UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended January 31, 2001.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ____ to ____.
Commission file number 000-26399
EON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 62-1482176
(State of incorporation) (I.R.S. Employer Identification No.)
4105 Royal Drive NW, Kennesaw, Georgia, 30144
(Address of principal executive office)
(770) 423-2200
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: 11,895,944 shares of Common
---------------------------
Stock, $.001 par value, as of January 31, 2001.
- ----------------------------------------------
EON COMMUNICATIONS CORPORATION
FORM 10-Q
QUARTER ENDED JANUARY 31, 2001
INDEX
Page
----
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of January 31, 2001 and
July 31, 2000................................................. 3
Consolidated Statements of Operations for the Three Months
and Six Months Ended January 31, 2001 and 2000................ 4
Consolidated Statements of Cash Flows for the Six Months
Ended January 31, 2001 and 2000............................... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 9
Item 3. Qualitative and Quantitative Disclosure about Market Risk........ 17
Part II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................. 18
Item 6. Exhibits and Reports on Form 8-K..................................... 18
Signatures 18
2
EON COMMUNICATIONS CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eOn Communications Corporation
Consolidated Balance Sheets (Unaudited)
January 31, 2001 and July 31, 2000
(Dollars in thousands)
January 31, July 31,
2001 2000
-------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 3,282 $ 2,473
Marketable securities 9,500 16,337
Trade accounts receivable, net 10,110 12,381
Inventories 10,078 11,453
Income tax receivable 1,663 1,200
Other current assets 1,233 1,933
-------- -------
Total current assets 35,866 45,777
Property and equipment, net 3,734 2,416
Other assets:
Goodwill, net 10,668 10,961
Intangible assets, net 190 239
Other 107 499
-------- -------
Total other assets 10,965 11,699
-------- -------
Total $ 50,565 $59,892
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividend payable $ 45 $ 46
Trade accounts payable 5,267 6,119
Accrued expenses and other 3,585 3,684
Payable to affiliate 279 89
-------- -------
Total current liabilities 9,176 9,938
Commitments and contingencies - -
Stockholders' equity:
Common stock 12 12
Additional paid-in capital 56,470 57,585
Accumulated deficit (14,829) (7,379)
Note receivable from affiliate (former parent) (264) (264)
-------- -------
Total stockholders' equity 41,389 49,954
-------- -------
Total $ 50,565 $59,892
======== =======
See notes to consolidated financial statements.
3
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For the Three Months and Six Months Ended January 31, 2001 and 2000
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
January 31, January 31,
---------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
Net revenues $ 9,134 $13,364 $21,472 $27,707
Cost of revenues 7,272 8,067 14,718 15,993
------- ------- ------- -------
Gross profit 1,862 5,297 6,754 11,714
Operating expenses:
Selling, general, and administrative 5,560 4,658 10,760 9,322
Research and development 1,191 873 2,426 1,773
Amortization of goodwill 146 148 293 296
Restructuring charge 1,449 - 1,449 -
------- ------- ------- -------
Total operating expenses 8,346 5,679 14,928 11,391
------- ------- ------- -------
Income (loss) from operations (6,484) (382) (8,174) 323
Interest expense - 137 - 253
Interest income (243) - (485) -
Other expense (income), net 52 (59) 131 (68)
------- ------- ------- -------
Income (loss) before income tax expense (benefit) (6,293) (460) (7,820) 138
Income tax expense (benefit) - (87) (370) 176
------- ------- ------- -------
Net income (loss) and comprehensive income (loss) $(6,293) $ (373) $(7,450) $ (38)
======= ======= ======= =======
Net income (loss) per common share:
Basic $ (0.53) $ (0.05) $ (0.62) $ -
Diluted (0.53) (0.05) (0.62) -
See notes to consolidated financial statements.
4
eOn Communications Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended January 31, 2001 and 2000
(Dollars in thousands)
Six Months Ended
January 31,
----------------------
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITES:
Net income (loss) $(7,450) $ (38)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 478 283
Amortization of intangibles 49 66
Amortization of goodwill 293 296
Amortization of deferred financing costs - 46
Provision for the allowance for doubtful accounts 689 467
Loss on sales of property and equipment 2 -
Loss on marketable securities 46 -
Equity in earnings of joint venture 13 -
Changes in net assets and liabilities:
Trade accounts receivable 1,581 (1,701)
Inventories 1,375 (2,586)
Other current assets 700 (35)
Other non-current assets (4) (435)
Trade accounts payable (852) 4,362
Payable to affiliate 190 781
Accrued expenses and other (99) 275
Income taxes receivable/payable (463) (1,422)
------- -------
Net cash provided by (used in) operating activities (3,452) 359
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,798) (754)
Proceeds from sales of property and equipment - 23
Net repayments under notes receivable from employees - 73
Sale of marketable securities 6,791 -
------- -------
Net cash provided by (used in) investing activities 4,993 (658)
CASH FLOWS FROM FINANCING ACTIVITIES:
Return of collateral from expired letter of credit 383 -
Purchases of treasury stock (1,296) -
Proceeds from ESPP and stock option exercises 181 -
Repayment of note receivable from former parent - 420
Net borrowings (repayments) under revolving line of credit - 30
Deferred offering costs - (575)
------- -------
Net cash used in financing activities (732) (125)
------- -------
Net increase (decrease) in cash and cash equivalents 809 (424)
Cash and cash equivalents, beginning of period 2,473 1,874
------- -------
Cash and cash equivalents, end of period $ 3,282 $ 1,450
======= =======
See notes to consolidated financial statements.
