-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VrQW8B4rCz+JNJPWeu6SjapoNozKDIQEHSzvOTREJH6k/CXqyc0nczXXXlxPPRWz T+aLYI2QxgBtxWZ4MWVUxA== 0001012870-01-503176.txt : 20020413 0001012870-01-503176.hdr.sgml : 20020413 ACCESSION NUMBER: 0001012870-01-503176 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010731 FILED AS OF DATE: 20011214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EON COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001084752 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 621482178 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-26399 FILM NUMBER: 1813475 BUSINESS ADDRESS: STREET 1: 4119 WILLOW LAKE BOULEVARD CITY: MEMPHIS STATE: TN ZIP: 38118 BUSINESS PHONE: 9013657774 MAIL ADDRESS: STREET 1: 4105 ROYAL DRIVE NW, SUITE 100 CITY: KENNESAW STATE: GA ZIP: 30144 FORMER COMPANY: FORMER CONFORMED NAME: CORTELCO SYSTEMS INC DATE OF NAME CHANGE: 19990421 10-K405/A 1 d10k405a.txt AMENDMENT NO 1 TO FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________________________ FORM 10-K/A (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended July 31, 2001 or [_] 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 offices) (770) 423-2200 (Telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value per share (Title of each class) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the shares of common stock held by non-affiliates of the registrant was approximately $5,053,000 based upon the closing sale price as reported by the Nasdaq Stock Market on September 28, 2001. The number of outstanding shares of the registrant's $0.001 par value common stock was 11,980,297 shares as of that date. This form 10-K/A amends the Company's Form 10-K filed on October 29, 2001 to correct the quarterly financial data table for fiscal year 2001. Specifically, the `loss before discontinued operations and extraordinary item" was incorrect for the first, second, and third quarters of fiscal 2001. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders are incorporated by reference in Part III. ================================================================================ ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW We design, develop and market next-generation communications servers and software 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. We recognize revenues from our eQueue 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. 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. RESULTS OF OPERATIONS The following table presents our operating ratios for fiscal years 2001, 2000, and 1999:
Year Ended July 31, ------------------------------------- 2001 2000 1999 --------- --------- --------- Net revenues...................................................... 100.0% 100.0% 100.0% Cost of revenues ................................................. 45.1% 47.1% 50.4% Special charges .................................................. 9.8% 0.0% 0.0% -------- -------- -------- Gross margin ..................................................... 45.1% 52.9% 49.6% Operating expenses: Selling, general, and administrative ........................... 71.2% 51.4% 35.1% Research and development ....................................... 21.5% 13.2% 8.6% Amortization of goodwill ....................................... 2.9% 2.0% 0.7% Special charges ................................................ 23.4% 0.0% 0.0% -------- -------- -------- Total operating expenses ......................................... 119.0% 66.6% 44.4% -------- -------- -------- Income (loss) from operations .................................... (73.9%) (13.7%) 5.2% Interest (income) expense, net ................................... (3.9%) (1.8%) 1.6% Other (income) expense, net ...................................... 1.1% 3.3% 0.0% -------- -------- -------- Income (loss) from continuing operations before income taxes ................................................ (71.1%) (15.2%) 3.6% Income tax expense (benefit) ..................................... (0.2%) (4.0%) 0.0% -------- -------- -------- Income (loss) before discontinued operations and extraordinary item .......................................... (70.9%) (11.2%) 3.6% Income (loss) from discontinued operations, net of tax ........... (3.2%) 1.7% 4.3% Extraordinary loss from early extinguishment of debt, net of tax .................................................. 0.0% (0.6%) 0.0% -------- -------- -------- Net income (loss) ................................................ (74.1%) (10.1%) 7.9% ======== ======== ========
