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, 2002.
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ____ to ____.
Commission file number 000-26399
EON COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 62-1482176
(State of incorporation) (I.R.S. Employer Identification No.)
4105 Royal Drive NW, Suite 100, Kennesaw, Georgia, 30144
(Address of principal executive office)
(770) 423-2200
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: 11,981,294 shares of Common
---------------------------
Stock, $.001 par value, as of February 28, 2002.
- -----------------------------------------------
EON COMMUNICATIONS CORPORATION
FORM 10-Q
QUARTER ENDED JANUARY 31, 2002
INDEX
Page
----
Part I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of January 31, 2002 and
July 31, 2001................................................... 3
Consolidated Statements of Operations for the Three Months and
Six Months ended January 31, 2002 and 2001...................... 4
Consolidated Statements of Cash Flows for the Six Months
ended January 31, 2002 and 2001................................. 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.......... 16
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................... 17
Signatures 17
2
EON COMMUNICATIONS CORPORATION
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eOn Communications Corporation
Consolidated Balance Sheets (Unaudited)
January 31, 2002 and July 31, 2001
(Dollars in thousands)
January 31, July 31,
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,903 $ 3,590
Marketable securities 9,252 8,850
Trade accounts receivable, net of allowance for doubtful accounts
of $1,228 and $1,265 2,746 3,713
Inventories 3,642 3,994
Income tax refund receivable 271 271
Net assets held for disposition 5,107 5,568
Other current assets 373 173
----------- -----------
Total current assets 23,294 26,159
Property and equipment, net 1,757 2,041
Other assets:
Goodwill, net -- 10,375
Intangible assets, net 29 42
Net assets held for disposition 996 1,028
----------- -----------
Total other assets 1,025 11,445
----------- -----------
Total $ 26,076 $ 39,645
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 1,363 1,343
Accrued special charges 1,285 2,272
Accrued expenses and other 2,111 1,941
Payable to affiliate 65 60
----------- -----------
Total current liabilities 4,824 5,616
Commitments and contingencies -- --
Stockholders' equity:
Common stock 12 12
Additional paid-in capital 56,517 56,623
Accumulated deficit (35,013) (22,342)
Note receivable from affiliate (former parent) (264) (264)
----------- -----------
Total stockholders' equity 21,252 34,029
----------- -----------
Total $ 26,076 $ 39,645
=========== ===========
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, 2002 and 2001
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
January 31, January 31,
-------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net revenue $ 3,030 $ 4,010 $ 8,052 $ 10,322
Cost of revenues 1,359 1,958 3,557 4,850
Special charges -- 901 -- 901
----------- ----------- ----------- -----------
Gross profit 1,671 1,151 4,495 4,571
Operating expenses:
Selling, general, and administrative 2,366 4,011 4,805 7,775
Research and development 719 1,191 1,494 2,426
Amortization of goodwill -- 146 -- 293
Special charges -- 1,298 -- 1,298
----------- ----------- ----------- -----------
Total operating expenses 3,085 6,646 6,299 11,792
----------- ----------- ----------- -----------
Loss from operations (1,414) (5,495) (1,804) (7,221)
Interest income (78) (234) (186) (476)
Other expense (income), net 33 47 42 131
----------- ----------- ----------- -----------
Loss from continuing operations
before income tax benefit (1,369) (5,308) (1,660) (6,876)
Income tax benefit -- -- -- (370)
----------- ----------- ----------- -----------
Loss before discontinued operations and
cumulative effect of change in accounting principle (1,369) (5,308) (1,660) (6,506)
Loss from discontinued operations, net of tax (571) (985) (636) (944)
----------- ----------- ----------- -----------
Loss before cumulative effect of change in
accounting principle (1,940) (6,293) (2,296) (7,450)
Cumulative effect of change in accounting
principle, net of tax -- -- (10,375) --
----------- ----------- ----------- -----------
Net loss $ (1,940) $ (6,293) $ (12,671) $ (7,450)
=========== =========== =========== ===========
Net loss per common share
Basic and Diluted:
Net loss from continuing operations $ (0.11) $ (0.44) $ (0.14) $ (0.54)
Discontinued operations, net of tax (0.05) (0.08) (0.05) (0.08)
Cumulative effect of change in accounting
principle, net of tax (0.00) 0.00 (0.86) 0.00
----------- ----------- ----------- -----------
Net loss per common share $ (0.16) $ (0.53) $ (1.06) $ (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, 2002 and 2001
(Dollars in thousands)
Six Months Ended
January 31,
