<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended January 31, 2000.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ____ to ____.
Commission file number 000-26399
EON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 62-1482176
(State of incorporation) (I.R.S. Employer Identification No.)
4119 Willow Lake Blvd., Memphis, Tennessee, 38118
(Address of principal executive office)
(901) 365-7774
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: 12,254,821 shares of Common
----------------------------
Stock, $.001 par value, as of February 29, 2000.
- ------------------------------------------------
<PAGE>
EON COMMUNICATIONS CORPORATION
FORM 10-Q
QUARTER ENDED JANUARY 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 1999 and
January 31, 2000.............................................. 3
Consolidated Statements of Operations for the Three Months
and Six Months Ended January 31, 1999 and January 31,
2000.......................................................... 4
Consolidated Statements of Cash Flows for the Six Months
Ended January 31, 1999 and January 31, 2000................... 5
Notes to Consolidated Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 10
Item 3. Qualitative and Quantitative Disclosure about Market Risk........ 22
</TABLE>
<TABLE>
Part II: OTHER INFORMATION
<S> <C> <C>
Item 1. Legal Proceedings................................................... 23
Item 2. Changes in Securities............................................... 23
Item 3. Defaults Upon Senior Securities..................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................. 23
Item 5. Other Information................................................... 23
Item 6. Exhibits and Reports on Form 8-K.................................... 23
Signatures 24
Exhibit Index 25
</TABLE>
2
<PAGE>
EON COMMUNICATIONS CORPORATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
eOn Communications Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
July 31, 1999 and January 31, 2000
(Dollars in thousands)
<TABLE>
<CAPTION>
At July 31, At January 31,
1999 2000
----------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,874 $ 1,450
Trade accounts receivable, net of allowance for doubtful accounts of $1,803 and $2,018 12,135 13,369
Inventories 8,679 11,265
Other current assets 1,346 1,381
------- -------
Total current assets 24,034 27,465
Property and equipment, net 1,419 1,866
Receivable from affiliate 9 -
Other assets:
Goodwill, net of accumulated amortization of $177 and $473 11,547 11,251
Intangible assets, net of accumulated amortization of $49 and $106 359 315
Other 1,657 2,527
------- -------
Total other assets 13,563 14,093
------- -------
Total $39,025 $43,424
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable $ 2,667 $ 2,667
Notes payable under revolving line of credit 3,137 3,167
Trade accounts payable and checks outstanding 5,580 8,792
Accounts payable to CMC Industries, Inc. 3,278 4,428
Accrued expenses and other 2,958 3,233
Income tax payable 1,939 517
------- -------
Total current liabilities 19,559 22,804
Payable to affiliate - 772
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 8 8
and outstanding)
Additional paid-in capital 24,148 24,148
Accumulated deficit (4,380) (4,418)
Note receivable from affiliate (former parent) (3,284) (2,864)
------- -------
Total stockholders' equity 17,152 17,534
------- -------
Total $39,025 $43,424
======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For the Three Months and Six Months Ended January 31, 1999 and 2000
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
----------------------- ---------------------
1999 2000 1999 2000
---------- -------- --------- --------
<S> <C> <C> <C> <C>
Net revenues $ 8,678 $ 13,364 $ 17,156 $ 27,707
Cost of revenues 5,048 8,067 9,941 15,993
------- -------- -------- --------
Gross profit 3,630 5,297 7,215 11,714
Operating expenses:
Selling, general, and administrative 2,588 4,658 5,171 9,322
Research and development 474 873 917 1,773
Amortization of goodwill - 148 - 296
------- -------- -------- --------
Total operating expenses 3,062 5,679 6,088 11,391
------- -------- -------- --------
Income (loss) from operations 568 (382) 1,127 323
Interest expense 220 137 412 253
Other expense (income), net 27 (59) 19 (68)
------- -------- -------- --------
Income (loss) before income tax expense (benefit) 321 (460) 696 138
Income tax expense (benefit) 27 (87) 62 176
------- -------- -------- --------
Net income (loss) and comprehensive income (loss) $ 294 $ (373) $ 634 $ (38)
======= ======== ======== ========
Net income (loss) per common share:
Basic $ 0.08 $ (0.05) $ 0.16 $ -
Diluted 0.06 (0.05) 0.12 -
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended January 31, 1999 and 2000
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
---------------------
1999 2000
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES:
