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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 0-25882
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EZENIA! INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3114212
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
NORTHWEST PARK, 63 THIRD AVENUE, BURLINGTON, MASSACHUSETTS 01803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(781) 229-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 / /
The number of shares outstanding of the registrant's Common Stock as of July 31,
2000 was 13,694,542.
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EZENIA! INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999............................................3
Condensed Consolidated Statements of Operations
Three months and six months ended June 30, 2000 and 1999.......................4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999........................................5
Notes to Condensed Consolidated Financial Statements.............................6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................7
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.......................9
PART II. OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Securities Holders...........................10
ITEM 6 Exhibits and Reports on Form 8K.................................................11
SIGNATURE..................................................................................12
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including without limitation those discussed in
the Company's 1999 Annual Report to Shareholders in the section titled "Other
factors which may affect future operations" (which section is incorporated by
reference into the Company's Annual Report on Form 10-K for the year ended
December 31, 1999). Such forward-looking statements speak only as of the date on
which they are made, and the Company cautions readers not to place undue
reliance on such statements.
2
EZENIA! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 30,280 $ 35,095
Marketable securities 14,771 17,985
Accounts receivable, less allowances of $1,268 and $1,518 at 3,883 6,800
June 30, 2000 and December 31, 1999, respectively
Inventories 4,618 2,610
Deferred income taxes 3,733
Litigation settlement receivable 6,000
Other current assets 1,384 1,183
-------- --------
Total current assets 60,936 67,406
Equipment and improvements, net of accumulated depreciation 6,944 6,461
Deferred income taxes 4,047
Other assets, net 1,716 1,824
-------- --------
$ 69,596 $ 79,738
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 5,499 $ 4,750
Accrued expenses 7,655 7,595
Deferred revenue 813 603
-------- --------
Total current liabilities 13,967 12,948
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares authorized, none
issued and outstanding
Common stock, $.01 par value, 40,000,000 shares authorized;
13,694,542 issued and outstanding at June 30, 2000;
13,588,505 issued and outstanding at December 31, 1999 137 136
Capital in excess of par value 59,123 58,483
Retained earnings (deficit) (3,277) 8,441
Accumulated other comprehensive loss (354) (270)
-------- --------
55,629 66,790
-------- --------
$ 69,596 $ 79,738
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See accompanying notes.
3
EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- ------- -------- -------
Revenue
Product revenue $ 6,292 $15,009 $ 14,348 $29,829
Service revenue 985 1,823 2,096 3,565
-------- ------- -------- -------
7,277 16,832 16,444 33,394
Cost of revenue
Cost of product revenue 2,897 5,261 6,305 10,424
Cost of service revenue 898 1,013 1,922 1,996
-------- ------- -------- -------
3,795 6,274 8,227 12,420
-------- ------- -------- -------
Gross profit 3,482 10,558 8,217 20,974
Operating expenses
Research and development 5,045 4,174 10,115 7,973
Sales and marketing 3,244 3,543 6,413 7,374
General and administrative 1,150 1,264 2,355 2,575
-------- ------- -------- -------
Total operating expenses 9,439 8,981 18,883 17,922
-------- ------- -------- -------
Income (loss) from operations (5,957) 1,577 (10,666) 3,052
Interest income, net 642 500 1,264 1,043
Litigation settlement 6,500 6,500
-------- ------- -------- -------
Income (loss) before income taxes 1,185 2,077 (2,902) 4,095
Income taxes 1,002 706 8,816 1,392
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Net income (loss) $ 183 $ 1,371 ($11,718) $ 2,703
======== ======= ======== =======
Net income (loss) per share:
Basic $ 0.01 $ 0.10 ($ 0.86) $ 0.20
Diluted $ 0.01 $ 0.10 ($ 0.86) $ 0.20
Shares used in computing net income
(loss) per share:
Basic 13,693,980 13,501,000 13,668,893 13,394,000
Diluted 13,711,701 13,933,000 13,668,893 13,849,000
See accompanying notes.
4
EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2000 1999
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OPERATING ACTIVITIES
Net income (loss) ($11,718) $ 2,703
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization 1,876 1,776
Deferred income taxes 7,780
Changes in operating assets and liabilities:
Accounts receivable 2,917 (2,036)
Inventories (2,008) 1,301
Litigation settlement receivable (6,000)
Other current assets (201) 184
Accounts payable and accrued expenses 809 (245)
Other current liabilities 210 (34)
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Net cash provided by (used for) operating activities (6,335) 3,649
INVESTING ACTIVITIES
Purchases of equipment and improvements (2,245) (1,189)
Changes in marketable securities, net 3,214 4,760
Increases in other assets (6) (168)
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Net cash provided by investing activities 963 3,403
FINANCING ACTIVITIES
Net proceeds from stock issued under employee stock benefit plans 641 1,088
-------- --------
Net cash provided by financing activities 641 1,088
Effect of exchange rate on cash and cash equivalents (84) (44)
-------- --------
Increase (decrease) in cash and cash equivalents (4,815) 8,096
Cash and cash equivalents at beginning of year 35,095 23,225
-------- --------
Cash and cash equivalents at end of period $ 30,280 $ 31,321
======== ========
See accompanying notes.
