on 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
disclosure 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.
Reclassifications--Certain amounts in the 1997 financial statements have been
reclassified to conform with the 1998 and 1999 presentation.
Comprehensive Income--In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS 130, "Reporting Comprehensive Income," which established
standards for reporting and display of comprehensive income and its components
and requires a separate statement to report
F-14
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
the components of comprehensive income for each period reported. For the years
ended July 31, 1997, 1998 and 1999, 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
embedded in other contracts, and for hedging activities. The provisions of this
statement are effective for fiscal years beginning after June 15, 2000.
Management has not evaluated what impact, if any, the adoption of this
statement will have on the disclosures in the Company's financial statements.
3. 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, April 12, 1999. The purchase price, including direct costs
of acquisition, was $17,089,000 and it exceeded the fair value of the net
assets acquired by $11,724,000, which is being amortized on a straight-line
basis over twenty years.
The following summarized unaudited pro forma consolidated results of
operations for the years ended July 31, 1998 and 1999 assumes the acquisition
had occurred as of August 1 of each year:
<TABLE>
<CAPTION>
1998 1999
------- -------
(In thousands,
except per
share data)
<S> <C> <C>
Pro forma information:
Net revenues................................................. $36,618 $53,650
Net income (loss)............................................ (98) 4,315
Earnings per share:
Basic...................................................... $ (0.01) $ 0.55
Diluted.................................................... $ (0.01) $ 0.46
</TABLE>
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.
F-15
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
4. DISCONTINUED OPERATIONS
Effective March 31, 1997 the Company distributed all of the outstanding
common stock of its subsidiary, Cortelco, Inc., to the CSHC stockholders. The
net assets, results of operations, and cash flows of Cortelco, Inc. have been
reported as discontinued operations in the accompanying financial statements.
Summarized financial information of the discontinued operations is presented as
follows:
<TABLE>
<CAPTION>
Eight Months
Ended
March 31, 1997
--------------
(In thousands)
<S> <C>
Net revenues..................................................... $2,512
Loss from discontinued operations................................ (515)
</TABLE>
As of the date of the spin-off, the net assets of Cortelco, Inc. totalled
$1,250,000, and this amount was charged against retained earnings in 1997 to
reflect the distribution of the subsidiary's stock.
5. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of cash, trade accounts
receivable, and notes receivable. The Company maintains its cash balances with
large regional or national financial institutions and has not experienced
losses. The Company's products are sold principally to dealers, value added
resellers, national accounts, and the U.S. government. Approximately 36% of the
Company's revenues in 1999 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. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1999
------ ------
(In
thousands)
<S> <C> <C>
Raw materials and purchased components.......................... $ 819 $ 531
Finished goods.................................................. 4,926 8,222
LIFO reserve.................................................... (114) (74)
------ ------
Total inventories............................................. $5,631 $8,679
====== ======
</TABLE>
In 1997, the liquidation of LIFO inventories decreased cost of revenues and
therefore decreased net loss from continuing operations before taxes by
$200,000.
In 1998 and 1999, the liquidation of LIFO inventories decreased cost of
revenues and therefore increased the net income from continuing operations
before taxes by $84,000 and $40,000, respectively.
F-16
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
7. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Building improvements......................................... $ 1,000 $ 134
Machinery, equipment and automobiles.......................... 1,349 2,101
Furniture, fixtures and leasehold improvements................ 342 577
------- -------
Total....................................................... 2,691 2,812
Less accumulated depreciation................................. (1,441) (1,393)
------- -------
Property and equipment, net................................. $ 1,250 $ 1,419
======= =======
</TABLE>
8. ACCRUED EXPENSES AND OTHER
Accrued expenses and other consists of the following:
<TABLE>
<CAPTION>
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Employee Compensation........................................... $ 152 $ 344
Commissions..................................................... 85 242
Vacation........................................................ 259 523
Warranty........................................................ 250 450
Interest........................................................ 263 395
Deferred income................................................. -- 404
Other........................................................... 292 600
------- -------
Total......................................................... $ 1,301 $ 2,958
======= =======
</TABLE>
F-17
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
9. LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES
Debt consists of the following:
<TABLE>
<CAPTION>
1998 1999
------- -------
(In thousands)
<S> <C> <C>
eOn revolving credit facility expiring July 2001, interest
rate of 8.375% (prime rate plus .375%) at July 31, 1999,
collateralized by substantially all the assets of eOn
including the common stock of CSPR......................... $ 2,353 $ 2,825
CSPR revolving credit facility expiring August 27, 2001,
interest rate of 9.25% (prime plus 1.25%) at July 31, 1999,
collateralized by accounts receivable and inventories as
well as a pledge of CSPR's common stock.................... 386 312
8% subordinated note due July 31, 2002...................... 3,000 2,314
10% note payable to bank due in monthly installments of
principal and interest totalling $28,000 through September
2002, collateralized by certain property (CPR retained this
note in connection with the merger discussed in Note 1).... 3,073 --
------- -------
Total..................................................... 8,812 5,451
Less current portion........................................ (2,771) (3,137)
------- -------
Long-term debt, less current portion...................... $ 6,041 $ 2,314
======= =======
</TABLE>
The eOn and CSPR credit facilities provide for borrowings up to a maximum of
$7,500,000 and $1,500,000, respectively. The eOn credit facility provides for
borrowings based upon an asset formula involving accounts receivable and
inventories, including letters of credit. The borrowings under these facilities
are classified as current liabilities. The Company had no outstanding letters
of credit at July 31, 1999. The weighted average interest rate on the credit
facilities was 9% and 8.51% as of July 31, 1998 and 1999, respectively. At July
31, 1999 available borrowings under the eOn credit facility were approximately
$980,000.
The eOn and CSPR credit facilities also contain covenants which, among other
matters, limit the ability of the Company to incur indebtedness; merge,
consolidate, or acquire or sell assets; pay dividends; or redeem or exchange
capital stock. Additionally, under the provisions of the CSPR credit facility,
net assets totalling $2,529,000 are restricted from payment of dividends.
The subordinated note agreement also contains covenants which, among other
matters, limit the ability of the Company to merge, consolidate, acquire, or
sell assets. During 1999 the holder converted $686,000 of principal to
1,463,206 shares of the Company's Series A Convertible Preferred Stock.
Maturities of debt are as follows:
<TABLE>
<CAPTION>
Year Ending (In thousands)
- ----------- -------------
<S> <C>
2000............................................................. $3,137
2001............................................................. Nil
2002............................................................. 2,314
------
Total........................................................ $5,451
======
</TABLE>
F-18
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
10. LEASE COMMITMENTS
The Company leases its primary warehouse and office facilities, as well as
certain office equipment, under operating leases.
The following is a schedule of future minimum lease payments required under
operating leases that have remaining initial or remaining noncancellable lease
terms in excess of one year as of July 31, 1999:
<TABLE>
<CAPTION>
Year Ending (In thousands)
- ----------- --------------
<S> <C>
2000............................................................. $ 678
2001............................................................. 923
2002............................................................. 825
2003............................................................. 740
2004 and thereafter.............................................. 6,444
------
Total........................................................ $9,610
======
</TABLE>
Rent expense for the years ended July 31, 1997, 1998, and 1999 totalled
$526,000, $446,000, and $568,000, respectively, which included $137,000,
$137,000, and 137,000, respectively, rent charged by CII for the sharing of
warehouse space.
11. INCOME TAXES
The components of income tax expense attributable to continuing operations
for 1999 are as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Current:
Federal........................................................ $ 415
State.......................................................... 22
Puerto Rico.................................................... 91
-----
Total current................................................ 528
Deferred:
Federal........................................................ (423)
State.......................................................... ( 22)
Puerto Rico.................................................... --
-----
Total deferred............................................... (445)
-----
Total income tax expense..................................... $ 83
=====
</TABLE>
The financial statements of the Company do not include a provision (benefit)
for income taxes for 1997 and 1998 due to cumulative net operating losses.
A reconciliation between the income tax expense from continuing operations
recognized in the Company's consolidated statement of operations and the income
tax expense computed by applying
F-19
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
the domestic federal statutory income tax rate to income from continuing
operations before income taxes is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ---- -----
(In thousands)
<S> <C> <C> <C>
Income tax at Federal statutory rate (34%).................. $(572) $107 $ 761
State income taxes, net of federal benefit ................. -- 13 22
Change in valuation allowance............................... 580 (169) (808)
Amortization of goodwill.................................... -- -- 62
Other, net ................................................. (8) 49 46
----- ---- -----
Total income tax expense.................................. $ NIL $NIL $ 83
===== ==== =====
</TABLE>
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 $66,000.
The deferred tax effects of the Company's principal temporary differences at
July 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 Assets Liabilities Total
- ---- ------- ----------- -------
(In thousands)
<S> <C> <C> <C>
Allowance for doubtful receivables................ $ 574 -- $ 574
Inventories....................................... 350 $ (78) 272
Basis difference in property and equipment........ 157 -- 157
Accrued warranty costs............................ 54 -- 54
Accrued expenses and other........................ 47 -- 47
Other............................................. 88 -- 88
Net operating loss carryforwards.................. 392 -- 392
Minimum tax credits............................... 154 -- 154
Valuation allowance............................... (1,738) -- (1,738)
------- ----- -------
Total deferred asset (liability)................ $ 78 $ (78) $ NIL
======= ===== =======
<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>
F-20
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
At July 31, 1999, net operating loss carryforwards of approximately $296,000,
which expire at various dates through July 2012, are available to reduce future
taxable income. During the year ended July 31, 1999, the Company utilized
approximately $1,033,000 of net operating loss carryforwards.
12. STOCK OPTIONS
The status of the Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding at July 31, 1997................................. -- $ --
Granted.................................................... 139,311 0.885
Exercised.................................................. -- --
Cancelled.................................................. -- --
--------- ------
Outstanding at July 31, 1998................................. 139,311 0.885
Granted.................................................... 1,277,716 9.105
Exercised ................................................. -- --
Cancelled.................................................. 8,934 8.169
--------- ------
Outstanding at July 31, 1999................................. 1,408,093 $8.297
========= ======
Options exercisable at July 31, 1998......................... 7,904 $0.945
========= ======
Options exercisable at July 31, 1999......................... 85,368 $ 2.62
========= ======
</TABLE>
The options outstanding at July 31, 1999 are exercisable at prices ranging
from $.70 to $10.38 per share. The weighted average remaining contractual life
of all outstanding options was 9.54 years at July 31, 1999. The weighted
average fair value, using the Black-Scholes method, of options granted was $.74
in 1998 and $7.61 in 1999.
During 1999 the board of directors approved the adoption of the 1999 Equity
Incentive Plan (the "1999 Plan") which permits the granting of incentive stock
options, supplemental stock options, stock bonuses, and restricted stock
purchase agreements to officers, directors, and key employees of the Company
and to non-employee consultants. At July 31, 1999, 2,000,000 shares of the
Company's common stock were reserved for issuance under the terms of the Plan.
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 vest over a four-year period and the term of any option shall not
be greater than ten years from the date of grant. Stock bonuses and restricted
stock purchase agreements are granted only to directors, officers, or employees
of or consultants to the Company and are issued at prices not less than 85% of
the fair market value of the stock at the date of grant. During 1999 the
Company issued 989,314 options with exercise prices ranging from $9.44 to
$10.38.
F-21
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
At July 31, 1999, 450,000 shares of the Company's common stock were reserved
for issuance under the terms of the 1997 Equity Incentive Plan (the "1997
Plan"). The provisions of the 1997 Plan are similar to the 1999 Plan discussed
above. During 1998 and 1999, 139,311 and 288,402 options, respectively, were
granted with exercise prices ranging from $.70 to $6.50 per share.
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, 1999.
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 option grants was recorded during 1998 or
1999 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 dates in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been as follows:
<TABLE>
<CAPTION>
1998 1999
--------------
(In thousands,
except per
share data)
<S> <C> <C>
Net income:
As reported.................................................... $ 316 $ 2,155
Pro forma...................................................... 306 1,724
Earnings per share:
As reported--basic............................................. $ 0.08 $ 0.43
Pro forma--basic............................................... $ 0.07 $ 0.34
As reported--diluted........................................... $ 0.07 $ 0.33
Pro forma--diluted............................................. $ 0.07 $ 0.26
</TABLE>
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>
1998 1999
---- ----
<S> <C> <C>
Risk-free interest rate............................................. 6.25% 6.25%
Dividend yield...................................................... -- --
Expected volatility................................................. 75% 75%
Expected option life in years....................................... 10 10
</TABLE>
13. RELATED PARTIES
The accompanying financial statements include the assets, liabilities,
revenues, and expenses specifically identifiable with the Company as well as
certain allocated expenses for services provided
F-22
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
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 has
incurred certain administrative costs on behalf of CSHC and the consolidated
group.
The management fees are summarized as follows:
<TABLE>
<CAPTION>
Year Ended
July 31,
---------------
1997 1998 1999
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Management fee (income) expense incurred by eOn............... $300 $(80) $(53)
Management fee expense incurred by CSPR....................... 106 265 40
---- ---- ----
Net management fee (income) expense........................... $406 $185 $(13)
==== ==== ====
</TABLE>
Management estimates that the costs that would have been incurred on a stand-
alone basis would have approximated $390,000, $100,000, and $NIL for the years
ended July 31, 1997, 1998, and 1999, respectively.
The following represent additional related party transactions:
<TABLE>
<CAPTION>
Year Ended July 31,
---------------------
1997 1998 1999
------- ------ ------
(In thousands)
<S> <C> <C> <C>
Purchases from CMC, affiliate through common ownership... $10,663 $9,351 $8,835
Sales to CMC............................................. 128 154 161
Sales to BCS prior to acquisition........................ 392 353 985
Purchases from CII....................................... 692 188 244
Sales to CII............................................. 65 85 79
Rental expense to CPR.................................... -- -- 94
</TABLE>
The following represent related party balances:
<TABLE>
<CAPTION>
1998 1999
------- -------
(In thousands)
<S> <C> <C>
Receivable from CSHC.......................................... $ 656 $ 37
Receivable from (payable to) CII.............................. 1 (28)
Demand note payable to CSHC................................... 359 --
Non-interest bearing demand note payable to a stockholder of
CSHC......................................................... 250 --
Trade accounts receivable from BCS............................ 95 --
Receivable from officers/employees (included in other
assets)...................................................... 138 65
</TABLE>
F-23
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
Additionally, at July 31, 1998 the Company had a $3,184,000 note receivable
from CSHC that was reflected as a reduction of stockholders' 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% (9.5% at July 31, 1999).
14. EMPLOYEE SAVINGS PLAN
Substantially all employees of the Company can participate in the Cortelco
International, Inc. Profit Sharing 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 1997, 1998, and 1999 contributions allocated to the Company totalled
$119,000, $110,000, and $144,000, respectively.
15. SEGMENT INFORMATION
The Company's reportable segments are communications systems, communication
systems--Caribbean/Latin American and cellular airtime services, each of which
offers different products and services. Each segment requires different
technology and marketing strategies. The communication systems segments offer
communications solutions that address voice, data, and video network switching.
The Company's cellular airtime services segment offers cellular airtime and
cellular telephones through CSPR. The other category includes the Company's
investment in a China joint venture, which is accounted for on the equity
method.
F-24
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
The accounting policies of the segments are those described in the summary of
significant accounting policies.
