Our quarterly operating results are also likely to fluctuate due to seasonal factors. Some of our vertical markets, such as the U.S. government, educational and retail buyers, follow seasonal buying patterns and do not make substantial purchases during the quarters ending January 31. Thus, revenues in the quarters ending January 31 are often lower than in the previous quarters. Because of these and other factors, our operating results may not meet expectations in some future quarters, which could cause our stock price to decline.
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, while many more remain private. More established competitors, as well as those emerging companies that have completed initial public offerings, currently have greater resources and market presence than we do. Additionally, a number of our current and potential competitors have recently been acquired by larger companies who seek to enter our markets.
Our current and potential competitors can be grouped into the following categories:
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.
We sell our eQueue communications servers both directly and indirectly through dealers and value added resellers that have experience in data as well as voice communications. We may not be able to expand this indirect sales channel. In addition, 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 uncertainty of our sales cycle makes the timing of sales difficult to predict and may cause fluctuations in our quarterly operating results. Our sales cycles generally vary from four to twelve months for our eQueue products and from one to six months for our Millennium voice switching platform. The purchase of our products may involve a significant commitment of our customers’ time, personnel, and financial and other resources. 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.
Unanticipated difficulties in integrating our recent acquisition of Cortelco Shanghai could harm our business.
On June 1, 2004 eOn purchased a controlling interest in Cortelco Shanghai. Cortelco Shanghai provides telecommunications products in China, including fiber optic transmission equipment, data communications systems, and network management software. eOn’s future operating results may be adversely affected if we are not able to realize operating efficiencies and sales opportunities as a result of this acquisition.
We face many risks from expanding into foreign markets.
The Company expects to increase sales to customers outside of the United States and establish additional distribution channels in Asia. However, foreign markets for our products may develop more slowly than currently anticipated. eOn may not be able to successfully establish international distribution channels, or may not be able to hire the additional personnel necessary to support such distribution channels.
Our future results could be harmed by economic, political, regulatory and other risks associated with international sales and operations.
Because our growth initiatives include expansion into foreign markets, we are subject to the risks of conducting business outside of the United States, including:
- changes in a specific country’s or region’s political or economic conditions; |
- trade protection measures and import or export licensing requirements; |
- potentially negative consequences from changes in tax laws; |
- difficulty in managing widespread sales and customer service operations; and |
- less effective protection of intellectual property. |
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 able to sustain our Millennium voice switching platform revenues, our business, operating results and financial condition could be harmed.
We may not be able to sustain our Millennium revenues because the traditional private branch exchange (PBX) market, which accounts for a substantial portion of our Millennium revenues, is declining. One reason for the decline of the traditional PBX market is the emergence of voice switching platforms based on standard PCs. If we are not able to grow or sustain our Millennium voice switching platform revenues, our business, operating results and financial condition could be harmed.
In addition, a significant portion 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.
23
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, and voice processor boards. Interruptions in the availability of components from our key suppliers could result in delays or reductions in product shipments, which could damage our customer relationships and harm our operating results. Finding alternate suppliers or modifying product designs to use alternative components may cause delays and expenses. Further, a significant increase in the price of one or more third-party components or subassemblies could reduce our gross profit.
We depend upon our primary contract manufacturers ACT Electronics, Innovative Circuits, and Clover Electronics. We may not be able to deliver our products on a timely basis if any of these manufacturers fail to manufacture our products and deliver them to us on time. In addition, it could be difficult to engage other manufacturers to build our products. Our business, results of operations and financial condition could be harmed by any delivery delays.
We may be unable to hire and retain engineering and sales and marketing personnel necessary to execute our business strategy.
Competition for highly qualified personnel is intense due to the limited number of people available with the necessary technical skills, and we may not be able to attract, assimilate or retain such personnel. If we cannot attract, hire and retain sufficient qualified personnel, we may not be able to successfully develop, market and sell new products.
Our business could be harmed if we lose principal members of our management team.
We are highly dependent on the continued service of our management team. The loss of any key member of our management team may substantially disrupt our business and could harm our business, results of operations and financial condition. In addition, replacing management personnel could be costly and time consuming.
We are effectively controlled by our principal stockholders and management, which may limit your ability to influence stockholder matters.
As of July 31, 2004, our executive officers, directors and principal stockholders and their affiliates beneficially owned 4,618,477 shares, or 35.3% 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.
24
Our products may have undetected faults leading to liability claims, which could harm our business.
Our products may contain undetected faults or failures. Any failures of our products could result in significant losses to our customers, particularly in mission-critical applications. A failure could also result in product returns and the loss of, or delay in, market acceptance of our products. In addition, any failure of our products could result in claims against us. Our purchase agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provisions contained in our purchase agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover all possible claims asserted against us. In addition, even claims that ultimately are unsuccessful could be expensive to defend and consume management time and resources.
Our charter contains certain anti-takeover provisions that may discourage take-over attempts and may reduce our stock price.
Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of any preferred stock that may be issued in the future. Certain provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of us without the consent of our board of directors, even if such changes were favored by a majority of the stockholders. These include provisions that provide for a staggered board of directors, prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings.
Future sales of shares may decrease our stock price.
Sales of substantial amounts of our common stock in the public market, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task force (“EITF”) reached a consensus regarding EITF Issue 00-21,Accounting for Revenue Arrangements with Multiple Deliverables. The consensus addresses not only when and how an arrangement involving multiple deliverables should be divided into separate units of accounting but also how the arrangement’s consideration should be allocated among separate units. The addition of this pronouncement did not have a material impact on our results of operations or financial position.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148,Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS 148”). SFAS 148 amends Statement No. 123,Accounting for Stock-Based Compensation(“SFAS 123”), to provide alternative methods for voluntary transition to SFAS 123’s fair value method of accounting for stock-based employee compensation. SFAS 148 also requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net earnings (loss) and earnings (loss) per share in annual and interim financial statements. The provisions of SFAS 148 are effective in fiscal years beginning after December 15, 2002. The Company has implemented the required disclosures of this pronouncement and will continue to account for stock options under the intrinsic value method.
In July 2003, the EITF reached consensus regarding EITF Issue 03-5, Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to nonsoftware deliverables. The consensus addresses whether nonsoftware deliverables in a multiple-element arrangement that includes software that is more than incidental to the products or services as a whole should be within the scope of SOP 97-2,Software Revenue Recognition. The pronouncement is effective prospectively for arrangements entered into after the beginning of an entity’s next reporting period beginning after August 13, 2003. The adoption of EITF Issue 03-5 did not have a material impact on the Company’s results of operations or financial position.