Net income (loss) $ 634 $ (38)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 224 283
Amortization of intangibles 6 66
Amortization of goodwill - 296
Amortization of deferred financing costs 74 46
Provision for the allowance for doubtful accounts 40 467
Equity in earnings of joint venture (6) -
Changes in net assets and liabilities:
Trade accounts receivable (2,719) (1,701)
Accounts receivable from (payable to) affiliates (3) 781
Inventories 824 (2,586)
Other current assets 85 (35)
Other non-current assets (164) (435)
Trade accounts payable and checks outstanding 1,277 3,212
Accounts payable to CMC Industries, Inc. 215 1,150
Accrued expenses and other 318 275
Income taxes payable - (1,422)
------- ------
Net cash provided by operating activities 805 359
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (325) (754)
Proceeds from sales of property and equipment 2 23
Net repayments under notes receivable from employees 45 73
Purchase of patents, trademarks, and software technology (27) -
------- ------
Net cash used in investing activities (305) (658)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving line of credit (126) (30)
Deferred offering costs - (575)
Net borrowings (repayments) of long-term debt (16) -
Repayment of note receivable from former parent - 420
Repayment of note payable to parent (100) -
Repayment of note payable to related party (250) -
------- ------
Net cash used in financing activities (492) (125)
------- ------
Net increase (decrease) in cash and cash equivalents 8 (424)
Cash and cash equivalents, beginning of period 103 1,874
------- ------
Cash and cash equivalents, end of period $ 111 $1,450
======= ======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by eOn
Communications Corporation (the "Company") without audit. It is management's
opinion that these statements include all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position,
results of operations, and cash flows as of January 31, 2000 and for all periods
presented. The results for the six months ended January 31, 1999 and 2000 are
not necessarily indicative of the results that may be expected for the full
year.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto as of July 31, 1998 and 1999 and for each
of the three years in the period ended July 31, 1999, which are included in the
Registration Statement filed with the Securities and Exchange Commission on Form
S-1.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging," which established standards
of accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The provisions of this statement are effective for fiscal years
beginning after June 15, 2000. Management has not evaluated what impact, if
any, the adoption of this statement will have on the disclosures in the
Company's financial statements.
2. EARNINGS PER SHARE
The computations of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------ ------------------------------
1999 2000 1999 2000
-------------- ------------ ----------- -----------
(In thousands, except (In thousands, except
per share data) per share data)
<S> <C> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss) $ 294 $ (373) $ 634 $ (38)
Weighted average shares outstanding - basic 3,920 7,640 3,920 7,640
------ ------ ------ ------
Basic earnings (loss) per share $ 0.08 $(0.05) $ 0.16 $ 0.00
====== ====== ====== ======
Diluted earnings per share:
Income:
Net income (loss) $ 294 $ (373) $ 634 $ (38)
Interest on 8% convertible subordinated debt 14 - 27 -
------ ------ ------ ------
Income (loss) available to common shareholders 308 (373) 661 (38)
Weighted average shares:
Outstanding 3,920 7,640 3,920 7,640
Assumed conversion of preferred stock 1,435 - 1,435 -
Dilutive effect of stock options 127 - 99 -
------ ------ ------ ------
Weighted average shares outstanding - diluted 5,482 7,640 5,454 7,640
------ ------ ------ ------
Diluted earnings (loss) per share $ 0.06 $(0.05) $ 0.12 $ 0.00
====== ====== ====== ======
</TABLE>
6.
<PAGE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1999 2000
------ -------
(In thousands)
<S> <C> <C>
Raw materials and purchased components $ 531 $ 811
Finished goods 8,222 10,528
LIFO reserve (74) (74)
------ -------
Total inventories $8,679 $11,265
====== =======
</TABLE>
4. SEGMENT INFORMATION
<TABLE>
<CAPTION>
Systems - Cellular
Communications Caribbean/ Airtime Consolidated
Systems Latin America Services Other Reconciliations Total
-------------- ------------- -------- ----- --------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Three months ended January 31, 1999:
Revenues $ 5,190 $2,146 $1,342 $ 152 $ (152) $ 8,678
Income from continuing operations (87) 173 208 9 (9) $ 294
Total assets 11,538 4,391 3,661 1,288 (1,288) $19,590
Three months ended January 31, 2000:
Revenues 8,167 4,070 1,127 58 (58) $13,364
Income from continuing operations (412) (37) 76 (5) 5 $ (373)
Total assets 31,169 8,028 4,227 1,071 (1,071) $43,424
</TABLE>
7.