<TABLE>
<CAPTION>
Communications
Systems- Cellular
Communications Caribbean/Latin Airtime Consolidated
1997 Systems America Services Other Reconciliations Total
- ---- -------------- --------------- -------- ------ --------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $21,216 $4,622 $9,797 $35,635
Operating income
(loss)................. 311 -- (401) (90)
Interest expense........ 758 105 52 915
Income tax expense...... -- -- -- --
Income (loss) from
continuing operations.. (1,213) (169) (301) (1,683)
Total assets............ 14,224 757 2,718 17,699
Capital expenditures ... 77 293 167 537
Depreciation and
amortization........... 251 103 14 368
<CAPTION>
Communications
Systems- Cellular
Communications Caribbean/Latin Airtime Consolidated
1998 Systems America Services Other Reconciliations Total
- ---- -------------- --------------- -------- ------ --------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $18,346 $5,118 $6,708 $ 771 $ (771) $30,172
Operating income ....... 751 293 260 138 (138) 1,304
Interest expense........ 524 142 160 -- -- 826
Income tax expense...... -- -- -- -- -- --
Income (loss) from
continuing operations.. 226 49 (25) 120 (54) 316
Total assets ........... 13,880 819 1,731 1,269 (1,269) 16,430
Capital expenditures ... 185 65 6 8 (8) 256
Depreciation and
amortization........... 154 128 48 24 (24) 330
</TABLE>
F-25
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Communications
Systems- Cellular
Communications Caribbean/ Airtime Consolidated
1999 Systems Latin America Services Other Reconciliations Total
- ---- -------------- -------------- -------- ------ --------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $27,186 $9,881 $5,307 $ 557 $ (557) $42,374
Operating income
(loss)................. 1,372 903 642 (28) 28 2,917
Interest expense........ 616 33 38 -- -- 687
Income tax expense...... -- 48 35 -- -- 83
Income (loss) from
continuing operations.. 754 822 585 (11) 5 2,155
Total assets............ 36,490 601 1,934 1,142 (1,142) 39,025
Capital expenditures ... 844 43 4 32 (32) 891
Depreciation and
amortization........... 436 87 50 22 (22) 573
</TABLE>
Financial information relating to the Company's revenues by geographic area
was as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
(In thousands)
<S> <C> <C> <C>
United States........................................... $34,994 $29,404 $41,353
Central America and South America....................... 492 440 547
Europe, Middle East, and Africa......................... 148 214 468
Asia.................................................... 1 114 6
------- ------- -------
Consolidated.......................................... $35,635 $30,172 $42,374
======= ======= =======
</TABLE>
16. COMMITMENTS AND CONTINGENCIES
At July 31, 1999 the Company had outstanding commitments for inventory
purchases under open purchase orders of approximately $4,920,000.
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.
F-26
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Years Ended July 31, 1997, 1998 and 1999
17. EARNINGS PER SHARE
The computations of basic and diluted earnings per share for each year were
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------ ------
(In thousands,
except per share
data)
<S> <C> <C> <C>
Basic earnings per share:
Income (loss) from continuing operations.............. $(1,683) $ 316 $2,155
Income (loss) from discontinued operations............ (515) -- --
------- ------ ------
Income (loss) available to common shareholders...... (2,198) 316 2,155
Weighted average shares outstanding--basic............ 3,825 3,918 5,036
------- ------ ------
Basic earnings per share............................ $ (0.57) $ 0.08 $ 0.43
======= ====== ======
Diluted earnings per share:
Income:
Income (loss) available to common shareholders...... $(2,198) $ 316 $2,155
Interest on 8% convertible subordinated debt........ -- 55 38
------- ------ ------
Income (loss) available to common shareholders.. (2,198) 371 2,193
Weighted average shares:
Outstanding......................................... 3,825 3,918 5,036
Assumed conversion of convertible debt/preferred
stock.............................................. -- 1,435 1,435
Dilutive effect of stock options -- -- 180
------- ------ ------
Weighted average shares outstanding--diluted.... 3,825 5,353 6,651
------- ------ ------
Diluted earnings per share...................... $ (0.57) $ 0.07 $ 0.33
======= ====== ======
</TABLE>
Options to purchase 139,311 shares of common stock were outstanding at July
31, 1998 but were not included in the computation of the diluted earnings per
share because the options' exercise price was equal to or greater than the
average market price of the common shares. Additionally, at July 31, 1997 and
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. These potential common shares were excluded from the
computation of diluted earnings per share for 1997 because their inclusion
would have had an antidilutive effect on earnings per share.
F-27
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
July 31, 1999 and October 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
At July 31, At October 31,
1999 1999
----------- --------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $ 1,874 $ 1,704
Trade accounts receivable, net of allowance for
doubtful accounts of $1,803 and $1,872........... 12,135 12,761
Inventories....................................... 8,679 11,554
Other current assets.............................. 1,346 1,446
------- -------
Total current assets............................ 24,034 27,465
Property and equipment, net......................... 1,419 1,681
Receivable from affiliate........................... 9 94
Other assets:
Goodwill, net of accumulated amortization of $177
and $325......................................... 11,547 11,399
Intangible assets, net of accumulated amortization
of $49 and $83................................... 359 325
Other............................................. 1,657 2,206
------- -------
Total other assets.............................. 13,563 13,930
------- -------
Total........................................... $39,025 $43,170
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable.................................. $ 2,667 $ 2,667
Current portion of debt........................... 3,137 4,202
Trade accounts payable and checks outstanding..... 5,580 8,094
Accounts payable to CMC Industries, Inc........... 3,278 4,304
Accrued expenses and other........................ 2,958 3,396
Income tax payable................................ 1,939 706
------- -------
Total current liabilities....................... 19,559 23,369
Long-term debt...................................... 2,314 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).......................... 660 660
Common stock, $.001 par value (50,000,000 shares
authorized, 7,639,932 shares issued and
outstanding)..................................... 8 8
Additional paid-in capital.......................... 24,148 24,148
Accumulated deficit................................. (4,380) (4,045)
Note receivable from affiliate (former parent)...... (3,284) (3,284)
------- -------
Total stockholders' equity...................... 17,152 17,487
------- -------
Total........................................... $39,025 $43,170
======= =======
</TABLE>
See notes to consolidated financial statements
F-28
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended October 31, 1998 and 1999
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-------------------
1998 1999
--------- ---------
<S> <C> <C>
Net revenues............................................... $ 8,478 $ 14,343
Cost of revenues........................................... 4,893 7,926
-------- ---------
Gross profit............................................. 3,585 6,417
Operating expenses:
Selling, general and administrative...................... 2,583 4,664
Research and development................................. 443 900
Amortization of goodwill................................. -- 148
-------- ---------
Total operating expenses............................... 3,026 5,712
-------- ---------
Income from operations..................................... 559 705
Interest expense........................................... 192 116
Other (income) expense, net................................ (8) (9)
-------- ---------
Income before income taxes............................... 375 598
Income tax expense......................................... 35 263
-------- ---------
Net income and comprehensive income...................... $ 340 $ 335
======== =========
Net income per common share:
Basic.................................................... $ 0.09 $ 0.04
Diluted.................................................. $ 0.07 $ 0.04
</TABLE>
See notes to consolidated financial statements
F-29
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended October 31, 1998 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months
Ended October
31,
----------------
1998 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 340 $ 335
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation............................................... 77 125
Amortization of intangibles................................ 6 34
Amortization of goodwill................................... -- 148
Amortization of deferred financing costs................... 23 23
Provision for the allowance for doubtful accounts.......... 55 222
Equity in earnings of joint venture........................ 9 (7)
Changes in net assets and liabilities:
Trade accounts receivable ............................... (2,091) (848)
Accounts receivable from/payable to affiliates........... (181) (85)
Inventories.............................................. 1,056 (2,875)
Other current assets..................................... 189 (100)
Other non-current assets................................. (140) (284)
Trade accounts payable and checks outstanding............ 593 2,515
Accounts payable to CMC Industries, Inc.................. (356) 1,026
Accrued expenses and other............................... (10) 438
Income taxes payable..................................... -- (1,233)
------- -------
Net cash used in operating activities.................. (430) (566)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (206) (388)
Net repayments under notes receivable from employees........ 61 2
------- -------
Net cash used in investing activities.................. (145) (386)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving line of credit.. 825 1,065
Deferred offering costs..................................... -- (283)
Net borrowings (repayments) of long-term debt............... (8) --
Repayment of note payable to related party.................. (250) --
------- -------
Net cash provided by financing activities.............. 567 782
------- -------
Net increase (decrease) in cash and cash equivalents......... (8) (170)
Cash and cash equivalents, beginning of period............... 103 1,874
------- -------
Cash and cash equivalents, end of period..................... $ 95 $ 1,704
======= =======
</TABLE>
See notes to consolidated financial statements
F-30
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended October 31, 1998 and 1999
(Dollars in thousands)
1. FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared by 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, 1999 and for all periods presented. The results
for the three months ended October 31, 1998 and 1999 are not necessarily
indicative of the results that may be expected for the full year.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto as of July 31, 1998 and 1999 and for
each of the three years in the period ended July 31, 1999.
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 embedded in
other contracts, and for hedging activities. The provisions of this statement
are effective for fiscal years beginning after June 15, 2000. Management has
not evaluated what impact, if any, the adoption of this statement will have on
the disclosures in the Company's financial statements.
2. EARNINGS PER SHARE
The computations of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
Three Months Ended
October 31,
---------------------
1998 1999
---------- ----------
(In thousands, except
per share data)
<S> <C> <C>
Basic earnings per share:
Net Income............................................. $ 340 $ 335
Weighted average shares outstanding--basic............. 3,920 7,640
---------- ----------
Basic earnings per share: $ 0.09 $ 0.04
========== ==========
Diluted earnings per share:
Income:
Net Income............................................. $ 340 $ 335
Interest on 8% convertible subordinated debt........... 14 --
---------- ----------
Income available to common shareholders................ 354 335
Weighted average shares:
Outstanding............................................ 3,920 7,640
Assumed conversion of preferred stock.................. 1,435 1,435
Dilutive effect of stock options....................... -- 283
---------- ----------
Weighted average shares outstanding--diluted............. 5,355 9,358
---------- ----------
Diluted earnings per share............................... $ 0.07 $ 0.04
========== ==========
</TABLE>
F-31
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Three Months Ended October 31, 1998 and 1999
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1999 1999
-------- -----------
(In thousands)
<S> <C> <C>
Raw materials and purchased components..................... $ 531 $ 330
Finished Goods............................................. 8,222 11,298
LIFO reserve............................................... (74) (74)
------ -------
Total inventories........................................ $8,679 $11,554
====== =======
</TABLE>
4. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Communications
Systems- Cellular
Communications Caribbean/Latin Airtime Consolidated
Systems America Services Other Reconciliations Total
-------------- --------------- -------- ------ --------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Three months ended
October 31, 1998:
Revenues............... $ 5,684 $1,264 $1,530 $ 174 $ (174) $ 8,478
Income from continuing
operations............ 196 (70) 214 16 (16) 340
Total assets........... 11,500 3,280 3,176 1,510 (1,510) 17,956
Three months ended
October 31, 1999:
Revenues............... 9,912 3,377 1,054 72 (72) 14,343
Income from continuing
operations............ 98 213 24 (12) 12 335
Total assets........... 31,432 9,797 1,941 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. On April 12, 1999, the Company acquired BCS Technologies,
Inc. which represents total assets of approximately $18 million at October 31,
1999 and are included in the communications systems segment.
F-32
<PAGE>
eOn Communications Corporation and Subsidiaries
Notes to Consolidated Financial Statements--(Continued)
Three Months Ended October 31, 1998 and 1999
5. CHANGES IN STOCKHOLDERS' EQUITY
The following represents the changes in stockholders' equity for the three
months ended October 31, 1999.
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Note Receivable
---------------- ---------------- Paid in Accumulated from Affiliate Stockholders'
Shares Amount Shares Amount Capital Deficit (former parent) Equity (Deficit)
--------- ------ --------- ------ ---------- ----------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
July 31, 1999.......... 1,463,206 $660 7,639,932 $ 8 $24,148 $(4,380) $(3,284) $17,152
Net income and
comprehensive income
for the three months
ended October 31,
1999................... 335 335
--------- ---- --------- --- ------- ------- ------- -------
Balance as of
October 31, 1999....... 1,463,206 $660 7,639,932 $ 8 $24,148 $(4,045) $(3,284) $17,487
========= ==== ========= === ======= ======= ======= =======
</TABLE>
F-33
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
BCS Technologies, Inc.
Englewood, Colorado
We have audited the accompanying balance sheets of BCS Technologies, Inc. as
of July 31, 1997 and 1998, and the related statements of operations, changes in
stockholders' equity and cash flows for the eleven months ended July 31, 1997
and the year ended July 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the financial statements referred to above present fairly, in
all material respects, the financial position of BCS Technologies, Inc. as of
July 31, 1997 and 1998, and the results of its operations and its cash flows
for the eleven months ended July 31, 1997 and the year ended July 31, 1998 in
conformity with generally accepted accounting principles.
Brock and Company, CPAs, P.C.
Certified Public Accountants
Littleton, Colorado
March 5, 1999
F-34
<PAGE>
BCS Technologies, Inc.
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
At July 31, At
-------------- April 12,
1997 1998 1999
------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 927 $ 406 $3,126
Accounts receivable--trade....................... 865 2,073 2,428
Inventories...................................... 1,134 1,257 2,009
Prepaid expenses and other current assets........ 104 90 238
Deferred income tax asset........................ -- 69 260
------ ------ ------
Total current assets........................... 3,030 3,895 8,061
Property and equipment, at cost:
Machinery, equipment and Computer software....... 457 536 631
Furniture and fixtures, and Leasehold
improvements.................................... 93 116 134
------ ------ ------
550 652 765
Less accumulated depreciation.................... (310) (396) (502)
------ ------ ------
Net property and equipment..................... 240 256 263
------ ------ ------
Total assets................................... $3,270 $4,151 $8,324
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................. $ 107 $ 28 $ 16
Accounts payable................................. 202 328 632
Accounts payable--affiliates..................... 137 183 --
Prepaid maintenance contracts.................... 254 296 368
Income taxes payable--current.................... 17 223 1,409
Accrued liabilities:
Compensation................................... 101 256 349
Other............................................ 94 75 185
------ ------ ------
Total current liabilities...................... 912 1,389 2,959
------ ------ ------
Stockholders' Equity:
Common stock, par value $.000001, 24,386,775
shares authorized, 23,814,706 shares issued and
outstanding in 1997 and 1998 and 23,534,075
shares issued and outstanding in 1999........... -- -- --
Treasury stock, at cost.......................... -- -- (203)
Additional paid-in capital....................... 2,298 2,298 2,298
Retained earnings................................ 60 464 3,270
------ ------ ------
Total stockholders' equity..................... 2,358 2,762 5,365
------ ------ ------
Total liabilities and stockholders' equity..... $3,270 $4,151 $8,324
====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE>
BCS Technologies, Inc.
Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
August 1,
1998
Eleven Months Year Ended through
Ended July 31, April 12,
July 31, 1997 1998 1999
------------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Revenues.................................. $ 3,924 $ 6,799 $ 12,263
Cost of revenues.......................... 1,455 2,242 3,628
--------- ---------- ----------
Gross profit............................ 2,469 4,557 8,635
Operating expenses:
Selling, general and administrative..... 1,893 3,318 3,626
Research and development................ 235 704 823
--------- ---------- ----------
Total operating expenses.............. 2,128 4,022 4,449
--------- ---------- ----------
Income from operations.................... 341 535 4,186
Other Income:
Interest income......................... 14 26 50
Gain on sale of equipment............... 63 -- --
--------- ---------- ----------
Total other income.................... 77 26 50
--------- ---------- ----------
Income before income taxes................ 418 561 4,236
Income tax expense........................ 17 157 1,430
--------- ---------- ----------
Net income.............................. $ 401 $ 404 $ 2,806
========= ========== ==========
Pro forma information:
Net income before income taxes.......... $ 418
Income tax expense...................... 152
---------
Pro forma net income.................... $ 266
=========
Earnings per common share:
Basic:
Net income............................ $ 0.03 $ 0.02 $ 0.12
Weighted average number of common
shares............................... 8,701,076 23,814,706 23,716,554
Diluted:
Net income............................ $ 0.03 $ 0.02 $ 0.12
Weighted average number of common
shares............................... 8,763,810 24,046,252 24,071,554
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE>
BCS Technologies, Inc.
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(Dollars in thousands)
<TABLE>
<CAPTION>
Eleven Period from
Months Ended Year Ended August 1, 1998
July 31, July 31, Through April
1997 1998 12, 1999
------------ ---------- --------------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 401 $ 404 $2,806
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation......................... 44 87 105
Gain on sale of equipment............ (63) -- --
Increase (decrease) from changes in
assets and liabilities, net of effects
from acquisition:
Accounts receivable.................. 14 (1,208) (355)
Inventories.......................... 134 (123) (752)
Prepaid expenses and other current
assets.............................. (1) 14 (148)
Deferred income tax asset............ -- (69) (191)
Accounts payable..................... (204) 126 304
Accounts payable--affiliates......... 137 46 (183)
Prepaid maintenance contracts........ 74 42 72
Income taxes payable--current........ 17 206 1,186
Accrued liabilities.................. (99) 136 203
----- ------- ------
Net cash provided (used) by operating
activities.......................... 454 (339) 3,047
----- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from acquisition....... 500 -- --
Proceeds from sale of equipment...... 75 2 1
Purchases of property and equipment.. (73) (105) (113)
----- ------- ------
Net cash provided (used) by
investing activities.............. 502 (103) (112)
----- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Subchapter S dividend................ (412) -- --
Loan principal payments.............. -- (79) (12)
Proceeds from exercise of stock
options............................. 19 -- --
Repurchase of common stock........... -- -- (203)
----- ------- ------
Net cash used by financing
activities........................ (393) (79) (215)
----- ------- ------
Net increase (decrease) in cash and
cash equivalents...................... 563 (521) 2,720
Cash and cash equivalents, beginning of
period................................ 364 927 406
----- ------- ------
Cash and cash equivalents, end of
period................................ $ 927 $ 406 $3,126
===== ======= ======
Supplemental Information:
Cash paid for income taxes........... -- $ 17 $ 382
===== ======= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE>
BCS Technologies, Inc.