25
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended July 31, 2004 and 2003 is summarized as follows:
2004 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | |
| |
| |
| |
| |
| |
| | (In thousands) | |
Net revenues | | $ | 5,039 | | $ | 3,958 | | $ | 2,770 | | $ | 6,183 | |
Gross profit | | | 2,939 | | | 2,367 | | | 1,511 | | | 2,626 | |
Income (loss) before discontinued operations
and extraordinary item | | | 330 | | | 87 | | | (944 | ) | | (400 | ) |
Net income (loss) | | | 330 | | | 87 | | | (944 | ) | | (400 | ) |
| | | | | | | | | | | | | |
Income (loss) before discontinued operations
and extraordinary item per common share: | | | | | | | | | | | | | |
Basic and diluted | | $ | 0.03 | | $ | 0.01 | | $ | (0.07 | ) | $ | (0.03 | ) |
Net income loss per common share | | | | | | | | | | | | | |
Basic and diluted (1) | | $ | 0.03 | | $ | 0.01 | | $ | (0.07 | ) | $ | (0.03 | ) |
2003 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | |
| |
| |
| |
| |
| |
| | (In thousands) | |
Net revenues | | $ | 3,555 | | $ | 4,118 | | $ | 4,749 | | $ | 5,035 | |
Gross profit | | | 1,785 | | | 2,489 | | | 2,969 | | | 2,736 | |
Income (loss) before discontinued operations
and extraordinary item | | | (1,262 | ) | | (532 | ) | | 82 | | | 208 | |
Net income (loss) | | | (1,262 | ) | | (532 | ) | | 82 | | | 208 | |
| | | | | | | | | | | | | |
Income (loss) before discontinued operations
and extraordinary item per common share (1): | | | | | | | | | | | | | |
Basic and diluted | | $ | (0.10 | ) | $ | (0.04 | ) | $ | 0.01 | | $ | 0.02 | |
Net income loss per common share: | | | | | | | | | | | | | |
Basic and diluted (1) | | | (0.10 | ) | | (0.04 | ) | | 0 01 | | | 0.02 | |
(1) | Due to rounding and changes in outstanding shares, the sum of the four quarters does not equal the earnings per common share amounts calculated for the year. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The majority of our cash equivalents and marketable securities are invested in variable rate instruments with frequent rate resets. Because these securities have short effective maturities, we believe the market risk for such holdings is insignificant. We do not have any derivative instruments, and we do not engage in hedging transactions.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page |
|
|
Reports of Independent Registered Public Accounting Firms | 28 |
| | |
Consolidated Balance Sheets as of July 31, 2004 and 2003 | | 30 |
| | |
Consolidated Statements of Operations for the Years ended July 31, 2004, 2003, and 2002 | | 31 |
| | |
Consolidated Statements of Cash Flows for the Years ended July 31, 2004, 2003, and 2002 | | 32 |
| | |
Consolidated Statement of Stockholders’ Equity for the Years Ended July 31, 2004, 2003, and 2002 | | 34 |
| | |
Notes to Financial Statements | | 35 |
| | |
Schedule II – Valuation and Qualifying Accounts for Each of the Three Years in the Period Ended July 31, 2004 | | 56 |
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
eOn Communications Corporation
We have audited the accompanying consolidated balance sheets of eOn Communications Corporation and subsidiary as of July 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended July 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eOn Communications Corporation and subsidiary as of July 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended July 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II, Valuation and Qualifying Accounts listed in the Index at Item 15(A), is presented for purposes of additional analysis and is not a required part of the basic financial statements. The schedule as of July 31, 2004 and 2003 and for the years then ended has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ Grant Thornton LLP |
|
Atlanta, Georgia |
August 26, 2004 |
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of eOn Communications Corporation
We have audited the accompanying consolidated statements of operations, cash flows, and stockholders’ equity of eOn Communications Corporation and subsidiaries (the “Company”) for the year ended July 31, 2002. Our audit also included the financial statement schedule listed in the Index at Item 15 for the year ended July 31, 2002. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended July 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 5 to the consolidated financial statements, on August 1, 2001 the Company changed its method of accounting for goodwill and other intangible assets to conform with FASB Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
/s/ Deloitte & Touche LLP |
|
Atlanta, Georgia |
August 29, 2002 |
29
eOn Communications Corporation
Consolidated Balance Sheets
July 31, 2004 and 2003
(Dollars in thousands)
ASSETS
| | July 31, | |
| |
| |
| | 2004 | | 2003 | |
| |
| |
| |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 4,679 | | $ | 3,221 | |
Marketable securities | | | 4,200 | | | 4,200 | |
Trade accounts receivable, net of allowance for
doubtful accounts of $774 and $689 | | | 6,656 | | | 2,849 | |
Trade accounts receivable – related party, net of
allowance for doubtful accounts of $18 | | | 615 | | | - | |
Notes receivable | | | 528 | | | - | |
Inventories | | | 2,733 | | | 2,162 | |
Other current assets | | | 1,913 | | | 134 | |
| |
|
| |
|
| |
Total current assets | | | 21,324 | | | 12,566 | |
| | | | | | | |
Property and equipment, net | | | 971 | | | 1,149 | |
Intangible assets, net of accumulated amortization | | | 0 | | | 2 | |
| |
|
| |
|
| |
Total | | $ | 22,295 | | $ | 13,717 | |
| |
|
| |
|
| |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | |
| | | | | | | |
Current liabilities: | | | | | | | |
Trade accounts payable | | $ | 5,431 | | $ | 1,240 | |
Payable to affiliate | | | 2,049 | | | 121 | |
Note payable – current | | | 767 | | | 613 | |
Deferred acquisition payment | | | 1,078 | | | - | |
Accrued expenses and other | | | 2,284 | | | 2,279 | |
| |
|
| |
|
| |
Total current liabilities | | | 11,609 | | | 4,253 | |
| |
|
| |
|
| |
| | | | | | | |
Minority Interest | | | 1,227 | | | - | |
| |
|
| |
|
| |
| | | | | | | |
Stockholders' equity: | | | | | | | |
Common Stock, $.001 par value (50,000,000 shares
authorized, 12,810,260 and 12,176,312 shares issued
and outstanding) | | | 13 | | | 12 | |
Additional paid-in capital | | | 54,369 | | | 53,447 | |
Treasury stock, at cost (676,900 and 676,900 shares,
respectively) | | | (1,502 | ) | | (1,502 | ) |
Accumulated deficit | | | (43,421 | ) | | (42,493 | ) |
| |
|
| |
|
| |
Total stockholders' equity | | | 9,459 | | | 9,464 | |
| | | | | | | |
| |
|
| |
|
| |
Total | | $ | 22,295 | | $ | 13,717 | |
| |
|
| |
|
| |
See notes to financial statements.
30
eOn Communications Corporation
Consolidated Statements of Operations
For the Years Ended July 31, 2004, 2003, and 2002
(Dollars in thousands, except per share data)
| | Year Ended July 31, | |
| |
| |
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
Net revenues | | $ | 17,950 | | $ | 17,457 | | $ | 15,046 | |
Cost of revenues | | | 8,507 | | | 7,478 | | | 6,706 | |
Special charges | | | - | | | - | | | 752 | |
| |
|
| |
|
| |
|
| |
Gross profit | | | 9,443 | | | 9,979 | | | 7,588 | |
| | | | | | | | | | |
Operating expenses: | | | | | | | | | | |
Selling, general and administrative | | | 7,087 | | | 8,667 | | | 9,538 | |
Research and development | | | 3,106 | | | 2,859 | | | 2,959 | |
Special charges | | | - | | | (63 | ) | | 970 | |
| |
|
| |
|
| |
|
| |
Total operating expenses | | | 10,193 | | | 11,463 | | | 13,467 | |
| | | | | | | | | | |
Loss from operations | | | (750 | ) | | (1,484 | ) | | (5,879 | ) |
| | | | | | | | | | |
Interest expense | | | 29 | | | 35 | | | 6 | |
Interest income | | | (79 | ) | | (99 | ) | | (287 | ) |
Other (income) expense, net | | | 167 | | | 84 | | | 210 | |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Loss from continuing operations
before income taxes and minority interest | | | (867 | ) | | (1,504 | ) | | (5,808 | ) |
| | | | | | | | | | |
Income tax expense | | | 24 | | | - | | | (121 | ) |
| |
|
| |
|
| |
|
| |
Loss before minority interest | | | (891 | ) | | (1,504 | ) | | (5,687 | ) |
| | | | | | | | | | |
Minority interest | | | (37 | ) | | - | | | - | |
| |
|
| |
|
| |
|
| |
Loss before discontinued operations,
extraordinary loss, and cumulative effect
of change in accounting principle | | | (928 | ) | | (1,504 | ) | | (5,687 | ) |
| | | | | | | | | | |
Income (loss) from discontinued operations,
net of income tax effect | | | - | | | - | | | (2,633 | ) |
| | | | | | | | | | |
Cumulative effect of change in accounting
principle, net of income tax effect | | | - | | | - | | | (10,375 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net loss and comprehensive loss | | $ | (928 | ) | $ | (1,504 | ) | $ | (18,695 | ) |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Net loss per common share: | | | | | | | | | | |
Basic and diluted: | | | | | | | | | | |
Loss before discontinued
operations and extraordinary items | | $ | (0.07 | ) | $ | (0.12 | ) | $ | (0.47 | ) |
Income (loss) from discontinued operations | | | - | | | - | | | (0.22 | ) |
Cumulative effect of change in accounting
principle | | | - | | | - | | | (0.86 | ) |
| |
|
| |
|
| |
|
| |
Net loss per common share | | $ | (0.07 | ) | $ | (0.12 | ) | $ | (1.56 | ) |
| |
|
| |
|
| |
|
| |
See notes to financial statements.
31
eOn Communications Corporation
Consolidated Statements of Cash Flows
For the Years Ended July 31, 2004, 2003, and 2002
(Dollars in thousands)
| | Year Ended July 31, | |
| |
| |
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | |
Net loss | | $ | (928 | ) | $ | (1,504 | ) | $ | (18,695 | ) |
Adjustments to reconcile net loss to net cash
used in operating activities: | | | | | | | | | | |
Loss from discontinued operations | | | - | | | - | | | 2,633 | |
Impairment of goodwill from adoption of FAS 142 | | | - | | | - | | | 10,375 | |
Depreciation and amortization | | | 596 | | | 729 | | | 744 | |
Minority Interest | | | 37 | | | - | | | - | |
Provision for the allowance for doubtful accounts | | | 85 | | | 110 | | | 164 | |
Loss on investments | | | - | | | - | | | 94 | |
Changes in net assets and liabilities (net of effect
of discontinued operations): | | | | | | | | | | |
Trade accounts receivable | | | (2,523 | ) | | (973 | ) | | 1,563 | |
Accounts receivable from/payable to affiliates | | | (106 | ) | | 37 | | | 24 | |
Notes receivable | | | (174 | ) | | - | | | - | |
Inventories | | | 363 | | | 915 | | | 1,310 | |
Other assets | | | (26 | ) | | (9 | ) | | 48 | |
Trade accounts payable | | | 1,916 | | | (52 | ) | | (51 | ) |
Accrued special charges | | | - | | | (195 | ) | | (707 | ) |
Accrued expenses and other | | | (569 | ) | | (110 | ) | | 117 | |
Income taxes payable (refund receivable) | | | - | | | - | | | 271 | |
| |
|
| |
|
| |
|
| |
Net cash used in operating activities | | | (1,329 | ) | | (1,052 | ) | | (2,110 | ) |
| | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | |
Net cash acquired in business acquisition | | | 3,108 | | | - | | | - | |
Purchases of property and equipment | | | (345 | ) | | (221 | ) | | (301 | ) |
Disposal of property and equipment | | | 146 | | | - | | | - | |
Sales of marketable securities | | | - | | | 3,909 | | | 7,438 | |
Purchases of marketable securities | | | - | | | (1,500 | ) | | (5,310 | ) |
| |
|
| |
|
| |
|
| |
Net cash provided by investing activities | | | 2,909 | | | 2,188 | | | 1,827 | |
| | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | |
Repayment of note payable | | | (724 | ) | | (665 | ) | | (53 | ) |
Repurchases of common stock | | | - | | | (3 | ) | | (203 | ) |
Proceeds from the exercise of stock options and
employee stock purchase plan | | | 602 | | | 71 | | | 84 | |
| |
|
| |
|
| |
|
| |
Net cash used in financing activities | | | (122 | ) | | (597 | ) | | (172 | ) |
| | | | | | | | | | |
Cash used by discontinued operations | | | - | | | - | | | (453 | ) |
32
eOn Communications Corporation
Consolidated Statements of Cash Flows (continued)
For the Years Ended July 31, 2004, 2003, and 2002
| | Year Ended July 31, | |
| |
| |
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
Net increase (decrease) in cash and cash equivalents | | | 1,458 | | | 539 | | | (908 | ) |
Cash and cash equivalents, beginning of year | | | 3,221 | | | 2,682 | | | 3,590 | |
| |
|
| |
|
| |
|
| |
Cash and cash equivalents, end of year | | $ | 4,679 | | $ | 3,221 | | $ | 2,682 | |
| |
|
| |
|
| |
|
| |
Supplemental cash flow information: | | | | | | | | | | |
Interest paid | | $ | 29 | | $ | 35 | | $ | 6 | |
Income taxes paid | | | 24 | | | - | | | - | |
Noncash activity:
2002: | |
| The Company distributed its entire ownership interest in Cortelco Systems Puerto Rico, Inc. to the shareholders of eOn via a stock distribution of 1,204,157 shares of CSPR on July 31, 2002. |
| |
| The Company contributed a $264,000 note receivable plus accrued interest from our former parent, Cortelco Systems Holding Corporation, to Cortelco Systems Puerto Rico prior to the spin-off. |
| |
| In connection with the lease termination agreement for the former facility in Memphis, Tennessee, the Company issued a non-interest bearing note payable in the amount of $1,400,000. After imputing a discount for interest over the life of the note, $1,331,000 was reclassified from accrued special charges upon the issuance of the note. |
See notes to financial statements.