---------------------
2002 2001
--------- --------
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $(12,671) $(7,450)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss from discontinued operations 636 944
Cumulative effect of change in accounting principle 10,375 -
Depreciation and amortization 385 818
Provision for the allowance for doubtful accounts 90 617
Changes in net assets and liabilities (net of effects of
discontinued operations):
Trade accounts receivable 877 1,126
Inventories 352 1,777
Other current assets (200) 597
Other non-current assets - 395
Trade accounts payable 20 105
Receivable/payable to affiliate 5 119
Accrued expenses and other 223 (307)
Income taxes receivable/payable - (379)
Accrued special charges (987) 261
-------- -------
Net cash used in operating activities (895) (1,377)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (80) (1,746)
Purchases of marketable securities (3,310) -
Sales of marketable securities 2,900 6,791
-------- -------
Net cash provided by (used in) investing activities (490) 5,045
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock (203) (1,296)
Proceeds from ESPP and stock option exercises 44 181
-------- -------
Net cash used in financing activities (159) (1,115)
Cash to discontinued operations (143) (1,897)
-------- -------
Net decrease in cash and cash equivalents (1,687) 656
Cash and cash equivalents, beginning of period 3,590 1,829
-------- -------
Cash and cash equivalents, end of period $ 1,903 $ 2,485
======== =======
See notes to consolidated financial statements.
5
eOn Communications Corporation
Notes to Consolidated Financial Statements (Unaudited)
For the Three Months Ended October 31, 2001 and 2000
(Dollars in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by eOn Communications Corporation ("eOn" or the "Company"). It is
management's opinion that these statements include all adjustments, consisting
of only normal recurring adjustments necessary to present fairly the financial
position, results of operations, and cash flows as of January 31, 2002 and for
all periods presented.
The Company has 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. 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
and the Company's financial statements have been restated to conform to the
discontinued operations presentation.
Certain information and footnote disclosures normally included in the
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America 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, 2001 and 2000 and for each of the three years in the period ended July
31, 2001, which are included in the Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations be accounted for under the purchase method only and
that certain acquired intangible assets in a business combination be recognized
as assets apart from goodwill. SFAS No. 142 requires that ratable amortization
of goodwill be replaced with periodic tests of the goodwill's impairment and
that intangible assets other than goodwill should be amortized over their useful
lives. The Company elected to early adopt SFAS No. 142 on August 1, 2001. Note 4
provides additional discussion regarding the impact to the Company's financial
statements as a result of adopting this statement.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The adoption of SFAS No. 143 is
effective for the Company in the first quarter of fiscal year 2003. The Company
does not expect the adoption of SFAS No. 143 to have a significant impact on the
Company's future results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets and for segments of a business to be disposed of. The
adoption of SFAS No. 144 is effective for the Company in the first quarter of
fiscal 2003. The Company is currently assessing the impact of SFAS No. 144 on
its results of operations and financial position.
2. 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. The Company believes that its revenue
recognition policies are compliant with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," and Statement of Position No.
97-2, "Software Revenue Recognition."
6
3. DISCONTINUED OPERATIONS
On August 28, 2001, the Board of Directors of the Company approved a plan
to spin-off CSPR, its wholly-owned Caribbean/Latin America service and
distribution subsidiary, as an independent entity headquartered in San Juan,
Puerto Rico. To accomplish the spin-off , the Company intends to declare a
special dividend of the shares of CSPR to its stockholders. The Company has
filed a Form 10 with the Securities and Exchange Commission and is currently
awaiting comments. It is currently anticipated that the spin-off will occur
during the latter half of fiscal year 2002.
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. The assets held for disposition are primarily comprised of accounts
receivable, inventory, fixed assets, and goodwill, net of liabilities.