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/Subsequent Events in the notes to the consolidated financial statements). NET REVENUES Our overall net revenues decreased 32.1% to $20.2 million in fiscal 2001 from $29.7 million in fiscal 2000. The decrease was primarily due to the large amount of sales in fiscal 2000 that were driven by Year 2000 upgrades and demand weakness in fiscal 2001. Fiscal 2000 net revenues represented a 9.3% increase from $27.2 million in fiscal 1999. The increase in 2000 was primarily due to the addition of the eQueue Multimedia Contact Center product line and additional Millennium sales volume driven by Year 2000 upgrades. 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 of our systems. Gross profit decreased 42.1% to $9.1 million for the year ended July 31, 2001 from $15.7 million in fiscal 2000. The decrease was due primarily to special charges related to our restructuring initiatives (see Special Charges section below) as well as decreased revenues for both our eQueue and Millennium products. Fiscal 2000 represented an increase in gross profit of 16.5% from $13.5 million in fiscal 1999. The increase in gross profit in 2000 was primarily due to the addition of the higher margin eQueue product line. SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses were $14.4 million in fiscal 2001, a decrease of 5.9% from $15.3 million in fiscal 2000. Fiscal 2000 represented a 60.1% increase from $9.5 million in fiscal 1999. The decrease in fiscal 2001 resulted from a decrease in personnel and fixed costs from the implementation of our restructuring plan (see the Special Charges section below). The increase in fiscal 2000 was primarily due to the addition of the eQueue product line, increased marketing expenses, and the hiring of additional sales and customer service personnel. RESEARCH AND DEVELOPMENT EXPENSE Research and development expenses consist primarily of personnel and related expenses for our engineering staff. The majority of our research and development efforts are currently concentrated on enhancements for our eQueue product line . Research and development expenses increased 10.9% to $4.3 million in the year ended July 31, 2001 from $3.9 million in fiscal 2000. Fiscal 2000 represented a 67.7% increase from $2.3 million in fiscal 1999. The increases in both years were primarily due to the hiring of additional engineers and expansion of facilities dedicated to our R&D efforts. AMORTIZATION OF GOODWILL We recorded $11.7 million of goodwill related to the acquisition of BCS in April 1999, and are amortizing this amount over a 20-year period. It is anticipated that goodwill amortization will cease with the adoption of Statement of Financial Accounting Standard No. 142 - Goodwill and Other Intangible Assets in fiscal 2002. SPECIAL CHARGES To reduce costs and improve productivity, the Company adopted a restructuring plan in fiscal 2001. Major components of the 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%. See Footnote 4 - Special Charges in the notes to the consolidated financial statements. The following table provides detail about the special charges recorded during fiscal year 2001and the associated liabilities at July 31, 2001:
July 31, 2001 Charges Expenditures Other Adjustments Liability Balance ----------- ------------- ------------------ ------------------- Inventory charges $ 1,985 $ - $ (1,985) (1) $ - Termination benefits $ 1,222 $ (597) $ - $ 625 Excess facilities cost 1,968 (363) - 1,605 Asset impairments 1,248 - (1,248) (2) - Relocation costs 276 (234) - 42 --------- ----------- ------------------ ------------- Total $ 6,699 $ (1,194) $ (3,233) $ 2,272 ========== =========== ================== =============
(1) Represents write-down of inventory to net realizable value. (2) Represents write-off of assets. Net workforce reductions under the plan will reduce our employee expense. The reduction in employee expense began in the second quarter and continued through the fourth quarter of fiscal 2001. The annual depreciation expense associated with the impaired assets will not have a significant impact on future results. The reduction in rent and facility costs from the consolidation of sites is expected to reduce our expenses by over $0.5 million annually. The decrease in costs as a result of the restructuring activities outlined above will primarily impact selling, general and administrative expense, and to a lesser extent research and development expense. The remaining cash outlays of $2,272 related to the above restructuring activities are expected to be completed by the end of fiscal 2002 and will be funded from current cash and marketable securities. INTEREST INCOME AND EXPENSE We had no interest expense in fiscal 2001. Interest expense decreased 50.8% to $0.2 million in fiscal 2000 from $0.4 million in fiscal 1999. The decrease in both years was primarily due to the retirement of all outstanding debt in February 2000 in connection with our initial public offering. Interest income in fiscal 2001 of $0.78 million was relatively unchanged from $0.76 million in fiscal 2000. We had no interest income in fiscal 1999. The slight increase in fiscal 2001 was due to the investment of surplus funds for a full year versus 6 months in the previous year, offset by lower marketable securities balances and interest rates. The increase in fiscal 2000 was primarily due to the investment of funds from our initial public offering in interest-bearing securities. OTHER INCOME AND EXPENSE, NET Other expense was $0.2 million in fiscal 2001, compared to $1.0 million in fiscal 2000 and $0.02 million in fiscal 1999. Other expense in fiscal 2000 resulted primarily from the recognition of a loss on marketable securities of $0.8 million