33
eOn Communications Corporation
Consolidated Statement of Stockholders' Equity
For the Years Ended July 31, 2004, 2003, and 2002
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | Note
Receivable
From
Affiliate/
Former
Parent | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-In
Capital | | Treasury Stock | | | | | | Total
Stockholders’
Equity | |
| |
| | |
| | Accumulated
Deficit | | | |
| | Shares | | Amount | | | Shares | | Amount | | | | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | |
Balance at July 31, 2001 | | | 12,473,445 | | $ | 12 | | $ | 57,919 | | | (431,500 | ) | $ | (1,296 | ) | $ | (22,294 | ) | $ | (264 | ) | $ | 34,077 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of common stock | | | - | | | - | | | - | | | (234,500 | ) | | (203 | ) | | - | | | - | | | (203 | ) |
Exercise of stock options | | | 112,620 | | | - | | | 56 | | | - | | | - | | | - | | | - | | | 56 | |
Issuances from employee stock purchase plan | | | 120,569 | | | - | | | 81 | | | - | | | - | | | - | | | - | | | 81 | |
Distribution of CSPR stock | | | - | | | - | | | (4,680 | ) | | - | | | - | | | - | | | 264 | | | (4,416 | ) |
Net loss and comprehensive loss | | | - | | | - | | | - | | | - | | | - | | | (18,695 | ) | | - | | | (18,695 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at July 31, 2002 | | | 12,706,634 | | $ | 12 | | $ | 53,376 | | | (666,000 | ) | $ | (1,499 | ) | $ | (40,989 | ) | $ | - | | $ | 10,900 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase of common stock | | | - | | | - | | | - | | | (10,900 | ) | | (3 | ) | | - | | | - | | | (3 | ) |
Exercise of stock options | | | 34,831 | | | - | | | 34 | | | - | | | - | | | - | | | - | | | 34 | |
Issuances from employee stock purchase plan | | | 111,747 | | | - | | | 37 | | | - | | | - | | | - | | | - | | | 37 | |
Net loss and comprehensive loss | | | - | | | - | | | - | | | - | | | - | | | (1,504 | ) | | - | | | (1,504 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at July 31, 2003 | | | 12,853,212 | | $ | 12 | | $ | 53,447 | | | (676,900 | ) | $ | (1,502 | ) | $ | (42,493 | ) | $ | - | | $ | 9,464 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock options | | | 355,023 | | | 1 | | | 510 | | | - | | | - | | | - | | | - | | | 511 | |
Issuances from employee stock purchase plan | | | 121,758 | | | - | | | 91 | | | - | | | - | | | - | | | - | | | 91 | |
Issuances of common stock for acquisitions | | | 157,167 | | | - | | | 321 | | | - | | | - | | | - | | | - | | | 321 | |
Net loss and comprehensive loss | | | - | | | - | | | - | | | - | | | - | | | (928 | ) | | - | | | (928 | ) |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at July 31, 2004 | | | 13,487,160 | | $ | 13 | | $ | 54,369 | | | (676,900 | ) | $ | (1,502 | ) | $ | (43,421 | ) | $ | - | | $ | 9,459 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
See notes to financial statements.
34
eOn Communications Corporation
Notes to Consolidated Financial Statements
Years Ended July 31, 2004, 2003, and 2002
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business - eOn Communications Corporation (the “Company” or “eOn”) designs, develops and markets communication products that include next generation communications servers and software which integrate and manage voice, email 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 owns a controlling interest in Cortelco Shanghai Telecom Equipment Company based in China, which provides fiber optic transmission equipment, data communications systems, and network management software.
Principles of Consolidation – The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and includes the accounts of the company’s majority owned subsidiary, Cortelco Shanghai. All significant balances and transactions have been eliminated during the consolidation.
The Company also had a wholly-owned subsidiary, Cortelco Systems Puerto Rico, Inc. (“CSPR”), based in San Juan Puerto Rico. On August 28, 2001, the Board of Directors approved a plan to spin-off this subsidiary as a separate entity to the stockholders of eOn. This action was completed on July 31, 2002 via a distribution of all the outstanding shares of CSPR to the shareholders of eOn. Therefore, the assets, liabilities, results of operations and cash flows of this entity have been segregated and are reflected in the financial statements of eOn as a discontinued operation for all periods. The Company’s financial statements have been restated to conform to the discontinued operations presentation. See Footnote 4 for additional information.
The Company is affiliated with the following entities through common stockholder ownership: |
| CSPR (former subsidiary) |
| 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) |
| Alcatel Shanghai Bell Co., Ltd. (“Shanghai Bell”) |
2. ACQUISITION OF CORTELCO SHANGHAI TELECOM EQUIPMENT COMPANY
On June 1, 2004, eOn acquired a controlling interest in Cortelco Shanghai Telecom Equipment Company (“Cortelco Shanghai”), a provider of fiber optic transmission equipment, data communications systems, and network management software in China.
Under the terms of the agreement, eOn acquired all of the stock of Cortelco China Corp, a California corporation that owns a 54.14% ownership interest in Cortelco Shanghai, from Cortelco Systems Holding Corporation (“CSHC”). CSHC received 157,167 shares of eOn common stock valued at $321,250. It is anticipated that up to an additional 471,501 shares may be issued over the next four fiscal quarters if Cortelco Shanghai attains specified revenue targets as set forth in the purchase agreement which is classified as Accrued earnout liability in the purchase allocation.
35
This acquisition has been accounted for under the purchase method pursuant to Statement of Financial Accounting Standards No. 141, “Business Combinations.” A summary of the net assets acquired is as follows:
Acquisition cost: | | | | |
| | | | |
Shares issued on May 31, 2004 | | $ | 321,000 | |
Additional Consideration | | | 7,000 | |
Total consideration | | | 328,000 | |
As of May 31, 2004: | | | | |
Current assets | | $ | 8,100,000 | |
Long term assets | | | 206,000 | |
Current Liabilities | | | (5,710,000 | ) |
Minority Interest | | | (1,190,000 | ) |
Accrued earnout liability | | | (1,078,000 | ) |
| |
|
| |
Net assets acquired | | $ | 328,000 | |
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The accompanying consolidated financial statements include the accounts of eOn Communications Corporation and its majority owned subsidiary — Cortelco Shanghai Telecom Equipment Company. All significant inter-company accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents - - All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. At July 31, 2004 there was $2,924,392 held in foreign bank accounts.
Marketable Securities - Marketable securities are classified as available for sale and are reported at fair value. Unrealized holding gains and losses, if any, net of the related income tax effect, are excluded from income and are reported in other comprehensive income. Realized gains and losses are included in income on the specific identification method.
Inventories - Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method.
Property and Equipment - Property and equipment are stated at cost. Depreciation is provided using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes over the estimated useful lives of the assets, generally three to five years. Maintenance and repair costs are charged to expense as incurred.
Goodwill - Goodwill represented the cost in excess of the fair value of net assets acquired. Prior to July 31, 2001, these costs were being amortized on a straight line basis over twenty years. On August 1, 2001, the Company adopted FAS 142, “Goodwill and Other Intangible Assets” and ceased amortizing goodwill as of that date. It was also determined that goodwill was impaired as of that date, and the Company recorded an impairment charge of $10,375,000. See Footnote 5 for more information.
