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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 0-25882
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)
63 THIRD AVENUE, BURLINGTON, MASSACHUSETTS 01803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(781) 229-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-----------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
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. / /
The aggregate market value of voting stock held by non-affiliates of
the registrant as of March 8, 2001 was $20,087,820 (based on the last reported
sale price on the Nasdaq National Market on that date).
The number of shares outstanding of the registrant's Common Stock as of
March 8, 2001 was 13,391,880.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to Shareholders in
connection with the Annual Meeting of Shareholders to be held May 30, 2001 are
incorporated by reference into Part III hereof. With the exception of the
portion of such Proxy Statement that is expressly incorporated herein, such
Proxy Statement shall not be deemed filed as part of this Annual Report on Form
10-K.
EZENIA! INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business............................................................................ 3
Item 2. Description of Property............................................................. 15
Item 3. Legal Proceedings................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................. 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............... 16
Item 6. Selected Financial Data............................................................. 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......................... 21
Item 8. Financial Statements and Supplementary Data......................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant.................................. 37
Item 11. Executive Compensation.............................................................. 37
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 37
Item 13. Certain Relationships and Related Transactions...................................... 37
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.................... 38
Signatures ...................................................................................... 40
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
Item 7 under the heading "Factors which may affect future operations." 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
PART I
ITEM 1. BUSINESS
Ezenia! Inc. ("Ezenia!" or the "Company") is a leading global provider of
real-time collaboration solutions for corporate networks and eBusiness. Founded
in 1991, Ezenia! develops and markets products that enable organizations to
provide high-quality group communication and collaboration capabilities to
commercial, consumer and institutional users. The Company's products allow
individuals and groups that are geographically distant from each other to
interact and share information in a natural, spontaneous way -- voice-to-voice,
face-to-face, flexibly and in real-time - via a wide range of networks. Using
our products, disparately located individuals can interact through a natural
meeting experience, allowing groups to work together effectively and disseminate
vital information quickly. The Company's products enable seamless connectivity
across a wide range of networks including LANs, intranets, the Internet, ISDN,
ATM and frame relay.
Ezenia! sells its products worldwide through leading resellers, integrators
and remarketers of collaboration, videoconferencing and networking solutions.
Ezenia! also sells directly to providers of conferencing services, including
Internet Service Providers (ISPs), telecommunication carriers and Regional Bell
Operating Companies (RBOCs). The Company believes that it was the largest
supplier in annual shipments of real-time collaboration servers for the past
five years.
INDUSTRY BACKGROUND
MULTIMEDIA CONFERENCING
The current market for interactive collaboration has evolved from the
earlier videoconferencing sector. In the late 1980s, the videoconferencing
market was fragmented, with each vendor providing a proprietary solution. This
market was limited by the lack of interoperability between the various products
available. If one company had a product from vendor A, it would be unable to
communicate with a company that had a videoconferencing product from vendor B.
The videoconferencing market began to grow in the early 1990s spurred by the
International Telecommunications Union's (ITU) introduction of the H.320
standard for videoconferencing over switched digital circuit networks. For the
first time, a standard framework allowed equipment from different manufacturers
to communicate with each other. Since the advantage of these services is dial-up
communications, without regard to the type of equipment being used at the
receiving ends of the transmission, compatibility is particularly important for
communication via these networks.
In May 1996, an important expansion of conferencing standards was realized
with the introduction of the H.323 standard governing real-time collaboration
over IP (Internet Protocol) networks, including local area networks (LANs),
corporate intranets and the Internet. Enabling conferencing over traditional
business networks provides a foundation for the adoption of this application as
a mainstream business tool. The majority of endpoint vendors who market H.320
compliant products have introduced or announced their intention to introduce
H.323 compliant endpoints as well.
Through the 1990s the videoconferencing industry experienced moderate
growth, but the size of the total market was limited by difficult access to ISDN
and expensive videoconferencing hardware. Beyond the technical difficulties,
users felt that videoconferencing was limited and that a more complete solution
was needed. As organizations became more decentralized and dispersed, users
sought solutions that would allow them to do more than simply talk and see other
users online.
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With the explosive growth of the Internet and the innovated technologies
that followed, a new class of applications emerged. Real-time collaboration
takes the best elements of videoconferencing and joins them with the ubiquity
and ease-of-use of the Internet. Where videoconferencing requires expensive
hardware and focuses on quality video, real-time collaboration uses video when
necessary but goes beyond it by offering a more complete solution, enabling
teams to work more effectively from disperse locations. Real-time solutions
often bring video and audio conferencing to the desktop and can include such
other features as integrating data conferencing, white-boarding, Instant
Messaging and virtual meeting spaces.
The use of real-time collaborative technologies within the enterprise is
still in its infancy. During the next two to four years, the Company expects to
see the accelerated growth of real-time collaboration. The investment in
information and collaborative technologies today has already helped flatten
organizations and improve enterprise wide communication. The goal today is not
to provide access to legacy data stored on a server, but to find ways to enable
knowledge workers to collaborate and share their expertise. Collaborative
technologies are about creating value through better human interaction, not just
better information. Businesses today need solutions that make it easier for
people to work together, to share information and expertise across the building,
country or around the world.
The use of real-time collaboration and videoconferencing technology has also
made its way outside the enterprise and is being used across the public
Internet. Sometimes called the Web Talk or Web Interactivity market, Web sites
today are enhancing their services by providing interactive voice and video
communication services. For example, some e-business sites are using Web
interactivity to resolve one of the biggest issues in e-commerce: poor customer
service caused by lack of human interaction. Other sites are using Web
interactivity to improve Web site retention by enabling lively voice chat
communities of interest.
THE EZENIA! SOLUTION
Ezenia! was founded in 1991 to develop a new generation of solutions
architected for the multimedia collaboration market. The Ezenia! product line is
built on an industry standard hardware and software platform that combines a
powerful set of real-time collaboration applications with management tools and
network connectivity features that aim to address the requirements of today's
customers and, the Company believes, are positioned to meet emerging
requirements. Ezenia! competes in three key markets:
Enterprise Collaboration - Ezenia! solutions are being used across the world to
allow teams to work together more effectively from dispersed locations. With the
Company's products, teams can collaborate face-to-face, voice-to-voice, while
sharing data such as a presentation or spreadsheet.