Statements of Changes in Stockholders' Equity
Dollars in thousands, except share data
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional
------------------ ---------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
---------- ------ -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 1,
1996................... 74,900 $ 51 -- $ -- $ -- $ 597 $ 648
Dividends............... -- -- -- -- -- (460) (460)
Recapitalization of
common stock,
conversion Of
Subchapter S retained
earnings to additional
paid-in capital and
change in par value of
common stock........... 12,850,090 (51) -- -- 529 (478) --
Issuance of common stock
in connection with
merger................. 10,675,850 -- -- -- 1,750 -- 1,750
Exercise of common stock
purchase options....... 213,866 -- -- -- 19 -- 19
Net income for the
eleven months ended
July 31, 1997.......... -- -- -- -- -- 401 401
---------- ------ -------- ----- ------ ------ ------
Balances, July 31,
1997................... 23,814,706 -- -- -- 2,298 60 2,358
========== ====== ======== ===== ====== ====== ======
Net income for the year
ended July 31, 1998.... -- -- -- -- -- 404 404
---------- ------ -------- ----- ------ ------ ------
Balances, July 31,
1998................... 23,814,706 -- -- -- 2,298 464 2,762
========== ====== ======== ===== ====== ====== ======
Treasury stock purchased
(unaudited)............ (280,631) -- (280,631) (203) -- -- (203)
Net income for the
period August 1, 1998
to April 12, 1999
(unaudited)............ -- -- -- -- -- 2,806 2,806
---------- ------ -------- ----- ------ ------ ------
Balances, April 12, 1999
(unaudited)............ 23,534,075 $ -- (280,631) $(203) $2,298 $3,270 $5,365
========== ====== ======== ===== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements
Periods Ended July 31, 1997 and July 31, 1998
Information related to the period
August 1, 1998 through April 12, 1999 is unaudited
1. Description of Business
The Company was originally founded in 1985 and operates from offices in
Englewood, Colorado and a 23,000 square foot facility located in Georgia. The
Company is engaged in the development, sales, manufacturing and distribution of
electronic communication devices throughout the United States. BCS Technologies
is a corporation organized under the laws of the State of Delaware for the
purpose of the sale and servicing of electronic communication devices
throughout the United States.
2. Basis of Presentation
Organization
Organization--BCS Technologies, Inc. is an organization formed by a series of
transactions between the following entities:
Cortelco Holding Corporation (CHC)
Cortelco Systems Holding Corporation (CSHC)
Cortelco, Inc. (CI)
Cortelco Systems, Inc. (CSI)
Business Communication Systems, Inc. (BCS)
CHC, CSHC, CI and CSI are all entities related through common stockholder
ownership. BCS was a closely held corporation not related to CHC, CSHC, CI and
CSI. The culmination of the series of transactions was a merger of BCS and CI
with BCS being the accounting acquirer. BCS then changed its name to
BCS Technologies, Inc. (the Company). The stockholders of BCS own 53% of the
common stock of the Company after the merger.
Before the merger of BCS and CI, CI was a wholly-owned subsidiary of CHC,
which was a wholly-owned subsidiary of CSI. CHC had no active operations. CSI
was a wholly-owned subsidiary of CSHC. At the time the merger agreement was
signed, CSHC owned 100% of CSI, which owned 100% of CI. Before the merger
agreement was signed, CSI owned 100% of CHC which owned 100% of CI. On March
27, 1997 CHC was merged into CI. On April 1, 1997, CI was spun off by CSHC to
its stockholders. Immediately following the spin off of CI, on April 2, 1997,
CI was merged into BCS with BCS as the accounting acquirer. BCS changed its
name to BCS Technologies, Inc.
3. Summary of Significant Accounting Policies
Use of Estimates in Preparing Financial Statements
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
F-39
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with a maturity of three months or less to be cash
equivalents. Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and temporary cash
investments. At times, cash balances held at financial institutions were in
excess of FDIC insurance limits. The Company limits the amount of credit
exposure to any one financial institution. The Company believes no significant
concentration of credit risk exists with respect to these cash investments.
Revenue Recognition
The Company recognizes revenues from system and product sales when title
passes to the customer. Revenues from prepaid maintenance contracts are
recognized ratably over the terms of the contracts. Revenues from the sales of
systems accounted for approximately 32%, 53%, and 78% for the eleven months
ended July 31, 1997, the year ended July 31, 1998, and the period August 1,
1998 through April 12, 1999. The Company generates the remainder of its revenue
from parts sales and system maintenance.
Accounts Receivable
The Company charges off all known uncollectible accounts on a current basis.
No reserve for uncollectible accounts is required, as any accounts which are
considered doubtful are not considered material to the financial statements.
Inventories
The Company uses the lower of first-in, first-out ("FIFO") cost or market in
valuing inventories.
Depreciation
The Company provides for depreciation of property and equipment using
straight-line and accelerated methods for financial and income tax reporting
purposes over the estimated useful lives of the assets, which is generally
fifteen years for leasehold improvements, five years for machinery and
equipment, five to seven years for furniture and fixtures and vehicles and
three years for computer software.
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.
F-40
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
Income Taxes
Income tax expense is based on reported income before income taxes. Deferred
income taxes reflect the temporary difference between assets and liabilities
recognized for financial reporting and such amounts recognized for tax purposes
which requires recognition of deferred income tax assets and liabilities.
Deferred income tax assets and liabilities are determined based on the
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recognized if it
is anticipated that some or all of a deferred income tax asset may not be
realized.
Advertising
Advertising costs are charged to operations in the year incurred. The Company
expended $170,426 for the eleven months ended July 31, 1997, $117,912 for the
year ended July 31, 1998, and $97,271 for the period August 1, 1998 through
April 12, 1999.
Interim Financial Statements
The financial statements for the period August 1, 1998 through April 12, 1999
are unaudited, but in the opinion of management, include all adjustments
necessary to fairly state the results therein, such adjustments being of a
normal, recurring nature. Operating results for the period August 1, 1998
through April 12, 1999 are not necessarily indicative of the results that may
be expected for the fiscal year ending July 31, 1999. All April 12, 1999 data
presented in these footnotes are unaudited.
Stock Option Plans
The Company utilizes Statement of Financial Accounting Standards No. 123 (FAS
123), "Accounting for Stock-Based Compensation." The Statement defines a fair
value based method of accounting for stock options or similar equity
instrument. FAS 123 allows an entity to continue to measure compensation cost
for employee stock option plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion (APB) No. 25,
which was elected by the Company. Accordingly, the Company must make certain
pro forma disclosures as if the fair value based method had been applied.
Earnings Per Common Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Dilutive earnings per share reflects the potential dilution that
could occur if dilutive securities, stock options, were exercised.
4. Business Acquisition
On April 2, 1997, the Company acquired the net assets of Cortelco, Inc.,
which had a fair value of $1,750,000, in exchange for 10,675,850 shares of
common stock. The acquisition was accounted for as a reverse acquisition using
the purchase method of accounting, and the results of CI's operations were
included in the Company's financial statements from the date of acquisition.
F-41
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
The Company acquired cash of $500,000, accounts receivable of $509,523,
inventory of $1,054,028, prepaid expenses of $70,185, property and equipment of
$183,333, and current liabilities of $567,069 in the purchase of Cortelco, Inc.
The following unaudited pro forma information presents the results of
operations as if the acquisition had occurred at September 1, 1996 and the
Company had revoked its subchapter S election on such date and was taxed as a
Subchapter C corporation for the entire period.
<TABLE>
<CAPTION>
Eleven months
ended
July 31, 1997
----------------------
(Dollars in thousands,
except per share data)
<S> <C>
Revenues................................................. $ 5,761
Net income............................................... 89
Earnings per common share:
Basic and diluted........................................ $ 0.00
</TABLE>
The unaudited pro forma information is not necessarily indicative of the
combined results that would have occurred had the acquisition been effected on
the assumed date, nor is it indicative of the results that may occur in the
future.
5. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
At July 31,
------------- April 12,
1997 1998 1999
------ ------ ---------
(Dollars in thousands)
<S> <C> <C> <C>
Raw materials and purchased components.................. $ 223 $ 225 $ 502
Finished goods.......................................... 911 1,032 1,507
------ ------ ------
Total inventories................................... $1,134 $1,257 $2,009
====== ====== ======
</TABLE>
6. Short-Term Debt
Short-term debt consists of following:
<TABLE>
<CAPTION>
At July 31,
------------- April 12,
1997 1998 1999
------ ------ ---------
(Dollars in thousands)
<S> <C> <C> <C>
Amount payable to affiliate--excess of net worth of CI
for the merger with BCS. To be reduced by any
uncollectible receivables, or other items that would
reduce the net worth of CI at the date of merger...... $ 54 $ 28 $16
Notes payable to stockholder, unsecured and due on
demand................................................ 48 -- --
Current portion of capital lease obligations........... 5 -- --
------ ----- ---
Total.............................................. $ 107 $ 28 $16
====== ===== ===
</TABLE>
F-42
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
7. Operating Leases and Rent Expense
The Company leases its office facilities in Englewood, Colorado and Dallas,
Texas under noncancellable lease agreements which expire in July 2001 and
December 1999, respectively. Additionally, the Company leases its primary
warehouse facility in Kennesaw, Georgia and certain office equipment under
noncancellable leases.
At July 31, 1999, future minimum lease payments required under the
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending July 31, Amount
- -------------------- ----------
(Dollars
in
thousands)
<S> <C>
1999................................................................. $178
2000................................................................. 100
2001................................................................. 98
----
Total............................................................ $376
====
</TABLE>
Rent expense under all operating leases in effect during the eleven months
ended July 31, 1997 was $148,246, during the year ended July 31, 1998 was
$308,164, and during the period August 1, 1998 through April 12, 1999 was
$236,788.
8. Related Party Transactions
During the eleven months ended July 31, 1997, the year ended July 31, 1998,
and the period August 1, 1998 through April 12, 1999, the Company purchased
inventory from affiliates totaling $391,568, $353,023, and $1,130,065,
respectively.
During the year ended July 31, 1998 the Company, through a related party, was
awarded a GSA contract. The contract is invoiced through the related party who
remits the amount collected to the Company when received from the government.
At July 31, 1998 and April 12, 1999 the Company was due $856,259 and
$1,991,360, respectively, from the related party for amounts invoiced on the
contract. These amounts are included in trade accounts receivable at July 31,
1998 and April 12, 1999.
The Company's payable to affiliated companies' stockholders consists of:
<TABLE>
<CAPTION>
July 31, July 31, April 12,
1997 1998 1999
-------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Payable to CSHC..................................... $ 16 $105 $ --
Payable to CSI...................................... 120 78 --
Payable to stockholders............................. 1 -- --
---- ---- -----
Net accounts payable--affiliates.................... $137 $183 $ --
==== ==== =====
</TABLE>
9. Employee Savings Plan
Substantially all employees of the Company can participate in the Dean Witter
Reynolds, Inc. Savings Incentive Match Plan, which is qualified under Section
408(p) of the Internal Revenue Code.
F-43
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
Under the provisions of the plan, all participants may contribute the lesser of
100% of their compensation or $6,000. The Company may contribute a matching
contribution equal to the lesser of the employee contributions or 3% of the
employee's compensation. During the eleven months ended July 31, 1997, the year
ended July 31, 1998, and the period August 1, 1998 through April 12, 1999, the
Company contributed $7,265, $48,602, and $56,458 to the plan, respectively.
10. Stock Option Plans
The Company currently has three stock option plans. Under the terms of the
first plan, certain employees may purchase common stock of the Company at
prices ranging from $.04 to $.34 per share. The number of options outstanding
under this plan and the number of common shares reserved for issuance upon the
exercise of those options is 558,928.
The other two plans grant certain employees options to purchase common stock
of the Company held by two major stockholders for prices ranging from nominal
amounts to $.65 per share. These options are exercisable upon the achievement
of certain conditions or a lapse of ten years. The number of shares subject to
option under these plans are 1,355,306. The following is a summary of
transactions:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding, September 1, 1996 (None vested)...... 7,490 $8.01
Granted (weighted average of fair value of $0.03
per share)..................................... 2,223,162 0.22
Canceled........................................ (174,964) 0.47
Exercised....................................... (213,866) 0.09
---------
Outstanding, July 31, 1997 (402,072 vested at a
weighted average price of $0.23 per share)....... 1,841,822 0.24
Canceled........................................ (83,144) 0.48
---------
Outstanding, July 31, 1998 (393,928 vested at a
weighted average price of $0.23 per share)....... 1,758,678 0.23
Granted (weighted average of fair value of $0.09
per share)..................................... 290,000 0.37
Canceled........................................ (134,444) 0.0001
---------
Outstanding, April 12, 1999 (393,928 vested at a
weighted average price of $0.13 per share)....... 1,914,234 $0.27
=========
</TABLE>
F-44
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
Additional information regarding options outstanding at April 12, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Vested Options
------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Vested Price
- ------------- ----------- ------------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.0001 480,306 7.9 $0.0001 -- $ --
0.04 81,499 2.4 0.04 81,499 0.04
0.14 293,637 2.4 0.14 293,637 0.14
0.25 400,000 8.2 0.25 -- --
0.34 183,792 8.6 0.34 18,792 0.34
0.65 475,000 8.1 0.65 -- --
- ------------- --------- --- ------- ------- -----
$0.0001-$0.65 1,914,234 7.0 $0.27 393,928 $0.13
============= ========= === ======= ======= =====
</TABLE>
Additional Stock Plan Information. Since the Company continues to account for
its stock-based awards to employees using the intrinsic value method in
accordance with APB No. 25, FAS 123, "Accounting for Stock-Based Compensation,"
requires the disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method as of the beginning of 1995. Under FAS
123, the fair value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock
option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's fair value calculations on stock-
based awards under the stock plans were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life, 8
years from the date of grant in 1997 and 10 years from the date of grant in
1999; stock volatility, 0% in 1997 and in 1999; risk-free interest rate, 6.75%
in 1997 and 5.0% in 1999 and no dividends during the expected term. The
Company's calculations are based on a single option award valuation approach,
and forfeitures are recognized as they occur. If the computed fair values of
the 1997 and 1999 awards had been amortized to expense over the vesting period
of the awards, the effect on pro forma net income would have been
insignificant.
F-45
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
11. Income Taxes
The provision for income taxes consists of the following at July 31:
<TABLE>
<CAPTION>
1997 1998
----- -----
(Dollars in
thousands)
<S> <C> <C>
Current
Federal......................................................... $ 13 $ 219
State........................................................... 4 7
Deferred
Federal......................................................... (34) (23)
State........................................................... (7) (5)
Valuation allowance............................................. 41 (41)
----- -----
$ 17 $ 157
===== =====
</TABLE>
Income tax effects of deferred income tax assets are comprised of the
following future deductible amounts at July 31:
<TABLE>
<CAPTION>
1997 1998
----- -----
(Dollars in
thousands)
<S> <C> <C>
Allowance for warranties and sales returns......................... $ 23 $ 19
Accrued compensated absences....................................... 18 27
Uniform inventory capitalization................................... -- 23
----- ----
41 69
Valuation allowance................................................ (41) --
----- ----
Deferred income tax asset........................................ $ -- $ 69
===== ====
</TABLE>
Prior to April 2, 1997, the Company had elected under Subchapter S of the
Internal Revenue Code to have its income taxed directly to its stockholders.
The 1997 provision for income taxes includes only the taxable income from April
2, 1997 through July 31, 1997. Pro forma net income and earnings per share have
been determined assuming the Company had been taxed under Subchapter C of the
Internal Revenue Code for federal and state purposes for 1997.
The following table reconciles the provision for income taxes at the U.S.