from an investment in equity securities of a publicly traded company. INCOME TAX EXPENSE (BENEFIT) Income tax expense (benefit) was $(0.05) million, $(1.2) million, and $(0.01) million in fiscal 2001, 2000, and 1999, respectively. The income tax benefit for fiscal 2001 and 2000 was affected by the carryback of operating losses to previous periods. Fiscal 1999 income tax benefit was affected by the utilization of consolidated operating loss carryforwards from previous periods. See Footnote 13 - Income Taxes of the notes to the consolidated financial statements. EXTRAORDINARY LOSS We used a portion of the net proceeds from our initial public offering to repay $6.4 million of outstanding debt in February 2000. In connection with the repayment of debt, the Company paid pre-payment penalties and wrote off deferred financing costs totaling $0.3 million. In fiscal 2000, the Company recognized an extraordinary loss from the early extinguishment of debt of $0.2 million, net of an income tax benefit of $0.1 million. LIQUIDITY AND CAPITAL RESOURCES Prior to our initial public offering, we funded our operations primarily through cash generated from operations, periodic borrowings under former revolving credit facilities, a $3.0 million subordinated convertible note financing and acquisition financing provided by Alcatel in connection with the purchase of our business from Alcatel in 1990. In February 2000, we received $32.8 million, net of underwriting fees, commissions, and offering costs, upon the issuance of 3,180,000 shares of common stock in our initial public offering. The net proceeds from the offering were used to retire $2.8 million of outstanding principal and interest on 8% subordinated notes due in 2002 and $3.6 million of outstanding indebtedness under a revolving credit facility and for working capital and general corporate purposes. See Footnote 5 - The Offering of the notes to consolidated financial statements. Net cash provided by (used in) operating activities was ($2.5) million, ($8.0) million, and $2.9 million for fiscal 2001, 2000, and 1999, respectively. The improvement in fiscal 2001 from fiscal 2000 was due primarily to increased collections of receivables and reductions in inventory levels, offset by higher net loss. The decrease in fiscal 2000 from fiscal 1999 was due primarily to lower net income, an increase in inventories, and the reduction in income taxes payable and increase in income taxes receivable. Net cash provided by (used in) investing activities was $5.7 million, ($17.9) million, and $2.4 million for fiscal 2001, 2000, and 1999, respectively. Cash provided by investing activities in the current year consisted primarily of sales of short-term available-for-sale securities. Cash used in investing activities in fiscal 2000 was due primarily to the investment of funds from our initial public offering in available for sale debt securities, while cash provided by investing activities in fiscal 1999 resulted primarily from cash acquired in the acquisition of BCS. Net cash provided by (used in) financing activities was ($1.0) million, $29.0 million, and ($3.5) million for fiscal 2001, 2000, and 1999, respectively. Cash used in financing activities in fiscal 2001 was primarily due to repurchases of our common stock. Cash provided by financing activities in fiscal 2000 consisted primarily of the proceeds from our initial public offering, offset by the early retirement of our outstanding long-term debt and amounts borrowed under our former revolving credit facilities. Cash used in financing activities in fiscal 1999 was primarily due to expenditures associated with our initial public offering and the issuance of a note receivable from our former parent. We believe that our available funds and anticipated cash flows from operations will satisfy our projected working capital and capital expenditure requirements at least through fiscal 2002. To the extent that we grow more rapidly than expected in the future, we may need additional cash to finance our operating and investing activities. 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 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. 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, 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. 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, 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 categories: . contact center vendors, such as Avaya, Nortel Networks, Aspect Communications, and Rockwell; . data communication equipment suppliers, such as Cisco Systems, 3COM, and Sun Microsystems; . email management and web center software suppliers, such as eGain, Kana Communications, Live Person, eShare and WebLine Communications (acquired by Cisco); . 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. 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 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. We generally recognize revenues on the date of shipment for Millennium and eQueue systems shipped to dealers and upon completion of installation for our eQueue systems sold directly to end users. 