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 by comparing the net book value of such assets to the future undiscounted cash flows attributable to such assets whenever events or changes in circumstances occur which might indicate that the carrying amount might not be recoverable. If impairment is indicated, the carrying amount of the asset is written down to fair value.
36
Stock Compensation Plans - The Company has three stock-based compensation plans for employees and an Employee Stock Purchase Plan (ESPP), which are more fully described in Footnote 15. The Company accounts for those plans under the intrinsic value method, which follows the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the stock compensation plans had an exercise price equal to or greater than the market value of the underlying common stock on the grant date. Further, the ESPP is a noncompensatory plan under APB Opinion No. 25, and, as such, no compensation cost was recognized with respect to the ESPP.
The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation, to stock-based employee compensation:
| | Fiscal Year Ended July 31, | |
| | | |
| | 2004 | | 2003 | | 2002 | |
| | | | | | | |
| | (in thousands) | |
Net loss as reported | | $ | (928 | ) | $ | (1,504 | ) | $ | (18,695 | ) |
Add: Stock-based compensation, as reported | | | | | | | | | | |
| | | — | | | — | | | — | |
Deduct: Total stock-based compensation | | | | | | | | | | |
determined under fair value based method for all | | | (612 | ) | | (995 | ) | | (1,249 | ) |
awards, net of tax | | | | | | | | | | |
| |
|
| |
|
| |
|
| |
Pro forma net loss | | $ | (1,540 | ) | $ | (2,499 | ) | $ | (19,944 | ) |
| | | | | | | | | | |
Net loss per share – basic and diluted: | | | | | | | | | | |
Net loss per share – as reported | | $ | (0.07 | ) | $ | (0.12 | ) | $ | (1.56 | ) |
Net loss per share – pro forma | | $ | (0.12 | ) | $ | (0.21 | ) | $ | (1.66 | ) |
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. A valuation allowance is provided for deferred tax assets when it is more likely than not that the asset will not be realized.
Revenue Recognition– Revenues from our Millennium and eQueue products are recognized only when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collectibility is reasonably assured. Generally, revenue is recognized (1) upon shipment for equipment and software, (2) as work is performed for professional services, and (3) in equal periodic amounts over the term of the contract for software and hardware maintenance. The Company’s revenue recognition policies are in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition,” and Statement of Position No. 97-2, “Software Revenue Recognition”
Medical Care and Disability Benefit Plans- The Company is fully insured with respect to the medical and disability benefits offered to substantially all employees. 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.
37
Fair Value of Financial Instruments- The carrying amounts of financial instruments such as cash, accounts receivable, accounts payable, and notes payable approximate their fair value due to the short term nature of the instruments.
Estimates- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Comprehensive Income- In June 1997, the Financial Accounting Standards Board (“FASB”) issued SFAS 130, “Reporting Comprehensive Income,” which establishes standards for reporting and display of comprehensive income and its components and requires a separate statement to report the components of comprehensive income for each period reported. For the years ended July 31, 2004, 2003, and 2002, net loss equaled comprehensive loss.
Research and Development Costs– The Company allocates expenses to Research and Development costs based on headcount that is partially dedicated to Research and Development activities.
Advertising Expense– The Company expenses advertising expenses as incurred. Advertising expenses for 2004, 2003, and 2002 were not significant.
Recently Issued Accounting Standards- In November 2002, the Emerging Issues Task force (“EITF”) reached a consensus regarding EITF Issue 00-21,Accounting for Revenue Arrangements with Multiple Deliverables. The consensus addresses not only when and how an arrangement involving multiple deliverables should be divided into separate units of accounting but also how the arrangement's consideration should be allocated among separate units. The adoption of EITF Issue 00-21 did not have a material impact on the Company’s results of operations or financial position.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148,Accounting for Stock -Based Compensation – Transition and Disclosure (“SFAS 148”). SFAS 148 amends Statement No. 123,Accounting for Stock-Based Compensation(“SFAS 123”), to provide alternative methods for voluntary transition to SFAS 123’s fair value method of accounting for stock-based employee compensation. SFAS 148 also requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net earnings (loss) and earnings (loss) per share in annual and interim financial statements. The provisions of SFAS 148 are effective in fiscal years beginning after December 15, 2002. The Company has implemented the required disclosures of this pronouncement and will continue to account for stock options under the intrinsic value method.
In July 2003, the EITF reached consensus regarding EITF Issue 03-5, Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to nonsoftware deliverables. The consensus addresses whether nonsoftware deliverables in a multiple-element arrangement that includes software that is more than incidental to the products or services as a whole should be within the scope of SOP 97-2,Software Revenue Recognition. The pronouncement is effective prospectively for arrangements entered into after the beginning of an entity’s next reporting period beginning after August 13, 2003. The adoption of EITF Issue 03-5 did not have a material impact on the Company's results of operations or financial position.
Reclassifications- Certain amounts in the 2003 and 2002 financial statements have been reclassified to conform with the 2004 presentation.
38
4. DISCONTINUED OPERATIONS
On August 28, 2001, the Board of Directors of the Company approved a plan to spin-off Cortelco Systems Puerto Rico, eOn’s wholly-owned Caribbean/Latin America service and distribution subsidiary, as an independent entity headquartered in San Juan, Puerto Rico. The spin-off transaction was completed on July 31, 2002 with the issuance of CSPR shares on a 1-for-10 basis to eOn stockholders.
The Company’s financial statements have been restated to reflect the Caribbean / Latin America subsidiary as a discontinued operation for all periods presented. Summarized results of the discontinued business are shown separately as discontinued operations in the accompanying consolidated financial statements.
Operating results of the discontinued operations are as follows:
| | Year ended July 31, | |
| |
| |
| | 2002 | |
| |
| |
| | (In thousands) | |
| | | |
Net sales | | | $ | 10,384 | | |
| | |
|
| | |
Loss before income taxes
and extraordinary loss | | | | (2,633 | ) | |
Income tax expense | | | | - | | |
| | |
|
| | |
| | | | | | |
Net loss from discontinued
operations | | | $ | (2,633 | ) | |
| | |
|
| | |
Net loss per share: | | | | | | |
Basic and Diluted | | | $ | (0.22 | ) | |
5. ACCOUNTING FOR GOODWILL
In June 2001, the FASB issued SFAS No.142, “Goodwill and Other Intangible Assets” which changes the method by which companies may recognize intangible assets in purchase business combinations and generally requires identifiable intangible assets to be recognized separately from goodwill. In addition, it eliminates the amortization of all existing and newly acquired goodwill on a prospective basis and requires companies to assess goodwill for impairment, at least annually, based on the fair value of the reporting unit associated with the goodwill. The Company elected to early adopt SFAS No.142 on August 1, 2001, and ceased amortizing goodwill as of this date.
Goodwill of $11,724,000 had been recorded in conjunction with the acquisition of BCS Technologies in April 1999. This balance was subsequently reduced by $1,349,000 due to amortization expense in fiscal years 2001, 2000, and 1999. On August 1, 2001 the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which changed the method of evaluating goodwill from a recoverability test based upon undiscounted cash flows to a fair value approach. Accordingly, the Company's previously recognized goodwill was tested for impairment as of August 1, 2001. The Company calculated the fair value of the reporting unit using a combination of the Company’s quoted market prices and a discounted cash flow analysis. As a result of this analysis, the Company concluded that goodwill was impaired and recorded an impairment charge in the amount of $10,375,000, which is reflected as a cumulative effect of change in accounting principle in the accompanying consolidated statement of operations for the year ended July 31, 2002. The income tax effect of this change in accounting principle was $0.
39
6. SPECIAL CHARGES
To reduce costs and improve productivity, the Company adopted a restructuring plan during the second quarter of fiscal year 2001, which included headcount reductions and office space consolidation. During the fourth quarter of 2001, the Company made the decision to consolidate the majority of functions to its Atlanta headquarters. In fiscal 2002, the Company recorded additional special charges to reflect the impact of a lease termination agreement for its former facility in Memphis, Tennessee and to properly value excess inventories on hand at July 31, 2002. In fiscal 2003, the company settled all remaining property tax liabilities associated with the former facility in Memphis, Tennessee and recorded an expense reversal to reflect this favorable settlement and close out the restructuring accrual.
Major components of the restructuring plan included corporate management changes; the relocation and concentration of management and strategic functions at the Company’s headquarters in Atlanta, Georgia; site closures; outsourcing initiatives for the assembly, repair, and manufacturing of our products; and workforce reductions of approximately 40%. The majority of the restructuring plan was completed by July 31, 2002.
As a result of the adoption of the restructuring plan, the Company recognized special charges in operating expenses. The special charge in operating expenses included ($63,000) and $970,000 in fiscal 2003 and 2002, respectively, for the expected costs associated with excess space at the Company’s locations in Memphis, Tennessee; Englewood, Colorado; and Guelph, Ontario. The excess space resulted from the Company’s relocation of personnel and certain functions to the Atlanta headquarters and the corresponding reductions in the company’s workforce.
The Company also recognized special charges of $752,000 in cost of revenues during 2002. The noncash charge was recorded to properly value excess inventories in light of then-current economic conditions.