5
eOn Communications Corporation
Notes to Consolidated Financial Statements (Unaudited)
For the Three Months and Six Months Ended January 31, 2001 and 2000
(Dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
eOn Communications Corporation (the "Company") without audit. It is management's
opinion that these statements include all adjustments, consisting of only normal
recurring adjustments except for the adjustments described in Note 2, necessary
to present fairly the financial position, results of operations, and cash flows
as of January 31, 2001 and for all periods presented.
Certain information and footnote disclosures normally included in the
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements and notes thereto as of July 31, 2000 and 1999 and for each
of the three years in the period ended July 31, 2000, which are included in the
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging," which established standards of accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
provisions of this statement are effective for fiscal years beginning after June
15, 2000. Management has determined the adoption of this statement will not
have a material impact on the results of operations of financial position of the
Company.
2. RESTRUCTURING
To reduce costs and improve productivity, the Company adopted a
restructuring plan during the second quarter of fiscal year 2001. This
restructuring plan will streamline the Company's corporate structure with the
relocation and concentration of management and certain strategic functions to
the Company's headquarters in Atlanta, Georgia. In addition, the restructuring
plan calls for the Company to discontinue the sales of certain third-party
products in both the domestic and Caribbean/Latin America operations. In
connection with the restructuring plan, the Company has implemented work force
reductions of approximately 20% during the quarter ended January 31, 2001.
As a result of the adoption of the restructuring plan, in the quarter
ended January 31, 2001, the Company recognized a restructuring charge of
$1,449,000 in our operating expenses. This charge does not include the write-
down of inventory related to this restructuring plan.
Of the total restructuring charge, approximately $743,000 relates to
employee termination benefits. During the quarter ended January 31, 2001, the
Company terminated 60 employees. These reductions have taken place in each
segment area and in all major functions. At January 31, 2001, the remaining
amount of employee termination benefits recorded as a current liability was
approximately $498,000.
The restructuring charge includes $706,000 for the expected costs
associated with excess space at the Company's Memphis location. The excess space
resulted from the Company's relocation of personnel and certain functions to the
Atlanta headquarters and the corresponding reductions in our workforce. At
January 31, 2001, the remaining amount of expected costs related to the unused
portion of the Memphis facilities was approximately $636,000.
6
3. EARNINGS PER SHARE
The computations of basic and diluted earnings per share were as follows:
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------------- -------------------------
2001 2000 2001 2000
----------- -------------- ----------- --------
(In thousands, except (In thousands, except
per share data) per share data)
Basic and diluted earnings (loss) per share:
Net income (loss) $(6,293) $ (373) $(7,450) $ (38)
Weighted average shares outstanding - basic 11,952 7,640 12,083 7,640
------- ------- ------- -------
Basic earnings (loss) per share $ (0.53) $(0.05) $ (0.62) $ 0.00
======= ======= ======= =======
4. INVENTORIES
Inventories consist of the following:
January 31, July 31,
2001 2000
------- -------
(In thousands)
Raw materials and purchased components $ 4,242 $ 4,126
Finished goods 5,884 7,375
LIFO reserve (48) (48)
------- -------
Total inventories $10,078 $11,453
======= =======
5. SEGMENT INFORMATION
Communications
Systems - Caribbean/ Consolidated
North America Latin America Other Reconciliations Total
--------------- -------------- ------- --------------- ------------
(In thousands)
Three months ended January 31, 2001:
Revenues $ 4,010 $ 5,124 $ 33 $ (33) $ 9,134
Income from continuing operations (5,110) (1,167) (29) 13 (6,293)
Total assets 39,017 11,548 873 (873) 50,565
Three months ended January 31, 2000:
Revenues 8,167 5,197 58 (58) $13,364
Income from continuing operations (412) 39 (5) 5 (373)
Total assets 31,169 12,255 1,071 (1,071) 43,424
Communications
Systems - Caribbean/ Consolidated
North America Latin America Other Reconciliations Total
-------------- ------------- ------- --------------- ------------
(In thousands)
Six months ended January 31, 2001:
Revenues $ 10,322 $ 11,150 $ 212 $ (212) $21,472
Income from continuing operations (6,209) (1,228) (21) 8 (7,450)
Six months ended January 31, 2000:
Revenues 18,079 9,628 130 (130) $27,707
Income from continuing operations (314) 276 (17) 17 (38)
There have been no differences from the last annual financial statements in
the basis of measuring segment profit or loss. There have been no material
changes in the amount of assets for any operating segment since the last annual
financial statements.