Operating results of the discontinued operations are as follows:
Three months ended January 31, Six months ended January 31,
------------------------------- ----------------------------
2002 2001 2002 2001
-------------- --------------- ------------ -------------
(In thousands) (In thousands)
Net sales $ 2,398 $5,124 $ 6,150 $ 11,150
======== ======== ======== ========
Loss before income taxes (571) (985) (636) (944)
Income tax expense - - - -
-------- -------- -------- --------
Net loss from
discontinued operations $ (571) $ (985) $ (636) $ (944)
======== ======== ======== ========
Net loss per share:
Basic and diluted $ (0.05) $(0.08) $ (0.05) $ (0.08)
4. 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 and resulted in charges of
$2,199,000. During the fourth quarter, the Company made the decision to
consolidate the majority of our functions to our Atlanta headquarters, which
resulted in additional charges of $4,500,000. Major components of this 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, 2001. The
remaining components of the plan which relate primarily to obtaining tenants for
leased space are expected to be completed by July 31, 2002.
The following table summarizes the activity relating to the special charges
during the first two quarters of fiscal 2002 and the associated liabilities at
January 31, 2002:
July 31, 2001 January 31, 2002
Liability Balance Expenditures Other Adjustments Liability Balance
----------------- ------------ ------------------- -------------------
Termination benefits $ 625 $ (535) $ - $ 90
Excess facilities cost 1,605 (410) - 1,195
Relocation costs 42 (42) - -
---------------- ------------ ------------------- -------------------
Total $ 2,272 $ (987) $ - $ 1,285
================ ============ =================== ===================
7
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.
The following table presents the pro-forma financial results for the three
months and six months ended January 31, 2001 on a basis consistent with the new
accounting principle (dollars in thousands except per share amounts):
Three Months Six Months
Ended Ended
January 31, 2001 January 31, 2001
---------------- ----------------
Reported net loss $(6,293) $(7,450)
Add back amortization of goodwill 146 293
------- -------
Adjusted net loss $(6,147) $(7,157)
======= =======
Reported basic and diluted net loss per share $ (0.53) $ (0.62)
Add back goodwill amortization per share 0.01 0.02
------- -------
Adjusted basic and diluted net loss per share $ (0.51) $ (0.59)
======= =======
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 condensed consolidated statement of
operations for the six months ended January 31, 2002. The income tax effect of
this change in accounting principle was $0.
6. LOSS PER SHARE
The computations of basic and diluted loss per share were as follows:
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------ ------------------------------
2002 2001 2002 2001
-------------- ------------ ----------- -----------
(In thousands, except (In thousands, except
per share data) per share data)
Basic and diluted loss per share:
Loss from continuing operations $(1,369) $(5,308) $(1,660) $(6,506)
Weighted average shares outstanding 11,981 11,952 11,999 12,083
------- ------- ------- -------
Loss from continuing operations per share $ (0.11) $ (0.44) $ (0.14) $ (0.54)
======= ======= ======= =======
Potential common shares related to options outstanding to purchase shares
of common stock were excluded from the computation of diluted loss per shares
for both quarters presented above because their inclusion would have had an
anti-dilutive effect. There were 1,787,463 and 1,782,912 options outstanding at
January 31, 2002 and 2001, respectively.
8
7. INVENTORIES
Inventories consist of the following:
January 31, July 31,
2002 2001
------ ------
(In thousands)
Raw materials and purchased components $ 506 $ 304
Finished goods 3,184 3,738
LIFO reserve (48) (48)
------ ------
Total inventories $ 3,642 $ 3,994
======= =======
8. CHANGES IN STOCKHOLDERS' EQUITY
The following represents the changes in stockholders' equity for the six
months ended January 31, 2002:
(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, 2001 12,041,945 $12 $56,623 $(22,342) $(264) $34,029
Net loss and
comprehensive loss - - - (12,671) - (12,671)
Repurchases of common stock (234,500) - (203) - - (203)
Issuance of common stock
under employee stock plan 61,229 - 41 - - 41
Issuance of common stock
under equity incentive plans 112,620 - 56 - - 56
---------- -- ------- -------- ----- -------
Balance at
January 31, 2002 11,981,294 $12 $56,517 $(35,013) $(264) $21,252
========== === ======= ======== ===== =======
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 which
integrate and manage voice, email and Internet communications for customer
contact centers and other applications. We also offer a traditional
voice-switching platform for small and medium-sized installations.