The following tables summarize the activity relating to the special charges during fiscal years 2003 and 2002 and the associated liabilities at July 31, 2003 and 2002:
| | July 31, 2001
Liability
Balance | | Charges | | Expenditures | | Other
Adjustments | | July 31, 2002
Liability
Balance | |
| |
| |
| |
| |
| |
| |
Inventory charges | | | $ | - | | | | $ | 752 | | | $ | - | | | | $ | (752 | ) (1) | | | $ | - | | |
Termination benefits | | | | 625 | | | | | 58 | | | | (622 | ) | | | | - | | | | | 61 | | |
Excess facilities cost | | | | 1,605 | | | | | 912 | | | | (1,013 | ) | | | | (1,331 | ) (2) | | | | 173 | | |
Relocation costs | | | | 42 | | | | | - | | | | (42 | ) | | | | - | | | | | - | | |
| | |
|
| | | |
|
| | |
|
| | | |
|
| | | |
|
| | |
Total | | | $ | 2,272 | | | | $ | 1,722 | | | $ | (1,677 | ) | | | $ | (2,083 | ) | | | $ | 234 | | |
| | |
|
| | | |
|
| | |
|
| | | |
|
| | | |
|
| | |
| | July 31, 2002
Liability
Balance | | Charges | | Expenditures | | Other
Adjustments | | July 31, 2003
Liability
Balance | |
| |
| |
| |
| |
| |
| |
Termination benefits | | | | 61 | | | | | - | | | | (61 | ) | | | | - | | | | | - | | |
Excess facilities cost | | | | 173 | | | | | (63 | ) | | | (110 | ) | | | | - | | | | | - | | |
| | |
|
| | | |
|
| | |
|
| | | |
|
| | | |
|
| | |
Total | | | $ | 234 | | | | $ | (63 | ) | | $ | (171 | ) | | | $ | - | | | | $ | - | | |
| | |
|
| | | |
|
| | |
|
| | | |
|
| | | |
|
| | |
(1) Represents write-down of inventory to net realizable value
(2) Reflects issuance of note payable in connection with the lease termination agreement for the Company’s former facility in Memphis, Tennessee. The note payable does not bear interest and is payable in 24 equal monthly installments beginning July 1, 2002 and ending June 1, 2004.
40
7. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of cash, marketable securities, trade accounts receivable, and notes receivable. The Company maintains its cash balances with large regional financial institutions and has not experienced losses. The marketable securities are invested in accounts at large national brokerages which maintain insurance coverage. The Company's products are sold principally to dealers, value added resellers, national accounts, the U.S. government and foreign telecommunications companies. 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.
The company had sales to a single customer during 2004 that equaled 11% of total sales. The related accounts receivable due from this customer at July 31, 2004 was $428,810.
8. MARKETABLE SECURITIES
Marketable securities consists of the following:
| | July 31, 2004 | | July 31, 2003 | |
| |
| |
| |
| | Cost | | Market value | | Cost | | Market Value | |
| |
| |
| |
| |
| |
(In thousands) | | | | | | | | | | | | | | | | | |
Municipal bonds | | $ | 4,200 | | | $ | 4,200 | | | $ | 4,200 | | | $ | 4,200 | | |
| |
|
| | |
|
| | |
|
| | |
|
| | |
Total | | $ | 4,200 | | | $ | 4,200 | | | $ | 4,200 | | | $ | 4,200 | | |
| |
|
| | |
|
| | |
|
| | |
|
| | |
The municipal bond investments are comprised solely of taxable auction-rate securities with stated maturities ranging from 17-26 years. Due to the fact that these investments have frequent interest rate resets, the Company did not have any gross unrealized gains or losses at July 31, 2004 or 2003. The Company has classified the municipal bonds as available for sale investments.
The Company has pledged a $175,000 municipal security to secure a standby letter of credit associated with the sublease termination agreement for the Memphis facility.
9. INVENTORIES
The Company accounts for inventories at the lower of cost or market. Cost has been determined by the first-in, first-out (“FIFO”) method. The Company adopted FIFO costing for these inventories as of August 1, 2001 in order to provide a better matching of revenues and costs and to conform to a single method of accounting for all of the Company’s inventories. The effect of the accounting change on income for fiscal year 2002 was as follows:
| | 2002 | |
| |
| |
| | (In thousands, except per share data) | |
| | | | | | |
Decrease in loss before discontinued
operations and extraordinary items | | | $ | 8 | | |
| | | | | | |
Increase in basic and diluted loss per common share | | | $ | 0.00 | | |
| | |
|
| | |
The balance of accumulated deficit as of July 31, 2000 was adjusted for the effect of applying retroactively the new method of accounting.
Inventories consist of the following:
| | 2004 | | 2003 | |
| |
| |
| |
| | (In thousands) | |
Raw materials and purchased components | | $ | 723 | | $ | 392 | |
Finished goods | | | 2,010 | | | 1,770 | |
| |
|
| |
|
| |
Total inventories | | $ | 2,733 | | $ | 2,162 | |
| |
|
| |
|
| |
41
10. OTHER CURRENT ASSETS
Other current assets consists of the following:
| | 2004 | | 2003 | |
| |
| |
| |
| | (In thousands) | |
Customer deposits | | $ | 794 | | $ | - | |
Advances to suppliers | | | 893 | | | - | |
Prepaid expenses | | | 132 | | | 96 | |
Other | | | 94 | | | 38 | |
| |
|
| |
|
| |
Total | | | 1,913 | | | 134 | |
11. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
| | 2004 | | 2003 | |
| |
| |
| |
| | (In thousands) | |
Leasehold improvements | | $ | 311 | | $ | 300 | |
Equipment | | | 2,565 | | | 3,593 | |
Furniture and fixtures | | | 501 | | | 751 | |
| |
|
| |
|
| |
Total | | | 3,377 | | | 4,644 | |
Less accumulated depreciation | | | (2,406 | ) | | (3,495 | ) |
| |
|
| |
|
| |
Property and equipment, net | | $ | 971 | | $ | 1,149 | |
| |
|
| |
|
| |
Depreciation expense was $596,000, $703,000, and $711,000 for 2004, 2003, and 2002, respectively.
12. ACCRUED EXPENSES AND OTHER
Accrued expenses and other consists of the following:
| | 2004 | | 2003 | |
| |
| |
| |
| | (In thousands) | |
Employee compensation | | $ | 197 | | $ | 362 | |
Commissions | | | 37 | | | 65 | |
Vacation | | | 35 | | | 271 | |
Deferred income | | | 651 | | | 657 | |
Employee withholdings | | | 533 | | | 69 | |
Warranty reserve | | | 361 | | | 283 | |
Other | | | 470 | | | 572 | |
| |
|
| |
|
| |
Total | | $ | 2,284 | | $ | 2,279 | |
| |
|
| |
|
| |
FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee.
42
The requirements of FIN 45 are applicable to the Company’s product warranty liability. As of July 31, 2004 and July 31, 2003, the Company’s product warranty liability recorded in other accrued liabilities was $361,000 and $283,000, respectively. The following table summarizes the activity related to the product warranty liability during fiscal 2004 and 2003 (in thousands):
| | July 31, 2004 | | July 31, 2003 | |
| |
| |
| |
Balance at beginning of period | | | $ | 283 | | | | $ | 199 | | |
Accruals for warranty liability | | | | 325 | | | | | 312 | | |
Warranty expense | | | | (247 | ) | | | | (228 | ) | |
| | |
|
| | | |
|
| | |
Balance at end of period | | | $ | 361 | | | | $ | 283 | | |
| | |
|
| | | |
|
| | |
13. 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 noncancellable lease terms in excess of one year as of July 31, 2004:
Year Ending July 31, 2004 | | (In thousands) | |
| |
| |
2005 | | | $ | 287 | | |
2006 | | | | 288 | | |
2007 | | | | 182 | | |
2008 | | | | - | | |
Thereafter | | | | - | | |
| | |
|
| | |
Total | | | $ | 757 | | |
| | |
|
| | |
Rent expense for the years ended July 31, 2004, 2003, and 2002 totaled $357,000, $319,000, and $327,000, respectively.