7
6. CHANGES IN STOCKHOLDERS' EQUITY
The following represents the changes in stockholders' equity for the six
months ended January 31, 2001:
(In thousands, except share data)
------------------------------------------------------------------------------------
Common Stock Additional Note Total
--------------------- Paid-in Accumulated Receivable Stockholders'
Shares Amount Capital Deficit from Affiliate Equity
------ ------ ------- ----------- -------------- -------------
Balance at
July 31, 2000 12,264,446 $12 $57,585 $ (7,379) $(264) $49,954
Net income (loss) and
comprehensive income (loss) - - - (7,450) - (7,450)
Repurchases of common stock (431,500) - (1,296) - - (1,296)
Issuance of common stock
Under employee stock plan 59,431 - 174 - - 174
Exercise of stock options 3,567 - 7 - - 7
---------- --- ------- -------- ----- -------
Balance at
January 31, 2001 11,895,944 $12 $56,470 $(14,829) $(264) $41,389
========== === ======= ======== ===== =======
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of the
federal securities laws. Forward-looking statements are those that express
management's views of future events, developments, and trends. In some cases,
these statements may be identified by terminology such as "may," "will,"
"should," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms and other
comparable expressions. Forward-looking statements include statements regarding
our anticipated or projected operating performance, financial results, liquidity
and capital resources. These statements are based on management's beliefs,
assumptions, and expectations, which in turn are based on the information
currently available to management. Information contained in these forward-
looking statements is inherently uncertain, and our actual operating
performance, financial results, liquidity, and capital resources may differ
materially due to a number of factors, most of which are beyond our ability to
predict or control. Factors that may cause or contribute to such differences
include, but are not limited to, eOn's ability to compete successfully in its
industry and to continue to develop products for new and rapidly changing
markets. We also direct your attention to the risk factors affecting our
business that are discussed below. eOn disclaims any obligation to update any of
the forward-looking statements contained in this report to reflect any future
events or developments. The following discussions should be read in conjunction
with our consolidated financial statements and the notes included thereto.
Overview
We design, develop and market next-generation communications servers and
software for the integration and management of voice, e-mail, and Internet
communications for customer contact centers and other applications. For small
and medium-sized installations, we offer a traditional voice-switching platform.
Through our Caribbean/Latin American operations, we sell and service
communications systems and cellular telephones and resell cellular airtime. Our
products help enterprises communicate more effectively with customers, convert
inquiries into sales, and increase customer satisfaction and loyalty.
We recognize revenues from our eQueue and eNterprise communications server
products upon completion of installation when they are sold directly to end
users, due to the customized nature of each installation. We recognize revenues
upon shipment for products shipped to dealers and for our Millennium products
sold to end-users. We recognize revenues from the resale of cellular airtime and
cellular telephones when these revenues are earned.
Net revenues in quarters ending January 31 usually decline from the
previous quarter, reflecting seasonal factors that affect some of our customers.
U.S. government customers typically make substantial purchases during the
quarters ending October 31, the last quarter of the government's fiscal year,
and these purchases decline significantly in the following quarter. Customers in
such markets as contact centers, education, and retail also have seasonal buying
patterns and do not purchase substantial amounts of equipment during the
quarters ending January 31.
Restructuring Plan
During the quarter ended January 31, 2001, we adopted and began to
implement a plan to focus our efforts on the most profitable lines of our
business and structure our workforce accordingly. The plan has several
components as follows:
Corporate structure and management changes.
Troy Lynch, our executive vice-president and chief technology officer, assumed
the role of chief operating officer. In addition to his oversight of our
engineering efforts and OEM sales development, Mr. Lynch will now oversee our
sales, product development, and customer support operations. David S. Lee will
continue to function as chairman and chief executive officer of eOn.
Lanny Lambert, our chief accounting officer, has assumed the role of chief
financial officer. Mr. Lambert joined eOn in October 2000. His previous
experience in the communications industry includes service as vice president of
finance and administration and chief financial officer of CMC Industries, Inc.;
vice president of finance and administration and chief financial officer of
Corinth Telecommunications Corporation subsidiary of Alcatel, N.V.; and various
financial and administrative positions with ITT. Mr. Lambert succeeded Stephen
N. Samp, who resigned to pursue other interests.
Robert R. Cash, vice president and chief marketing officer, resigned during the
current quarter. Subsequent to quarter end, we hired Kelly Bevan to fill this
role. During his 20-year career in marketing and product management, Mr. Bevan
has held
9
executive positions in the call center, networking and telecommunications
industries. Most recently, he served as Vice President of Marketing at Cellit
Technologies, where he successfully established a leadership position for the
company in the customer interaction management market. He has also served as
Vice President of Marketing at Melita International, now known as eShare, and
helped establish the company as a leading vendor in the outbound call center
market following its successful IPO. Other industry positions he has held:
Senior Vice President of Marketing for the Americas at Newbridge Networks;
Product Line Manager for the Meridian 1 at Nortel Networks; and, senior product
management positions at Mitel Networks.
Focus operating resources on our Linux-based communications systems and software
business.
Part of our current operations include the sale of various third-party systems
and software, both within our Communications Systems - North America segment and
through our Caribbean/Latin America operations. We have made the decision to
discontinue the sale of certain of these third-party products, and focus our
efforts on eOn branded systems. Specifically, we will be dedicating the majority
of our resources to the development and marketing of our Linux-based products.