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 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 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 July 31, 2001, our executive officers, directors and principal stockholders and their affiliates beneficially owned 4,878,097 shares, or 40% 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. 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 July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" and Statement of Financial Accounting Standards 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 initiated after June 30, 2001 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. Management has determined that the adoption of SFAS No. 141 will not have a material impact on our results of operations. Management plans to adopt SFAS No. 142 effective August 1, 2001, and is currently evaluating the impact that adoption will have on our results of operations. Goodwill amortization for fiscal year 2001 approximated $586,000. 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 retirment 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. In June 1998, the FASB issued SFAS No .133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet measured at fair value. The adoption of SFAS No. 133 on August 1, 2000 did not have a material impact on the Company's results of operations or financial position. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years ended July 31, 2001 and 2000 is summarized as follows:
2001 First Second Third Fourth Quarter Quarter Quarter Quarter(3) ------- ------- ------- --------- (In thousands) Net revenues (1)............................. $ 6,312 $ 4,010 $ 4,863 $ 4,999 Gross profit (1)............................. 3,420 1,151 2,787 1,730 Income (loss) before discontinued operations and extraordinary item (1).................. (1,198) (5,308) (1,230) (6,582) Net income (loss)............................ (1,157) (6,293) (1,360) (6,153) Income (loss) before discontinued operations and extraordinary item per common share (1): Basic..................................... $ (0.10) $ (0.44) $ (0.10) $ (0.55) Diluted................................... $ (0.10) $ (0.44) $ (0.10) $ (0.55) Net income loss per common share: Basic..................................... (0.09) (0.53) (0.11) (0.51) Diluted................................... (0.09) (0.53) (0.11) (0.51)
2000 First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands) Net revenues (1)................................... $ 9,891 $ 7,275 $ 7,032 $ 5,507 Gross profit (1)................................... 5,113 3,692 4,133 2,766 Income (loss) before discontinued operations and extraordinary item (1)........................ 269 (583) (1,291) (1,704) Net income (loss).................................. 335 (373) (1,571) (1,390) Income (loss) before discontinued operations and extraordinary item per common share (1): Basic (2)....................................... $ 0.04 $ (0.08) $ (0.11) $ (0.14) Diluted (2)..................................... $ 0.03 $ (0.08) $ (0.11) $ (0.14) Net income loss per common share: Basic (2)....................................... 0.04 (0.05) (0.13) (0.11) Diluted (2)..................................... 0.04 (0.05) (0.13) (0.11)
(1) Represents results from continuing operations; excludes disposition of Cortelco Systems Puerto Rico, Inc. (see Footnote 3 of the notes to the consolidated financial statements). (2) Due to rounding and changes in outstanding shares, the sum of the four quarters does not equal the earnings per common share amounts calculated for the year. (3) The fourth quarter results of operations include special charges of $4,500,000 related to a restructuring plan that resulted in the write-down of inventory, termination of employees, impairment of assets, and accrual of expected costs associated with excess space (see Footnote 4 of the notes to the consolidated financial statements.) SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EON COMMUNICATIONS CORPORATION Date: December 14, 2001 By /s/ Lanny N. Lambert ==================================== Lanny N. Lambert, Vice President, Chief Financial Officer, Secretary (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date - ---------------------------------- ----------------------------------- ------------------------ /s/ Troy E. Lynch President, Chief Executive December 14, 2001 ================= Officer (Principal Executive Troy E. Lynch Officer) /s/ Lanny N. Lambert Vice President, Chief Financial December 14, 2001 ==================== Officer, Secretary (Principal Lanny N. Lambert Financial Officer) /s/ Thomas G. Bevan Vice President, Chief Marketing December 14, 2001 =================== Thomas G. Bevan Officer /s/ David S. Lee Chairman December 14, 2001 ================ David S. Lee /s/ Stephen R. Bowling Director December 14, 2001 ====================== Stephen R. Bowling /s/ Robert P. Dilworth Director December 14, 2001 ====================== Robert P. Dilworth /s/ W. Frank King Director December 14, 2001 ================= W. Frank King /s/ Jenny Hsui Theleen Director December 14, 2001 ====================== Jenny Hsui Theleen
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