14. INCOME TAXES
The income tax provision is summarized as follows:
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
| | (In thousands) | |
Continuing operations | | $ | 24 | | $ | - | | $ | (121 | ) |
Discontinued operations | | | - | | | - | | | - | |
Extraordinary item | | | - | | | - | | | - | |
| |
|
| |
|
| |
|
| |
Total income tax benefit | | | 24 | | | - | | | (121 | ) |
| |
|
| |
|
| |
|
| |
The components of income tax expense (benefit) for 2004, 2003, and 2002 attributable to continuing operations are as follows:
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
| | (In thousands) | |
Current: | | | | | | | | | | |
Federal | | $ | - | | $ | - | | $ | (121 | ) |
State | | | - | | | - | | | - | |
Foreign Income Tax Expense | | | 24 | | | - | | | - | |
| |
|
| |
|
| |
|
| |
Total current | | | 24 | | | - | | | (121 | ) |
| | | | | | | | | | |
Deferred: | | | | | | | | | | |
Federal | | | - | | | - | | | - | |
State | | | - | | | - | | | - | |
| |
|
| |
|
| |
|
| |
Total deferred | | | - | | | - | | | - | |
| | | | | | | | | | |
| |
|
| |
|
| |
|
| |
Total income tax expense (benefit) | | $ | 24 | | $ | - | | $ | (121 | ) |
| |
|
| |
|
| |
|
| |
43
A reconciliation between the income tax expense (benefit) from continuing operations recognized in the Company’s consolidated statement of operations and the income tax benefit computed by applying the domestic federal statutory income tax rate to income from continuing operations before income taxes is as follows:
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
| | (In thousands) | |
Income tax at Federal statutory rate (35%) | | $ | (340 | ) | $ | (526 | ) | $ | (5,664 | ) |
State income taxes, net of federal benefit | | | (35 | ) | | (66 | ) | | (308 | ) |
Change in valuation allowance | | | 245 | | | 120 | | | 2,227 | |
Amortization of goodwill | | | - | | | - | | | 3,631 | |
Adjustment to effective state tax rate | | | 120 | | | - | | | - | |
Over provision of deferred taxes in prior year | | | - | | | 461 | | | - | |
Foreign income tax expense | | | 24 | | | - | | | - | |
Other, net | | | 11 | | | 10 | | | (7 | ) |
| |
|
| |
|
| |
|
| |
Total income tax expense (benefit) | | $ | 24 | | $ | - | | $ | (121 | ) |
| |
|
| |
|
| |
|
| |
The deferred tax effects of the Company’s principal temporary differences at July 31, 2004 and 2003 are as follows:
2004 | | Assets | | Liabilities | | Total | |
| |
| |
| |
| |
| | (In thousands) |
Allowance for doubtful receivables | | $ | 207 | | | $ | - | | | $ | 207 | |
Inventories | | | 653 | | | | - | | | | 653 | |
Basis difference in property and equipment | | | 33 | | | | - | | | | 33 | |
Accrued warranty costs | | | 156 | | | | - | | | | 156 | |
Accrued expenses and other | | | - | | | | (58 | ) | | | (58 | ) |
Deferred revenue | | | 232 | | | | - | | | | 232 | |
Loss reserve | | | 326 | | | | - | | | | 326 | |
Net operating loss carryforwards | | | 7,086 | | | | - | | | | 7,086 | |
Capital loss carryforward | | | 36 | | | | - | | | | 36 | |
Valuation allowance | | | (8,729 | ) | | | 58 | | | | (8,671 | ) |
| |
|
| | |
|
| | |
|
| |
Total deferred asset (liability) | | $ | - | | | $ | - | | | $ | - | |
| |
|
| |
|
| |
|
| |
| |
2003 | | Assets | | Liabilities | | Total | |
| |
| |
| |
| |
| | (In thousands) | |
Allowance for doubtful receivables | | $ | 256 | | | $ | - | | | $ | 256 | |
Inventories | | | 551 | | | | - | | | | 551 | |
Basis difference in property and equipment | | | 59 | | | | - | | | | 59 | |
Accrued warranty costs | | | 116 | | | | - | | | | 116 | |
Accrued expenses and other | | | 101 | | | | - | | | | 101 | |
Deferred revenue | | | 180 | | | | - | | | | 180 | |
Loss reserve | | | 332 | | | | - | | | | 332 | |
Net operating loss carryforwards | | | 6,632 | | | | - | | | | 6,632 | |
Capital loss carryforward | | | 199 | | | | - | | | | 199 | |
Valuation allowance | | | (8,426 | ) | | | - | | | | (8,426 | ) |
| |
|
| | |
|
| | |
|
| |
Total deferred asset (liability) | | $ | - | | | $ | - | | | $ | - | |
| |
|
| | |
|
| | |
|
| |
44
Due to uncertainties surrounding the timing of realizing the benefits of its net favorable tax attributes in future tax returns; the Company has placed a valuation allowance against its deferred tax assets at July 31, 2004 and 2003.
At July 31, 2004, net operating loss carryforwards of approximately $18.8 million are available to reduce future taxable income. The net operating loss carryforwards expire as follows:
| | NOL | |
| |
| |
| | (In thousands) | |
2012 | | | $ | 63 | | |
2013 | | | | 233 | | |
2020 | | | | 9 | | |
2021 | | | | 6,167 | | |
2022 | | | | 8,730 | | |
2023 | | | | 2,283 | | |
2024 | | | | 1,346 | | |
| | |
|
| | |
Total | | | $ | 18,830 | | |
| | |
|
| | |
No provision has been made for income taxes which may become payable upon distribution of the foreign subsidiary’s earnings since management considers essentially all of these earnings permanently invested. As of July 31, 2004 the unrecorded tax liability related to the undistributed earnings of the Company’s foreign subsidiary was insignificant.
15. EQUITY INCENTIVE PLANS
The Company’s Equity Incentive Plans, adopted in fiscal years 1997, 1999 and 2001, authorize the granting of incentive stock options, supplemental stock options, stock bonuses, and restricted stock purchase agreements to officers, directors, and employees of the Company and to non-employee consultants. Incentive stock options are granted only to employees and are issued at prices not less than 100% of the fair market value of the stock at the date of grant. The options generally vest over a four-year period and the term of any option cannot be greater than ten years from the date of grant. Stock bonuses and restricted stock purchase agreements are issued at prices not less than 85% of the fair market value of the stock at the date of grant.
No grants were made under the 1997 Equity Incentive Plan during 2004, 2003, or 2002. The board of directors has declared that no future grants will be made under this plan.
The board of directors has authorized up to an aggregate of 2,000,000 shares of the Company’s common stock for issuance under the 1999 Equity Incentive Plan. 264,000, 215,000, and 200,000 options were issued under this plan during fiscal years 2004, 2003, and 2002, respectively, with exercise prices ranging from $0.45 to $3.27 per share.
During fiscal year 2001, the board of directors authorized 500,000 shares of the Company’s common stock for issuance under the 2001 Equity Incentive Plan. Grants to officers or directors are prohibited under the terms of this plan. 64,000, 81,250, and 130,500 options, respectively, were issued under this plan during fiscal years 2004, 2003, and 2002, respectively, with exercise prices ranging from $0.24 - $3.99.
Additionally, during 1999, the board of directors adopted an Employee Stock Purchase Plan which permits employees to purchase up to 250,000 shares of the Company’s common stock. The plan was amended in 2001 to increase the number of shares available under the plan to 500,000. The purchase price under this plan is 85% of the fair market value of the common stock at the beginning of an offering period or on a purchase date, whichever is less. Offering periods generally last one year with purchase dates six and twelve months from the beginning of an offering period. The plan qualifies as a noncompensatory plan under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” 121,758, 111,747, and 120,569 shares were purchased by employees under this plan during fiscal years 2004, 2003, and 2002, respectively.