<PAGE>
<TABLE>
<CAPTION>
Systems - Cellular
Communications Caribbean/ Airtime Consolidated
Systems Latin America Services Other Reconciliations Total
-------------- -------------- -------- ----- --------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Six months ended January 31, 1999:
Revenues $10,874 $3,410 $2,872 $326 $(326) $17,156
Income from continuing operations 109 103 422 7 (7) $ 634
Six months ended January 31, 2000:
Revenues 18,079 7,447 2,181 130 (130) $27,707
Income from continuing operations (314) 176 100 (17) 17 $ (38)
operations
</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 January 31,
2000, and are included in the communications systems segment.
5. SUBSEQUENT EVENTS
On February 4, 2000, the Company completed the initial public offering of
2,790,000 shares of common stock at a price of $12.00 per share resulting in net
proceeds to the Company, net of underwriting commissions and discounts, and
offering costs, of $28.6 million. On February 17, 2000, the underwriters
exercised their over-allotment option, resulting in the issuance of an
additional 390,000 shares of common stock and additional proceeds to the Company
totaling $4.4 million. Simultaneous with the offering, all of the shares of the
Company's Series A convertible preferred stock were converted into shares of the
Company's common stock on approximately a 1 for .98 basis, resulting in the
issuance of 1,434,894 shares of common stock. The Company used the proceeds from
the offering to repay $2.8 million of outstanding principal and interest on 8%
subordinated notes due in 2002 and $3.6 million of outstanding indebtedness
under a revolving credit facility, including early payment penalties.
8.
<PAGE>
6. CHANGES IN STOCKHOLDERS' EQUITY
The following represents the changes in stockholders' equity for the six
months ended January 31, 2000:
<TABLE>
<CAPTION>
(In thousands, except share data)
------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional Note Total
--------------------------- --------------------- Paid-in Accumulated Receivable Stockholders'
Shares Amount Shares Amount Capital Deficit from Parent Equity (Deficit)
------ ------ ------ ------ ------- ------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
July 31, 1999 1,463,206 $660 7,639,932 $8 $24,148 $(4,380) $(3,284) $17,152
Collection of note
receivable from
affiliate 420 420
Net income (loss)
and comprehensive
income (loss) for
the six months ended
January 31, 2000 (38) (38)
--------- ---- --------- -- ------- ------- ------- -------
Balance at
January 31, 2000 1,463,206 $660 7,639,932 $8 $24,148 $(4,418) $(2,864) $17,534
========= ==== ========= == ======= ======= ======= =======
</TABLE>
9.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains forward-looking statements. In some cases, these
statements may be identified by terminology such as "may", "will", "should",
"expects", "plans", "anticipates", "believes", "estimates", "predicts",
"potential", or "continue" or the negative of such terms and other comparable
expressions. These statements involve known and unknown risks and uncertainties
that may cause the results, levels of activity, performance or achievements of
eOn or its industry to be materially different from those expressed or implied
by the forward-looking statements. Factors that may cause or contribute to such
differences include, but are not limited to, eOn's ability to compete
successfully in its industry and to continue to develop products for new and
rapidly changing markets. eOn disclaims any obligation to update any of the
forward-looking statements contained in this report to reflect any future events
or developments. The following discussions should be read in conjunction with
the unaudited condensed consolidated financial statements and notes included
elsewhere herein.
Overview
We design, develop and market next-generation Linux communications servers
and software which integrate and manage voice, e-mail and Internet
communications for customer contact centers and other applications. We also
offer a traditional voice switching platform for small and medium-sized
installations. Through our Caribbean/Latin American operations, we sell and
service voice communications systems and cellular telephones and resell cellular
airtime.