Web Interactivity - Ezenia! solutions can enhance a Web site by enabling
interactive voice communication. With the Company's products, Web sites can host
voice chat communities, hold online events or bring the human touch to the
e-commerce process by online access to customer service representatives.
Conferencing - The Company provides products that allow users of traditional
videoconferencing equipment to hold large multi-location meetings as well as
enabling them to bridge and connect the world of ISDN conferencing with IP-based
users.
PRODUCTS
The Company's technology manages audio, video and data when more than two
sites participate in a collaborative conference. In the past, solutions have
been available to connect people on a point-to-point basis. Today, an increasing
number of users are finding group collaboration and group chat to be an even
more effective way of communicating. The Company believes group capabilities
will be one of the key requirements for the long-term growth of the real-time
collaboration market.
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Ezenia!'s expertise is in developing products that deliver flexible support for
video, audio and data collaboration across a wide range of platforms. The
Company's products have been designed within a scaleable, modular architecture
to allow the customer to add capacity, processing power and conferencing
features as the customer's network and application requirements grow. Using a
common set of hardware and software building blocks, customers can choose from a
wide range of product configurations that differ in capacity, price, network
connectivity and features, all of which share the same operating software user
interface. The product may be configured for use in customer premises
environments or may be configured with specialized packaging for use in a
telephone carrier's central office setting.
The Ezenia! family of products includes:
ENCOUNTER - The Encounter family of products is the industry's most
comprehensive solution for real-time multimedia collaboration. The Encounter
family includes the Encounter 3000 NetServer, the Encounter 1000 NetServer and
the Encounter 3000 NetGate. The Encounter NetServer enables users on IP networks
- -- corporate LANs, intranets or the Internet -- to create and participate in
group, multimedia conferences. The Encounter NetGate enables multimedia
conferencing between ISDN and IP endpoints.
EZENIA! INTERACTIVITY - Ezenia! Interactivity enables Web sites and portals
to host live, interactive voice chat rooms and interactive events, such as
online "talk shows." Designed to be integrated with the host organization's
existing Web infrastructure, Ezenia! Interactivity is a scalable solution
consisting of a server platform, controlling software and a developer's toolkit.
SERIES 2000 - The Series 2000 family of servers provide the optimal solution
for companies looking to deliver multimedia conferencing over dedicated or
circuit switched networks. The Series 2000 supports the broadest range of voice,
video and data conferencing standards in the industry. These servers include
network interface modules that support all major types of connectivity,
including Primary Rate ISDN, Basic Rate ISDN and ATM, and E1 and T1 access. The
Company's solutions also support large hybrid networks, such as T1, E1, BRI,
V.35/RS-499, ATM and Frame Relay. Ezenia!'s open-system architecture
interoperates with any endpoint based on the H.320 standard and any
circuit-based digital network or mix of networks. The Series 2000 is also the
most widely homologated multimedia conference server for international use, with
certifications encompassing all the major international markets.
ENCOUNTER-TM- FAMILY OF CONFERENCING PRODUCTS
The Company began shipping the first products in its Encounter family of network
servers and gateways in March, 1998. These products were the industry's first
business-quality collaboration offerings in the IP arena. The Encounter product
family allows individuals and groups that are geographically distant from each
other to interact and share information in a natural, spontaneous way --
voice-to-voice, face-to-face, flexibly and in real-time - via any type of
network. The Encounter family is being used by enterprise customers and distance
learning facilities across the world.
The Encounter product line includes:
o Encounter 1000 NetServer: Collaboration server marketed to small
enterprises and workgroups. Encounter 1000 NetServer is a software-based
product that runs on a standard Windows NT Server.
o Encounter 3000 NetServer: Real-time collaboration server designed to
support the largest enterprise and service provider customers. The
Encounter 3000 NetServer is a complete solution that includes Ezenia!
hardware making it one of the most scalable solutions available today.
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o Encounter 3000 NetGate: Gateway solution that allows traditional
videoconferencing systems to participate in IP-based collaboration
sessions.
ENCOUNTER NETSERVER
The Encounter NetServer is designed to allow groups of users to come together
online and work collaboratively. The product allows users to interact and share
information in a natural, spontaneous way -- voice-to-voice and face-to-face.
The solution comes in two main versions: Encounter 1000 NetServer is a
software-based solution designed for small workgroups; the Encounter 3000
NetServer is a hardware-based solution designed for large enterprises and
service providers. Both products provide the same core feature set and are
managed by the same unified web-based interface.
The Encounter 3000 NetServer is delivered as a complete system ready for
deployment. The NetServer is based on an industry standard PC platform using
an Intel Pentium control processor for control and incorporates high
performance digital signal processors for real-time video and audio
processing. The Encounter 3000 NetServer operates on a Windows-Registered
Trademark- NT platform and leverages Microsoft IIS. It supports as many as 90
conference endpoints and can reside anywhere in a TCP/IP network.
The Encounter 3000 NetServer is available in two chassis versions, the workgroup
and enterprise chassis. The only difference between the chassis types is the
physical size and number of slots within the chassis. All multimedia processing
is handled by the Multimedia Processing Unit (MPU) that are common to both
chassis. These MPUs are PCI-based boards that leverage Digital Signal Processors
(DSPs) to ensure a high level of audio quality.
The complete Encounter 3000 product line is based upon a modular architecture to
ensure simple and flexible upgrade options. Systems can be purchased supporting
anywhere from 8 to 64 connected users. System capacity can easily be increased
by adding additional processing and network modules into the Encounter chassis.
This approach ensures that the Encounter series can expand to support increasing
levels of user demand. As the required capacity increases, more processing
modules can be installed into a chassis to provide an increased port count. Each
processing module provides dedicated digital signal processing (DSP)
capabilities. This ensures that as user demand increases additional processing
cycles are being added to the system in parallel. This approach avoids
overloading a single processor with more and more requests as user capacity is
increased.