45
The status of the Company’s equity incentive plans is summarized below:
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
| | Number of
Shares | | Weighted
Average
Exercise
Price | | Number of
Shares | | Weighted
Average
Exercise
Price | | Number of
Shares | | Weighted
Average
Exercise
Price | |
| |
| |
| |
| |
| |
| |
| |
Outstanding, beginning of year | | | 1,824,053 | | | $ | 3.66 | | | | 1,842,566 | | | $ | 3.90 | | | | 2,002,837 | | | $ | 4.71 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Granted | | | 328,000 | | | | 3.15 | | | | 296,250 | | | | 1.48 | | | | 330,500 | | | | 0.51 | | |
Exercised | | | (355,023 | ) | | | 1.44 | | | | (34,831 | ) | | | 0.98 | | | | (113,192 | ) | | | 0.03 | | |
Cancelled | | | (165,560 | ) | | | 1.95 | | | | (279,932 | ) | | | 3.28 | | | | (377,579 | ) | | | 6.39 | | |
| |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | |
Outstanding, end of year | | | 1,631,470 | | | $ | 4.21 | | | | 1,824,053 | | | $ | 3.66 | | | | 1,842,566 | | | $ | 3.90 | | |
| |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | | |
| | |
Exercisable, end of year | | | 1,082,180 | | | $ | 5.10 | | | | 1,184,425 | | | $ | 4.75 | | | | 1,009,162 | | | $ | 5.34 | | |
| |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | |
|
| | |
Exercise price range | | | $0.24-$24.25 | | | $0.24-$24.25 | | | $0.24 - $24.25 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Options available for
grant, end of year | | | 559,600 | | | 725,311 | | | 743,054 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average grant date
fair value of options
granted during the year | | | $ 2.65 | | | $ 1.20 | | | $ 0.57 | |
The following table summarizes information about the options outstanding as of July 31, 2004:
| | Options Outstanding | | Options Exercisable | |
| |
| |
| |
Range of
Exercise
Prices | | Outstanding
at
July 31,
2004 | | Weighted
Average
Remaining
Contractual
Life | | Weighted
Average
Exercise
Price | | Exercisable
at
July 31,
2004 | | Weighted
Average
Exercise
Price | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | | | | | | | | | | |
$0.00 -$5.00 | | | 1,218,691 | | | 7.0 years | | | $ | 2.43 | | | | 669,401 | | | $ | 2.41 | | |
$5.01 - $10.00 | | | 317,979 | | | 3.4 years | | | $ | 8.74 | | | | 317,979 | | | $ | 8.74 | | |
$10.01 - $15.00 | | | 86,300 | | | 5.0 years | | | $ | 10.73 | | | | 86,300 | | | $ | 10.73 | | |
$15.01 - $25.00 | | | 8,500 | | | 3.7 years | | | $ | 24.25 | | | | 8,500 | | | $ | 24.25 | | |
| |
|
| |
|
| | |
|
| | |
|
| | |
|
| | |
| | | 1,631,470 | | | 6.2 years | | | $ | 4.21 | | | | 1,082,180 | | | $ | 5.10 | | |
| |
|
| |
|
| | |
|
| | |
|
| | |
|
| | |
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 the fair market value of the underlying common stock. The company recognized $53,000 in compensation expense during FY 2002 for stock grants to employees. No compensation expense related to stock options was recorded during 2004 or 2003 as the option exercise prices were equal to or greater than the fair market value of the underlying common stock on the date of the grant. In addition, no compensation expense was recognized on any purchases of common stock under the Employee Stock Purchase Plan during the year. Had compensation expense been determined based upon fair values of the options at the grant date in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company’s net income (loss) and earnings per share would have been as follows:
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
| | (In thousands, except per share data) | |
| | | | | | | | | | | | |
Net loss: | | | | | | | | | | | | |
As reported | | $ | (928 | ) | $ | (1,504 | ) | | $ | (18,695 | ) | |
Pro forma | | | (1,540 | ) | | (2,499 | ) | | | (19,944 | ) | |
Loss per share: | | | | | | | | | | | | |
As reported – basic and diluted | | $ | (0.07 | ) | $ | (0.12 | ) | | $ | (1.56 | ) | |
Pro forma – basic and diluted | | $ | (0.12 | ) | $ | (0.21) | | | $ | (1.66) | | |
46
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:
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
Risk-free interest rate | | | 4.25 | % | | 4.25 | % | | 4.25 | % |
Dividend yield | | | - | | | - | | | - | |
Expected volatility | | | 100 | % | | 75 | % | | 75 | % |
Expected option life in years | | | 7 | | | 10 | | | 10 | |
16. RELATED PARTIES
The following represent related party transactions:
| | Year Ended July 31, | |
| | | |
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
| | (In thousands) | |
Purchases from CSHC and subsidiaries | | | 609 | | | 615 | | | 784 | |
Sales to CSHC and subsidiaries | | | - | | | - | | | 1 | |
Sales to CSPR | | | - | | | 28 | | | - | |
Purchases from Shanghai Bell | | | 25 | | | - | | | - | |
Sales to Shanghai Bell | | | 134 | | | - | | | - | |
The following represent related party balances:
| | July 31, | |
| | | |
| | 2004 | | 2003 | |
| |
| |
| |
| | (In thousands) | |
Payable to CII | | | 64 | | | 121 | |
Payable to Shanghai Bell | | | 1,985 | | | - | |
In addition, at July 31, 1998 the Company had a $3,184,000 note receivable from CSHC that was reflected as a reduction of stockholder’s equity in the accompanying financial statements. The note was to mature on 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 was due and payable on demand and provided for interest at a rate equal to prime plus 1.5%. During 2000, the Company received $420,000 in principal payments against the note receivable and distributed the $2,600,000 note to CSHC in payment of a dividend payable. During 2002, the note receivable and accrued interest was contributed to CSPR prior to the spin-off.
The acquisition disclosed in footnote 2 was made from an entity related to eOn through common ownership.
17. EMPLOYEE SAVINGS PLAN
Substantially all employees of the company can participate in the eOn Communications Corporation Profit Sharing Savings Plan, which is qualified under Section 401 of the Internal Revenue Code. Under the provisions of the plan, all participants may contribute up to 60% 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 2004, 2003, and 2002, contributions made by the Company totaled $77,000, $79,000, and $96,000, respectively.
18. COMMITMENTS AND CONTINGENCIES
At July 31, 2004, the Company had outstanding commitments for inventory purchases under open purchase orders of approximately $1,518,000.
47
During fiscal 2002, the Company entered into a lease termination agreement for its former facility in Memphis, Tennessee. A $1,400,000 declining balance letter of credit was issued to secure payments under the termination agreement. The balance of the letter of credit as of July 31, 2004 was $175,000.
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.
19. SEGMENT INFORMATION
The company is comprised of two principal business segments: eOn US and Cortelco Shanghai. The eOn US business segment designs, develops and markets communication products for customer contact centers and other applications and offers a traditional voice-switching platform. Cortelco Shanghai provides fiber optic transmission equipment, data communications systems, and network management software. There is no overlap in operational management reporting or of decision making authority between the two segments as defined. Following is a tabulation of business segment information on eOn US for fiscal year ended July 31, 2004 and for Cortelco Shanghai for the two months ended July 31, 2004.
| | eOn US | | Cortelco
Shanghai | | Consolidated | |
| |
| |
| |
| |
| | (In thousands) | |
Revenues from customers | | $ | 15,576 | | | $ | 2,282 | | | | $ | 17,858 | | |
Revenues from other segments | | | 92 | | | | - | | | | | 92 | | |
| |
|
| | |
|
| | | |
|
| | |
Total revenues | | $ | 15,668 | | | $ | 2,282 | | | | $ | 17,950 | | |
Total expenses | | | 16,640 | | | | 2,238 | | | | | 18,878 | | |
| |
|
| | |
|
| | | |
|
| | |
Business segment income(loss) | | $ | (972 | ) | | $ | 44 | | | | $ | (928 | ) | |
| |
|
| | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | |
Depreciation and amortization expense | | $ | 585 | | | $ | 11 | | | | $ | 596 | | |
Interest income | | | 62 | | | | 17 | | | | | 79 | | |
Interest expense | | | 29 | | | | - | | | | | 29 | | |
Income tax expense | | | - | | | | 24 | | | | | 24 | | |
| | | | | | | | | | | | | | |
Capital Expenditures | | $ | 334 | | | $ | 11 | | | | $ | 345 | | |
Business Segment Assets at July 31, 2004 | | $ | 11,716 | | | $ | 10,218 | | | | $ | 21,934 | | |
20. EARNINGS PER SHARE
The computation of basic and diluted earnings per share for each year were as follows:
| | 2004 | | 2003 | | 2002 | |
| |
| |
| |
| |
| | (In thousands, except per share data) | |
Basic and diluted loss per share: | | | | | | | | | | | | |
Loss before discontinued operations and
extraordinary items | | | $ | (928 | ) | | | $ | (1,504 | ) | | | $ | (5,687 | ) | |
Weighted average shares outstanding | | | | 12,522 | | | | | 12,091 | | | | | 12,013 | | |
| | |
|
| | | |
|
| | | |
|
| | |
| | | | | | | | | | | | | | | | |
Basic and diluted loss per share before
discontinued operations and extraordinary items | | | $ | (0.07 | ) | | | $ | (0.12 | ) | | | | (0.47 | ) | |
| | |
|
| | | |
|
| | | |
|
| | |
50
Potential common shares related to options outstanding at July 31, 2004 to purchase 1,631,470 shares of common stock were excluded from the computation of diluted loss per share for the year ended July 31, 2004 because their inclusion would have had an antidilutive effect.
Potential common shares related to options outstanding at July 31, 2003 to purchase 1,824,053 shares of common stock were excluded from the computation of diluted loss per share for the year ended July 31, 2003 because their inclusion would have had an antidilutive effect.
Potential common shares related to options outstanding at July 31, 2002 to purchase 1,842,566 shares of common stock were excluded from the computation of diluted loss per share for the year ended July 31, 2002 because their inclusion would have had an antidilutive effect.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On June 5, 2003, upon the recommendation of the Audit Committee of the Board of Directors of eOn Communications Corporation (the “Company”), the Board of Directors decided to no longer engage Deloitte & Touche LLP (“Deloitte”) as the Company’s independent auditor, and engaged Grant Thornton, LLP (“Grant Thornton”) to serve as the Company’s independent auditor for the fiscal year ending July 31, 2003.
Deloitte’s reports on the Company’s consolidated financial statements for each of the fiscal years ended July 31, 2002 and 2001, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. Deloitte’s report on the Company’s consolidated financial statements for 2002 was issued on an unqualified basis in conjunction with the publication of the Company’s 2002 Annual Report and the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2002.
During the Company’s fiscal years ended July 31, 2002 and 2001, and the subsequent interim period through June 5, 2003, there were no disagreements with Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Deloitte’s satisfaction, would have caused them to make reference to the subject matter in connection with their reports on the Company’s consolidated financial statements for such fiscal years.
None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within the Company’s fiscal years ended July 31, 2002 and 2001, or the subsequent interim period through June 5, 2003.