Our Linux communications server product line was originally developed by
BCS, and was introduced initially in April 1997. We acquired BCS on April 12,
1999 and have since combined the eQueue 4000 Linux communications server and our
Millennium voice switching platform, which we introduced in fiscal 1994, into
our Communications Systems operations. We have recently concentrated our
product development efforts on extending and enhancing our Linux communications
server product line.
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.
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.
10
<PAGE>
Three Months Ended January 31, 2000 and 1999
Net Revenues. Total revenues increased 54.0% to $13.4 million in the three
months ended January 31, 2000 from $8.7 million in the three months ended
January 31, 1999. The increase resulted primarily from Linux communications
server revenues of $2.1 million and an increase in revenues from Caribbean/Latin
American operations of $2.5 million.
Cost of Revenues and Gross Profit. Cost of revenues consist 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 45.9% to $5.3 million in the three months ended January 31,
2000 from $3.6 million in the three months ended January 31, 1999. The increase
resulted primarily from Linux communications server gross profit of $1.5
million. Our gross margin was 39.6% in the three months ended January 31, 2000
and 41.8% in the three months ended January 31, 1999.
Operating Expenses. Operating expenses increased 85.5% to $5.7 million
in the three months ended January 31, 2000 from $3.1 million in the three months
ended January 31, 1999. The increased expenses in the three months ended January
31, 2000 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 42.5% in
the three months ended January 31, 2000 from 35.3% in the three months ended
January 31, 1999.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and benefit costs, advertising and trade
show related costs, and facilities and other overhead expenses incurred to
support the growth of our business. Selling, general and administrative expenses
increased 80.0% to $4.7 million in the three months ended January 31, 2000 from
$2.6 million in the three months ended January 31, 1999. The increased expense
was due primarily to $1.1 million of selling, general and administrative
expenses related to our Linux communications server revenues, an increase of
$0.7 million due primarily to the growth of the business including the hiring of
additional sales personnel, and an increased bad debt provision of $0.2 million
due primarily to higher system sales in Caribbean/Latin American operations.
These expenses as a percentage of revenues increased to 34.9% in the three
months ended January 31, 2000 from 29.8% in the three months ended January 31,
1999. We expect selling, general and administrative expenses to increase in
dollars and as a percentage of revenue as we increase our investment in sales
and marketing.
Research and Development. Research and development expenses consist
primarily of personnel and related expenses for our engineering staff and
depreciation of related equipment. Research and development expenses increased
84.2% to $0.9 million in the three months ended January 31, 2000 from $0.5
million in the three months ended January 31, 1999. The increased expenses were
primarily due to the hiring of additional engineering personnel, additional
equipment purchases, and $0.3 million of expenses incurred in conjunction with
sales of our Linux communications servers during the three months ended January
31, 2000. These expenses as a percentage of revenues increased to 6.5% in the
three months ended January 31, 2000 from 5.5% in the three months ended January
31, 1999. We expect research and development expenses to increase in dollars as
we hire additional engineers to support our new product initiatives.
11
<PAGE>
Amortization of Goodwill. We recorded $11.7 million of goodwill related to
the acquisition of BCS in April 1999 and are amortizing the amount over a 20-
year period.
Income (Loss) from Operations. Income (loss) from operations decreased
167.3% to $(0.4) million in the three months ended January 31, 2000 from $0.6
million in the three months ended January 31, 1999. This was primarily due to
operating expenses increasing more quickly than gross profit due to the hiring
of additional sales and research and development personnel and the amortization
of goodwill during the three months ended January 31, 2000.
Six Months Ended January 31, 2000 and 1999
Net Revenues. Total revenues increased 61.5% to $27.7 million in the six
months ended January 31, 2000 from $17.2 million in the six months ended January
31, 1999. The increase resulted primarily from Linux communications server
revenues of $4.9 million and an increase in revenues from Caribbean/Latin
American operations of $4.3 million.
Cost of Revenues and Gross Profit. Gross profit increased 62.4% to $11.7
million in the six months ended January 31, 2000 from $7.2 million in the six
months ended January 31, 1999. The increase resulted primarily from Linux
communications server gross profit of $3.7 million. Our gross margin was 42.3%
in the six months ended January 31, 2000 and 42.1% in the six months ended
January 31, 1999.