5
EZENIA! INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. In the opinion of
management, these financial statements contain all adjustments, consisting only
of normal recurring adjustments, except for provision for foreign withholding
taxes and deferred tax allowance (See Note 3 of the Notes to Condensed
Consolidated Financial Statements), necessary for a fair presentation of the
results of these interim periods. Certain footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Company
believes the disclosures in these financial statements are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the Company's audited financial statements included in the
Company's 1999 Annual Report to Shareholders and incorporated by reference into
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The results of operations for the interim periods shown are not necessarily
indicative of the results for any future interim period or for the entire fiscal
year.
2. INVENTORIES
Inventories consist of:
JUNE 30, DECEMBER 31,
(In thousands) 2000 1999
------------- --------------
Raw materials and subassemblies $3,066 $1,790
Work in process 961 565
Finished goods 591 255
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$4,618 $2,610
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3. INCOME TAXES
In the second quarter of the year ending December 31, 2000, the Company recorded
a provision for income taxes of $975,000 representing an estimate of foreign
withholding taxes related to the litigation settlement with Accord Networks,
Inc. f/k/a Accord Video Telecommunications, Inc. Due to reported losses for the
quarter ended March 31, 2000 and the lack of further recoverability of tax
benefits in the allowable carryback period, the Company recorded a valuation
allowance of approximately $7.8 million to reduce the carrying value of deferred
tax assets to zero.
4. LEGAL PROCEEDINGS
On June 16, 2000, the Company settled its patent infringement suit against
Accord Networks, Inc. f/k/a Accord Video Telecommunications, Inc. ("Accord") in
the United States District Court for the District of Massachusetts. The
settlement agreement, among other things, provided that the Company receive
$6,500,000 in return for a covenant not to sue with respect to the patents that
were the subject of the litigation. The Company received $500,000 at the time
the agreement was signed and will receive $6,000,000 after certain tax matters
related to the settlement are resolved with tax authorities in Israel.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
REVENUE Revenue decreased to $7.3 million for the quarter ended June 30,
2000 from $16.8 million reported for the quarter ended June 30, 1999. Revenue
decreased to $16.4 million in the six months ended June 30, 1999 compared to
$33.4 million for the six months ended June 30, 1999. The decrease in revenue
was principally related to a significant decline in sales of ISDN products and
related service revenues as the videoconferencing market continues to weaken. In
particular, sales of ISDN products and related services to PictureTel
Corporation and VTEL Corporation (which customers accounted for 24% and 25% of
the Company's revenue in 1999) were significantly lower than in the three and
six month periods ended June 30, 1999.
Revenue from international markets, primarily in Europe, accounted
for approximately 40% and 30% of revenue for the quarters ended June 30, 2000
and 1999 respectively, and 38% and 31% for the six months ended June 30, 2000
and 1999. The Company expects that revenue from international markets, which is
currently denominated in U.S. dollars, will continue to be a significant portion
of the Company's business.
GROSS PROFIT Gross profit as a percentage of revenue was 47.8% for the
quarter ended June 30, 2000 as compared to 62.7% for the quarter ended June 30,
1999. For the six months ended June 30, 2000, gross profit was 50.0% compared to
62.8% in the corresponding period of 1999. Reduction in margin for the quarter
and six months ended June 30, 2000 was primarily attributable to the overall
decrease in revenues and the related disproportionate effect of fixed
manufacturing and service costs included in cost of revenues.
RESEARCH AND DEVELOPMENT Research and development expenses increased to
$5.0 million for the quarter ended June 30, 2000 from $4.2 million for the
quarter ended June 30, 1999. For the six months ended June 30, 2000, research
and development expenses were $10.1 million compared to $8.0 million in the
corresponding period of 1999. The Company's spending increases were primarily
attributable to development of its IP and internet products. The Company expects
to continue to commit substantial resources to research and development in the
future.
SALES AND MARKETING Sales and marketing expenses decreased to $3.2 million
for the quarter ended June 30, 2000 from $3.5 million for the quarter ended June
30, 1999. For the six months ended June 30, 2000, sales and marketing expenses
were $6.4 million compared to $7.4 million in the corresponding period of 1999.