As our traditional PBX Millennium product continues to progress though the
stages of its product cycle, we have taken steps to improve the profitability
of this line. We have outsourced the warehousing, assembly, and repair
activities associated with this product, and we will be closely monitoring the
level of resources provided to this product family. We believe the Millennium
product will remain a viable communications solution for many years, and we are
focused on maximizing the returns from this product line.
In connection with this change in product strategy, the company recognized $1.1
million of inventory write-downs and other charges as a cost of revenues to
reflect the net realizable value of inventory in the impacted product lines. We
anticipate that there may be further charges in the following quarters as we
continue to analyze our businesses and refine our product strategy. In addition,
we increased our provision for doubtful accounts by approximately $0.5 million
to reflect the impact of these product strategy initiatives upon our outstanding
customer accounts.
Relocation of personnel and concentration of strategic functions.
The company established our corporate headquarters in the Atlanta metropolitan
area in June 2000. We have decided to concentrate our marketing and OEM efforts
at the corporate headquarters, as well as other strategic functions and support
personnel. In connection with this decision, we have relocated personnel to the
corporate headquarters, and will continue to do so over the next two quarters.
We expect to incur additional expense of approximately $0.2 million to complete
these efforts.
Because of the consolidation of functions at our corporate headquarters, the
company has excess space at our Memphis location. We hope to locate a tenant to
assume this space in the near future. Included in the restructuring charge in
the current quarter is $0.7 million which relates to the costs of finding a
suitable tenant and executing a sublease agreement.
Workforce reductions.
As a direct result of the above initiatives, we were able to reduce our
workforce by over 20% in the current quarter. The company recognized $0.7
million in employee severance expenses, which were recorded as a component of
the restructuring charge in operating expense. As we continue to analyze our
core businesses and refine our strategy, there may be the opportunity for
further work force reductions. Any further work force reductions would result in
additional termination expenses.
Three Months Ended January 31, 2001 and 2000
Net Revenues. Total revenues decreased 31.7% to $9.1 million in the quarter
ended January 31, 2001 from $13.4 million in the quarter ended January 31, 2000.
Sales of communications systems in the U.S. declined $4.2 million, while
revenues in our Caribbean and Latin America operations were relatively
unchanged. The volume decline in the U.S. from Q2 2000 to Q2 2001 resulted
primarily from purchases by customers in Q2 2000 related to Year 2000 upgrades
and demand weakness in the current quarter. Sales in Caribbean and Latin America
reflected increased revenues from the sale of wireless phones and decreased
sales of communication systems.
Cost of Revenues and Gross Profit. Cost of revenues consists primarily of
purchases from our contract manufacturers and other suppliers and costs incurred
for final assembly, quality assurance and installation of our systems. Gross
profit
10
decreased 64.8% to $1.9 million in the quarter ended January 31, 2001 from $5.3
million in the quarter ended January 31, 2000. The decrease resulted primarily
from decreased communications systems gross profit of $2.5 million and decreased
Caribbean/Latin America gross profit of $1.0 million. Our gross margin was 20.4%
in the quarter ended January 31, 2001 and 39.7% in the quarter ended January 31,
2000. The lower gross margin in the current quarter was due primarily to the
increase in the sale of lower margin wireless products in the Caribbean and
Latin America and a write-down of specific inventory items to net realizable
value in connection with the restructuring plan and outsourcing initiatives.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and benefit costs, advertising and trade
show related costs, and facilities and other overhead expenses incurred to
support our business. Selling, general and administrative expenses increased
19.4% to $5.6 million in the quarter ended January 31, 2001 from $4.7 million in
the quarter ended January 31, 2000. The increase was primarily due to increased
marketing expenses and the hiring of additional sales and customer service
personnel to support anticipated growth of the business. Also included in SG&A
for the second quarter was $0.6 million in charges made in connection with the
restructuring charge primarily to increase the allowance for doubtful accounts.
These expenses as a percentage of revenues increased to 60.9% in the quarter
ended January 31, 2001 from 34.9% in the quarter ended January 31, 2000.
Although selling, general and administrative expenses increased in comparison to
the prior periods, we believe these expenses will decrease as the results of our
restructuring plan are realized. However, as described further in "Additional
Risk Factors That May Affect Future Results of Operations," there is no
certainty that the restructuring plan will prove to be successful.
Research and Development. Research and development expenses consist
primarily of personnel and related expenses for our engineering staff and
depreciation of related equipment. Research and development expenses increased
36.4% to $1.2 million in the quarter ended January 31, 2001 from $0.9 million in
the quarter ended January 31, 2000. The increased expenses were primarily due to
the hiring of additional engineers to support the development efforts of our
communication server products and related software applications. These expenses
as a percentage of revenues increased to 13.0% in the quarter ended January 31,
2001 from 6.5% in the quarter ended January 31, 2000.
Amortization of Goodwill. We recorded $11.7 million of goodwill related to
the acquisition of BCS Technologies, Inc. in April 1999 and are amortizing the
amount over a 20-year period.