Encounter NetServer provides a simple-to-use, web-based interface, eCMS, that
allows users to schedule and manage conferences. The Encounter eCMS application
also supports scheduling of public conferences. These provide a conferencing
space for users to join on a first-come-first-served basis. eCMS supports the
creation and scheduling of publicly listed conferences in which the user need
only specify the maximum number of H.323 users and maximum number of POTS (plain
old telephone system) users. No specific user information needs to be entered
unless desired by the conference administrator. This significantly reduces the
burden on conference administrators for meetings, which do not require a list of
participants.
The Encounter NetServer also includes the Encounter Gatekeeper software, which
provides the administrator a highly configurable means for managing access and
bandwidth utilization policies for the system IP conferencing environment. The
Encounter Gatekeeper is a software application, which can run on the Encounter
NetServer or on a separate NT Server.
The Encounter 1000 NetServer, which is geared towards smaller workgroups or more
distributed organizations, provides all the same capabilities as the Encounter
3000 NetServer such as continuous presence, T.120 data
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conferencing and audio mixing, and also includes both eCMS and the Encounter
Gatekeeper. Unlike the Encounter 3000, however, the Encounter 1000 is completely
software-based, running on a standard Windows NT Server. The Encounter 1000
contains no special software and ships as a CD-ROM for easy installation. Where
the Encounter 3000 uses hardware-based DSP to manage the multimedia streams,
Encounter 1000 uses the host Pentium processor for all media processing. Because
it is software-based, and runs on any standard Windows NT Server, it is a lower
cost solution for smaller workgroups where the scalability of the Encounter 3000
NetServer is not needed.
The Encounter NetServer has a variety of features, some of which are listed
below:
o Flexible video viewing choices include voice-activated video-switching,
user selected video switching and Continuous Presence, where four video
windows are viewed at the same time.
o Audio transcoding allows each endpoint to experience optimal voice quality,
while minimizing bandwidth utilized.
o Built-in voice gateway allows up to 24 phone users to participate in
conference sessions.
o Interactive Voice Response (IVR) allows phone users to easily enter their
conference by providing conference and password information using touch
tones (DTMF).
o Password-controlled entry to conferences provides security for conference
participants.
o Conference cascading allows conferences to span between any two Encounter
3000 NetServers, no matter where they are located. This allows for the
distribution of Encounter 3000 NetServer conferencing resources to where
they most make sense in the network and allows for the creation of
conferences that are larger than the capacity of a single Encounter 3000
NetServer.
o With ConferenceNow!, endpoint users can create and join multipoint
conferences on Encounter 3000 NetServer on an ad-hoc basis, as easily as
placing a point-to-point call.
o Calendar-based reservation and scheduling system for control of multiple
NetServers, eCMS (Encounter Centralized Management System) allows users and
administrators to view, schedule and manage their own conferencing session
through an intuitive web-browser interface.
o Recording of detailed usage information facilitates accurate billing and
reporting.
ENCOUNTER 3000 NETGATE
The Encounter 3000 NetGate enables multimedia conferencing between H.320 and
H.323 endpoints. The Encounter NetGate reconciles the differences in the network
protocols allowing users to collaborate in real-time via audio, video and data,
regardless of their network type. The Encounter 3000 NetGate is the market's
first gateway to offer the quality, scalability and data conferencing features
required to support both the installed base of ISDN conferencing terminals and
the growing number of IP conferencing terminals.
The Encounter 3000 NetGate shares many of the same characteristics of the
Encounter 3000 NetServer. The system is delivered as a complete system based
on an industry standard PC platform using an Intel Pentium control processor
for control and incorporates high-performance digital signal processors for
real-time video and audio processing. The Encounter 3000 NetGate operates on
a Windows-Registered Trademark- NT platform and leverages Microsoft IIS. It
supports as many as 16 conference sessions.
The Encounter 3000 NetServer is available in two chassis versions, the workgroup
and enterprise chassis. The only difference between the chassis types is the
physical size and number of slots within the chassis. All multimedia processing
is handled by the Multimedia Processing Unit (MPU) that are common to both
chassis. These MPUs are PCI-based boards that leverage Digital Signal Processors
(DSPs) to ensure a high level of audio quality. The Encounter 3000 NetGate
supports a variety of network interface including 10/100BaseT Ethernet,
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Dual port T1/PRI, Dual port E1/PRI, Quad port BRI and Dual port V.35/V.36/RS-449
DDM making it possible to connect with just about any type of network.
The Encounter NetGate has numerous features, some of which are listed below:
o Supports restricted and unrestricted rates of 2B up to 768 Kbps IMUXed and
384 Kbps H0, allowing for a high-quality conferencing experience.
o Direct Inward Dialing (DID) and IVR facilitate WAN to LAN dialing.
o Dynamically selects best available video standard (supports H.261 and H.263)
per session based on endpoint capabilities.
o Real-time voice transcoding optimizes performance on a call-by-call basis.
o Direct connection between the Encounter 3000 NetGate and Ezenia! Series 2000
MCS without incurring costly line charges.
o LAN to WAN, WAN to LAN calls and administrator-initiated gateway calls
supported at all transfer rates, providing call flexibility.
o Tandem gateway support (NetGate to NetGate) provides cost-effective means
for bridging WAN or LAN links. o Web-browser based administrative user
interface allows system administrators to configure, manage and monitor
gateway activity, including customization of system-wide behavior for
support of T.120, WAN to LAN and LAN to WAN calls.
EZENIA! INTERACTIVITY - BRING LIFE TO THE WEB
Ezenia! Interactivity allows companies to add easy-to-use voice interactivity to
their Web sites. With Ezenia! Interactivity, individuals and groups can meet on
the Web and talk with each other in a high-quality audio environment, adding the
natural ease and richness of conversation to their Internet experience. Ezenia!
Interactivity enables Web sites and portals to host voice and video chat rooms,
where family, friends, colleagues or communities of interest can meet and talk.
Sites can draw large or specialized audiences by hosting events such as online
talk shows that allow listeners to interact with celebrity guests or experts on
a hot topic. Ezenia! Interactivity consists of two components: The Interactivity
software and Media Service Provider (MSP) subsystems.
The Interactivity Server software provides an application programmer interface,
based on Microsoft Component Object Model (COM) technology. The software
interfaces exposed by an Interactivity Server allows Web content developers to
integrate Interactivity into Web site while maintaining the sites current look
and feel. The interfaces allow the control of the underlying technology to be
completely hidden from the user - the user simply sees the browser and whatever
your Web site looks like. To enter an interactive session, the user simply
clicks on a hyperlink or an icon and they enter the session - "click to talk".
