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| EONC > SEC Filings for EONC > Form 8-K/A on 10-Jun-2009 | All Recent SEC Filings |
10-Jun-2009
Completion of Acquisition or Disposition of Assets, Financial Statement
On April 1, 2009, eOn Communications Corporation ("eOn") acquired Cortelco Systems Holding Corp. ("Cortelco") for up to $11,000,000 in cash. Cortelco merged with a newly formed wholly-owned subsidiary of eOn and is now a wholly-owned subsidiary of eOn.
In exchange for all the outstanding shares of Cortelco stock, Cortelco shareholders received an initial aggregate payment of $500,000. All subsequent payments will be made to Cortelco stockholders quarterly in an amount based upon Cortelco's quarterly earnings after closing, less $25,000 quarterly distributions made to eOn until eOn has received $500,000. Contingent primarily upon the level of Cortelco earnings after closing, all Cortelco stockholders are eligible to receive quarterly payments in cash until the full $11,000,000 consideration has been paid. David Lee, Chairman and CEO of eOn, is the Chairman and the controlling shareholder of Cortelco.
For additional information, refer to the amended and restated Merger Agreement among the Company, Cortelco, and a wholly-owned subsidiary of the Company, setting forth the terms and conditions of the acquisition, filed as an exhibit to the Company's 8-K dated as of December 18, 2008.
(a) Financial Statements of Business Acquired.
The audited financial statements of Cortelco for the years ended December 31, 2008 and 2007 are included herein.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed consolidated balance sheet as of January 31, 2009 and the unaudited pro forma condensed consolidated statements of operations for the six months ended January 31, 2009 and the year ended July 31, 2008 which give effect to the consummation of the acquisition of Cortelco are included herein.
Exhibits:
Exhibit
Number Description of Exhibit
23.1 Consent of Independent Audit Firm
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To the Board of Directors
Cortelco Systems Holding Corporation
Corinth, Mississippi
We have audited the accompanying consolidated balance sheet of Cortelco Systems Holding Corporation and subsidiaries as of December 31, 2008, and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cortelco Systems Holding Corporation and subsidiaries as of December 31, 2008, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Tupelo, Mississippi
May 7, 2009
ASSETS
CURRENT ASSETS
Cash $ 501,298
Accounts receivable, net of allowance for doubtful accounts of $
31,655 (Notes 4, 9 and 10) 1,863,896
Inventories (Notes 4 and 9) 3,352,161
Prepaid expenses 244,913
Deferred income taxes (Note 6) 294,090
Total current assets 6,256,358
PROPERTY AND EQUIPMENT (Notes 3 and 4) 181,444
MARKETABLE SECURITIES (Note 2) 148,501
DEFERRED INCOME TAXES (Note 6) 57,581
$ 6,643,884
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LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable (Note 9) $ 577,893 Accrued expenses (Note 5) 573,975 Income taxes payable 102,683 Total current liabilities 1,254,551 |
STOCKHOLDERS' EQUITY
Common stock, $ .001 par value; 40,000,000 shares authorized,
28,462,884 shares issued 28,463
Additional paid-in capital 17,916
Retained earnings 5,351,598
Accumulated other comprehensive loss (8,644 )
5,389,333
$ 6,643,884
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The notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
CORTELCO SYSTEMS HOLDING CORPORATION
Year ended December 31, 2008
Net sales (Notes 9 and 10) $ 14,798,372
Other operating revenue (Note 9) 879,407
Total net revenue 15,677,779
Cost of revenues (Note 9) 10,722,235
Gross profit 4,955,544
Selling, general and administrative expenses 3,352,346
Operating income 1,603,198
Other income 6,672
Interest expense (2,249 )
Net income before taxes 1,607,621
Provision for income taxes (Note 6) 634,577
Net income 973,044
Unrealized losses on marketable securities, net of income taxes of
$ 78,498 (151,020 )
Comprehensive income $ 822,024
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The notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CORTELCO SYSTEMS HOLDING CORPORATION
Year ended December 31, 2008
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS)
Balance, January 1, 2008 $ 28,463 $ 17,916 $ 4,876,654 $ 137,599
Net income - - 973,044 -
Dividends - - (498,100 ) -
Unrealized losses on marketable
securities, net of tax benefit of $
78,498 - - - (151,020 )
Reclassification adjustment for
losses included in net income, net of
tax benefit of $ 2,842 - - - 4,777
Balance, December 31, 2008 $ 28,463 $ 17,916 $ 5,351,598 $ (8,644 )
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The notes to consolidated financial statements are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
CORTELCO SYSTEMS HOLDING CORPORATION
Year ended December 31, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 973,044
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 73,795
Loss on sale of marketable securities 7,619
Change in assets and liabilities:
Accounts receivable 152,512
Refundable income taxes 69,104
Inventories (151,792 )
Prepaid expenses (160,381 )
Accounts payable (193,307 )
Accrued expenses (23,320 )
Deferred income taxes (18,997 )
Income taxes payable 102,683
Net cash provided by operating activities 830,960
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CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of marketable securities 13,261 Purchase of marketable securities (13,261 ) Purchase of property and equipment (38,505 ) Net cash used in investing activities (38,505 ) |
CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (498,100 ) Net repayments under line of credit (98,493 ) Net cash used in financing activities (596,593 ) Net increase in cash 195,862 Cash, beginning of year 305,436 Cash, end of year $ 501,298 |
The notes to consolidated financial statements are an integral part of this statement.