Restructuring Charge. We recorded a restructuring charge of $1.4 million in
the quarter ended January 31, 2001 to reflect the expenses associated with
concentrating functions at our Atlanta headquarters and exiting certain product
lines. See "Footnote 2 - Restructuring" in the Notes to Consolidated Financial
Statements and the discussion under "Restructuring Plan" in the preceding
section.
Interest income and expense. We had no interest expense in the current
quarter. Interest expense was $0.1 million in the quarter ended January 31,
2000. Interest expense declined due to the retirement of all outstanding debt in
connection with our initial public offering in February 2000. Interest income
was $0.2 million in the current quarter. We had no interest income in the
quarter ended January 31, 2000. The increase was due to the investment of funds
from our initial public offering in interest-bearing available for sale
securities.
Other income and expense. Other (income) expense was $0.1 million and
($0.1) million in the quarters ended January 31, 2001 and 2000, respectively.
Other expense in the current quarter included the recognition of a loss on
marketable securities from an investment in equity securities of a publicly
traded company.
Income tax expense and benefit. We recognized no income tax expense or
benefit in the current quarter. An income tax benefit of $0.1 million was
recognized in the quarter ended January 31, 2000. No benefit was recorded in the
current quarter due to the lack of taxable income available in prior years to
apply current operating losses.
Six Months Ended January 31, 2001 and 2000
Net Revenues. Total revenues decreased 22.5% to $21.5 million in the six
months ended January 31, 2001 from $27.7 million in the six months ended January
31, 2000. Sales of communications systems in the U.S. declined $7.7 million,
while revenues in our Caribbean and Latin America operations increased $1.5
million. The volume decline in the U.S. from 2000 to 2001 resulted primarily
from purchases by customers in the prior period related to Year 2000 upgrades
and demand weakness in the current six months. Sales in Caribbean and Latin
America reflected increased revenues from the sale of wireless phones and
decreased sales of communication systems.
11
Cost of Revenues and Gross Profit. Gross profit decreased 42.3% to $6.8
million in the six months ended January 31, 2001 from $11.7 million in the six
months ended January 31, 2000. The decrease resulted primarily from decreased
communications systems gross profit of $4.2 million and decreased
Caribbean/Latin America gross profit of $0.7 million. Our gross margin was 31.5%
in the six months ended January 31, 2001 and 42.3% in the six months ended
January 31, 2000. The lower gross margin in the current six months was due
primarily to the increase in the sale of lower margin wireless products in the
Caribbean and Latin America and a write-down of specific inventory items to net
realizable value in connection with the restructuring plan and outsourcing
initiatives.
Selling, General and Administrative. Selling, general and administrative
expenses increased 15.4% to $10.8 million in the six months ended January 31,
2001 from $9.3 million in the six months ended January 31, 2000. The increase
was primarily due to increased marketing expenses and the hiring of additional
sales and customer service personnel to support anticipated growth of the
business. Also included in SG&A in the current period was $0.6 million in
charges made in connection with the restructuring charge primarily to increase
the allowance for bad debts. These expenses as a percentage of revenues
increased to 50.1% in the six months ended January 31, 2001 from 33.6% in the
six months ended January 31, 2000. Although selling, general and administrative
expenses increased in comparison to the prior periods, we believe these expenses
will decrease as the results of our restructuring plan are realized. However, as
described further in "Additional Risk Factors That May Affect Future Results of
Operations," there is no certainty that the restructuring plan will prove to be
successful.
Research and Development. Research and development expenses increased 36.8%
to $2.4 million in the six months ended January 31, 2001 from $1.8 million in
the six months ended January 31, 2000. The increased expenses were primarily due
to the hiring of additional engineers to support the development efforts of our
communication server products and related software applications. These expenses
as a percentage of revenues increased to 11.3% in the six months ended January
31, 2001 from 6.4% in the six months ended January 31, 2000.
Amortization of Goodwill. We recorded $11.7 million of goodwill related to
the acquisition of BCS Technologies, Inc. in April 1999 and are amortizing the
amount over a 20-year period.
Restructuring Charge. We recorded a restructuring charge of $1.4 million in
the six months ended January 31, 2001 to reflect the expenses associated with
concentrating functions at our Atlanta headquarters and exiting certain product
lines. See "Footnote 2 - Restructuring" in the Notes to Consolidated Financial
Statements and the discussion under "Restructuring Plan".
Interest income and expense. We had no interest expense in the current six
months. Interest expense was $0.3 million in the six months ended January 31,
2000. Interest expense declined due to the retirement of all outstanding debt in
connection with our initial public offering in February 2000. Interest income
was $0.5 million in the current six months. We had no interest income in the six
months ended January 31, 2000. The increase was due to the investment of funds
from our initial public offering in interest-bearing available for sale
securities.
Other income and expense. Other (income) expense was $0.1 million and
($0.1) million in the six months ended January 31, 2001 and 2000, respectively.
Other expense in the current six months included the recognition of a loss on
marketable securities from an investment in equity securities of a publicly
traded company.
Income tax expense and benefit. We recognized an income tax benefit of $0.4
million in the six months ended January 31, 2001, versus income tax expenses of
$0.2 million in the six months ended January 31, 2000. The benefit in the
current period resulted primarily from the carryback of operating losses to
prior periods to realize a tax refund.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was ($3.5) million and
$0.4 million for the six months ended January 31, 2001 and 2000, respectively.