Statutory rate to that in the financial statements for 1998:
<TABLE>
<S> <C>
Income taxes at statutory rate........................................... 34.0%
State income taxes, net of federal benefit............................... 0.1
Uniform inventory capitalization......................................... 4.6
Change in valuation allowance and other.................................. (10.7)
-----
28.0%
=====
</TABLE>
F-46
<PAGE>
BCS Technologies, Inc.
Notes to Financial Statements--(Continued)
As a result of the merger, the Company has a net operating loss carryforward
of approximately $8,250,000 available to effect Georgia state income taxes. The
financial statements and disclosures do not include recognition of
approximately $495,000 of deferred income tax benefit due to the significant
uncertainty of its future realization.
12. Earnings Per Common Share
Outstanding stock options to purchase 1,383,542, 1,364,750, and 1,489,750
shares of common stock were not included in the computation of diluted earnings
per common share for the eleven months ended July 31, 1997, the year ended July
31, 1998, and the period August 1, 1998 through April 12, 1999. The effect of
including the stock options would be antidilutive or the stock options were
exercisable from shares owned by existing stockholders.
A summary of the diluted weighted average number of common shares is as
follows:
<TABLE>
<CAPTION>
Eleven
Months Period from
Ended Year Ended August 1, 1998
July 31, July 31, to
1997 1998 April 12, 1999
--------- ---------- --------------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding.............................. 8,701,076 23,814,706 23,716,554
Dilutive effect of stock options.......... 62,734 231,546 355,000
--------- ---------- ----------
Diluted weighted average number of common
shares outstanding....................... 8,763,810 24,046,252 24,071,554
========= ========== ==========
</TABLE>
13. Major Customer
The Company had one major customer which accounted for 22% of revenues for
the year ended July 31, 1998, and 80% of revenues for the period August 1, 1998
through April 12, 1999.
F-47
<PAGE>
[LOGO OF EON(TM) COMMUNICATIONS CORPORATION]
<PAGE>
Part II
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by eOn in connection with the sale of the
common stock being registered. All the amounts shown are estimates except for
the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee................................................. $ 12,276
NASD filing fee.................................................. 4,000
Nasdaq application fee........................................... 53,750
Blue sky qualification fee and expenses.......................... 5,000
Printing and engraving expenses.................................. 275,000
Legal fees and expenses.......................................... 550,000
Accounting fees and expenses..................................... 500,000
Directors' and officers' insurance............................... 153,000
Transfer agent and registrar fees................................ 9,650
Miscellaneous.................................................... 7,324
----------
Total............................................................ $1,570,000
</TABLE>
Item 14. Indemnification of Officers and Directors.
Under Section 145 of the Delaware General Corporation Law, we have broad
powers to indemnify our directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act.
Our certificate of incorporation provides for the elimination of liability
for monetary damages for breach of the directors' fiduciary duty of care to eOn
and its stockholders. These provisions do not eliminate the directors' duty of
care and, in appropriate circumstances, equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to eOn, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
any transaction from which the director derived an improper personal benefit,
and for payment of dividends or approval of stock repurchases or redemptions
that are unlawful under Delaware law. The provision does not affect a
director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
We expect to enter into agreements with our directors and officers that
require us to indemnify such persons against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred (including
expenses of a derivative action) in connection with any proceeding, whether
actual or threatened, to which any such person may be made a party by reason of
the fact that such person is or was a director or officer of eOn or any of its
affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of eOn and, with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this registration
statement provides for indemnification by the underwriters of eOn and its
officers and directors for certain liabilities arising under the Securities Act
or otherwise.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities.
Since January 1997, we have sold and issued the following unregistered
securities:
(1) In July 1997, we issued a convertible promissory note in the aggregate
principal amount of $3,000,000 to ChinaVest IV, L.P.
(2) In August 1997, we issued 95,343 shares of common stock to an investor
in exchange for an interest in the Longhai joint venture.
(3) In April 1999, we issued 3,969,680 shares of common stock to
stockholders of BCS Technologies, Inc. and assumed options covering
94,279 shares of common stock under the BCS 1997 Incentive Plan in
connection with the acquisition of BCS. We issued 553,880 shares of
common stock to Cortelco Systems Holding Corporation in connection
with the merger with Cortelco Systems Puerto Rico.
(4) Since April 1998, we have granted incentive stock options to
employees, directors and consultants under our 1997 Equity Incentive
Plan covering an aggregate of 333,409 shares of common stock, at an
average exercise price of $3.76. No options have been exercised under
the 1997 Equity Incentive Plan.
(5) Since April 1999, we have granted incentive stock options to
employees, directors and consultants under our 1999 Equity Incentive
Plan covering an aggregate of 1,045,057 shares of common stock, at an
average exercise price of $9.73. No options have been exercised under
the 1999 Equity Incentive Plan.
The sales and issuances of securities in the transactions described in
paragraphs (1) through (3) were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) and/or Regulation D promulgated under
the Securities Act. The purchasers in each case represented their intention to
acquire the securities for investment only and not with a view to the
distribution thereof. Appropriate legends are affixed to the stock certificates
issued in such transactions. Similar legends were imposed in connection with
any subsequent sales of any such securities. All recipients either received
adequate information about eOn or had access, through employment or other
relationships, to such information.
The sales and issuance of securities in the transaction described in
paragraphs (4) and (5) above were deemed to be exempt from registration under
the Securities Act by virtue of Rule 701 promulgated thereunder in that they
were offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
II-2
<PAGE>
Item 16. Exhibits.
(a)
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- ---------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Amended and Restated Certificate of Incorporation of eOn as currently
in effect.
3.1(a)+ Certificate of Amendment of 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 Certificate of Incorporation of eOn to be in
effect immediately following the closing of the offering.
3.3+ Bylaws of eOn as currently in effect.
3.4+ Amended and Restated Bylaws of eOn to be in effect immediately
following the closing of the offering.
4.1+ Reference is made to Exhibits 3.1, 3.1(a), 3.2, 3.3 and 3.4.
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.
5.1 Opinion of Cooley Godward LLP and Baker, Donelson, Bearman and
Caldwell, a Professional Corporation.
10.1+ Loan and Security Agreement between eOn and Foothill Capital
Corporation, dated as July 31, 1997.
10.2+ Convertible Subordinated Note issued by eOn in favor of ChinaVest IV,
L.P., dated as of July 31, 1997.
10.3+ Promissory Note issued by Cortelco Systems Holding Corporation in
favor of eOn, dated as of July 31, 1997.
10.4+ Promissory Note issued by J. Michael O'Dell in favor of eOn, dated as
of November 11, 1997.
10.5+ 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 and Foothill Capital Corporation, dated
as August 28, 1997.
10.6+ Promissory Note issued by Cortelco Systems Holding Corporation in
favor of BCS Technologies, Inc., dated as of May 28, 1999.
10.7+ Form of Indemnity Agreement to be entered into between eOn and its
officers and directors.
10.8+ Manufacturing Agreement between eOn and CMC Manufacturing, Inc.,
dated as of August 1, 1998.
10.9+ Lease Agreement between eOn and Willow Lake Associates, dated as of
July 24, 1989, as amended on April 26, 1999.
10.10+ Industrial Lease Agreement between BCS Technologies, Inc. and
Industrial Developments International (Georgia), L.P., dated as of
March 1, 1999.
10.11+ Lease Agreement between Cortelco Systems Puerto Rico, Inc. and
Cortelco Puerto Rico, Inc. dated as of March 1, 1999.
10.12+ Employment Agreement, dated as of April 12, 1999, by and between eOn
and each of David M. Fredrick and Frank Naso.
10.13+ eOn's 1999 Equity Incentive Plan and related documents.
10.14+ eOn's 1999 Employee Stock Purchase Plan and related documents.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- --------------------------------------------------------------
<C> <S>
21.1+ List of Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Brock and Company, CPAs, P.C.
23.3 Consent of Cooley Godward LLP and Baker, Donelson, Bearman and
Caldwell, a Professional Corporation. (See Exhibit 5.1)
24.1+ Power of Attorney. (See page II-5.)
27.1+ Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
(b)
Schedule II--Valuation and Qualifying Accounts
Item 17. Undertakings.
We undertake to provide to the underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of eOn pursuant
to the foregoing provisions or otherwise, eOn has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by eOn of expenses incurred or paid by a
director, officer or controlling person of eOn in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, eOn
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
We hereby undertake that: (i) for purposes of determining any liability under
the Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by eOn pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time the Commission declared it effective, and (ii) for the
purpose of determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Memphis,
State of Tennessee, on the 31st day of January, 2000.
eOn Communications Corporation
/s/ J. Michael O'Dell
By: _________________________________
J. Michael O'Dell
President and Chief Executive
Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Amendment to Registration Statement has been signed below by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ J. Michael O'Dell President, Chief Executive January 31, 2000
______________________________________ Officer and Director
J. Michael O'Dell (Principal Executive
Officer)
/s/ Stephen N. Samp Vice President of Finance January 31, 2000
______________________________________ and Administration, Chief
Stephen N. Samp Financial Officer and
Secretary (Principal
Financial and Accounting
Officer)
* Chairman of the Board January 31, 2000
______________________________________
David S. Lee
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director January 31, 2000
______________________________________
Stephen R. Bowling
* Director January 31, 2000
______________________________________
Robert P. Dilworth
* Director January 31, 2000
______________________________________
W. Frank King
* Director January 31, 2000
______________________________________
Jenny Hsui Theleen
</TABLE>
/s/ J. Michael O'Dell
*By: ____________________________
J. Michael O'Dell
Attorney-in-fact
II-6
<PAGE>
Cortelco Systems, Inc.
Schedule II--Valuation and Qualifying Accounts
<TABLE>
- -----------------------------------------------------------------------------
<CAPTION>
Column A Column B Column D Column E
- -------- ---------- Column C ---------- ---------
Additions
---------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997
Allowance for doubtful
accounts and sales
allowance 2,065,024 2,101,157 -- 1,076,419 3,089,762
Warranty reserve 328,806 481,921 -- 470,099 340,628
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
</TABLE>
S-1
<PAGE>
II. EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Amended and Restated Certificate of Incorporation of eOn as currently
in effect.
3.1(a)+ Certificate of Amendment of 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 Certificate of Incorporation of eOn to be in
effect immediately following the closing of the offering.
3.3+ Bylaws of eOn as currently in effect.
3.4+ Amended and Restated Bylaws of eOn to be in effect immediately
following the closing of the offering.
4.1+ Reference is made to Exhibits 3.1, 3.1(a), 3.2, 3.3 and 3.4.
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.
5.1 Opinion of Cooley Godward LLP and Baker, Donelson, Bearman and
Caldwell, a Professional Corporation.
10.1+ Loan and Security Agreement between eOn and Foothill Capital
Corporation, dated as July 31, 1997.
10.2+ Convertible Subordinated Note issued by eOn in favor of ChinaVest IV,
L.P., dated as of July 31, 1997.
10.3+ Promissory Note issued by Cortelco Systems Holding Corporation in
favor of eOn, dated as of July 31, 1997.
10.4+ Promissory Note issued by J. Michael O'Dell in favor of eOn, dated as
of November 11, 1997.
10.5+ 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 and Foothill Capital Corporation, dated
as August 28, 1997.
10.6+ Promissory Note issued by Cortelco Systems Holding Corporation in
favor of BCS Technologies, Inc., dated as of May 28, 1999.
10.7+ Form of Indemnity Agreement to be entered into between eOn and its
officers and directors.
10.8+ Manufacturing Agreement between eOn and CMC Manufacturing, Inc.,
dated as of August 1, 1998.
10.9+ Lease Agreement between eOn and Willow Lake Associates, dated as of
July 24, 1989, as amended on April 26, 1999.
10.10+ Industrial Lease Agreement between BCS Technologies, Inc. and
Industrial Developments International (Georgia), L.P., dated as of
March 1, 1999.
10.11+ Lease Agreement between Cortelco Systems Puerto Rico, Inc. and
Cortelco Puerto Rico, Inc. dated as of March 1, 1999.
10.12+ Employment Agreement, dated as of April 12, 1999, by and between eOn
and each of David M. Fredrick and Frank Naso.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.13+ eOn's 1999 Equity Incentive Plan and related documents.
10.14+ eOn's1999 Employee Stock Purchase Plan and related documents.
21.1+ List of Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Brock and Company, CPA's, P.C.
23.3 Consent of Cooley Godward LLP and Baker, Donelson, Bearman and
Caldwell, a Professional Corporation. (See Exhibit 5.1)
24.1+ Power of Attorney. (See page II-5.)
27.1+ Financial Data Schedule.
</TABLE>
- --------
+ Previously filed.
<PAGE>
EXHIBIT 1.1
3,000,000 Shares*
eOn Communications Corporation
Common Stock
UNDERWRITING AGREEMENT
----------------------
February _____, 2000
Needham & Company, Inc.
A.G. Edwards & Sons, Inc.
W.R. Hambrecht + Co., LLC
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
eOn Communications Corporation, a Delaware corporation (the
"Company"), proposes to issue and sell to the several Underwriters listed in
Schedule I hereto (the "Underwriters"), for whom you are acting as
representatives (the "Representatives"), an aggregate of 2,240,000 shares and,
at the election of the Underwriters, up to 300,000 additional shares of common
stock, par value $.001 per share (the "Stock"), of the Company, and the
stockholders of the Company named in Schedule II hereto (the "Selling
Stockholders") propose to sell to the Underwriters an aggregate of 760,000
shares of stock and, at the election of the Underwriters, up to 150,000
additional shares of Stock. The aggregate of 3,000,000 shares to be sold by the
Company and the Selling Stockholders is herein called the "Firm Shares" and the
aggregate of 450,000 additional shares to be sold by the Company and the Selling
Stockholders is herein called the "Option Shares". The Firm Shares and the
Option Shares are herein referred to as the "Shares".
The Company and each of the Selling Stockholders confirm as follows
its agreement with the Representatives and the several other Underwriters.
___________________________
*Plus an option to purchase up to an additional 450,000 to cover
over-allotments.
<PAGE>
1. Agreement to Sell and Purchase.
(a) On the basis of the representations, warranties and agreements of the
Company herein contained and subject to all the terms and conditions of this
Agreement, (i) the Company and each of the Selling Stockholders agrees,
severally and not jointly, to issue and sell the Firm Shares to the several
Underwriters and (ii) each of the Underwriters, severally and not jointly,
agrees to purchase from the Company and the Selling Stockholders the respective
number of Firm Shares set forth opposite that Underwriter's name in Schedule I
hereto, at the purchase price of $____ for each Firm Share.
(b) Subject to all the terms and conditions of this Agreement, the Company
and the Selling Stockholders grant the Option to the several Underwriters to
purchase, severally and not jointly, up to 450,000 Option Shares at the same
price per share as the Underwriters shall pay for the Firm Shares. The Option
may be exercised only to cover over-allotments in the sale of the Firm Shares by
the Underwriters and may be exercised in whole or in part at any time (but not
more than once) on or before the 30th day after the date of this Agreement upon
written or telegraphic notice (the "Option Shares Notice") by the
Representatives to the Company and the Attorney-in-Fact (as defined below) no
later than 12:00 noon, New York City time, at least two and no more than five
business days before the date specified for closing in the Option Shares Notice
(the "Option Closing Date"), setting forth the aggregate number of Option Shares
to be purchased and the time and date for such purchase. On the Option Closing
Date, the Company will issue and sell and the Selling Stockholders will sell to
the Underwriters the number of Option Shares set forth in the Option Shares
Notice, and each Underwriter will purchase such percentage of the Option Shares
as is equal to the percentage of Firm Shares that such Underwriter is
purchasing, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares.