The Media Service Provider is the platform that connects users engaging in
interactivity-enabled Web sites, providing low bandwidth audio and audio mixing.
The MSP is based on the Company's Encounter technology and ships with Ezenia!
Interactivity as a complete system ready for deployment. The MSP is based on an
industry standard PC platform using an Intel Pentium control processor for
control and incorporates high performance digital signal processors for
real-time audio processing. It supports as many as 64 simultaneous users per
system.
SERIES 2000 MCS
The Series 2000 MCS product line of servers designed for switched digital
circuit networks include a number of
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basic platform configurations that are expanded by the customer's selection of
optional processing modules and software applications. The platforms, configured
for the typical end-user, range in list price from under $20,000 to more than
$200,000. Each Series 2000 MCS configuration is built from a common set of
processing modules, network interfaces, software systems and optional features.
The following table lists the basic chassis configurations offered by the
Company and the typical target market and application in which each is used. In
this table, user capacity is a measure of the number of simultaneous conference
sites that can be connected to the Series 2000 MCS.
MODEL CAPACITY TARGET MARKET/APPLICATION
----- -------- -------------------------
2007 8 users Mid-range CPE for distributed network environments
2020 48 users Large CPE/central office network with extensive
multimedia applications
CO 48 users High availability central office server
Each of these systems may be interconnected to provide support for larger
conferences.
The Ezenia! Series 2000 MCS has an extensive number of available software and
hardware features, some of which are listed in the following table.
APPLICATIONS DESCRIPTION
------------ -----------
CONFERENCE SERVICE AND MANAGEMENT
---------------------------------
Continuous Presence with
CollaboRates............................. Continuous viewing of multiple conference sites
running at differing transfer rates
Asynchronous Transfer Mode............... ATM connected endpoints can connect directly to the
MCS via an ATM network
Multimedia Conferencing.................. Simultaneous audio visual conferencing and data conferencing
Reservation and Scheduling............... Schedule and manage MCS use
Directory Services....................... Database of potential conference participants and sites
Chairperson Conference Control........... Management of conference activities by a nominated
conference chairman (e.g., lecturer)
Security and Password Control............ Conference password and application security controls
Voice Activated Switching................ Dynamic switching of video presentation based on
current speaker
Audio Add-on............................. Conferencing for audio-only conference participants
Operator Attended Conferencing........... Provision for an operator to guide participants through
conference initiation and provide assistance during
the conference
NETWORK SERVICES AND MANAGEMENT
-------------------------------
Outbound Dialing......................... Automatic MCS dial-out capability
Conference Monitor....................... Real-time monitor of conference activities and status
Bandwidth Management..................... Bandwidth aggregation using inverse multiplexing
Event Management......................... System activity and alarms applications for network management
Network Diagnostics...................... Network loop-back and problem isolation tool kit
Premise Switching........................ Integrated ISDN switching functionality
The Company offers add-on software to its installed base in the form of either
major new software releases or
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unbundled software options. Customers may purchase new software releases on an
as-needed basis or as part of a maintenance agreement. Unbundled software
options are priced separately and are not part of maintenance agreements.
NETWORK ACCESS CARDS
On September 15, 2000, the Company completed the sale of assets and
technology associated with its network access card product line to Telco
Systems, Inc. ("Telco") for cash of $4.5 million, receivable in installments
through March 2001, and $1.5 million of future product to be supplied by Telco.
Revenue from sales of network access card products approximated $3.3 million,
$5.7 million and $9.1 million for the years ended December 31, 2000, 1999 and
1998, respectively.
RECENT DEVELOPMENTS
AGREEMENT TO ACQUIRE INFOWORKSPACE-TM-. On December 28, 2000, the Company
entered into a purchase agreement to acquire all operating assets and
intellectual property of InfoWorkSpace-TM-, a business unit of General
Dynamics Electronic Systems, for $17 million in cash and 400,000 shares of
the Company's common stock. An advance of $6 million was paid in December
2000, and the balance is due in installments through 2002. The 400,000 shares
to be issued are accompanied by an option allowing the seller to put the
shares back to the Company at $10 per share, beginning in December 2001. The
put right shall expire December 31, 2002 or at such time as the last reported
closing price of the common stock as reported on the Nasdaq National Market
has been equal to or greater than $11.00 per-share for fifteen (15)
consecutive trading days. Under the terms of the purchase agreement, the
Company will acquire the InfoWorkSpace-TM- product line and employ
substantially all of the management team and core group of developers who
currently work in the business unit. The acquisition will be accounted for as
a purchase. Accordingly, the purchase price will be allocated to the
underlying assets and liabilities based upon their estimated fair values at
the date of acquisition. The Company expects the closing to occur in the
first quarter of 2001.
InfoWorkSpace-TM- products provide knowledge workers a secure virtual
workspace for project and team collaboration. InfoWorkSpace-TM- is currently
used primarily by government organizations, including Defense Department
agencies and the Intelligence Community.
MARKET AND CHANNELS
Ezenia! sells its products, technologies and solutions primarily to large-scale
corporations, government entities, and educational institutions,
Telecommunication providers and resellers and distributors both domestically and
internationally. Ezenia! delivers its products through distributors, dealers,
vertical market resellers, systems integrators and OEMs who meet the Company's
criteria, as well as to major end users.
A large portion of the Company's revenue continues to come from strategic
OEM partners. In 2000, PictureTel and VTEL accounted for 26% and 17% of revenue,
respectively. In 1999, PictureTel and VTEL accounted for 24% and 25% of revenue,
respectively. In 1998, PictureTel and VTEL accounted for 35% and 18% of revenue,
respectively. Revenue from international markets accounted for 40%, 27% and 30%
of the Company's revenue for the years ended December 31, 2000, 1999 and 1998,
respectively.
Ezenia! conducts its sales and marketing activities from its principal
offices in Burlington, Massachusetts, as well as from two other North American
sales locations, its European headquarters in the United Kingdom and offices in
France, Germany, Australia, Japan and China.