The decrease from the prior year was due primarily to lower net income in the
current fiscal year of ($7.4) million, offset by collections of accounts
receivable and a decrease in inventories.
Net cash provided by (used in) investing activities was $5.0 million and
($0.7) million for the six months ended January 31, 2001 and 2000, respectively.
Cash provided by investing activities in the current period consisted primarily
of $6.8 million from sales of short-term available-for-sale debt securities,
offset by purchases of property and equipment of ($1.8)
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million. The majority of the property and equipment purchases were non-recurring
expenditures for leasehold improvements and related equipment at our facility in
Memphis, Tennessee.
Net cash used in financing activities was ($0.7) million and ($0.1) million
for the six months ended January 31, 2001 and 2000, respectively. Cash used in
financing activities in the current period consisted primarily of purchases of
common stock under the Company's stock repurchase program.
We believe that our available funds will satisfy our projected working
capital and capital expenditure requirements at least through calendar year
2001. To the extent future revenues are not realized or we grow more rapidly
than expected, we may need additional cash to finance our operating and
investing activities.
ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The following risk factors and other information contained in this report
should be carefully considered. The risks and uncertainties described below are
not the only ones we face. Additional risks and uncertainties that are not
currently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occurs, our
business, financial condition, and operating results could be materially
adversely affected.
In addition to the other information included in this report, the following
factors should be considered in evaluating our business and future prospects.
OUR RESTRUCTURING PLAN MAY NOT BE SUCCESSFUL.
In the second quarter of fiscal year 2001, the Company adopted a
restructuring plan which involves both a reduction in the Company's workforce
and the relocation and concentration of management and certain strategic
functions. The majority of the restructuring actions will be completed by July
31, 2001. No assurance can be given that the restructuring will prove to be
successful, that future operating results will improve, or that the completion
of the restructuring will not disrupt the Company's operations. Further, there
can be no assurance that additional reorganization of the Company's operations
will not be required in the future.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS COULD CAUSE OUR STOCK PRICE TO
DECLINE.
Future operating results are likely to fluctuate significantly from quarter
to quarter. Factors that could affect our quarterly operating results include:
. delays or difficulties in introducing new products;
. increasing expenses without commensurate revenue increases;
. variations in the mix of products sold;
. variations in the timing or size of orders from our customers;
. declining market for traditional private branch exchange (PBX) equipment;
. delayed deliveries from suppliers; and
. price decreases and other actions by our competitors.
Our quarterly operating results are also likely to fluctuate due to
seasonal factors. Some of our vertical markets, such as the U.S. government and
educational and retail buyers, follow seasonal buying patterns and do not make
substantial purchases during the quarters ending January 31. Thus, revenues in
the quarters ending January 31 are often lower than in the previous quarters.
Because of these and other factors, our operating results may not meet
expectations in some future quarters, which could cause our stock price to
decline.
WE MAY NOT SUCCESSFULLY INTRODUCE NEW PRODUCTS THAT ARE PLANNED FOR THE NEAR
FUTURE WHICH COULD HARM OUR BUSINESS AND FINANCIAL CONDITION.
We plan to introduce new products in the near future to serve the evolving
contact center and e-commerce markets. These new products must achieve market
acceptance, maintain technological competitiveness and meet increasing customer
requirements. New products may require long development and testing periods.
Significant delays in the development, release, installation or implementation
of new products could harm our business and financial condition.
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Planned Increases in operating expenses to develop and sell new products may
result in operating losses.
We intend to increase our operating expenses, particularly expenses related
to sales and marketing and development of new distribution channels. We will
need to generate significant additional revenue to attain profitability. If we
incur losses, our stock price could decline.
Our communications servers and software face intense competition from many
companies that have targeted our markets.
The competitive arena for our products is changing very rapidly and we face
intense competition in our markets. Well-established companies and many emerging
companies are scrambling to develop products to improve customer service in e-
commerce. While the industry remains fragmented, it is rapidly moving toward
consolidation, driven by both emerging companies' desires to expand product
offerings and resources and established companies' attempts to acquire new
technology and reach new market segments. A number of emerging companies have
completed initial public offerings in recent months, while many more remain
private. More established competitors, as well as those emerging companies that
have completed initial public offerings, currently have greater resources and
market presence than we do. Additionally, a number of our current and potential
competitors have recently been acquired by larger companies who seek to enter
our markets.
We expect competition to intensify as competitors develop new products,
competitors gain additional financial resources from public offerings, new
competitors enter the market, and companies with complementary products enter
into strategic alliances.