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.
9
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.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties and that could potentially result in
materially different results under different assumptions and conditions. We
believe that our critical accounting policies are limited to those described
below. For a detailed description of our accounting policies, see Note 2,
"Summary of Significant Accounting Policies," in Part II, Item 8, "Consolidated
Financial Statements and Supplementary Data," of our Annual Report on Form 10-K
for the year ended July 31, 2001.
o Product Warranties - We provide our customers with standard product
warranties from the date of purchase. The costs of satisfying warranty
claims have historically been comprised of materials and direct labor
costs. We estimate the costs of satisfying warranty claims based on
analysis of past claims experience. We perform quarterly evaluations
of these estimates, and any changes in estimate, which could
potentially be significant, are included in earnings in the period in
which the evaluations are completed.
o Inventory Obsolescence - We carry inventories at the lower of cost or
market. This policy depends on the timely identification of those items
included in inventory whose market price may have declined below
carrying value, such as slow-moving or obsolete items, and we record
any necessary valuation reserves. We perform an analysis of slow-moving
or obsolete inventory on a quarterly basis, and any necessary valuation
reserves, which could potentially be significant, are included in
earnings in the period in which the evaluations are completed.
o Allowance for Uncollectible Accounts Receivable - We typically grant
standard credit terms to customers in good credit standing. As a
result, we must estimate the portion of our accounts receivable that
are uncollectible and record any necessary valuation reserves. We
generally reserve for estimated uncollectible accounts on a
customer-by-customer basis, which requires us to make judgments about
each individual customer's ability and intention to fully pay balances
payable to us. We make these judgments based on our knowledge and
relationship of our customers, and we update our estimates on a monthly
basis. Any changes in estimate, which can be significant, are included
in earnings in the period in which the change in estimate occurs.
Three Months Ended January 31, 2002 and 2001
The following discussion provides information about the Company's
continuing operations, which excludes the results of Cortelco Systems Puerto
Rico, Inc. (see Footnote 3 - Discontinued Operations in the notes to the
consolidated financial statements).
Net Revenues. Total revenues decreased 24.4% to $3.0 million in the quarter
-------------
ended January 31, 2002 from $4.0 million in the quarter ended January 31, 2001.
The decline from Q2 2001 to Q2 2002 resulted primarily from a weaker U.S.
economic environment in the current quarter, which resulted in capital
constraints and delays in purchasing by potential and existing customers.
Cost of Revenues and Gross Profit. Cost of revenues consist primarily of
----------------------------------
purchases from our contract manufacturers and other suppliers and costs incurred
for final assembly of our systems. Gross profit increased 45.2% to $1.7 million
in the quarter ended January 31, 2002 from $1.2 million in the quarter ended
January 31, 2001. Gross profit in the prior quarter included $0.9 million in
special charges related to the Company's restructuring plan. Excluding the
special charges, gross profit decreased $0.4 million. Our gross margin was 55.2%
in the quarter ended January 31, 2002 and 28.7% in the quarter ended January 31,
2001. Excluding special charges in the prior quarter, gross margin would have
been 51.2%. The increase in gross margin in the current quarter was due
primarily to an increased margin on eQueue revenues in the current quarter.
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 decreased
41.0% to $2.4 million in the quarter ended January 31, 2002 from $4.0 million in
the quarter ended January 31, 2001. The decrease was primarily due to reductions
in personnel, facilities, and associated overhead resulting from the
implementation of our restructuring plan.
Research and Development. Research and development expenses consist
-------------------------
primarily of personnel and related facility costs for our engineering staff.
Research and development expenses decreased 39.6% to $0.8 million in the quarter
ended January
10
31, 2002 from $1.2 million in the quarter ended January 31, 2001. The decline in
the current quarter is primarily due to the reduction in personnel and facility
costs that resulted from the restructuring plan implemented in the latter half
of fiscal 2001.