Operating Expenses. Operating expenses increased 7.1% to $11.4 million
in the six months ended January 31, 2000 from $6.1 million in the six months
ended January 31, 1999. The increased expenses in the six months ended January
31, 2000 were due primarily to $2.8 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 41.1% in
the six months ended January 31, 2000 from 35.5% in the six months ended January
31, 1999.
Selling, General and Administrative. Selling, general and administrative
expenses increased 80.3% to $9.3 million in the six months ended January 31,
2000 from $5.2 million in the six months ended January 31, 1999. The increased
expense was due primarily to $2.3 million of selling, general and administrative
expenses related to our Linux communications server revenues, an increase of
$1.2 million due primarily to the growth of the business including the hiring of
additional sales personnel, and an increased bad debt provision of $0.4 million
due primarily to higher system sales in Caribbean/Latin American operations.
These expenses as a percentage of revenues increased to 33.6% in the six months
ended January 31, 2000 from 30.1% in the six months ended January 31, 1999. We
expect selling, general and administrative expenses to increase in dollars and
as a percentage of revenue as we increase our investment in sales and marketing.
Research and Development. Research and development expenses increased
93.3% to $1.8 million in the six months ended January 31, 2000 from $0.9 million
in the six months ended January 31, 1999. The increased expenses were primarily
due to the hiring of
12
<PAGE>
additional engineering personnel, additional equipment purchases, and $0.5
million of expenses incurred in conjunction with our Linux communications
servers during the six months ended January 31, 2000. These expenses as a
percentage of revenues increased to 6.4% in the six months ended January 31,
2000 from 5.3% in the six months ended January 31, 1999. We expect research and
development expenses to increase in dollars as we hire additional engineers to
support our new product initiatives.
Amortization of Goodwill. We recorded $11.7 million of goodwill related to
the acquisition of BCS in April 1999 and are amortizing the amount over a 20-
year period.
Income from Operations. Income from operations decreased 71.3% to $0.3
million in the six months ended January 31, 2000 from $1.1 million in the six
months ended January 31, 1999. This was primarily due to operating expenses
increasing more quickly than gross profit due to the hiring of additional sales
and research and development personnel and the amortization of goodwill during
the six months ended January 31, 2000.
13
<PAGE>
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 purchase of our business from Alcatel in
1990.
Net cash provided by operating activities was $0.4 million and $0.8 million
for the six months ended January 31, 2000 and 1999, respectively. The decrease
from the prior year is due primarily to the lower net income in the current
fiscal year and the reduction in income taxes payable during the six months
ended January 31, 2000.
Net cash used in investing activities was $0.7 million and $0.3 million for
the six months ended January 31, 2000 and 1999, respectively. Cash used in
investing activities in each period resulted primarily from equipment purchases.
Net cash used in financing activities was $0.1 million and $0.5 million for
the six months ended January 31, 2000 and 1999, respectively. Cash used in
financing activities in the six months ended January 31, 2000 consisted
primarily of deferred offering costs, offset primarily by the partial repayment
of a note receivable from our former parent company.
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 January 31, 2000, there was $3.2 million outstanding
under these credit facilities which were repaid during February 2000 using the
net proceeds from our initial public offering. See Note 5 to our consolidated
financial statements. We believe that the proceeds from our initial public
offering, together with available funds and anticipated cash flows from
operations will satisfy our projected working capital and capital expenditure
requirements at least through 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 Status
As of January 31, 2000 there were no significant interruptions our
automated systems and applications related to the Year 2000 issue. In addition,
there were no significant problems associated with third party suppliers and
customers related to the Year 2000 issue. We incurred expenses of approximately
$75,000 ($10,000 in the quarter ended January 31, 2000) for our Year 2000
readiness effort.
However, due to the uncertainties that are inherent in Year 2000
remediation, we can give no assurances that our efforts will prevent future
business interruptions. Although we believe we have adequately addressed the
Year 2000 issue, it is possible that future failures or disruptions stemming
from Year 2000 issues may yet result in our inability to process transactions,
send invoices, accept customer orders or timely provide customers with products
and services.
14
<PAGE>
ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
In addition to the other information included in this report, the following
factors should be considered in evaluating our business and future prospects.
Fluctuations in our quarterly operating results could cause our stock price to
decline.