Our current and potential competitors can be grouped into the following
five categories:
. data communications equipment suppliers, such as Cisco Systems, 3Com and
Sun Microsystems;
. web center software and services suppliers, such as eGain, Kana
Communications, Quintus, E.piphany, and WebLine Communications (acquired by
Cisco);
. contact center software and services suppliers, such as Aspect
Communications, Clarify (acquired by Nortel Networks), Genesys
Telecommunications Laboratories (acquired by Alcatel), Interactive
Intelligence, Kana Communications, and Vantive (acquired by PeopleSoft);
. emerging private communications exchange (PCX) suppliers, such as AltiGen
Communications, Artisoft, Cisco Systems, NBX Corporation (acquired by
3Com); and
. voice communications equipment suppliers, such as Alcatel, Aspect
Communications, Avaya, Mitel, NEC, Nortel Networks, Rockwell Electronic
Commerce and Siemens.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, customer service and other resources, greater
name and brand recognition and a larger installed customer base than we do.
Therefore, our competitors may be able to respond to new or emerging
technologies and changes faster than we can. They may also be able to devote
greater resources to the development, promotion and sale of their products.
Actions by our competitors could result in price reductions, reduced
margins and loss of market share, any of which would damage our business. We
cannot assure you that we will be able to compete successfully against these
competitors.
If we cannot develop a new indirect sales channel to sell our eNterprise
communications servers, our ability to generate revenue would be harmed.
We sell our eQueue communications servers directly and our eNterprise and
Web Center communications servers both directly and indirectly through dealers
and value added resellers that have experience in data as well as voice
communications. We may not be able to develop this new indirect sales channel.
In addition, these new distribution partners may devote fewer resources to
marketing and supporting our products than to our competitors' products and
could discontinue selling our products at any time in favor of our competitors'
products or for any other reason.
The lengthy sales cycles of some of our products and the difficulty in
predicting the timing of our sales may cause fluctuations in our quarterly
operating results.
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The uncertainty of our sales cycle makes the timing of sales difficult to
predict and may cause fluctuations in our quarterly operating results. Our sales
cycles generally vary from four to twelve months for our eQueue communications
servers and from one to six months for our Millennium voice switching platform
and eNterprise communications servers. The purchase of our products may involve
a significant commitment of our customers' time, personnel, financial, and other
resources. We generally recognize revenues on the date of shipment for
Millennium and eNterprise systems shipped to dealers and upon completion of
installation for our eQueue and eNterprise communications servers sold directly
to end users due to the customized nature of these installations. Also, it is
difficult to predict the timing of indirect sales because we have little control
over the selling activities of our dealers and value added resellers.
We incur substantial sales and marketing expenses and spend significant
management time before customers place orders with us, if at all. Revenues from
a specific customer may not be recognized in the quarter in which we incur
related sales and marketing expense, which may cause us to miss our revenues or
earnings expectations.
If the acceptance of the Linux operating system does not continue, our ability
to market our products could be adversely affected.
Our next-generation communications servers run on the Linux operating
system. Our products also incorporate application software developed
specifically for the Linux operating system. Our ability to market our products
could be adversely affected and we may incur significant development costs if:
. the Linux operating system does not evolve to meet changing market needs;
. new applications are not developed for the Linux operating system; or
. other operating systems, such as Microsoft Windows NT, reduce the recent
growing acceptance of Linux.
In addition, any other factor that reduces acceptance of the Linux
operating system could also reduce acceptance of our products and harm our
business, results of operations and financial condition.
Our products must respond to rapidly changing market needs and integrate with
changing protocols to remain competitive.
The markets for our products are characterized by rapid technological
change, frequent new product introductions, uncertain product life cycles and
changing customer requirements. If we are not able to rapidly and efficiently
develop new products and improve existing products to meet the changing needs of
our customers and to adopt changing communications standards, our business,
operating results and financial condition would be harmed.
Key features of our products include integration with standard protocols,
computer telephony integration and automatic call distribution applications and
protocols, operating systems and databases. If our products cannot be integrated
with third-party technologies or if they do not respond to changing market
needs, we could be required to redesign our products. Redesigning any of our
products may require significant resources and could harm our business,
operating results and financial condition.
If we are not be able to grow or sustain our Millennium voice switching platform
revenues, our business, operating results and financial condition could be
harmed.
We may not be able to grow or sustain our Millennium revenues because the
traditional private branch exchange (PBX) market, which accounts for a
substantial portion of our Millennium revenues, is declining. One reason for the
decline of the traditional PBX market is the emergence of voice switching
platforms based on standard PCs. If we are not able to grow or sustain our
Millennium voice switching platform revenues, our business, operating results
and financial condition could be harmed.
In addition, 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.
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Delayed deliveries of components from our single source suppliers or third-party
manufacturers could reduce our revenues or increase our costs.
We depend on sole source suppliers for certain components, digital signal
processors and chip sets, voice processor boards, wireless handsets and base
stations. Interruptions in the availability of components from our key suppliers
could result in delays or reductions in product shipments, which could damage
our customer relationships and harm our operating results. Finding alternate
suppliers or modifying product designs to use alternative components may cause
delays and expenses. Further, a significant increase in the price of one or more
third-party components or subassemblies could reduce our gross profit.
We depend upon our primary contract manufacturers ACT manufacturing, Inc.,
Innovative Circuits, and Clover Electronics. We may not be able to deliver our
products on a timely basis if any of these manufacturers fail to manufacture our
products and deliver them to us on time. In addition, it could be difficult to
engage other manufacturers to build our products. Our business, results of
operations and financial condition could be harmed by any delivery delays.