Amortization of Goodwill and Cumulative Effect of Change in Accounting
----------------------------------------------------------------------
Principle. We recorded $11.7 million of goodwill related to the acquisition of
- ----------
BCS Technologies, Inc. in April 1999 and amortized the amount using an estimated
20-year life through fiscal 2001. On August 1, 2001 the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets," which changed the method of
evaluating goodwill for impairment from a recoverability test based upon
undiscounted cash flows to a fair value approach, which is stipulated in SFAS
No. 142. In addition, the new standard eliminated the periodic amortization of
goodwill; consequently, no goodwill amortization was recorded in the current
quarter.
Special Charges. In the prior fiscal year, the Company adopted a
----------------
restructuring plan effective November 1, 2000. See Footnote 4 - Special Charges
in the notes to the consolidated financial statements for additional
information.
Interest and other income and expense. Interest income was $0.1 million in
--------------------------------------
the current quarter, as compared to $0.2 million in the quarter ended January
31, 2001. The decrease was due to significantly lower interest rates and a lower
level of investments in marketable securities.
Six Months Ended January 31, 2002 and 2001
The following discussion provides information about the Company's
continuing operations, which excludes the results of Cortelco Systems Puerto
Rico, Inc. (see Footnote 3 - Discontinued Operations in the notes to the
consolidated financial statements).
Net Revenues. Total revenues decreased 22.0% to $8.1 million in the six
-------------
months ended January 31, 2002 from $10.3 million in the six months ended January
31, 2001. The decline from 2001 to 2002 resulted primarily from a weaker U.S
economic environment in the current period, which resulted in capital
constraints and reduced demand by our potential and existing customers.
Cost of Revenues and Gross Profit. Gross profit decreased 1.7% to $4.5
----------------------------------
million in the six months ended January 31, 2002 from $4.6 million in the six
months ended January 31, 2001. The decrease resulted primarily from the decrease
in sales, offset by $0.9 million in special charges related to the Company's
restructuring plan in the prior year period. Our gross margin was 55.8% in the
six months ended January 31, 2002 and 53.0% (excluding special charges) in the
six months ended January 31, 2001. The higher gross margin in the current six
months was due primarily to a greater mix of higher margin eQueue products.
Selling, General and Administrative. Selling, general and administrative
------------------------------------
expenses decreased 38.2% to $4.8 million in the six months ended January 31,
2002 from $7.8 million in the six months ended January 31, 2001. The decrease
was primarily due to reductions in personnel, facilities, and associated
overhead resulting from the implementation of our restructuring plan.
Research and Development. Research and development expenses consist
-------------------------
primarily of personnel and related facility costs for our engineering staff.
Research and development expenses decreased 38.4% to $1.5 million in the six
months ended January 31, 2002 from $2.4 million in the six months ended January
31, 2001. The decline in the current six months is primarily due to the
reduction in personnel and facility costs that resulted from the restructuring
plan implemented in the latter half of fiscal 2001.
Amortization of Goodwill and Cumulative Effect of Change in Accounting
----------------------------------------------------------------------
Principle. We recorded $11.7 million of goodwill related to the acquisition of
- ----------
BCS Technologies, Inc. in April 1999 and amortized the amount using an estimated
20-year life through fiscal 2001. On August 1, 2001 the Company adopted SFAS No.
142, "Goodwill and Other Intangible Assets," which changed the method of
evaluating goodwill for impairment from a recoverability test based upon
undiscounted cash flows to a fair value approach, which is stipulated in SFAS
No. 142. In addition, the new standard eliminated the periodic amortization of
goodwill; consequently, no goodwill amortization was recorded in the current six
months.
The adoption of SFAS No. 142 on August 1, 2001 caused the Company to record
goodwill impairment in the amount of $10,375,000, which is reflected as a
cumulative effect of change in accounting principle in the financial statements
for the six months ended January 31, 2002. The income tax effect of this change
in accounting principle was $0.