During the Company’s fiscal years ended July 31, 2002 and 2001, and the subsequent interim period through June 5, 2003, the Company did not consult Grant Thornton regarding (i) either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
ITEM 9a. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
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Changes in internal control over financial reporting. Cortelco Shanghai has historically maintained its books and records in accordance with the Generally Accepted Accounting Principles adopted in the People’s Republic of China (“PRC GAAP”). Since the acquisition during the fourth quarter of this year, eOn must include Cortelco Shanghai’s financial information in its consolidated financial statements for its fourth quarter and fiscal year 2004 in accordance with the Generally Accepted Accounting Principles adopted in the United States of America (“US GAAP”). A number of adjustments were made to adjust Cortelco Shanghai’s year end financial information from PRC GAAP to US GAAP.
eOn’s auditors have rendered an unqualified opinion with respect to eOn’s consolidated financial statements, which include the financial information for Cortelco Shanghai. However, during the course of the audit of Cortelco Shanghai, the auditors identified certain material internal control deficiencies in Cortelco Shanghai’s financial reporting which could adversely affect the reliability of financial reporting for future periods if not corrected. Specifically, the auditors noted that the Cortelco Shanghai accounts were not analyzed or reconciled on a monthly, quarterly, or annual basis, as part of the closing process, and there was no provision for any review of any such reconciliations. The auditors noted that there was no standardized methodology to reconcile the differences between U.S. GAAP and PRC GAAP, and the auditors made numerous adjustments relating to the revenue recognition differences between U.S. GAAP and PRC GAAP. The auditors concluded that while it was evident that eOn has qualified accounting and finance personnel, Cortelco Shanghai does not have the skilled personnel to accumulate and report financial information in accordance with U.S. GAAP. In addition, management of Cortelco Shanghai had not established proper physical inventory counting procedures for the relevant staff to follow.
eOn has taken the following actions to address the internal control issues identified by the auditors:
1. | Cortelco Shanghai has hired a person trained in preparing financial information, with an MBA from a United States university , who is a native of the People’s Republic of China and has experience and knowledge with both PRC GAAP and US GAAP; |
| |
2. | eOn has begun the process of taking an inventory of Cortelco Shanghai’s internal controls and making adjustments as necessary to conform with eOn’s systems of internal controls over financial reporting; |
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3. | Commencing September 2004, Cortelco Shanghai is reconciling every account monthly, and delivers reconcilement information to eOn monthly for review by eOn’s Controller and the Chief Financial Officer; and |
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4. | By the end of October 2004 Cortelco Shanghai will have delivered detailed account information to verify that appropriate adjustments are being made between U.S. GAAP and PRC GAAP. Cortelco Shanghai will deliver such information to eOn monthly. |
eOn believes that these actions will satisfactorily address the control deficiencies identified by its auditors and will help ensure that internal controls are sufficient at Cortelco Shanghai to provide reasonable assurance regarding the reliability of the financial information provided to eOn. eOn will continue to monitor Cortelco Shanghai’s financial reporting systems and controls closely to ensure that any deficiencies are promptly identified and corrected.
Other than as described above, there was no change in our internal control over financial reporting during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 9b. OTHER INFORMATION
There were no events that occurred in the fourth quarter that were not previously disclosed in a form 8-K.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information set forth under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement for the 2004 Annual Meeting of Shareholders to be held on November 30, 2004 (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2004, are incorporated herein by reference in response to this item..
Information with respect to executive officers is set forth under the caption “Executive Officers” in Part I of this report.
The Company has adopted a Code of Ethics that applies to all employees, which is attached as Exhibit 14.1 to this report. We intend to satisfy the disclosure requirement under Item 10 of Form 10-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our investor relations website – investor.eoncc.com.
ITEM 11. EXECUTIVE COMPENSATION.
Information set forth under the caption “Executive Compensation” in the Proxy Statement is incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information set forth under the caption “Stock Ownership” in the Proxy Statement is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
Information set forth under the caption “Certain Transactions” in the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information set forth under the caption “Fees Paid to the Independent Auditors” in the Proxy Statement is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) (1) Financial Statements
The following information appears in Item 8 of Part II of this Report:
| - Report of Independent Registered Public Accounting Firm |
| - Consolidated Balance Sheets as of July 31, 2004 and 2003 |
| - Consolidated Statements of Operations for the Years Ended July 31, 2004, 2003, and 2002 |
| - Consolidated Statements of Cash Flows for the Years Ended July 31, 2004, 2003, and 2002 |
| - Consolidated Statements of Stockholders’ Equity for the Years Ended July 31, 2004, 2003, and 2002 |
| - Notes to Consolidated Financial Statements |
(2) Financial Statement Schedules
The following financial statement schedule is included in this report:
Schedule II – Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not applicable, or the required information is otherwise shown in the consolidated financial statements or the notes thereto.
(B) Reports on Form 8-K
During the fourth quarter ended July 31, 2004, the Company reported the following events of Form 8-K:
Date Filed or Furnished | | Item No(s). | | Description |
| |
| |
|
June 1, 2004 | | 7 and 12 | | Press release reporting financial results for the quarter ended April 30, 2004 |
| | | | |
June 1, 2004 | | 2 and 7 | | Announcement of acquisition in Cortelco Shanghai Telecomequipment company |
(C) Exhibits
The exhibits listed in the Exhibit Index following the signature page of this report are filed as part of this report or are incorporated by reference herein.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EON COMMUNICATIONS CORPORATION
Date:October 27, 2004 | By /s/ Stephen R. Bowling |
|
| |
| Stephen R. Bowling, Vice President,
Chief Financial Officer, Secretary
(Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | | Title | | Date |
| |
| |
|
/s/ David S. Lee | | President, Chief Executive
Officer and Chairman(Principal
Executive Officer) | | October 27, 2004 |
| | | | |
David S. Lee | | | |
| | | | |
/s/ Stephen R. Bowling | | Vice President, Chief Financial
Officer, Director (Principal
Financial Officer) | | October 27, 2004 |
| | | | |
Stephen R. Bowling | | | |
| | | | |
/s/ Mitch C. Gilstrap | | Vice President, Chief Operating | | October 27, 2004 |
| | | Officer | | |
Mitch C. Gilstrap | | | | |
| | | | |
/s/ Robert P. Dilworth | | Director | | October 27, 2004 |
| | | | | |
Robert P. Dilworth | | | | |
| | | | |
/s/ W. Frank King | | Director | | October 27, 2004 |
| | | | | |
W. Frank King | | | | |
| | | | |
/s/ Frederick W. Gibbs | | Director | | October 27, 2004 |
| | | | | |
Frederick W. Gibbs | | | | |
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eOn Communications Corporation and Subsidiaries
Schedule II – Valuation and Qualifying Accounts
Column A | | Column B | | Column C | | Column D | | Column E | |
| |
| |
| |
| |
| |
| | | | | Additions | | | | | | | |
| | | | |
| | | | | | | |
| | Balance at Beginning
of Period | | Charged to
Costs and
Expenses | | Charged
to Other
Accounts | | Deductions | | Balance
at End
of Period | |
| |
| |
| |
| |
| |
| |
| | | | | | | | | | | |
2002: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful
accounts and sales
allowance | | | 1,265,135 | | | | 164,000 | | | | - | | | 562,924 | | | | 866,211 | | |
Warranty reserve | | | 220,552 | | | | 213,044 | | | | - | | | 234,854 | | | | 198,742 | | |
| | | | | | | | | | | | | | | | | | | | |
2003: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful
accounts and sales
allowance | | | 866,211 | | | | 110,000 | | | | - | | | 287,182 | | | | 689,029 | | |
Warranty reserve | | | 198,742 | | | | 312,375 | | | | - | | | 227,667 | | | | 283,450 | | |
| | | | | | | | | | | | | | | | | | | | |
2004: | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for doubtful
accounts and sales
allowance | | | 689,029 | | | | 333,000 | | | | - | | | 247,794 | | | | 774,235 | | |
Warranty reserve | | | 283,450 | | | | 324,812 | | | | - | | | 246,975 | | | | 361,287 | | |
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EXHIBIT INDEX
Documents listed below are being filed as exhibits herewith. Exhibits identified by asterisks (*) are being incorporated herein by reference and, pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the Commission under the Securities Exchange Act of 1934, reference is made to such documents as previously filed exhibits with the Commission.
Exhibit
Number | | Description of Document |
| |
|
2.1(&) | | Plan of Acquisition for Cortelco Shanghai Telecom Equipment Company |
| | |
3.1* | | Amended and Restated Certificate of Incorporation of eOn as filed with the Secretary of State of Delaware on November 16, 1999. |
| | |
3.2* | | Amended and Restated Bylaws of eOn |
| | |
4.1* | | Reference is made to Exhibits 3.1 and 3.2 |
| | |
10.1* | | Form of Indemnity Agreement between eOn and its officers and directors. |
| | |
10.2(@) | | Sublease Termination and Release Agreement between eOn and TC Forest Hill Development, LP dated May 31, 2002. |
| | |
14.1 | | Code of Ethics |
| | |
18(@) | | Preferability letter regarding LIFO to FIFO change in inventory accounting |
| | |
21.1 | | Subsidiaries of eOn Communications Corporation. |
| | |
23.1 | | Consent of Grant Thornton LLP. |
| | |
23.2 | | Consent of Deloitte & Touche LLP. |
| | |
31.1 | | Officers’ Certification of Periodic Report pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
| | |
32.1 | | Officers’ Certification of Periodic Report pursuant to Section 906 of Sarbanes- Oxley Act of 2002 |
(&) | Incorporated by reference to identically numbered exhibits to the Registrant’s previously filed Form 8-K |
| |
(*) | Incorporated by reference to the Company’s Registration Statement on Form S-1 (No. 333-77021) or amendments thereto,
filed with the Securities and Exchange Commission on April 26, 1999. |
| |
(@) | Incorporated by reference to identically numbered exhibits to the Registrant’s previously filed Form 10-K’s or Form 10-Q’s |
| |
(#) | Executive compensation plan or arrangement filed as an exhibit pursuant to Item 14(c) of Form 10-K |
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