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies that have been followed by the Company in preparing the accompanying consolidated financial statements are summarized below:
Principles of Consolidation
The consolidated financial statements include the Company and its wholly owned subsidiaries, Cortelco, Inc., and Cortelco Puerto Rico, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.
Related Parties
The Company (CSHC) is also affiliated with the following entities through common stockholder ownership:
CIDCO Communications Corporation (CIDCO)
Cortelco Systems Puerto Rico, Inc. (CSPR)
eOn Communication Corp. (eOn)
Spark Technology Corporation, Inc. (Spark)
On April 1, 2009, eOn completed its acquisition of CSHC. CSHC was merged with a newly formed wholly-owned subsidiary of eOn, and is now a wholly-owned subsidiary of eOn.
Business Environment
The Company develops and distributes home and business telephones and telephone systems. The Company's products are primarily sold to major distributors operating primarily in the United States and Canada.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions are required as part of determining inventory valuation, establishing warranty and self-insured group medical reserves and establishing the allowance for doubtful accounts.
Cash Deposits in Excess of Federally Insured Limits
The Company has $ 222,095 of cash deposits in banks in excess of federally insured limits at December 31, 2008.
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Investments
Marketable securities are classified as available for sale and are reported at market value. Unrealized holdings gains and losses are excluded from net income and are reported in other comprehensive income.
Accounts Receivable
The Company reports trade receivables at net realizable value. Management determines the allowance for doubtful accounts based on historical losses and current economic conditions. On a continuing basis, management analyzes delinquent receivables and, once these receivables are determined to be uncollectible, they are written off through a charge against an existing allowance account or against earnings.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method for financial reporting and statutory methods for tax reporting purposes. Depreciable lives are generally five to seven years.
Product Warranties
The Company provides the customer with a warranty from the date of purchase. Estimated warranty obligations are recorded based on actual claims experience.
Income Taxes
The Company provides for deferred income taxes resulting from temporary differences between financial and taxable income. The Company has elected to defer the implementation of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. Accordingly, the Company evaluates the effect of uncertainties related to income taxes under the provisions of FASB Statement No. 5, Accounting for Contingencies.
Shipping and Handling Costs
Shipping and handling costs are included in costs of revenues in the statement of income and comprehensive income.
Advertising Costs
Advertising costs are expensed as incurred and totaled $ 5,963 during the year ended December 31, 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2. MARKETABLE SECURITIES
Marketable securities consists of investments in publicly traded equity
securities. The market value and gross unrealized gains and losses at
December 31, 2008 are as follows:
eOn CSPR OTHER TOTAL
Cost $ 51,645 $ 96,000 $ 13,261 $ 160,906
Gross unrealized holding gains - 42,046 - 42,046
Gross unrealized holding losses (49,503 ) - (4,948 ) (54,451 )
Fair value $ 2,142 $ 138,046 $ 8,313 $ 148,501
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Proceeds from sales of investments was $ 13,261 for the year ended December 31, 2008. Realized gain and losses totaled $ -0- and $ 7,619, respectively for 2008. The cost of investments is based on the specific identification method.