11
Special Charges. In the prior fiscal year, the company adopted a
---------------
restructuring plan effective November 1, 2000. See Footnote 4 - Special Charges
in the notes to the consolidated financial statements for additional
information.
Interest and other income and expense. Interest income was $0.2 million in
-------------------------------------
the current six months, as compared to $0.5 million in the six months ended
January 31, 2001. The decrease was due to significantly lower interest rates and
a lower level of investments in marketable securities.
Income tax benefit. We recognized no income tax benefit in the current six
------------------
months due to uncertainties surrounding the Company's ability to use its
deferred tax assets. Income tax benefit was 0.4 million in the six months ended
January 31, 2001, reflecting the carryback of operating losses to prior periods
to realize a tax refund.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was ($0.9) million and ($1.4) million
for the six months ended January 31, 2002 and 2001, respectively. The
improvement from the prior year period was due primarily to a lower net loss
from continuing operations, offset by expenditures for accrued restructuring
charges.
Net cash provided by (used in) investing activities was ($0.5) million and
$5.0 million for the six months ended January 31, 2002 and 2001, respectively.
Cash used in investing activities in the current period consisted primarily of
$0.4 million in net purchases of marketable securities. Cash provided by
investing activities for the period ended January 31, 2001 consisted primarily
of the sale of $6.8 million in marketable securities, offset by purchases of
property and equipment of $1.7 million.
Net cash used in financing activities was ($0.2) million and ($1.1) million
for the six months ended January 31, 2002 and 2001, respectively. Cash used in
financing activities in both periods 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 fiscal year 2002.
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 fiscal year 2001, the Company adopted a restructuring plan which
involved 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 were 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.
12
Fluctuations in our quarterly operating results could cause our stock price to
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decline.
- --------
Future operating results are likely to fluctuate significantly from quarter
to quarter. Factors that could affect our quarterly operating results include:
o delays or difficulties in introducing new products;
o increasing expenses without commensurate revenue increases;
o variations in the mix of products sold;
o variations in the timing or size of orders from our customers;
o declining market for traditional private branch exchange (PBX) equipment;
o delayed deliveries from suppliers; and
o 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,
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.
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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.
Our communications servers 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, 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,
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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
categories:
o contact center vendors, such as Avaya, Nortel Networks, Aspect
Communications, and Rockwell;
o data communication equipment suppliers, such as Cisco Systems, 3COM, and
Sun Microsystems;
o email management and web center software suppliers, such as eGain, Kana
Communications, Live Person, eShare and WebLine Communications (acquired by
Cisco);
o and voice communications equipment suppliers, such as Nortel Networks,
Avaya, Mitel, NEC, Toshiba, Panasonic, 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.
13
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 expand our indirect sales channel to sell our eQueue products, our
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ability to generate revenue would be harmed.
- -------------------------------------------
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 new 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 lengthy sales cycles of some of our products and the difficulty in
- ----------------------------------------------------------------------
predicting the timing of our sales may cause fluctuations in our quarterly
- --------------------------------------------------------------------------
operating results.
- -----------------
The uncertainty of our sales cycle makes the timing of sales difficult to
predict and may cause fluctuations in our quarterly operating results. Our sales
cycles generally vary from four to twelve months for our eQueue 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, 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.
Our products must respond to rapidly changing market needs and integrate with
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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 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.
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
14
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
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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,
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which may limit your ability to influence stockholder matters.
- -------------------------------------------------------------
As of January 31, 2002, our executive officers, directors and principal
stockholders and their affiliates beneficially owned 5,208,368 shares, or 42% of
the outstanding shares of common stock. Thus, they effectively control us and
direct our affairs, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying, deferring or preventing a change in control of our company
and some transactions may be more difficult or impossible without the support of
these stockholders. The interests of these stockholders may conflict with those
of other stockholders. We also conduct transactions with businesses in which our
principal stockholders maintain interests. We believe that these transactions
have been conducted on an arm's length basis, but we cannot assure you that
these transactions would have the same terms if conducted with unrelated third
parties.
We may not be able to protect our intellectual property, and any intellectual
- -----------------------------------------------------------------------------
property litigation could be expensive and time consuming.