2. Delivery and Payment. Delivery of the Firm Shares shall be made to
the Representatives for the accounts of the Underwriters against payment of the
purchase price by wire transfer payable in same-day funds (to the order of the
Company and to the accounts specified by the Attorney-in-Fact for the Selling
Stockholders) at the office of Needham & Company, Inc., 445 Park Avenue, New
York, New York 10022, at 10:00 a.m., New York City time, on the third (or, if
the purchase price set forth in Section 1(b) hereof is determined after 4:30
p.m., Washington D.C. time, the fourth) business day following the commencement
of the offering contemplated by this Agreement, or at such time on such other
date, not later than seven business days after the date of this Agreement, as
may be agreed upon by the Company, the Attorney-in-Fact and the Representatives
(such date is hereinafter referred to as the "Closing Date").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the
2
<PAGE>
offices specified above for the Closing Date at the time and date (which may be
the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and shall be
registered in such names and in such denominations as the Representatives shall
request at least two business days prior to the Closing Date or the Option
Closing Date, as the case may be, by written notice to the Company. For the
purpose of expediting the checking and packaging of certificates for the Shares,
the Company agrees to make such certificates available for inspection at least
24 hours prior to the Closing Date or the Option Closing Date, as the case may
be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and Option Shares by the Company and
the Selling Stockholders to the respective Underwriters shall be borne by the
Company. The Company and the Selling Stockholders will pay and save each
Underwriter and any subsequent holder of the Shares harmless from any and all
liabilities with respect to or resulting from any failure or delay in paying
Federal and state stamp and other transfer taxes, if any, which may be payable
or determined to be payable in connection with the original issuance or sale to
such Underwriter of the Shares.
3. Representations and Warranties of the Company. The Company
represents, warrants and covenants to each Underwriter that:
(a) A registration statement (Registration No. 333-77021) on Form S-1
relating to the Shares, including a preliminary prospectus and such amendments
to such registration statement as may have been required to the date of this
Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a preliminary
prospectus as contemplated by Rule 430 or Rule 430A of the Rules and Regulations
included at any time as part of the registration statement. Copies of such
registration statement and amendments and of each related preliminary prospectus
have been delivered to the Representatives. If such registration statement has
not become effective, a further amendment to such registration statement,
including a form of final prospectus, necessary to permit such registration
statement to become effective will be filed promptly by the Company with the
Commission. If such registration statement has become effective, a final
prospectus containing information permitted to be omitted at the time of
effectiveness by Rule 430A of the Rules and Regulations will be filed promptly
by the Company with the Commission in accordance with Rule 424(b) of the Rules
and Regulations. The term "Registration Statement" means the registration
statement as amended at the time it becomes or became effective (the "Effective
Date"), including financial statements and all exhibits and any information
deemed to be included by Rule 430A and includes any registration statement
3
<PAGE>
relating to the offering contemplated by this Agreement and filed pursuant to
Rule 462(b) of the Rules and Regulations. The term "Prospectus" means the
prospectus as first filed with the Commission pursuant to Rule 424(b) of the
Rules and Regulations or, if no such filing is required, the form of final
prospectus included in the Registration Statement at the Effective Date.
(b) No order preventing or suspending the use of any preliminary
prospectus has been issued by the Commission. On the Effective Date, the date
the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if
required), at all times subsequent to and including the Closing Date and, if
later, the Option Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did and will comply with all applicable
provisions of the Act, the Securities Exchange Act of 1934, as amended, (the
"Exchange Act"), the rules and regulations under the Exchange Act (the "Exchange
Act Rules and Regulations"), and the Rules and Regulations and will contain all
statements required to be stated therein in accordance with the Act, the
Exchange Act, the Exchange Act Rules and Regulations, and the Rules and
Regulations. On the Effective Date and when any post-effective amendment to the
Registration Statement becomes effective, no part of the Registration Statement,
the Prospectus or any such amendment or supplement did or will contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. At the Effective Date, the date the Prospectus or any amendment or
supplement to the Prospectus is filed with the Commission and at the Closing
Date and, if later, the Option Closing Date, the Prospectus did not and will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The foregoing representations and
warranties in this Section 3(b) do not apply to any statements or omissions made
in reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives specifically for
inclusion in the Registration Statement or Prospectus or any amendment or
supplement thereto. The Company acknowledges that the statements set forth under
the heading "Underwriting" in the Prospectus constitute the only information
relating to any Underwriter furnished in writing to the Company by the
Representatives specifically for inclusion in the Registration Statement.
(c) The Company does not own, and at the Closing Date and, if later, the
Option Closing Date, will not own, directly or indirectly, any shares of stock
or any other equity or long-term debt securities of any corporation or have any
equity interest in any corporation, firm, partnership, joint venture,
association or other entity, other than the subsidiaries listed in Exhibit 21 to
the Registration Statement and certain immaterial,
4
<PAGE>
non-operating subsidiaries not listed on such Exhibit (collectively, the
"Subsidiaries"). The Company and each of its Subsidiaries is, and at the Closing
Date and, if later, the Option Closing Date, will be, a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. The Company and each of its Subsidiaries has, and
at the Closing Date and, if later, the Option Closing Date, will have, full
power and authority to conduct all the activities conducted by it, to own or
lease all the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus. The Company and each
of its Subsidiaries is, and at the Closing Date and, if later, the Option
Closing Date, will be, duly licensed or qualified to do business and in good
standing as a foreign corporation in all jurisdictions in which the nature of
the activities conducted by it or the character of the assets owned or leased by
it makes such license or qualification necessary, except to the extent that the
failure to be so qualified or be in good standing would not materially and
adversely affect the Company or its business, properties, business prospects,
condition (financial or other) or results of operations. All of the outstanding
shares of capital stock of each Subsidiary have been duly authorized and validly
issued and are fully paid and nonassessable, and owned by the Company free and
clear of all claims, liens, charges and encumbrances; there are no securities
outstanding that are convertible into or exercisable or exchangeable for capital
stock of any Subsidiary. The Company is not, and at the Closing Date and, if
later, the Option Closing Date, will not be, engaged in any discussions or a
party to any agreement or understanding, written or oral, regarding the
acquisition of an interest in any corporation, firm, partnership, joint venture,
association or other entity where such discussions, agreements or understandings
would require amendment to the Registration Statement pursuant to applicable
securities laws. Complete and correct copies of the certificate of incorporation
and of the by-laws of the Company and each of its Subsidiaries and all
amendments thereto have been delivered to the Representatives, and no changes
therein will be made subsequent to the date hereof and prior to the Closing Date
or, if later, the Option Closing Date.
(d) All of the outstanding shares of capital stock of the Company have
been duly authorized, validly issued and are fully paid and nonassessable and
were issued in compliance with all applicable state and federal securities laws;
the Shares have been duly authorized and when issued and paid for as
contemplated herein will be validly issued, fully paid and nonassessable; no
preemptive or similar rights exist with respect to any of the Shares or the
issue and sale thereof. The description of the capital stock of the Company in
the Registration Statement and the Prospectus is, and at the Closing Date and,
if later, the Option Closing Date, will be, complete and accurate in all
respects. Except as set forth in the Prospectus, the Company does not have
outstanding, and at the Closing Date and, if later, the Option Closing Date,
will not have outstanding, any options to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any shares of capital stock, or any
such warrants, convertible securities or obligations. No further
5
<PAGE>
approval or authority of stockholders or the Board of Directors of the Company
will be required for the issuance and sale of the Shares as contemplated herein.
(e) The financial statements and schedules included in the Registration
Statement or the Prospectus present fairly the financial condition of the
Company and its consolidated Subsidiaries as of the respective dates thereof and
the results of operations and cash flows of the Company and its consolidated
Subsidiaries for the respective periods covered thereby, all in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the entire period involved. No other financial statements or
schedules of the Company are required by the Act, the Exchange Act, the Exchange
Act Rules and Regulations or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. Deloitte & Touche LLP (the
"Accountants"), who have reported on such financial statements and schedules,
are independent accountants with respect to the Company as required by the Act
and the Rules and Regulations. The summary consolidated financial and
statistical data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with the
financial statements presented therein.
(f) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus and prior to the Closing Date and,
if later, the Option Closing Date, except as set forth in or contemplated by the
Registration Statement and the Prospectus, (i) there has not been and will not
have been any change in the capitalization of the Company (other than in
connection with the exercise of options to purchase the Company's Common Stock
granted pursuant to the Company's stock option plans from the shares reserved
therefor as described in the Registration Statement), or any material adverse
change in the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company or any of its Subsidiaries,
arising for any reason whatsoever, (ii) neither the Company nor any of its
Subsidiaries has incurred nor will any of them incur, except in the ordinary
course of business (consistent with past practice) as described in the
Prospectus, any material liabilities or obligations, direct or contingent, nor
has the Company or any of its Subsidiaries entered into nor will it enter into,
except in the ordinary course of business as described in the Prospectus, any
material transactions other than pursuant to this Agreement and the transactions
referred to herein and (iii) the Company has not and will not have paid or
declared any dividends or other distributions of any kind on any class of its
capital stock.
(g) The Company is not, will not become as a result of the transactions
contemplated hereby, and does not intend to conduct its business in a manner
that would cause it to become, an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
6
<PAGE>
(h) Except as set forth in the Registration Statement and the Prospectus,
there are no actions, suits or proceedings pending or, to the knowledge of the
Company, threatened against or affecting the Company, and of its Subsidiaries or
any of their officers in their capacity as such, nor any basis therefor, before
or by any federal or state court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, wherein an unfavorable
ruling, decision or finding might materially and adversely affect the Company,
any of its Subsidiaries or the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company or
any of its Subsidiaries.
(i) The Company and each Subsidiary has, and at the Closing Date and, if
later, the Option Closing Date, will have, performed all the obligations
required to be performed by it, and is not, and at the Closing Date, and, if
later, the Option Closing Date, will not be, in default, under any contract or
other instrument to which it is a party or by which its property is bound or
affected, which default might reasonably be expected to materially and adversely
affect the Company and its Subsidiaries taken as a whole or the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Company and its Subsidiaries taken as a whole. To the best
knowledge of the Company, no other party under any contract or other instrument
to which it or any of its Subsidiaries is a party is in default in any respect
thereunder, which default might reasonably be expected to materially and
adversely affect the Company and its Subsidiaries taken as a whole or the
business, properties, business prospects, condition (financial or other) or
results of operations of the Company and its Subsidiaries taken as a whole.
Neither the Company nor any of its Subsidiaries is, and at the Closing Date and,
if later, the Option Closing Date, will be, in violation of any provision of its
certificate or articles of organization or by-laws or other organizational
documents.
(j) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Company of the transactions on its part contemplated herein,
except such as have been obtained under the Act or the Rules and Regulations and
such as may be required under state securities or Blue Sky laws or the by-laws
and rules of the National Association of Securities Dealers, Inc. (the "NASD")
in connection with the purchase and distribution by the Underwriters of the
Shares.
(k) The Company has full corporate power and authority to enter into this
Agreement. This Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with the terms hereof. The
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company pursuant to the
terms or provisions of, or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, or give any party a right to
7
<PAGE>
terminate any of its obligations under, or result in the acceleration of any
obligation under, the certificate or articles of incorporation or by-laws of the
Company or any of its Subsidiaries, any indenture, mortgage, deed of trust,
voting trust agreement, loan agreement, bond, debenture, note agreement or other
evidence of indebtedness, lease, contract or other agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which the Company,
any of its Subsidiaries or any of their properties is bound or affected, or
violate or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to the
business or properties of the Company or any of its Subsidiaries which would
have a material adverse effect on the Company and its Subsidiaries taken as a
whole.
(l) The Company and each of its subsidiaries has good and marketable title
to all properties and assets described in the Prospectus as owned by them, free
and clear of all liens, charges, encumbrances or restrictions, except such as
are described in the Prospectus. The Company or its Subsidiaries has valid,
subsisting and enforceable leases for the properties described in the Prospectus
as leased by them. The Company or one of its wholly-owned Subsidiaries owns or
leases all such properties as are necessary to its operations as now conducted
or as proposed to be conducted, except where the failure to so own or lease
would not materially and adversely affect the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries taken as a whole.
(m) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company or any of its Subsidiaries is
a party have been duly authorized, executed and delivered by the Company or such
Subsidiary, constitute valid and binding agreements of the Company or such
Subsidiary and are enforceable against and by the Company or such Subsidiary in
accordance with the terms thereof.
(n) No statement, representation, warranty or covenant made by the Company
in this Agreement or made in any certificate or document required by Section 5
of this Agreement to be delivered to the Representatives contained or will
contain, when made, any untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
(o) Neither the Company nor any of its directors, officers or controlling
persons has taken, directly or indirectly, any action designed, or which might
reasonably be expected, to cause or result, under the Act or otherwise, in, or
which has constituted, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
8
<PAGE>
(p) No holder of securities of the Company has rights to the registration
of any securities of the Company because of the filing of the Registration
Statement, except for rights that have been waived by the holder thereof as of
the date hereof.
(q) The Company has filed a registration statement pursuant to Section
12(g) of the Exchange Act to register the Common Stock, has filed an application
to list the Shares on the Nasdaq National Market ("NNM"), and has received
notification that the listing has been approved, subject to notice of issuance
of the Shares.
(r) The Company and its wholly-owned Subsidiaries have sufficient
trademarks, trade names, patent rights, mask works, copyrights, licenses,
approvals and governmental authorizations to conduct their businesses as now
conducted and as proposed to be conducted. Neither the Company nor any of its
Subsidiaries has received notice of infringement or is aware of any infringement
on trademarks, trade name rights, patent rights, mask work rights, copyrights,
licenses, trade secrets or other similar rights of others, where such
infringement could have a material and adverse effect on the Company and its
Subsidiaries taken as a whole or the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company and
its Subsidiaries taken as a whole. There is no claim being made against the
Company or any of its Subsidiaries, or to the best of the Company's knowledge,
any employee of the Company or any of its Subsidiaries, regarding trademark,
trade name, patent, mask work, copyright, license, trade secret or other
infringement which could have a material and adverse effect on the Company and
its Subsidiaries taken as a whole or the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries taken as a whole.
(s) The Company and each of its Subsidiaries has filed all federal, state,
local and foreign income tax returns which have been required to be filed and
has paid all taxes and assessments received by it to the extent that such taxes
or assessments have become due and are not being contested in good faith.
Neither the Company nor any of its Subsidiaries has any tax deficiency which has
been or, to the best knowledge of the Company, might be asserted or threatened
against it which could have a material and adverse effect on the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Company and its Subsidiaries taken as a whole.
(t) The pro forma financial information set forth in the Registration
Statement reflects, subject to the limitations set forth in the Registration
Statement as to such pro forma financial information, the results of operations
of the Company and its consolidated Subsidiaries purported to be shown thereby
for the periods indicated and conforms to the requirements of Regulation S-X of
the Rules and Regulations and management of the Company believes (i) the
assumptions underlying the pro forma adjustments are reasonable, (ii) that such
adjustments have been properly applied to the historical amounts in the
compilation of such statements, and (iii) that such statements
9
<PAGE>
present fairly, with respect to the Company and its consolidated Subsidiaries,
the pro forma financial position and results of operations and the other
information purported to be shown therein at the respective dates or for the
respective periods therein specified.
(u) The Company and its Subsidiaries own or possess all authorizations,
approvals, orders, licenses, registrations, other certificates and permits of
and from all governmental regulatory officials and bodies, necessary to conduct
their respective businesses as contemplated in the Prospectus, except where the
failure to own or possess all such authorizations, approvals, orders, licenses,
registrations, other certificates and permits would not materially and adversely
affect the Company and its Subsidiaries taken as a whole or the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Company and its Subsidiaries taken as a whole. There is no
proceeding pending or threatened (or any basis therefor known to the Company)
which may cause any such authorization, approval, order, license, registration,
certificate or permit to be revoked, withdrawn, cancelled, suspended or not
renewed; and the Company and each of its Subsidiaries is conducting its business
in compliance with all laws, rules and regulations applicable thereto
(including, without limitation, all applicable federal, state and local
environmental laws and regulations) except where such noncompliance would not
materially and adversely affect the Company and its Subsidiaries taken as a
whole or the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries taken as
a whole.
(v) The Company and each of its Subsidiaries maintains insurance of the
types and in the amounts generally deemed adequate for its business, including,
but not limited to, insurance covering real and personal property owned or
leased by the Company and its Subsidiaries against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(w) Neither the Company nor any of its Subsidiaries nor, to the best of
the Company's knowledge, any of its or their respective employees or agents has,
at any time during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(x) Each employee benefit plan, within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended, ("ERISA") that is
maintained, administered or contributed to by the Company or any of its
affiliates for employees or former employees of the Company and its affiliates
has been maintained in compliance with its terms and the requirements of any
applicable statutes, orders, rules and regulations, including but not limited to
ERISA and the Internal Revenue Code of
10
<PAGE>
1986, as amended, ("Code"). No prohibited transaction, within the meaning of
Section 406 of EISA or Section 4975 of the Code has occurred with respect to any
such plan excluding transactions effected pursuant to a statutory or
administrative exemption. For each such plan which is subject to the funding
rules of Section 412 of the Code or Section 302 of ERISA no "accumulated funding
deficiency" as defined in Section 412 of the Code has been incurred, whether or
not waived, and the fair market value of the assets of each such plan (excluding
for these purposes accrued but unpaid contributions) exceeded the present value
of all benefits accrued under such plan determined using reasonable actuarial
assumptions.