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RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that its future success depends on its ability to
continue to enhance and expand its existing products and to develop new products
that maintain its technology leadership. Ezenia! has invested, and expects to
continue to invest heavily, in the development of products and core
technologies. Extensive product development input is obtained from customers,
partners, service providers and through the Company's active participation and
leadership in industry groups responsible for establishing technical standards
such as the ITU and the IETF.
Since its founding, the Company's research and development effort has been
directed towards the development of standards-based collaboration server
technology. In concert with the evolution of industry standards, these efforts
currently are focused on extending the breadth of network services supported
beyond switched digital services to include local area networks, corporate
intranets, the Internet and ATM. This includes the development of multipoint
products for particular network types and gateway products to provide
interoperability between dissimilar network types. Development is also underway
to support emerging data conferencing applications, provide additional
conferencing management capabilities including enhanced user interfaces and to
add higher capacities to the product families.
At December 31, 2000, Ezenia!'s research and development staff consisted of
41 employees, principally software engineers. The Company's net research and
development expenditures were $16.9 million, $17.3 million and $14.9 million in
2000, 1999 and 1998, representing 60%, 30% and 27% of revenue in those years.
All software development costs have been expensed as incurred because costs
eligible for capitalization have not been material to date.
CUSTOMER SUPPORT AND SERVICE
The Company provides technical support and services to its resellers and
direct customers. A high-level of continuing service and support is critical to
the Company's objective of developing long-term relationships with customers.
The Company's resellers offer a broad range of support including installation,
maintenance and on-site and headquarters-level technical support of products to
their end-user customers. Ezenia! provides a comprehensive service program
including problem management, training, diagnostic tools, hardware repair
services, software updates and upgrades and spare parts programs to facilitate
and supplement the efforts of the Company's resellers.
The Company offers a technical support hotline to its resellers and
customers. Network support engineers answer technical support calls placed by
the support engineers of the Company's resellers and by its direct customers.
The engineers generally provide same-day responses to questions that cannot be
resolved during the initial call. The products are designed with advanced remote
diagnostic capabilities that permit a reseller's or the Company's support
engineers to immediately begin the process of diagnosing any problems in the
field, thereby reducing both response time and cost. When necessary, however,
support engineers are dispatched to the customer's facility.
The Company warranties its software products for 90 days. During this 90-day
warranty period, the Company will investigate all reported problems and will
follow escalation procedures to provide resolution. The Company warranties its
hardware products for 12 months. During this warranty period, the Company will
repair or replace any failed hardware component. The Company also offers
post-warranty support programs ranging from services on a time-and-materials
basis to full-service contracts on a 24-hour, 7-days-a-week basis, and a full
suite of training courses.
11
MANUFACTURING
The Company's manufacturing operations consist primarily of materials
management, quality control, test engineering, production, shipping and
logistics. The Company employs an outsourced manufacturing model in which it
designs the significant hardware subassemblies for its products and uses
independent third-party contract assembly companies to perform printed circuit
board assembly and other production activities with internal efforts generally
limited to final product configuration, assembly and testing. This manufacturing
model offers the capability to quickly fulfill orders with limited lead times
thus providing enhanced customer satisfaction and improved inventory management.
All products are functionally tested utilizing state-of-the-art equipment
designed for "burn-in", diagnostic testing and stress screen testing to assure
the reliability and quality of the Company's products. The Company achieved
International Standard Organization (ISO) 9002 certification in 1994 and each
year since has been re-certified.
Although the Company generally uses standard parts and components for its
products, certain components, including key digital signal processors are
presently available only from single sources or from limited sources such as
Texas Instruments, Motorola and 8X8. The Company has no supply commitments from
its vendors, and generally purchases components on a purchase order basis as
opposed to entering into long-term procurement agreements with vendors. The
Company has been able to obtain adequate supplies of components in a timely
manner from current vendors, or when necessary to meet production needs, from
alternate vendors. The Company believes that, for digital signal processors in
particular, alternative sources of supply would be difficult to develop over a
short period of time and an interruption in supply or a significant increase in
the price of these components would adversely affect the Company's operating
results and business.
Because of the generally short cycle between order and shipment and because
the majority of the Company's sales in each quarter results from orders booked
in that quarter, the Company does not believe that its backlog as of any
particular date is indicative of future sales levels.
COMPETITION
The market for multimedia collaboration products is highly competitive and
is subject to rapid technological change. Additional competition could adversely
affect the Company's sales and profitability, through price reductions and loss
of market share. In particular, should one or more of the Company's current
customers, including strategic partners, telecommunications carriers or
traditional network equipment vendors choose to provide or distribute
competitive products (including their own products) and services, the Company's
business could be materially adversely affected. Many of the Company's current
and potential competitors have substantially greater financial, technical, and
sales and marketing resources than the Company.
The principal competitive factors in the market for multimedia collaboration
servers are, and should continue to be, breadth of capabilities, conformance to
industry standards and demonstrated interoperability, price per port,
performance, network management capabilities, transcoding capabilities,
reliability and customer support. While the Company believes it presently
competes favorably in all of these areas, there can be no assurance that it will
continue to do so.
12
The Company currently competes, or expects to compete, directly or
indirectly with the following category of companies:
o Real-time collaboration companies, such as Cu-See-Me Networks, Centra,
WebEx, and RADvision
o Web interactivity companies, such as Hearme.com, Firetalk, and Lipstream
o Conferencing companies, such as Accord and Lucent
PROPRIETARY RIGHTS
The Company holds eight U.S. Patents and has several patent applications
pending in the United States and other jurisdictions. In addition, the Company
relies on a combination of contractual rights, trade secrets and copyright laws
to establish and protect its intellectual property rights. The Company believes
that, because of the rapid pace of technological change in the data
communications and telecommunications industries, the intellectual property
protection for its products is only one factor in the Company's success,
complementing the knowledge, abilities and experience of the Company's
employees, the frequency of its product enhancements, its relationships with its
partners, the effectiveness of its marketing activities and the timeliness and
quality of its support services.
On June 16, 2000, the Company settled its patent infringement suit against
Accord Networks Ltd. ("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 by December 31,
2000, received an additional $5,025,000. The final $975,000 is being held in
escrow until certain tax matters related to the settlement are resolved with tax
authorities in Israel.