We may be unable to hire and retain engineering and sales and marketing
personnel necessary to execute our business strategy.
Competition for highly qualified personnel is intense due to the limited
number of people available with the necessary technical skills, and we may not
be able to attract, assimilate or retain such personnel. If we cannot attract,
hire and retain sufficient qualified personnel, we may not be able to
successfully develop, market and sell new products.
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 January 31, 2001, our executive officers, directors and principal
stockholders and their affiliates owned 4,688,575 shares, or 39% of the
outstanding shares of common stock. Thus, they effectively control us and direct
our affairs, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of our company and some
transactions may be more difficult or impossible without the support of these
stockholders. The interests of these stockholders may conflict with those of
other stockholders. We also conduct transactions with businesses in which our
principal stockholders maintain interests. We believe that these transactions
have been conducted on an arm's length basis, but we cannot assure you that
these transactions would have the same terms if conducted with unrelated third
parties.
We may not be able to protect our intellectual property, and any intellectual
property litigation could be expensive and time consuming.
Our business and competitive position could be harmed if we fail to
adequately protect our intellectual property. Although we have filed patent
applications, we are not certain that our patent applications will result in the
issuance of patents, or that any patents issued will provide commercially
significant protection to our technology. In addition, as we grow and gain brand
recognition, our products are more likely to be subjected to infringement
litigation. We could incur substantial costs and may have to divert management
and technical resources in order to respond to, defend against, or bring claims
related to our intellectual property rights. In addition, we rely on a
combination of patent, trademark, copyright and trade secret laws and
contractual restrictions to establish and protect our proprietary rights. These
statutory and contractual arrangements may not provide sufficient protection to
prevent misappropriation of our technology or to deter independent third-party
development of similar technologies. Any litigation could result in our
expenditure of funds, management time and resources.
Our products may have undetected faults leading to liability claims, which could
harm our business.
Our products may contain undetected faults or failures. Any failures of our
products could result in significant losses to our customers, particularly in
mission-critical applications. A failure could also result in product returns
and the loss of, or delay in, market acceptance of our products. In addition,
any failure of our products could result in claims against us. Our
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purchase agreements with our customers typically contain provisions designed to
limit our exposure to potential product liability claims. However, the
limitation of liability provisions contained in our purchase agreements may not
be effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions in the United States or other countries. We
maintain insurance to protect against certain claims associated with the use of
our products, but our insurance coverage may not adequately cover all possible
claims asserted against us. In addition, even claims that ultimately are
unsuccessful could be expensive to defend and consume management time and
resources.
Our charter contains certain anti-takeover provisions that may discourage take-
over attempts and may reduce our stock price.
Our board of directors has the authority to issue up to 10,000,000 shares
of preferred stock and to determine the preferences, rights and privileges of
those shares without any further vote or action by the stockholders. The rights
of the holders of common stock may be harmed by the rights of the holders of any
preferred stock that may be issued in the future. Certain provisions of our
certificate of incorporation and bylaws may make it more difficult for a third
party to acquire control of us without the consent of our board of directors,
even if such changes were favored by a majority of the stockholders. These
include provisions that provide for a staggered board of directors, prohibit
stockholders from taking action by written consent and restrict the ability of
stockholders to call special meetings.
Future sales of shares may decrease our stock price.
Sales of substantial amounts of our common stock in the public market after
our initial public offering, including shares issued upon the exercise of
outstanding options, or the perception that such sales could occur, could reduce
the market price of our common stock. These sales also might make it more
difficult for us to raise funds through future offerings of common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We are required to adopt SFAS No. 133, as
amended by SFAS No. 138, for the year ending July 31, 2001. SFAS No. 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. We have determined that the adoption of this statement will
not have a material impact on the results of operations of financial position of
the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 summarizes the staff's various views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We have evaluated our revenue recognition policies and concluded
that they comply with this SAB.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCOSURE ABOUT MARKET RISK.
Substantially all 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. In addition, the vast majority of our sales are made
in U.S. dollars and, consequently, we believe that our foreign currency exchange
rate risk is immaterial. We do not have any derivative instruments and do not
engage in hedging transactions.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
We held the 2000 Annual Meeting of Stockholders on December 20 at our
corporate headquarters. At that meeting, a majority of stockholders voted to
elect Stephen R. Bowling (8,568,418 votes for, 51,322 votes withheld) and Jenny
Hsui Theleen (8,267,887 votes for, 251,843 votes withheld) to serve as directors
for a term of three years. Robert Dilworth, Frank King, and David Lee are
continuing directors who were not up for election at the meeting.
In addition, stockholders ratified the appointment of Deloitte & Touche LLP
(8,391,589 votes for, 26,538 votes against, 201,603 abstentions) as our
independent auditors for the fiscal year ending July 31, 2001.
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits.
Exhibit 27 - Financial Data Schedule
(B) Reports On Form 8-K.
We did not file any reports on Form 8-K during the quarter ended
January 31, 2001.
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto authorized.
EON COMMUNICATIONS CORPORATION
Date: March 14, 2001 \s\ Lanny Lambert
-------------- ----------------------------------------
Lanny Lambert
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
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