(y) the Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (A) transactions are executed in
accordance with management's general or specific authorizations; (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and (D) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences;
(z) The Company has reviewed its operations and any third parties with
which the Company has a material relationship to evaluate the extent to which
the business or operations of the Company will be affected by the Year 2000
Problem. As a result of such review, the Company has no reason to believe, and
does not believe, that the Year 2000 Problem will have a material adverse effect
on the general affairs, business, management, financial position, stockholders'
equity or results of operations of the Company and its subsidiaries taken as a
whole or result in any material loss or interference with the Company's business
or operations. The "Year 2000 Problem" as used herein means any significant
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems of
any kind will not, in the case of dates or time periods occurring after December
31, 1999, function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000.
4. Representations and Warranties of the Selling Stockholders. Each of
the Selling Stockholders severally represents and warrants to, and agrees with,
each of the Underwriters and the Company that:
(a) all consents, approvals, authorizations and orders necessary for the
execution and delivery by such Selling Stockholder of this Agreement and the
Power of Attorney (the "Power of Attorney") and the Custody Agreement (the
"Custody Agreement") hereinafter referred to, and for the sale and delivery of
the Shares to be sold by such Selling Stockholder hereunder, have been obtained;
such Selling Stockholder has full right, power and authority to enter into this
Agreement, the Power of Attorney and
11
<PAGE>
the Custody Agreement and to sell, assign, transfer and deliver the Shares to be
sold by such Selling Stockholder hereunder; and this Agreement, the Power of
Attorney and the Custody Agreement have each been duly authorized, executed and
delivered by such Selling Stockholder;
(b) the sale of the Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody Agreement
and the consummation of the transactions herein and therein contemplated will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which such Selling Stockholder is a party or by which such Selling Stockholder
is bound or to which any of the property or assets of such Selling Stockholder
is subject, nor will such action result in any violation of the provisions of
the Certificate of Incorporation or By-laws of such Selling Stockholder if such
Selling Stockholder is a corporation, the Partnership Agreement of such Selling
Stockholder if such Selling Stockholder is a partnership, or any statute or any
order, rule or regulation of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or the property of such Selling
Stockholder;
(c) such Selling Stockholder has good and valid title to the Shares to be
sold at the Closing Date or Option Closing Date, as the case may be, by such
Selling Stockholder hereunder, free and clear of all liens, encumbrances,
equities or adverse claims; such Selling Stockholder will have, immediately
prior to the Closing Date or Option Closing Date, as the case may be, good and
valid title to the Shares to be sold at the Closing Date or Option Closing Date,
as the case may be, by such Selling Stockholder, free and clear of all liens,
encumbrances, equities or adverse claims; and, upon delivery of the certificates
representing such Shares and payment therefor pursuant hereto good and valid
title to such Shares, free and clear of all liens, encumbrances, equities or
adverse claims, will pass to the several Underwriters assuming the Underwriters
purchase the Shares in good faith and without notice of adverse claim within the
meaning of the Uniform Commercial Code;
(d) such Selling Stockholder has not taken and will not take, directly or
indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Shares; and
(e) all information furnished by the Selling Stockholder for use in the
Registration Statement and Prospectus is, and will be, as of the Closing Date or
Option Closing Date, as the case may be, true, correct and complete, and does
not, and on the Closing Date or Option Closing Date, as the case may be, will
not, contain any untrue
12
<PAGE>
statements or material fact or omit to state any material fact necessary to make
such information not misleading.
(f) Each of the Selling Stockholders represents and warrants that
certificates in negotiable form representing all of the Shares to be sold by
such Selling Stockholder hereunder have been placed in custody under a Custody
Agreement relating to such Shares, in the form heretofore furnished to you, duly
executed and delivered by such Selling Stockholder to American Securities
Transfer and Trust, as custodian (the "Custodian"), and that such Selling
Stockholder has duly executed and delivered Powers of Attorney, in the form
heretofore furnished to you, appointing the person or persons indicated in the
Custody Agreement, and each of them, as such Selling Stockholder's Attorneys-in-
fact (the "Attorneys-in-Fact" or any one of them the "Attorney-in Fact") with
authority to execute and deliver this Agreement on behalf of such Selling
Stockholder, to determine the purchase price to be paid by the Underwriters to
the Selling Stockholders as provided herein, to authorize the delivery of the
Shares to be sold by such Selling Stockholder hereunder and otherwise to act on
behalf of such Selling Stockholder in connection with the transactions
contemplated by this Agreement and the Custody Agreement.
(g) Each of the Selling Stockholders specifically agrees that the Shares
represented by the certificates held in custody for such Selling Stockholder
under the Custody Agreement are subject to the interests of the Underwriters
hereunder, and that the arrangements made by such Selling Stockholder for such
custody, and the appointment by such Selling Stockholder of the Attorneys-in-
Fact by the Power of Attorney, are to that extent irrevocable. Each of the
Selling Stockholders specifically agrees that the obligations of such Selling
Stockholder hereunder shall not be terminated by operation of law, whether by
the death or incapacity of any individual Selling Stockholder, or, in the case
of an estate or trust, by the death or incapacity of any executor or trustee or
the termination of such estate or trust, or in the case of a partnership or
corporation, by the dissolution of such partnership or corporation, or by the
occurrence of any other event. If any individual Selling Stockholder or any such
executor or trustee should die or become incapacitated, or if any such estate or
trust should be terminated, or if any such partnership or corporation should be
dissolved, or if any other such event should occur, before the delivery of the
Shares hereunder, certificates representing such Shares shall be delivered by or
on behalf of such Selling Stockholder in accordance with the terms and
conditions of this Agreement and the Custody Agreement, and actions taken by the
Selling Stockholder pursuant to the Custody Agreement and by the Attorneys-in-
Fact pursuant to the Powers of Attorney shall be as valid as if such death,
incapacity, termination, dissolution or other event had not occurred, regardless
of whether or not the Custodian, the Attorneys-in-Fact, or any of them, shall
have received notice of such death, incapacity, termination, dissolution or
other event.
13
<PAGE>
5. Agreements of the Company. The Company covenants and agrees with each
of the several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or thereafter
during such period as the Prospectus is required by law to be delivered in
connection with sales of the Shares by an Underwriter or dealer, file any
amendment or supplement to the Registration Statement or the Prospectus, unless
a copy thereof shall first have been submitted to the Representatives within a
reasonable period of time prior to the filing thereof and the Representatives
shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Representatives promptly, and
will confirm such advice in writing, (i) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose or the threat thereof, (iv) of the happening of any event
during the period mentioned in the second sentence of Section 5(e) that in the
judgment of the Company makes any statement made in the Registration Statement
or the Prospectus untrue or that requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein, in the light of the circumstances in which they are made, not
misleading and (v) of receipt by the Company or any representative or attorney
of the Company of any other communication from the Commission relating to the
Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules and Regulations, the
Company will comply with the provisions of and make all requisite filings with
the Commission pursuant to said Rule 430A and notify the Representatives
promptly of all such filings.
(c) The Company will furnish to each Representative, without charge, one
signed copy of each of the Registration Statement and of any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto and will furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement.
14
<PAGE>
(e) On the Effective Date, and thereafter from time to time, the Company
will deliver to each of the Underwriters, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as the Representatives may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the several Underwriters and by all dealers
to whom the Shares may be sold, both in connection with the offering or sale of
the Shares and for any period of time thereafter during which the Prospectus is
required by law to be delivered in connection therewith. If during such period
of time any event shall occur which in the judgment of the Company or counsel to
the Underwriters should be set forth in the Prospectus in order to make any
statement therein, in the light of the circumstances under which it was made,
not misleading, or if it is necessary to supplement or amend the Prospectus to
comply with law, the Company will forthwith prepare and duly file with the
Commission an appropriate supplement or amendment thereto, and will deliver to
each of the Underwriters, without charge, such number of copies of such
supplement or amendment to the Prospectus as the Representatives may reasonably
request.
(f) Prior to any public offering of the Shares, the Company will cooperate
with the Representatives and counsel to the Underwriters in connection with the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as the Representatives may
request; provided, that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any jurisdiction
where it is not now so subject.
(g) The Company will, so long as required under the Rules and Regulations,
furnish to its stockholders as soon as practicable after the end of each fiscal
year an annual report (including a balance sheet and statements of income,
stockholders' equity and cash flow of the Company and its consolidated
Subsidiaries, if any, certified by independent public accountants).
(h) During the period of five years commencing on the Effective Date, the
Company will furnish to the Representatives and each other Underwriter who may
so request copies of such financial statements and other periodic and special
reports as the Company may from time to time distribute generally to the holders
of any class of its capital stock, and will furnish to the Representatives and
each other Underwriter who may so request a copy of each annual or other report
it shall be required to file with the Commission.
(i) The Company will make generally available to holders of its securities
as soon as may be practicable but in no event later than the last day of the
fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for a
15
<PAGE>
period of 12 months ended commencing after the Effective Date, and satisfying
the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and
Regulations).
(j) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay or reimburse
if paid by the Representatives all costs and expenses incident to the
performance of the obligations of the Company under this Agreement and in
connection with the transactions contemplated hereby, including but not limited
to costs and expenses of or relating to (i) the preparation, printing and filing
of the Registration Statement and exhibits to it, each preliminary prospectus,
Prospectus and any amendment or supplement to the Registration Statement or
Prospectus, (ii) the preparation and delivery of certificates representing the
Shares, (iii) the printing of this Agreement, the Agreement Among Underwriters,
any Selected Dealer Agreements, any Underwriters' Questionnaires, any
Underwriters' Powers of Attorney, and any invitation letters to prospective
Underwriters, (iv) furnishing (including costs of shipping and mailing) such
copies of the Registration Statement, the Prospectus and any preliminary
prospectus, and all amendments and supplements thereto, as may be requested for
use in connection with the offering and sale of the Shares by the Underwriters
or by dealers to whom Shares may be sold, (v) the listing of the Shares on the
NNM, (vi) any filings required to be made by the Underwriters with the NASD, and
the fees, disbursements and other charges of counsel for the Underwriters in
connection therewith, (vii) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions
designated pursuant to Section 5(f), including the fees, disbursements and other
charges of counsel to the Underwriters in connection therewith, and the
preparation and printing of preliminary, supplemental and final Blue Sky
memoranda, (viii) fees, disbursements and other charges of counsel to the
Company (but not those of counsel for the Underwriters, except as otherwise
provided herein) and (ix) the transfer agent for the Shares.
(k) The Company will not at any time, directly or indirectly, take any
action designed or which might reasonably be expected to cause or result in, or
which will constitute, stabilization of the price of the shares of Common Stock
to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering and sale of
the Shares to be sold by the Company in the manner set forth in the Prospectus
under "Use of Proceeds" and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.
(m) During the period beginning from the date hereof and continuing to and
including the date 180 days after the date of the Prospectus, without the prior
written consent of Needham & Company, Inc., the Company will not offer, sell,
contract to sell,
16
<PAGE>
grant options to purchase or otherwise dispose of any of the Company's equity
securities of the Company or any other securities convertible into or
exchangeable with its Common Stock or other equity security (other than pursuant
to employee stock option plans or the conversion of convertible securities or
the exercise of warrants outstanding on the date of this Agreement).
(n) During the period of 180 days after the date of the Prospectus, the
Company will not, without the prior written consent of Needham & Company, Inc.,
grant options to purchase shares of Common Stock at a price less than the
initial public offering price. During the period of 180 days after the date of
the Prospectus, the Company will not file with the Commission or cause to become
effective any registration statement relating to any securities of the Company
without the prior written consent of Needham & Company, Inc.
(o) The Company will cause each of its officers, directors and certain
stockholders designated by the Representatives to, enter into lock-up agreements
with the Representatives to the effect that they will not, without the prior
written consent of Needham & Company, Inc., sell, contract to sell or otherwise
dispose of any shares of Common Stock or rights to acquire such shares according
to the terms set forth in Schedule II hereto.
(p) The Company will not file with the Commission any registration
statement on Form S-8 relating to shares of its Common Stock prior to 90 days
after the effective date of the Registration Statement.
(q) whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
costs and expenses incident to the performance of its obligations hereunder,
including without limiting the generality of the foregoing, all costs and
expenses (A) incident to the preparation, reregistration, transfer, execution
and delivery of the Shares, (B) incident to the preparation, printing and filing
under the Securities Act of the Registration Statement, the Prospectus and any
preliminary prospectus (including in each case all exhibits, amendments and
supplements thereto), (C) incurred in connection with the registration or
qualification of the Shares under the laws of such jurisdictions as the
Representatives may designate (including fees of counsel for the Underwriters
and its disbursements), (D) in connection with the listing of the Shares on the
Nasdaq National Market, (E) related to the filing with, and clearance of the
offering by, the National Association of Securities Dealers, Inc., (F) in
connection with the printing (including word processing and duplication costs)
and delivery of this Agreement, the Preliminary and Supplemental Blue Sky
Memoranda and the furnishing to the Underwriters and dealers of copies of the
Registration Statement and the Prospectus, including mailing and shipping, as
herein provided, (G) any expenses incurred by the Company in connection with a
"road show"
17
<PAGE>
presentation to potential investors, (H) the cost of preparing stock
certificates and (I) the cost and charges of any transfer agent and any
registrar.
6. Agreements of the Selling Stockholders. Each of the Selling
Stockholders agrees with each of the several Underwriters as follows:
(a) for a period of 180 days after the date of the initial public offering
of the Shares not to (A) offer, pledge, announce the intention to sell, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of Stock or any
securities convertible into or exercisable or exchangeable for Stock or (B)
enter into any swap or other agreement that transfers, in whole or in part, any
of the economic consequences of ownership of the Stock, whether any such
transaction described in clause (A) or (B) above is to be settled by delivery of
Stock or such other securities, in cash or otherwise or (C) make any demand for
or exercise any right with respect to the registration of any shares of Stock or
any security convertible into or exercisable or exchangeable for Stock without
the prior written consent of Needham & Company, Inc., in each case other than
the Shares to be sold by such Selling Stockholder hereunder; and
(b) to deliver to the Representatives prior to or at the Closing Date a
properly completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by the Treasury Department
regulations in lieu thereof) in order to facilitate the Underwriters'
documentation of their compliance with the reporting and withholding provisions
of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the
transactions herein contemplated.
7. Conditions of the Obligations of the Underwriters. The several
obligations of each Underwriter hereunder are subject to the following
conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Representatives not later than 5:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Representatives and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission, (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by the Commission or the authorities of any such
jurisdiction, (iii) any request for additional information on the part of the
staff of the Commission or any such authorities shall have been complied with to
the satisfaction
18
<PAGE>
of the staff of the Commission or such authorities and (iv) after the date
hereof no amendment or supplement to the Registration Statement or the
Prospectus shall have been filed unless a copy thereof was first submitted to
the Representatives and the Representatives do not object thereto in good faith,
and the Representatives shall have received certificates, dated the Closing Date
and, if later, the Option Closing Date and signed by the Chief Executive Officer
and the Chief Financial Officer of the Company (who may, as to proceedings
threatened, rely upon the best of their information and belief), to the effect
of clauses (i), (ii) and (iii) of this paragraph.
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company and its Subsidiaries taken as a whole, whether or not
arising from transactions in the ordinary course of business, in each case other
than as described in or contemplated by the Registration Statement and the
Prospectus, and (ii) the Company shall not have sustained any material loss or
interference with its business or properties from fire, explosion, flood or
other casualty, whether or not covered by insurance, or from any labor dispute
or any court or legislative or other governmental action, order or decree, which
is not described in the Registration Statement and the Prospectus, if in the
judgment of the Representatives any such development makes it impracticable or
inadvisable to consummate the sale and delivery of the Shares by the
Underwriters at the initial public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company, any of its Subsidiaries, or
any of its or their officers or directors in their capacities as such, before or
by any Federal, state or local court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, in which
litigation or proceeding an unfavorable ruling, decision or finding would, in
the judgment of the Representatives, materially and adversely affect the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries taken as a whole.