EMPLOYEES
At December 31, 2000, the Company employed a total of 169 persons, including
41 in research and development, 74 in sales, marketing and customer support, 24
in manufacturing and 30 in finance and administration. Twenty-five of the
Company's employees were located internationally and the remainder were located
in the United States. None of the Company's employees are represented by a labor
organization, and the Company believes that its relations with employees are
good.
The Company's success depends, to a significant degree, upon the continuing
contributions of its key management, sales, marketing, and research and
development personnel, many of whom would be difficult to replace. The Company
does not have employment contracts with most of its key personnel. The Company
believes that its future success will depend in large part upon its ability to
attract and retain such key employees.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
NAME AGE POSITION
---- --- --------
Khoa D. Nguyen.............. 47 Chairman, Chief Executive Officer and President
Stephen G. Bassett.......... 53 Chief Financial Officer, Treasurer and Secretary
Steven M. Chomicz........... 47 Vice President of World Wide Sales
Arthur J. Souza............. 35 Vice President, Marketing and Business Development
Edward C. Wade.............. 64 Vice President of Manufacturing
- -------------
Khoa Nguyen was named Chairman of the Board of Directors in March 2000, has
served as President and CEO of the Company since April 1998 and has served as a
Director since December 1997. Previously he had been Executive Vice President
and Chief Operating Officer since September 1997. Prior to joining the Company,
Mr. Nguyen was employed at PictureTel Corporation, a videoconferencing company,
where he served as Vice President of Engineering from January 1993 to February
1994, and as Chief Technology Officer and General Manager of the Group Systems
and Networking Products divisions from February 1994 to August 1996. From August
1991 to December 1992, he was Vice President of Engineering at VTEL Corporation,
a videoconferencing company, and has also held various engineering management
positions with International Business Machines, a computer manufacturer.
Stephen G. Bassett joined Ezenia! in January 2000 as its Chief Financial
Officer, Treasurer, and Secretary. Prior to joining the Company, Mr. Bassett was
employed as an independent financial consultant from May 1996 to December 1999.
From October 1981 to May 1996, he served as an Audit Partner with Ernst & Young
LLP and from June 1969 to October 1981 held other various financial positions
with Ernst & Young LLP, an accounting firm.
Steven M. Chomicz joined Ezenia! in March 2000 as its Vice President, World
Wide Sales. Prior to joining the Company, Mr. Chomicz was employed at
MailWorkZ.com, an Internet software company, where he served as Vice President,
Sales and Marketing from January 1998 to December 1998, and as President and CEO
from December 1998 to November 1999. From August 1979 to January 1998, Mr.
Chomicz held various sales positions at Coulter Electronics, Inc., a medical
electronics company.
Arthur J. Souza was named Vice President of Worldwide Marketing in
February of 2000. Previously, Mr. Souza had been the Director of Product
Management since January 1999. Prior to joining the Company, Mr. Souza was
employed at EPiCON, an innovator in providing solutions to the Application
Service Provider market, where he served as Director of Product Management
from June 1998 to January 1999. From November 1996 to June 1998, Mr. Souza
served as Product Line Manager at Banyan, a leading provider of enterprise
networking and messaging products. From November 1995 to November 1996, Mr.
Souza served as Product Line Manager at FTP Software, a pioneering developer
of TCP/IP networking technology. From February 1986 to November 1995, Mr.
Souza held various senior marketing positions at Lotus Development
Corporation.
Edward C. Wade has served as Vice President of Operations since October
1997. He served at PictureTel Corporation, a video conferencing company, as
Director of Manufacturing for the Group & Network Systems Divisions from March
1991 until October 1997. From July 1988 until March 1991, he served as Vice
President of Materials Management for Symbol Technologies, a supplier of
hand-held terminals and bar code scanning devices. Previously, Mr. Wade held
various manufacturing and materials management positions for Polaroid
Corporation, a manufacturer of commercial and industrial instant photographic
and digital imaging devices.
Officers are elected on an annual basis to serve at the discretion of the
Board of Directors.
14
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate office and principal research, development and
manufacturing facility is located in Burlington, Massachusetts, in a 60,000
square foot facility.
The Company's European headquarters is located in a 6,500 square foot
facility in Wokingham, Berkshire, United Kingdom, which the Company leases
under a five-year agreement expiring in February 2005 and is utilized
principally for sales, marketing, customer service and development activities.
The Company also has sales/service offices located in Herndon, Virginia;
Duluth, Georgia; Sydney, Australia; Beijing, China; France; Tokyo, Japan; Hong
Kong and Wiesbaden, Germany, all of which are leased on a short-term basis.
The Company believes its existing facilities are adequate for its current
needs and that suitable additional or substitute space will be available as
needed.
ITEM 3. LEGAL PROCEEDINGS
In November 1998, the Company commenced an action for patent infringement
against Accord in the U.S. District Court for the District of Massachusetts. The
complaint alleged that Accord was infringing and had infringed on certain of the
Company's patents covering technology for transcoding video signals, which
enables several fundamental videoconferencing capabilities. These capabilities
include continuous presence or split screen video, and rate matching, which
allow parties who connect to the network at different network speeds to
participate in the same conference. The suit alleged patent infringement in
Accord's MGC product line. On June 16, 2000, the Company and Accord settled the
patent infringement suit. 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 by December 31,
2000, received an additional $5,025,000. The final $975,000 is being held in
escrow until certain tax matters related to the settlement are resolved with tax
authorities in Israel.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 2000.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market under the symbol
"EZEN." The following table sets forth, for the periods indicated, the high and
low sale prices per-share of our common stock as reported on the Nasdaq National
Market.
QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
2000
Common stock price - high $ 14.25 $ 10.94 $ 5.38 $ 4.38
Common stock price - low $ 6.13 $ 3.88 $ 2.44 $ 1.13
1999
Common stock price - high $ 20.44 $ 14.50 $ 11.38 $ 8.75
Common stock price - low $ 7.44 $ 6.75 $ 7.25 $ 4.63
As of March 8, 2001, the Company had approximately 115 shareholders of
record. This does not reflect persons or entities who hold their stock in
nominee or "street" name through various brokerage firms. The Company has not
paid dividends on its Common Stock. The Company anticipates it will continue to
reinvest earnings to finance future growth, and therefore, does not intend to
pay dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per-share amounts)
YEAR ENDED DECEMBER 31
2000 (1) 1999 1998 (2) 1997 (3) 1996
---------------------------------------------------------
OPERATING DATA
Revenue ............................... $ 28,152 $ 58,109 $ 55,939 $ 53,495 $ 48,833
Income (loss) from operations ......... (21,388) (760) 751 (9,494) 12,162
Net income (loss) ..................... (17,984) 1,134 1,814 (4,732) 10,194
Net income (loss) per share-diluted ... (1.32) 0.08 0.13 (0.37) 0.77
BALANCE SHEET DATA
Cash and marketable securities ........ $ 34,743 $ 53,080 $ 50,606 $ 46,531 $ 54,684
Total assets........................... 57,754 79,738 80,132 72,899 73,096
Redeemable preferred stock and
long-term debt, less current portion 167
Stockholders' equity .................. 47,791 66,790 64,145 60,091 59,871
(1) 2000 amounts include the establishment of a valuation reserve for deferred
tax assets recorded in prior years approximating $7.8 million, or $0.57
per-share, net income recognized from the settlement of the Accord litigation of
$5.5 million, or $0.40 per-share, and a gain recognized from the sale of the
Company's network access card product line of $3.3 million, or $0.24 per-share.
(2) 1998 amounts include a pre-tax charge to operations totaling $1.3 million,
or $0.10 per-share after taxes, related to the restructuring of certain of the
Company's operations.
16
(3) 1997 amounts include a pre-tax charge to operations of
$14.0 million, or $0.69 per-share after taxes, for purchased research and
development related to the acquisition of the network access card business unit
of Promptus Communications, Inc.
The Company has never paid a cash dividend.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table sets forth the percentage change in certain financial data
compared to the previous year, and the financial data as a percentage of revenue
for the years indicated.
Percent increase (decrease) year to year Items as a percentage of revenue
2000/99 1999/98 2000 1999 1998
Income and Expense Items
Revenues (52) % 4 % 100 % 100 % 100 %
Cost of revenues (34) 2 51 38 39
----------------------------------------------------------------------------------------
Gross profit (62) 5 49 62 61
Operating expenses
Research and development (2) 16 60 30 27
Sales and marketing (8) 11 47 25 23
General and administrative (6) 2 17 9 9
Purchased research and development * *
Non-recurring expenses * * 1
----------------------------------------------------------------------------------------
Total operating expenses (5) 10 124 64 60
----------------------------------------------------------------------------------------
Income (loss) from operations * (*) (75) (1) 1
Interest income, net 9 15 9 4 4
Other income 35
Income (loss) before income taxes * (44) 31 3 5
----------------------------------------------------------------------------------------
Income taxes (benefit) * (57) 32 1 2
----------------------------------------------------------------------------------------
Net income (loss) * (37) % 63 % 2 % 3 %
----------------------------------------------------------------------------------------
* Percentage not meaningful
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
REVENUE
Revenue decreased to $28.1 million in 2000. The decrease in revenue was
principally related to a significant decline in sales of ISDN products and
related service revenues as the videoconferencing market continued to weaken. In
particular, sales of ISDN products and related services to PictureTel
Corporation and VTEL Corporation were significantly lower than in the year ended
December 31, 1999. ISDN product revenue from PictureTel was $6.9 million in 2000
and $13.0 million in 1999. ISDN product revenue from VTEL was $2.5 million in
2000 and $11.1 million in 1999. The sale of the Company's network access card
product line also had the effect of decreasing product revenue for the year
ended December 31, 2000.
17
Revenue increased to $58.1 million in 1999. The change was primarily attributed
to increased sales of the Company's Encounter family of Internet Protocol
(IP)-based products and increased service revenue, offset by a decrease in
revenue from sales of the Company's network access card products resulting
principally from new product offerings that carry a lower selling price. Revenue
from sales of the Company's ISDN products increased marginally in 1999 as the
market for video-conferencing products grew at a slower rate than the market for
IP based products.
GROSS PROFIT Cost of revenues includes material costs, manufacturing labor and
overhead and customer support costs. Gross profit as a percentage of revenues
decreased in 2000 to 48.5% from 62.3% in 1999. Reduction in margin for the year
ended December 31, 2000 was primarily attributable to the overall decrease in
revenues and the related disproportionate effect of fixed manufacturing and
service cost included in cost of revenues. Gross profit as a percentage of
revenues increased in 1999 to 62.3% from 61.5% in 1998. This increase was
primarily attributable to increased margins on service contracts resulting from
increases in service revenues that share in the absorption of fixed cost.
RESEARCH AND DEVELOPMENT Research and development expenses decreased to $16.9
million for the year ended December 31, 2000 from $17.3 million for the year
ended December 31, 1999. This decrease is attributable to the completion of
various engineering projects and the reduction of costs related to the sale of
the network access card product line. Research and development expenses
increased to $17.3 million in 1999 from $14.9 million in 1998 primarily due to
increased staffing for the development of products for the IP and web-based
Internet products, the first of which was released in the first quarter of 2000.
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 $13.2 million in
2000 from $14.4 million in 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. Sales and marketing expenses
increased to $14.4 million in 1999 from $13.0 million in 1998 primarily due to
the cost incurred in connection with the Company's name change and expanded
marketing programs relating to the continued development of the Company's
Encounter family of IP-based products. The Company expects to continue to commit
substantial resources to sales and marketing in the future.
GENERAL AND ADMINISTRATIVE General and administrative expenses decreased to $4.9
million in 2000 from $5.2 million in 1999. The decrease was primarily due to
reduction of expenditures related to the Company's corporate-wide financial
accounting, manufacturing, and sales and distribution system, which was
implemented during 1999. General and administrative expenses in 1999 remained at
approximately the same levels as compared to 1998.
INTEREST INCOME, NET Interest income, net, consists of interest on cash, cash
equivalents and marketable securities. Interest income increased over the last
two years to approximately $2.5 million in 2000, $2.3 million in 1999 and $2.0
million in 1998. Increases in interest income were primarily related to higher
rates of return on investments.