- ---------------------------------------------------------
Our business and competitive position could be harmed if we fail to
adequately protect our intellectual property. Although we have filed patent
applications, we are not certain that our patent applications will result in the
issuance of patents, or that any patents issued will provide commercially
significant protection to our technology. In addition, as we grow and gain brand
recognition, our products are more likely to be subjected to infringement
litigation. We could incur substantial costs and may have to divert management
and technical resources in order to respond to, defend against, or bring claims
related to our intellectual property rights. In addition, we rely on a
combination of patent, trademark, copyright and trade secret laws and
contractual restrictions to establish and protect our proprietary rights. These
statutory and contractual arrangements may not provide sufficient protection to
prevent misappropriation of our technology or to deter independent third-party
development of similar technologies. Any litigation could result in our
expenditure of funds, management time and resources.
Our products may have undetected faults leading to liability claims, which could
- --------------------------------------------------------------------------------
harm our business.
- -----------------
Our products may contain undetected faults or failures. Any failures of our
products could result in significant losses to our customers, particularly in
mission-critical applications. A failure could also result in product returns
and the loss of, or delay in, market acceptance of our products. In addition,
any failure of our products could result in claims against us. Our purchase
agreements with our customers typically contain provisions designed to limit our
exposure to potential product liability claims. However, the limitation of
liability provisions contained in our purchase agreements may not be effective
as a result of federal, state or local laws or ordinances or unfavorable
judicial decisions in the United States or other countries. We maintain
insurance to protect against certain claims associated with the use of our
products, but our insurance coverage may not adequately cover all possible
claims asserted against us. In addition, even claims that ultimately are
unsuccessful could be expensive to defend and consume management time and
resources.
15
Our charter contains certain anti-takeover provisions that may discourage
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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 July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations be accounted for under the purchase method only and
that certain acquired intangible assets in a business combination be recognized
as assets apart from goodwill. SFAS No. 142 requires that ratable amortization
of goodwill be replaced with periodic tests of the goodwill's impairment and
that intangible assets other than goodwill should be amortized over their useful
lives. The Company elected to early adopt SFAS No. 142 on August 1, 2001.
Footnote 4 of the consolidated financial statements provides additional
discussion regarding the impact to the Company's financial statements as a
result of adopting this statement.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The adoption of SFAS No. 143 is
effective for the Company in the first quarter of fiscal year 2003. The Company
does not expect the adoption of SFAS No. 143 to have a significant impact on the
Company's future results of operations or financial position.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets and for segments of a business to be disposed of. The
adoption of SFAS No. 144 is effective for the Company in the first quarter of
fiscal 2003. The Company is currently assessing the impact of SFAS No. 144 on
its results of operations and financial position.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.
The majority of our cash equivalents and marketable securities are invested
in variable rate instruments with frequent rate resets, while the remainder are
invested in fixed income securities with maturities less than one year. 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.
16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
We held the 2001 Annual Meeting of Stockholders on December 19 at our
corporate headquarters. At that meeting, a majority of stockholders voted to
elect Robert P. Dilworth (10,121,443 votes for, 163,023 votes withheld) and
David S. Lee (10,118,703 votes for, 165,763 votes withheld) to serve as
directors for a term of three years. Stephen R. Bowling, W. Frank King, and
Jenny Hsui Theleen are continuing directors who were not up for election at the
meeting.
A majority of stockholders also approved an amendment to the 1999 Employee
Stock Purchase Plan to increase the authorized shares available under the plan
to 500,000 shares from 250,000 shares. 10,102,647 votes were cast for the
amendment, 173,051 votes were cast against the amendment, and 8,768 votes
abstained.
In addition, stockholders ratified the appointment of Deloitte & Touche LLP
(10,159,343 votes for, 113,480 votes against, 11,643 abstentions) as our
independent auditors for the fiscal year ending July 31, 2002.
Item 6. Exhibits and Reports on Form 8-K.
(A) Exhibits.
None
(B) Reports On Form 8-K.
None.
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 15, 2002 /s/ Lanny N. Lambert
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Lanny N. Lambert
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
17