Future operating results are likely to fluctuate significantly from quarter
to quarter. Factors that could affect our quarterly operating results include:
. delays or difficulties in introducing new products;
. 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.
15
<PAGE>
Our Linux communications servers and software face intense competition from many
companies that have targeted our markets.
The competitive arena for our products is changing very rapidly and we face
intense competition in our markets. Well-established companies and many emerging
companies are scrambling to develop products to improve customer service in e-
commerce. While the industry remains fragmented, it is rapidly moving toward
consolidation, driven by both emerging companies' desires to expand product
offerings and resources and established companies' attempts to acquire new
technology and reach new market segments. A number of emerging companies have
completed initial public offerings in recent months, while many more remain
private. Most established competitors, as well as those emerging companies that
have completed initial public offerings, currently have greater resources and
market presence than we do. In addition, a number of our current and potential
competitors have recently been acquired by larger companies who seek to enter
our markets.
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.
16
<PAGE>
Actions by our competitors could result in price reductions, reduced margins
and loss of market share, any of which would damage our business. We cannot
assure you that we will be able to compete successfully against these
competitors.
If we are unable to increase our sales capability, we may not be able to grow or
sustain our business.
We must expand our sales force in order to increase our revenues. If we
fail to do so, our business, operating results and financial condition could be
harmed. We must recruit, train and retain additional direct sales personnel. It
may take a new sales person months to become a productive member of our direct
sales force, if ever. New sales personnel, dealers and value added resellers
might not be effective in increasing sales.
If we cannot develop a new indirect sales channel to sell our eNterprise
communications servers our ability to generate revenue would be harmed.
We sell our eQueue 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.
17
<PAGE>
Our next-generation communications servers run on the Linux operating
system. Our products also incorporate application software developed
specifically for the Linux operating system. Our ability to market our products
could be adversely affected and we may incur significant development costs if:
. the Linux operating system does not evolve to meet changing market
needs;
. new applications are not developed for the Linux operating system; or
. other operating systems, such as Microsoft Windows NT, reduce the recent
growing acceptance of Linux.
In addition, any other factor that reduces acceptance of the Linux
operating system could also reduce acceptance of our products and harm our
business, results of operations and financial condition.
Our products must respond to rapidly changing market needs and integrate with
changing protocols to remain competitive.
The markets for our products are characterized by rapid technological
change, frequent new product introductions, uncertain product life cycles and
changing customer requirements. If we are not able to rapidly and efficiently
develop new products and improve existing products to meet the changing needs of
our customers and to adopt changing communications standards our business,
operating results and financial condition would be harmed.
Key features of our products include integration with standard protocols,
computer telephony integration and automatic call distribution applications and
protocols, operating systems and databases. If our products cannot be integrated
with third-party technologies or if they do not respond to changing market
needs, we could be required to redesign our products. Redesigning any of our
products may require significant resources and could harm our business,
operating results and financial condition.
If we are not be able to grow or sustain our Millennium voice switching platform
revenues, our business, operating results and financial condition could be
harmed.
We derived approximately 44% of our total revenues for the six months ended
January 31, 2000 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.
18
<PAGE>
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 effectively 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.
We may be unable to hire and retain engineering and sales and marketing
personnel necessary to execute our business strategy.
We intend to substantially increase our engineering and sales and marketing
personnel over the next twelve months. Competition for highly qualified
personnel is intense due to the limited number of people available with the
necessary technical skills, and we may not be able to attract, assimilate or
retain such personnel. If we cannot attract, hire and retain sufficient
qualified personnel, we may not be able to successfully develop, market and sell
new products.
Our business could be harmed if we lose principal members of our management
team.
We are highly dependent on the continued service of our management team.
The loss of any key member of our management team may substantially disrupt our
business and could harm our business, results of
19
<PAGE>
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 our initial public offering and the underwriters
exercise of their over-allotment option on February 17, 2000, our executive
officers, directors and principal stockholders and their affiliates owned
4,959,281 shares, or 40.5% of the outstanding shares of common stock. Thus, they
effectively control us and direct our affairs, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may have the effect of delaying, deferring or preventing a change
in control of our company and some transactions may be more difficult or
impossible without the support of these stockholders. The interests of these
stockholders may conflict with those of other stockholders. We also conduct
transactions with businesses in which our principal stockholders maintain
interests. We believe that these transactions have been conducted
on an arm's length basis, but we cannot assure you that these transactions would
have the same terms if conducted with unrelated third parties.