The decreased spending was primarily due to the current transition of sales and
marketing personnel from an ISDN product focus to a concentration on IP and
internet products. The Company expects to significantly increase sales and
marketing spending in the future as it broadens its channels of distribution and
continues to emphasize development of the market for IP and internet-based
products.
GENERAL AND ADMINISTRATIVE General and administrative expenses decreased
to $1.2 million for the quarter ended June 30, 2000 from $1.3 million for the
quarter ended June 30, 1999. For the six months ended June 30, 2000, general and
administrative expenses were $2.4 million compared to $2.6 million for the
corresponding period of 1999. The decreased spending is primarily attributed to
reduction of expenditures related to the Company's corporate-wide financial
accounting, manufacturing, and sales and distribution system, which was
implemented during 1999.
INTEREST INCOME, NET Interest income, net, increased to approximately
$642,000 in the quarter ended June 30, 2000, from approximately $500,000 in the
quarter ended June 30, 1999. For the six months ended June 30, 2000, interest
income, net was $1,264,000 compared to $1,043,000 for the corresponding period
of 1999. The increase was due to slightly higher rates of return on investments.
7
PROVISION FOR INCOME TAXES Provision for income taxes for the quarter
ended June 30, 2000 consists principally of an estimate of $975,000 for
foreign withholding taxes related to the litigation settlement with Accord.
Provision for income taxes for the six months ended June 30, 2000, in
addition to the withholding tax on the litigation settlement, consists
principally of a valuation allowance recorded during the quarter ended March
31, 2000 to reduce the carrying value of deferred tax assets to zero. (See
Note 3 of Notes to Condensed Consolidated Financial Statements.)
OTHER FACTORS WHICH MAY AFFECT FUTURE OPERATIONS There are a number of
business factors which singularly or combined may affect the Company's future
operating results. Some of them, including dependence on major customers (one
of which, PictureTel Corporation, earlier in the year 2000 reported that it
is experiencing financial difficulties), market growth and the risks and
uncertainties related to an evolving market, rapid technological change,
competition, variability of quarterly results, protection of proprietary
technology, retention of key employees, and uncertainties regarding patents
have been outlined in the Company's 1999 Annual Report to Shareholders,
incorporated by reference into the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company has cash, cash equivalents and marketable
securities of approximately $45.1 million. The Company regularly invests excess
funds in short-term money market funds, government securities, and commercial
paper. The Company believes that its existing cash, cash equivalents and
marketable securities will be sufficient to meet the Company's cash requirements
for the foreseeable future.
8
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
To date, the Company has not utilized derivative financial instruments or
derivative commodity instruments. The Company invests cash in highly liquid
investments, consisting of highly rated U.S. and state government securities,
commercial paper, and short-term money market funds. These investments are
subject to minimal credit and market risk and the Company has no debt.
Therefore, the Company believes the market risks associated with these financial
instruments are immaterial.
9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
On May 31, 2000, at the Company's 2000 Annual Meeting of
Stockholders, the Company's stockholders met to consider and vote
upon the following four proposals:
(1) A proposal to elect one Class II director to hold office for a
three-year term and until his/her respective successor has been
duly qualified and elected.
(2) A proposal to approve an amendment to extend the term of the
Amended and Restated 1991 Stock Incentive Plan.
(3) A proposal to approve an amendment to allow non-employee
directors to participate under the Amended and Restated 1991
Stock Incentive Plan.
(4) A proposal to ratify the appointment of Ernst & Young LLP as
auditors for the Company for the fiscal year ending December 31,
2000.
Results with respect to the voting on each of the above
proposals were as follows:
Proposal 1:
William E. Foster
For - 11,531,366 Withhold Authority - 464,543
--- --------------- ------------------ ---------------
The terms of office of John F. Keane, Jr., John A. McMullen,
Khoa D. Nguyen, and Roy G. Perry, the remaining members of the
Board of Directors of the Company, continued after the meeting.
Proposal 2:
2,408,969 Votes For
3,910,561 Votes Against
335,155 Abstentions
5,341,224 No Votes
Proposal 3:
3,180,420 Votes For
3,136,102 Votes Against
338,163 Abstentions
5,341,224 No Votes
Proposal 4:
11,962,879 Votes For
14,991 Votes Against
18,039 Abstentions
10
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27: Financial Data Schedule.
(b) No reports on Form 8-K were filed during the three-month period ended
June 30, 2000.
11
SIGNATURE
Pursuant to the requirements 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.
EZENIA! INC.
Date: August 4, 2000 By: /s/ Stephen G. Bassett
---------------------------------
Stephen G. Bassett
Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer, Authorized Officer)
12