(e) Each of the representations and warranties of the Company and the
Selling Stockholders contained herein shall be true and correct in all material
respects at the Closing Date and, with respect to the Option Shares, at the
Option Closing Date, and all covenants and agreements contained herein to be
performed on the part of the Company and the Selling Stockholders and all
conditions contained herein to be fulfilled or complied with by the Company at
or prior to the Closing Date and, with respect to the Option Shares, at or prior
to the Option Closing Date, shall have been duly performed, fulfilled or
complied with.
19
<PAGE>
(f) The Representatives shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to the Representatives and counsel for the
Underwriters from Cooley Godward LLP and Baker, Donelson, Bearman & Caldwell,
each counsel to the Company, with respect to the matters set forth on Exhibit A
hereto.
(g) The Representatives shall have received an opinion, dated the Closing
Date and the Option Closing Date, from Heller Ehrman White & McAuliffe, counsel
to the Underwriters, with respect to the Registration Statement, the Prospectus,
and this Agreement, which opinion shall be satisfactory in all respects to the
Representatives.
(h) ________________, counsel for the Selling Stockholders, shall have
furnished to the Representatives their written opinion, dated the Closing Date
or Additional Closing Date, as the case may be, in form and substance
satisfactory to the Representatives, to the effect that:
(i) this Agreement has been duly authorized, executed and delivered
by or on behalf of each of the Selling Stockholders;
(ii) a Power of Attorney and a Custody Agreement have been duly
authorized, executed and delivered by each Selling Stockholder and
constitute valid and binding agreements of each Selling Stockholder in
accordance with their terms;
(iii) each Selling Stockholder is the record owner of all of the
Shares to be sold by such Selling Stockholder and upon payment and delivery
in accordance with this Agreement and assuming the Underwriters purchase
the Shares in good faith without notice of adverse claim within the meaning
of the UCC, delivery of the certificates representing the Shares will pass
good and marketable title to the Shares without any adverse claim; and
(iv) the sale of the Shares and the execution and delivery by the
Selling Stockholder of, and the performance by the Selling Stockholder of
its obligations under, this Agreement, and the consummation of the
transactions contemplated herein, (i) have been duly authorized on the part
of each Selling Stockholder, and (ii) will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other material
agreement or instrument to which any Selling Stockholder is a party or by
which any Selling Stockholder is bound or to which any of the property or
assets of any Selling Stockholder is subject, nor will any such action
result in any violation of the provisions of the Certificate of
Incorporation or the By-Laws of any Selling Stockholder if such Selling
Stockholder is a corporation, the partnership agreement if such Selling
Stockholder is a partnership or any applicable law or statute or any order,
rule or
20
<PAGE>
regulation of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or any of its properties; and no
consent, approval, authorization, order, registration or qualification of
or with any such court or governmental agency or body is required for the
sale of the Shares or the consummation by the Selling Stockholder of the
transactions contemplated by this Agreement, except such consents,
approvals, authorizations, registrations or qualifications as have been
obtained under the Securities Act and as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(i) Concurrently with the execution and delivery of this Agreement, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company and its Subsidiaries as required by the
Act and the Exchange Act and the Rules and Regulations and with respect to
certain financial and other statistical and numerical information contained in
the Registration Statement. At the Closing Date and, as to the Option Shares,
the Option Closing Date, the Accountants shall have furnished to the
Representatives a letter, dated the date of its delivery, which shall confirm,
on the basis of a review in accordance with the procedures set forth in the
letter from the Accountants, that nothing has come to their attention during the
period from the date of the letter referred to in the prior sentence to a date
(specified in the letter) not more than five days prior to the Closing Date and
the Option Closing Date, as the case may be, which would require any change in
their letter dated the date hereof if it were required to be dated and delivered
at the Closing Date and the Option Closing Date.
(j) Concurrently with the execution and delivery of this Agreement and at
the Closing Date and, as to the Option Shares, the Option Closing Date, there
shall be furnished to the Representatives a certificate, dated the date of its
delivery, signed by each of the Chief Executive Officer and the Chief Financial
Officer of the Company, in form and substance satisfactory to the
Representatives, to the effect that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, such documents are true and correct in all material respects
and do not omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not untrue or misleading
and (B) in the case of the certificate delivered at the Closing Date and
the Option Closing Date, since the Effective Date no event has occurred as
a result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein not untrue or misleading.
21
<PAGE>
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct.
(iii) Each of the covenants required to be performed by the Company
herein on or prior to the date of such certificate has been duly, timely
and fully performed and each condition herein required to be satisfied or
fulfilled on or prior to the date of such certificate has been duly, timely
and fully satisfied or fulfilled.
(k) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 7(o).
(l) The Shares shall be qualified for sale in such jurisdictions as the
Representatives may reasonably request and each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
or the Option Closing Date.
(m) Prior to the Closing Date, the Shares shall have been duly authorized
for listing on the NNM upon official notice of issuance.
(n) The Company shall have furnished to the Representatives such
certificates, in addition to those specifically mentioned herein, as the
Representatives may have reasonably requested as to the accuracy and
completeness at the Closing Date and the Option Closing Date of any statement in
the Registration Statement or the Prospectus, as to the accuracy at the Closing
Date and the Option Closing Date of the representations and warranties of the
Company herein, as to the performance by the Company of its obligations
hereunder, or as to the fulfillment of the conditions concurrent and precedent
to the obligations hereunder of the Representatives.
8. Indemnification.
(a) The Company will indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each person,
if any, who controls each Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, from and against any and all losses,
claims, liabilities, expenses and damages (including any and all investigative,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted), to
which they, or any of them, may become subject under the Act, the Exchange Act
or other Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, liabilities, expenses or damages
arise out of or are based on any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus, or the omission or alleged omission to state in
such document a material fact
22
<PAGE>
required to be stated in it or necessary to make the statements in it not
misleading in the light of the circumstances in which they were made, or arise
out of or are based in whole or in part on any inaccuracy in the representations
and warranties of the Company contained herein or any failure of the Company to
perform its obligations hereunder or under law in connection with the
transactions contemplated hereby; provided, however, that (i) the Company will
not be liable to the extent that such loss, claim, liability, expense or damage
arises from the sale of the Shares in the public offering to any person by an
Underwriter and is based on an untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to any Underwriter furnished in writing to the Company by the
Representatives, on behalf of any Underwriter, expressly for inclusion in the
Registration Statement, the preliminary prospectus or the Prospectus and (ii)
the Company will not be liable to any Underwriter, the directors, officers,
employees or agents of such Underwriter or any person controlling such
Underwriter with respect to any loss, claim, liability, expense, or damage
arising out of or based on any untrue statement or omission or alleged untrue
statement or omission or alleged omission to state a material fact in the
preliminary prospectus which is corrected in the Prospectus if the person
asserting any such loss, claim, liability, charge or damage purchased Shares
from such Underwriter but was not sent or given a copy of the Prospectus at or
prior to the written confirmation of the sale of such Shares to such person. The
Company acknowledges that the statements set forth under the heading
"Underwriting" in the preliminary prospectus and the Prospectus constitute the
only information relating to any Underwriter furnished in writing to the Company
by the Representatives on behalf of the Underwriters expressly for inclusion in
the Registration Statement, the preliminary prospectus or the Prospectus. This
indemnity agreement will be in addition to any liability that the Company might
otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company, each
director of the Company, each officer of the Company who signs the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to each Underwriter, as set forth in
Section 8(a), but only insofar as losses, claims, liabilities, expenses or
damages arise out of or are based on any untrue statement or omission or alleged
untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives, on behalf of such Underwriter, expressly for use in the
Registration Statement, the preliminary prospectus or the Prospectus or the
failure of the managing Underwriters to perform its obligations hereunder. The
Company acknowledges that the statements set forth under the heading
"Underwriting" in the preliminary prospectus and the Prospectus constitute the
only information relating to any Underwriter furnished in writing to the Company
by the Representatives on behalf of the Underwriters expressly for inclusion in
the Registration Statement, the preliminary prospectus or the Prospectus. This
indemnity will be in addition to any liability that each Underwriter might
otherwise have.
23
<PAGE>
(c) Any party that proposes to assert the right to be indemnified under
this Section 8 shall, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 8, notify each such
indemnifying party in writing of the commencement of such action, enclosing with
such notice a copy of all papers served, but the omission so to notify such
indemnifying party will not relieve it from any liability that it may have to
any indemnified party under the foregoing provisions of this Section 6 unless,
and only to the extent that, such omission results in the loss of substantive
rights or defenses by the indemnifying party. If any such action is brought
against any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and, to
the extent that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly notified,
to assume the defense of the action, with counsel reasonably satisfactory to the
indemnified party. After notice from the indemnifying party to the indemnified
party of its election to assume the defense, the indemnifying party will not be
liable to the indemnified party for any legal or other expenses except as
provided below and except for the reasonable costs of investigation subsequently
incurred by the indemnified party in connection with the defense. The
indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (i) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (ii)
the indemnified party has reasonably concluded (based on advice of counsel) that
there may be legal defenses available to it or other indemnified parties that
are different from or in addition to those available to the indemnifying party,
(iii) a conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (iv) the indemnifying
party has not in fact employed counsel to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees, disbursements and other
charges of counsel will be at the expense of the indemnifying party or parties.
It is understood that the indemnifying party or parties shall not, in connection
with any proceeding or related proceedings in the same jurisdiction, be liable
for the reasonable fees, disbursements and other charges of more than one
separate firm admitted to practice in such jurisdiction at any one time for all
such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred. Any indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld).
(d) If the indemnification provided for in this Section 8 is applicable in
accordance with its terms but for any reason is held to be unavailable to or
insufficient to
24
<PAGE>
hold harmless an indemnified party under paragraphs (a), (b) and (c) of this
Section 8 in respect of any losses, claims, liabilities, expenses and damages
referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted, but after deducting any contribution
received by the Company from persons other than the Underwriters, such as
persons who control the Company within the meaning of the Act, officers of the
Company who signed the Registration Statement and directors of the Company, who
also may be liable for contribution) by such indemnified party as a result of
such losses, claims, liabilities, expenses and damages in such proportion as
shall be appropriate to reflect the relative benefits received by the Company,
on the one hand, and the Underwriters, on the other hand. The relative benefits
received by the Company, on the one hand, and the Underwriters, on the other
hand, shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus. If,
but only if, the allocation provided by the foregoing sentence is not permitted
by applicable law, the allocation of contribution shall be made in such
proportion as is appropriate to reflect not only the relative benefits referred
to in the foregoing sentence but also the relative fault of the Company, on the
one hand, and the Underwriters, on the other hand, with respect to the
statements or omissions which resulted in such loss, claim, liability, expense
or damage, or action in respect thereof, as well as any other relevant equitable
considerations with respect to such offering. Such relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Representatives on behalf of the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 8(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 8(d)
shall be deemed to include, for purposes of this Section 8(d), any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), no Underwriter shall be required to contribute
any amount in excess of the underwriting discounts received by it and no person
found guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute as provided in this Section 8(d) are several in proportion to their
respective underwriting obligations and
25
<PAGE>
not joint. For purposes of this Section 8(d), any person who controls a party to
this Agreement within the meaning of the Act will have the same rights to
contribution as that party, and each officer of the Company who signed the
Registration Statement will have the same rights to contribution as the Company,
subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action
against any such party in respect of which a claim for contribution may be made
under this Section 8(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 8(d). No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in this Section 8
and the representations and warranties of the Company contained in this
Agreement shall remain operative and in full force and effect regardless of (i)
any investigation made by or on behalf of the Underwriters, (ii) acceptance of
any of the Shares and payment therefor or (iii) any termination of this
Agreement.
9. Reimbursement of Certain Expenses. In addition to its other
obligations under Section 8(a) of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon,
in whole or in part, any statement or omission or alleged statement or omission,
or any inaccuracy in the representations and warranties of the Company contained
herein or failure of the Company to perform its or their respective obligations
hereunder or under law, all as described in Section 8(a), notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section 9 and the possibility that such payment might
later be held to be improper; provided, however, that, to the extent any such
payment is ultimately held to be improper, the persons receiving such payments
shall promptly refund them.
10. Termination. The obligations of the several Underwriters under this
Agreement may be terminated at any time on or prior to the Closing Date (or,
with respect to the Option Shares, on or prior to the Option Closing Date), by
notice to the Company and the Attorney-in-Fact from the Representatives, without
liability on the part of any Underwriter to the Company or the Selling
Stockholders if, prior to delivery and payment for the Firm Shares or Option
Shares, as the case may be, in the sole judgment of the Representatives, (i)
trading in any of the equity securities of the Company shall have been suspended
by the Commission or by the Nasdaq Stock Market, (ii) trading in securities
generally on The Nasdaq Stock Market shall have been suspended or limited or
minimum or maximum prices shall have been generally established on such
exchange, or
26
<PAGE>
additional material governmental restrictions, not in force on the date of this
Agreement, shall have been imposed upon trading in securities generally by such
exchange, by order of the Commission or any court or other governmental
authority, The Nasdaq Stock Market, (iii) a general banking moratorium shall
have been declared by either Federal or New York State authorities or (iv) any
material adverse change in the financial or securities markets in the United
States or in political, financial or economic conditions in the United States or
any outbreak or material escalation of hostilities or other calamity or crisis
shall have occurred, the effect of which is such as to make it, in the sole
judgment of the Representatives, impracticable or inadvisable to proceed with
completion of the public offering or the delivery of and payment for the Shares.
If this Agreement is terminated pursuant to Section 10 hereof, neither the
Company nor any Selling Stockholder shall be under any liability to any
Underwriter except as provided in Sections 9 and 10 hereof; but, if for any
other reason (other than the Underwriters' unwillingness to proceed) the
purchase of the Shares by the Underwriters is not consummated or if for any
reason the Company or the Selling Stockholders shall be unable to perform their
respective obligations hereunder, the Company and the Selling Stockholders shall
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees, disbursements, expenses and other charges of counsel to the Underwriters)
incurred by them in connection with the offering of the Shares.
11. Substitution of Underwriters. If any one or more of the Underwriters
shall fail or refuse to purchase any of the Firm Shares which it or they have
agreed to purchase hereunder, and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
is not more than one-tenth of the aggregate number of Firm Shares, the other
Underwriters shall be obligated, severally, to purchase the Firm Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase, in the proportions which the number of Firm Shares which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
number of Firm Shares which all such non-defaulting Underwriters have so agreed
to purchase, or in such other proportions as the Representatives may specify;
provided that in no event shall the maximum number of Firm Shares which any
Underwriter has become obligated to purchase pursuant to Section 1 be increased
pursuant to this Section 11 by more than one-ninth of such number of Firm Shares
without the prior written consent of such Underwriter. If any Underwriter or
Underwriters shall fail or refuse to purchase any Firm Shares and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase exceeds one-tenth of the aggregate number of
the Firm Shares and arrangements satisfactory to the Representatives and the
Company for the purchase of such Firm Shares are not made within 48 hours after
such default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter and the Company for the purchase or sale of any
Shares under this Agreement. In any such case either the Representatives or the
Company shall have the right to postpone the Closing Date, but in no event for
longer
27
<PAGE>
than seven days, in order that the required changes, if any, in the Registration
Statement and the Prospectus or in any other documents or arrangements may be
effected. Any action taken pursuant to this Section 10 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
12. Miscellaneous. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the office of the Company, 4119 Willow
Lake Blvd., Memphis, TN 38118, Attention: Chief Executive Officer, with a copy
to James C. Kitch, Esq., Cooley Godward LLP, Five Palo Alto Square, 3000 El
Camino Real, Palo Alto, CA 94036, or (b) if to the Underwriters, to the
Representatives at the offices of Needham & Company, Inc., 445 Park Avenue, New
York, New York 10022, Attention: Corporate Finance Department, with a copy to
Victor A. Hebert, Esq., Heller Ehrman White & McAuliffe, 333 Bush Street, San
Francisco, California 90017. Any such notice shall be effective only upon
receipt. Any notice under such Section 10, 11 or 12 may be made by telex or
telephone, but if so made shall be subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, the Selling Stockholder, and the controlling persons,
directors and officers referred to in Section 8, and their respective successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" as used in this
Agreement shall not include a purchaser, as such purchaser, of Shares from any
of the several Underwriters.
Any action required or permitted to be made by the Representatives under
this Agreement may be taken by them jointly or by Needham & Company, Inc.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and to be performed
entirely within such State.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby waive any right they may have
to a trial by jury in respect of any claim based upon or arising out of this
Agreement or the transactions contemplated hereby.
28
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company and the several Underwriters.
Very truly yours,
EON COMMUNICATIONS CORP.