We may not be able to protect our intellectual property, and any intellectual
property litigation could be expensive and time consuming.
Our business and competitive position could be harmed if we fail to
adequately protect our intellectual property. Although we have filed patent
applications, we are not certain that our patent applications will result in the
issuance of patents, or that any patents issued will provide commercially
significant protection to our technology. In addition, as we grow and gain brand
recognition, our products are more likely to be subjected to infringement
litigation. We could incur substantial costs and may have to divert management
and technical resources in order to respond to, defend against, or bring claims
related to our intellectual property rights. In addition, we rely on a
combination of patent, trademark, copyright and trade secret laws and
contractual restrictions to establish and protect our proprietary rights. These
statutory and contractual arrangements may not provide sufficient protection to
prevent misappropriation of our technology or to deter independent third-party
development of similar technologies. Any litigation could result in our
expenditure of funds, management time and resources.
Our products may have undetected faults leading to liability claims, which could
harm our business.
Our products may contain undetected faults or failures. Any failures of our
products could result in significant losses to our customers, particularly in
mission-critical applications. A failure could also result in product returns
and the loss of, or delay in, market acceptance of our products. In addition,
any failure of our products could result in claims against us. Our purchase
agreements with our customers typically contain provisions designed to limit our
exposure to potential product liability claims. However, the limitation of
liability provisions contained in our purchase agreements may not be effective
as a result of federal, state or local laws or ordinances or unfavorable
judicial decisions in the United States or other countries. We maintain
insurance
20
<PAGE>
to protect against certain claims associated with the use of our products, but
our insurance coverage may not adequately cover all possible claims asserted
against us. In addition, even claims that ultimately are unsuccessful could be
expensive to defend and consume management time and resources.
Our charter contains certain anti-takeover provisions that may discourage take-
over attempts and may reduce our stock price.
Our board of directors has the authority to issue up to 10,000,000 shares
of preferred stock and to determine the preferences, rights and privileges of
those shares without any further vote or action by the stockholders. The rights
of the holders of common stock may be harmed by the rights of the holders of any
preferred stock that may be issued in the future. Certain provisions of our
certificate of incorporation and bylaws may make it more difficult for a third
party to acquire control of us without the consent of our board of directors,
even if such changes were favored by a majority of the stockholders. These
include provisions that provide for a staggered board of directors, prohibit
stockholders from taking action by written consent and restrict the ability of
stockholders to call special meetings.
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, 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 Status."
Future sales of shares may decrease our stock price.
Sales of substantial amounts of our common stock in the public market after
our initial public offering, including shares issued upon the exercise of
outstanding options, or the perception that such sales could occur, could reduce
the market price of our common stock. These sales also might make it more
difficult for us to raise funds through future offerings of common stock.
21
<PAGE>
eOn may have a contingent liability arising out of a possible violation of
Section 5 of the Securities Act in connection with the posting of materials on
an underwriter's website with respect to eOn's initial public offering.
Prior to January 10, 2000, a copy of the registration statement for eOn's
initial public offering was posted on the website of W.R. Hambrecht + Co., Inc.,
an underwriter for our initial public offering, which included a prospectus that
did not contain preliminary pricing information as required by Section 10 of the
Securities Act. We urge all persons to read and base their investment decision
only on the preliminary prospectus dated January 10, 2000, which contained the
preliminary pricing information, and the final prospectus.
If this posting did constitute a violation of the Securities Act, then any
purchasers in this offering who viewed this posting would have the right, for a
period of one year from the date of their purchase of the common stock, to bring
an action for rescission or for damages resulting from their purchase of common
stock. We believe that any exposure we may have will not be material.
Item 3. Qualitative and Quantitative Disclosure About Market Risk.
Substantially all of our cash equivalents and investment securities are at
fixed interest rates and, therefore, are affected by changes in market interest
rates. Because substantially all of these holdings have short maturities, we
believe that the market risk for such holdings is immaterial. In addition,
substantially all of our sales are made in U.S. dollars and, consequently, we
believe that our foreign currency exchange rate risk is also immaterial. We do
not have any derivative instruments and do not engage in hedging transactions.