Information pertaining to securities with gross unrealized losses at December 31, 2008, aggregated by length of time that individual securities have been in a continuous loss position follows:
LESS THAN TWELVE MONTHS OVER TWELVE MONTHS
GROSS GROSS
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
$ 4,948 $ 8,313 $ 49,503 $ 2,142
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Management evaluates securities for other-than-temporary impairment at least on an annual basis. Consideration is given to (1) length of time and the extent to which the fair value has been less than cost (2) the volatility of the market price and (3) the intent and ability of the Company to hold these securities for a period of time sufficient for a recovery of costs.
Effective January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements" ("SFAS 157") which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis.
"Fair value" is defined by SFAS No. 157 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The hierarchy is broken down into the following three levels, based on the reliability of inputs:
NOTE 2. MARKETABLE SECURITIES (Continued)
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs for the asset or liability that reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability.
Assets and liabilities measured at fair value on a recurring basis are as follows as of December 31, 2008:
QUOTED MARKET SIGNIFICANT OTHER SIGNIFICANT
PRICE IN ACTIVE OBSERVABLE UNOBSERVABLE
MARKETS (LEVEL 1) INPUTS (LEVEL 2) INPUTS (LEVEL 3)
Marketable securities $ 148,501 $ - $ -
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The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.
FASB Staff Position No. FAS 157-2 delays the implementation of SFAS 157 until the first quarter of 2009 with respect to goodwill, other intangible assets, and other non-financial assets measured at fair value on a nonrecurring basis.
NOTE 3. PROPERTY AND EQUIPMENT
Major classes of property and equipment and accumulated depreciation at
December 31, 2008 are as follows:
Leasehold improvements $ 314,979
Furniture and fixtures 40,958
Machinery and equipment 1,109,883
Vehicles 34,045
Computer equipment 729,217
2,229,082
Less: Accumulated depreciation 2,047,638
$ 181,444
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NOTE 4. NOTES PAYABLE
Notes payable consisted of borrowings under the Company's credit agreement with a bank. The agreement provides for borrowings based on an asset formula involving accounts receivable and inventories up to a maximum of $ 5,000,000. The note is secured by substantially all of the Company's assets. The interest rate is floating based on the bank's prime rate. The agreement provides covenants which require maintaining certain financial ratios. The agreement expires June 29, 2009.
Cash outlays for interest expense amounted to $ 2,329 in 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 5. ACCRUED EXPENSES
Accrued expenses are as follows:
Employee compensation $ 171,636
Commissions 8,553
Vacation 55,600
Group insurance 51,000
Product warranty 120,402
Customer volume rebates 92,036
Other 74,748
$ 573,975
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The activity in the product warranty liability is as follows:
Balance, beginning $ 150,402
Claims paid (107,513 )
Provision 77,513
Balance, ending $ 120,402
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NOTE 6. INCOME TAXES
The provision for income taxes consists of the following:
Current 628,506
Deferred 6,071
$ 634,577
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Significant components of the Company's deferred tax assets and liabilities are as follows:
Deferred tax assets:
Allowance for doubtful accounts $ 11,807
Inventories 208,347
Unrealized securities losses 3,762
Merger related expenses 81,618
Accrued product warranty costs 44,910
Other accrued expenses 29,026
379,470
Deferred tax liabilities:
Depreciation (27,799 )
Net deferred tax asset $ 351,671
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Cash outlays for income taxes amounted to $ 481,787 in 2008.
NOTE 7. RETIREMENT PLAN
The Company has a deferred-salary arrangement under Internal Revenue Code
Section 401(k). The Plan covers substantially all employees. The Company
provides for a matching contribution and is allowed to make additional
contributions at the discretion of the Board of Directors. The Company's
matching contribution totaled $ 69,149 in 2008.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company leases warehouse and office facilities under obligations accounted for as operating leases. Rental expense under operating leases was $ 151,728 in 2008 and was composed entirely of minimum rentals.
Future minimum lease payments required under all noncancellable leases are as follows:
2009 $ 150,304
2010 147,898
2011 368
Total minimum payments required $ 298,570
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NOTE 9. RELATED PARTY TRANSACTIONS AND BALANCES
The Company performs repair and refurbishment work on behalf of affiliated companies. The Company charges these affiliates based on a cost plus basis or . . .
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