By: ________________________________
Name:
Title:
Confirmed as of the date first SELLING STOCKHOLDERS.
above mentioned:
Needham & Company, Inc. By: ________________________________
A.G. Edwards & Sons, Inc. Attorney-in-Fact
W.R. Hambrecht + Co
Acting on behalf of themselves
and as the Representatives of
the other several Underwriters
named in Schedule I hereto.
By: Needham & Company, Inc.
By: ______________________________
Name:
Title:
29
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Firm
Shares
Underwriters to be Purchased
- ------------ ---------------
<S> <C>
Needham & Company, Inc..................................
A.G. Edwards & Sons, Inc................................
W.R. Hambrecht + Co., LLC...............................
________
Total.............................................
========
</TABLE>
30
<PAGE>
SCHEDULE II
SELLING STOCKHOLDERS
31
<PAGE>
EXHIBIT A
FORM OF COMPANY COUNSEL OPINIONS
Baker, Donelson, Bearman & Caldwell, a professional corporation, as counsel
for the Company, shall have furnished to the Representatives their written
opinion, dated the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to the Representatives, to the effect
that:
(i) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus;
(ii) the Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, other than where the failure to
be so qualified or in good standing would not have a material adverse effect on
the Company and its Subsidiaries taken as a whole;
(iii) each of the Company's Subsidiaries has been duly incorporated
and is validly existing as a corporation under the laws of its jurisdiction of
incorporation with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus and has been
duly qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns or
leases properties, or conducts any business, so as to require such
qualification, other than where the failure to be so qualified and in good
standing would not have a material adverse effect on the Company and its
Subsidiaries taken as a whole; and all of the outstanding shares of capital
stock of each Subsidiary have been duly and validly authorized and issued, are
fully paid and non- assessable, and (except, in the case of foreign
subsidiaries, for directors' qualifying shares, and except as described in the
Prospectus) are owned of record by the Company;
(iv) other than as set forth or contemplated in the Prospectus, the
Company has not received any notice of legal or governmental investigations,
actions, suits or proceedings pending or, to the best of such counsel's
knowledge, there are no legal or governmental investigations, actions, suits or
proceedings threatened against or affecting the Company or any of its
Subsidiaries or any of their respective properties or to which the Company or
any of its Subsidiaries is or may be a party or to which any property of the
Company or its Subsidiaries is or may be the subject which, if determined
adversely to the Company or any of its Subsidiaries, could individually or in
the aggregate have, or reasonably be expected to have, a material adverse effect
on the general affairs, business, prospects, management, financial position,
stockholders' equity or results of operations of the Company and its
Subsidiaries taken as a whole, and such
32
<PAGE>
counsel does not know of any contracts or other documents that are required to
be described in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required;
(v) to such counsel's knowledge, each of the Company and its
subsidiaries owns, possesses or has obtained all licenses, permits,
certificates, consents, orders, approvals and other authorizations from, and has
made all declarations and filings with, all federal, state, local and other
governmental authorities and all courts and other tribunals, domestic or
foreign, necessary to own or lease, as the case may be, and to operate its
properties and to carry on its business as conducted as of the date hereof, and,
to such counsel's knowledge, neither the Company nor any such Subsidiary has
received any actual notice of any proceeding relating to revocation or
modification of any such license, permit, certificate, consent, order, approval
or other authorization, except as described in the Registration Statement and
the Prospectus; and, to such counsel's knowledge, each of the Company and its
Subsidiaries is in compliance with all laws and regulations relating to the
conduct of its business as conducted as of the date of the Prospectus;
(vi) neither the Company nor any of its Subsidiaries is, or with the
giving of notice or lapse of time or both would be, in violation of or in
default under its Certificate of Incorporation or By-Laws or any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument, that
are material to the Company and its Subsidiaries taken as a whole, known to such
counsel to which the Company or any of its Subsidiaries is a party or by which
it or any of them or any of their respective properties is bound, except for
violations and defaults which individually and in the aggregate are not material
to the Company and its Subsidiaries taken as a whole; the issue and sale of the
Shares being delivered on the Closing Date or the Option Closing Date, as the
case may be, to be sold by the Company hereunder, and the performance by the
Company of its obligations under this Agreement and the consummation of the
transactions contemplated herein will not conflict with or result in a breach of
any of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument set
forth on Exhibit A to the opinion nor will any such action result in any
violation of the provisions of the Certificate of Incorporation or the By-Laws
of the Company or, to such counsel's knowledge, any applicable law or statute or
any order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company, its Subsidiaries or any of their respective
properties;
(vii) the shares of capital stock of the Company outstanding prior
to the issuance of the Shares to be sold by the Company hereunder (including the
Shares to be sold by the Selling Stockholders) have been duly authorized and are
validly issued, fully paid and non-assessable, were issued pursuant to
exemptions from the registration and
33
<PAGE>
qualification requirements of federal and applicable state securities laws, and
were not issued in violation of or subject to any preemptive or similar rights;
and
(viii) the Shares to be issued and sold by the Company hereunder have
been duly authorized, and when delivered to and paid for by the Underwriters in
accordance with the terms of this Agreement, will be validly issued, fully paid
and non-assessable, and the issuance of the Shares is not subject to any
preemptive or similar rights that have not been waived.
In rendering such opinions, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
the States of Delaware and Tennessee, to the extent such counsel deems proper
and to the extent specified in such opinion, if at all, upon an opinion or
opinions (in form and substance reasonably satisfactory to Underwriters'
counsel) of other counsel reasonably acceptable to the Underwriters' counsel,
familiar with the applicable laws and (B) as to matters of fact, to the extent
such counsel deems proper, on certificates of responsible officers of the
Company and certificates or other written statements of officials of
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company. The opinion of such counsel for the Company shall
state that the opinion of any such other counsel upon which they relied is in
form satisfactory to such counsel and, in such counsel's opinion, the
Underwriters and they are justified in relying thereon.
The opinion of Baker, Donelson, Bearman & Caldwell, a professional
corporation, described above shall be rendered to the Underwriters at the
request of the Company and shall so state therein.
(a) Cooley Godward LLP, counsel for the Company, shall have
furnished to the Representatives their written opinion, dated the Closing Date
or the Option Closing Date, as the case may be, in form and substance
satisfactory to the Representatives, to the effect that:
(i) this Agreement has been duly authorized, executed and delivered
by the Company;
(ii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus under the
caption "Description of Capital Stock";
(iii) the statements in the Prospectus under "Business --Legal
Proceedings", "Risk Factors - The issuance of shares eligible for future sale
may decrease our stock price," "Risk Factors-Our charter contains certain anti-
takeover provisions that may discourage take-over attempts and may reduce our
stock price," "Management- Stock Incentive Plans," "Management- Employment
Agreement," "Management- 401(k) Plan," "Management-Limitation of Liability and
34
<PAGE>
Indemnification Matters," "Certain Transactions," "Description of Capital
Stock," and "Shares Eligible for Future Sale" and in the Registration Statement
in Items 14 and 15, insofar as such statements constitute a summary of the terms
of the Stock, legal matters, documents or proceedings referred to therein,
fairly present the information called for with respect to such terms, legal
matters, documents or proceedings to the extent required under the Securities
Act and the related rules and regulations thereunder;
(iv) the Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or entity "controlled"
by an "investment company," as such terms are defined in the Investment Company
Act;
(v) such counsel is of the opinion that the Registration Statement
and the Prospectus and any amendments and supplements thereto (other than the
financial statements and related schedules therein, as to which such counsel
need express no opinion) comply as to form in all material respects with the
requirements of the Securities Act; (other than with respect to the financial
statements and related schedules therein, as to which such counsel need express
no opinion) nothing has come to such counsel's attention that would lead it to
believe that the Registration Statement and the prospectus included therein at
the time the Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus, as amended or supplemented, if applicable, contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(vi) neither the Company nor any of its Subsidiaries is, or with the
giving of notice or lapse of time or both would be, in violation of or in
default under any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument, that are material to the Company and its subsidiaries,
taken as a whole, known to such counsel to which the Company or any of its
Subsidiaries is a party or by which it or any of them or any of their respective
properties is bound, except for violations and defaults which individually and
in the aggregate are not material to the Company and its Subsidiaries taken as a
whole; the issue and sale of the Shares being delivered on the Closing Date or
the Additional Closing Date, as the case may be, to be sold by the Company
hereunder, and the performance by the Company of its obligations under this
Agreement and the consummation of the transactions contemplated herein, to such
counsel's knowledge, will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument set forth on
Exhibit A to the opinion, nor will any such action result in any violation of
any applicable law or statute or any order, rule
35
<PAGE>
or regulation of any court or governmental agency or body having jurisdiction
over the Company, its Subsidiaries or any of their respective properties, other
than state securities or Blue Sky laws or the bylaws and rules of the National
Association of Securities Dealers, Inc. (the "NASD") (as to which we express no
opinion);
(vii) to counsel's knowledge, there are no legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or any
of its Subsidiaries is subject that are required to be described in the
Registrations Statement or the Prospectus and are not so described or of any
contracts or other documents that are required to be described in the
Registrations Statement or the Prospectus or to be filed as exhibits to the
Registrations Statement that are not described or filed as required;
(viii) no consent, approval, authorization, order, license,
registration or qualification of or with any court or governmental agency or
body is required for the issuance by the Company of the Shares to be sold by it
hereunder or the consummation by the Company of the transactions contemplated by
this Agreement other than state securities or Blue Sky laws or the bylaws and
rules of the NASD (as to which we express no opinion), except such consents,
approvals, authorizations, orders, licenses, registrations or qualifications as
have been obtained or required under the Securities Act or Exchange Act and as
may be required under state securities or Blue Sky laws or the NASD in
connection with the purchase and distribution of the Shares by the Underwriters;
(ix) the Shares have been duly authorized for listing on the Nasdaq
National Market, subject to notice of issuance;
(x) the Registration Statement has become effective under the Act,
and to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose has been instituted or is pending, threatened or contemplated.
In rendering such opinions, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
the States of Delaware and California, to the extent such counsel deems proper
and to the extent specified in such opinion, if at all, upon an opinion or
opinions (in form and substance reasonably satisfactory to Underwriters'
counsel) of other counsel reasonably acceptable to the Underwriters' counsel,
familiar with the applicable laws and (B) as to matters of fact, to the extent
such counsel deems proper, on certificates of responsible officers of the
Company and certificates or other written statements of officials of
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company. The opinion of such counsel for the Company shall
state that the opinion of any such other counsel upon which they relied is in
form satisfactory to such counsel and, in such counsel's opinion, the
Underwriters and they are justified in relying thereon.
36
<PAGE>
With respect to the matters to be covered in Section (v) above counsel may state
their opinion and belief is based upon their participation in the preparation of
the Registration Statement and the Prospectus and any amendment or supplement
thereto and review and discussion of the contents thereof but is without
independent check or verification except as specified.
The opinion of Cooley Godward LLP described above shall be rendered to the
Underwriters at the request of the Company and shall so state therein.
37
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF COOLEY GODWARD LLP]
January 31, 2000
eOn Communications Corporation
4119 Willow Lake Boulevard
Memphis, TN 38118
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by eOn Communications Corporation, a Delaware corporation (the
"Company"), of a Registration Statement on Form S-1, as amended (the
"Registration Statement"), with the Securities and Exchange Commission (the
"Commission"), including a prospectus (the "Prospectus") to be filed with the
Commission pursuant to Rule 424(b) of Regulation C promulgated under the
Securities Act of 1933, as amended, covering the underwritten public offering of
up to 3,450,000 shares of the common stock of the Company (the "Common Stock")
(which includes 450,000 shares of Common Stock for which the underwriters have
been granted an over-allotment option), of which up to 2,540,000 shares of the
Common Stock are to be issued and sold by the Company (the "Company Shares")
(which includes 300,000 shares of Common Stock for which the underwriters have
been granted an over-allotment option) and up to 910,000 shares of the Common
Stock are to be sold by certain stockholders as described in the Registration
Statement (which includes 150,000 shares of Common Stock for which the
underwriters have been granted an over-allotment option).
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation, as amended, and the Company's Bylaws, as amended, and the
originals or copies certified to our satisfaction of such records, documents,
certificates, memoranda and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below; and (ii)
assumed that the shares of the Common Stock will be sold by the underwriters at
a price established by the Pricing Committee of the Board of Directors of the
Company. We have also assumed the genuineness and authenticity of all documents
submitted to us as originals, the conformity to originals of all documents
submitted to us as copies thereof, and the due execution and delivery of all
documents where due execution and delivery are a prerequisite to the
effectiveness thereof.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Company Shares, when sold, issued and paid for in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
prospectus included in the Registration Statement and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
Cooley Godward LLP
By: /s/ James C. Kitch
--------------------------
James C. Kitch
<PAGE>
January 31, 2000
Board of Directors
eOn Communications Corporation
4119 Willow Lake Blvd.
Memphis, TN 38118
Gentlemen:
We have acted as corporate counsel to eOn Communications Corporation, a
Delaware corporation (the "Company"), in connection with its preparation and
filing of its Registration Statement on Form S-1 (the "Registration Statement")
with the Securities and Exchange Commission relating to the proposed public
offering and sale of up to 3,000,000 shares (3,450,000 shares if the
underwriters' over-allotment option is exercised in full) of the Company's
common stock, $.001 par value per share, of which up to 2,240,000 shares of the
common stock are to be issued and sold by the Company (the "Company Shares")
(including 300,000 shares of common stock for which the underwriters have been
granted an over-allotment option) and up to 760,000 shares of the common stock
are to be sold by certain stockholders as described in the Registration
Statement (the "Selling Stockholder Shares") (including 150,000 shares of common
stock for which the underwriters have been granted an over-allotment option).
This opinion letter is furnished to you at your request to enable you to fulfill
the requirements of Item 601(b)(5) of Regulation S-K in connection with the
Registration Statement.
In delivering this opinion, we have examined such documents as we have
deemed necessary, including copies of the following documents:
1. an executed copy of the Registration Statement and all amendments
thereto;
2. the Certificate of Incorporation of the Company, as amended;
3. the Bylaws of the Company, as amended;
4. records of the corporate proceedings taken to date with respect to the
authorization, issuance and sale of the Shares; and
<PAGE>
January 31, 2000
Page 2
5. a form of underwriting agreement (the "Underwriting Agreement") to be
executed between the Company, the Selling Stockholders (as defined therein)
and the underwriters to be named therein.
In our examination of the foregoing documents, we have assumed the
genuineness of all
signatures, the legal capacity of natural persons, the accuracy and completeness
of all documents submitted to us, the authenticity of all original documents and
the conformity to authentic original documents of all documents submitted to us
as certified, telecopies, photostatic or reproduced copies.
Based upon and limited by the foregoing, and subject to the following
qualifications and limitations, we are of the opinion that, as of the date
hereof:
1. The Selling Stockholder Shares are validly issued, fully paid and
nonassessable.
This opinion letter has been prepared solely for your use in connection
with the filing of the Registration Statement on the date of this opinion letter
and should not be quoted in whole or in part or otherwise be referred to, nor
filed with or furnished to any governmental agency or other person or entity,
without the prior written consent of this firm. Our opinions are limited in all
respects to the substantive law of the State of Tennessee, and accordingly, we
express no opinion as to the laws of any other state or jurisdiction.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
BAKER, DONELSON, BEARMAN & CALDWELL,
A Professional Corporation
By:/s/ Desiree M. Franklin
---------------------------
Desiree M. Franklin
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Amendment No. 7 to Registration Statement No.
333-77021 of eOn Communications Corporation (formerly Cortelco Systems, Inc.)
of our report dated September 16, 1999 appearing in the Prospectus, which is a
part of such Registration Statement, and to the reference to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the consolidated financial statement schedule of eOn
Communications Corporation and subsidiaries, listed in Item 16(b). This
financial statement schedule is the responsibility of eOn Communications
Corporation's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Deloitte & Touche LLP
/s/ Deloitte & Touche LLP
Memphis, Tennessee
January 28, 2000
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITOR'S CONSENT
--------------------------------
We consent to the use in Amendment No. 7 to this Registration Statement of
eOn Communications Corporation, formerly Cortelco Systems, Inc., on Form S-1 of
our report on the financial statements of BCS Technologies, Inc., dated March
5, 1999, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Experts" in such
Prospectus.
/s/ Brock and Company, CPAs, P.C.
-------------------------------
Brock and Company, CPAs, P.C.
Certified Public Accountants
Littleton, Colorado
January 28, 2000