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes In Securities.
During the quarter ended January 31, 2000 we granted options to purchase
9,800 shares of common stock at an exercise price of $11.00 per share to
employees under our 1999 Equity Incentive Plan. The sale of the foregoing
securities was deemed to be exempt From registration under the Securities Act of
1933 ("the Act") in reliance upon Rule 701 promulgated thereunder in that such
securities were offered and sold either pursuant to a written compensatory plan
or pursuant to a written contract relating to compensation.
Our initial public offering pursuant to Registration Statement on Form S-
1 (Registration No. 333-77021) under the Securities Act of 1933, as amended,
covering the registration and sale of an aggregate of 4,140,000 shares of our
common stock, including 540,000 shares of common stock pursuant to the exercise
of the underwriter's overallotment option, became effective on February 4, 2000.
In the offering, we sold an aggregate of 3,180,000 shares of our common stock,
including 390,000 shares pursuant to the exercise of the underwriters' over-
allotment option, at a price per share of $12.00 for an aggregate purchase price
of $38,160,000, and the selling stockholders sold an aggregate of 960,000 shares
of our common stock, including 150,000 shares pursuant to the exercise of the
underwriters' over-allotment option, at a price per share of $12.00 for an
aggregate purchase price of $11,520,000. The offering commenced on February 4,
2000 and closed on February 17, 2000. Our net proceeds from the offering were
approximately $33.0 million. The managing underwriters were Needham & Company,
Inc., A.G. Edwards & Sons, Inc. and WR Hambrecht & Co., LLC. The aggregate
underwriting fees were approximately $3.5 million and offering costs totaled
approximately $2.5 million, including approximately $292,000 in the three months
ended January 31, 2000. Upon the closing of the initial public offering in
February 2000, 1,463,206 shares of Series A Preferred Stock, representing all of
the outstanding shares of Preferred Stock were automatically converted into
1,434,894 shares of common stock. Concurrent with the closing of the initial
public offering in February 2000, we filed an amendment to our Amended and
Restated Certificate of Incorporation with the Delaware Secretary of State that
authorizes 10,000,000 shares of undesignated preferred stock. For additional
information about out capital stock, please refer to "Description of Capital
Stock" in our Registration Statement (SEC File No. 333-77021) filed with the
Securities and Exchange Commission.
The net offering proceeds from the initial public offering were used to
repay $2,8 million of outstanding principal and interest on a long-term
subordinated note and $3.6 million of senior debt under a revolving credit
facility including early payment penalties, and for working capital and general
corporate purposes. The remaining net proceeds were invested in short-term,
investment grade securities.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits.
27.1 Financial Data Schedule
(B) Reports On Form 8-K.
We did not file any reports on Form 8-K during the quarter ended January
31, 2000.
23
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SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto authorized.
EON COMMUNICATIONS CORPORATION
Date: March 17, 2000 \s\ J. Michael O'Dell
-------------- -------------------------------------
J. Michael O'Dell
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 17, 2000 \s\ Stephen N. Samp
-------------- -------------------------------------------
Stephen N. Samp
Chief Financial Officer, Vice President of
Finance and Administration and Secretary
(Principal Financial and Accounting Officer)
24
<PAGE>
Exhibit Index
27.1 Financial Data Schedule
25
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 1,450
<SECURITIES> 0
<RECEIVABLES> 15,387
<ALLOWANCES> 2,018
<INVENTORY> 11,265
<CURRENT-ASSETS> 27,465
<PP&E> 3,811
<DEPRECIATION> 1,945
<TOTAL-ASSETS> 43,424
<CURRENT-LIABILITIES> 22,804
<BONDS> 0
0
660
<COMMON> 8
<OTHER-SE> 16,866
<TOTAL-LIABILITY-AND-EQUITY> 43,424
<SALES> 27,707
<TOTAL-REVENUES> 27,707
<CGS> 15,993
<TOTAL-COSTS> 15,993
<OTHER-EXPENSES> 11,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253
<INCOME-PRETAX> 138
<INCOME-TAX> 176
<INCOME-CONTINUING> (38)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38)
<EPS-BASIC> 0
<EPS-DILUTED> 0
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