INCOME TAX Income taxes increased to approximately $8.9 million in 2000 from
$400 thousand in 1999. The Company recorded a valuation allowance of
approximately $7.8 million to reduce the carrying value of deferred tax assets
recorded in prior years to zero and $975 thousand related to the settlement of
litigation with Accord. The decrease in income taxes to $400 thousand in 1999
from $935 thousand in 1998 was due to the decrease in income before income
taxes.
LITIGATION On June 16, 2000, the Company settled its patent infringement suit
against 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 by December 31, 2000 received
an additional $5,025,000. The final $975,000 is being held in escrow until
certain tax matters related to the settlement are resolved with tax authorities
in Israel.
FACTORS WHICH MAY AFFECT FUTURE OPERATIONS This Annual Report includes
discussions of its long-term growth outlook, including various forward-looking
statements. The following risks and uncertainties, among others, could affect
the degree to which such expectations are realized.
18
DEPENDENCE ON MAJOR CUSTOMERS. While the Company is focusing efforts on
broadening its reseller, distribution and OEM sales channels, sales to a
relatively small number of customers have accounted for a significant portion of
the Company's revenue. The Company believes that its dependence on a similarly
few number of customers will continue during 2001. This concentration of
customers may cause revenues and operating results to fluctuate from
quarter-to-quarter based on major customers' requirements and the timing of
their orders and shipments. The Company's agreements with its customers
generally do not include minimum purchase commitments or exclusivity
arrangements. The Company's operating results could be materially and adversely
affected if any present or future major customer were to choose to reduce its
level of orders, were to change to another vendor for purchases of a similar
product, were to combine their operations with another company who had an
established relationship with another vendor for purchases of a similar product,
were to experience financial, operational or other difficulties or were to delay
paying or fail to pay amounts due the Company. Early in 2000, PictureTel
reported that it is experiencing financial difficulties.
REDUCED DEMAND FOR TRADITIONAL VIDEOCONFERENCING PRODUCTS. Traditional
videoconferencing technology such as ISDN has had a rapid decline. The Company's
ISDN revenue declined to $16.1 million in 2000 from $39.2 million in 1999. In
response to increased customer demand for real-time collaboration products, the
Company has shifted its focus away from traditional ISDN-based products in order
to develop and sell its IP-based products.
EVOLVING MARKETS. Sales of real-time collaboration products account for an
increasing portion of the Company's revenue. The Company's success depends, to a
significant extent, on the acceptance and the rate of adoption of collaboration
products, in general and its products in particular. There is inadequate
experience to predict whether real-time collaboration products will ultimately
be accepted by the market. There can be no assurance that any of the markets for
the Company's products will develop to the extent, in the manner, or at the rate
anticipated by the Company. In addition, future prices the Company is able to
obtain for its products may decrease from historical levels as a result of new
product introductions by others, price competition, technological change or
other factors.
RAPID TECHNOLOGICAL CHANGE. The market for the Company's products is
characterized by rapidly changing technology, evolving industry standards,
emerging network architectures and frequent new product introductions. The
adoption rate of new technologies and products may adversely impact near-term
growth of the conferencing market as users evaluate the alternatives. The
Company has invested, and for 2001 plans to continue to invest, in software
development and products incorporating certain of these new technologies. Many
other companies, including the Company's largest customer, are also developing
products incorporating these new technologies that are competitive with the
Company's current and future offerings. The Company's success will depend, in
part, upon its ability through continued investments to maintain technological
leadership, to enhance and expand its existing product offerings and to select
and develop in a timely manner new products that achieve market acceptance.
COMPETITION. The market for networking and communication products is highly
competitive. The Company expects competition to increase significantly in the
future. A number of companies have introduced or announced their intention to
introduce products that could be competitive with the Company's products, and
the rapidly evolving nature of the markets in which the Company competes may
attract other new entrants as they perceive opportunities. Some of the Company's
current and potential competitors have longer operating histories and greater
financial, technical and sales and marketing resources.
INFOWORKSPACE ACQUISITION. On December 28, 2000, the Company entered into
a purchase agreement to acquire all of the operating assets and intellectual
property of the InfoWorkSpace-TM-, a business unit of General Dynamics
Electronic Systems. The Company entered into the purchase agreement with the
expectation that the transaction will result in certain benefits including,
among other things, benefits relating to expanded and complementary product
offerings, enhanced revenues, increased market opportunity, new technology
and the addition of engineering personnel. Achieving the benefits of the
acquisition will depend in part on the integration of our technology,
operations and personnel in a timely and efficient manner so as to minimize
the risk that the transaction will result in the loss of market opportunity
or key employees or the diversion of the attention of management. In
particular, the management team and developers who work with the
InfoWorkSpace business unit are located in Colorado Springs, Colorado,
Mountain View, California, Washington, DC, and its principal offices are
located in Burlington, Massachusetts. The Company cannot assure you that it
will successfully integrate the InfoWorkSpace-TM- operations and personnel
with its operations and personnel. In addition, the Company cannot assure you
that, following the transaction, its businesses will achieve revenues,
specific net income or loss levels, efficiencies or synergies that justify
the acquisition or that the acquisition will result in increased earnings in
any future period.
InfoWorkSpace-TM- products provide knowledge workers a secure virtual
workspace for project and team collaboration.
19
InfoWorkSpace-TM- is currently used primarily by government organizations,
including Defense Department agencies and the Intelligence Community.
PERIOD TO PERIOD FLUCTUATIONS. The Company's operating results are likely to
vary significantly from quarter to quarter as a result of several factors,
including: the timing of new product announcements and introductions by the
Company, its major customers and its competitors; market acceptance of new or
enhanced versions of the Company's products; changes in the product mix of
revenue; changes in the relative proportions of revenue among distribution
channels or among customers within each distribution channel; changes in
manufacturing costs; price reductions for the Company's products; the gain or
loss of significant customers; increased research and development expenses
associated with new product introductions; seasonally; and general economic
conditions. New customers orders have generally been characterized by lengthy
sales cycles, making it difficult to predict the quarter in which sales will
occur. The Company typically operates with a small backlog. As a result,
quarterly revenue and operating results generally depend on the volume, timing
of and ability to fulfill orders received within the quarter, which are
difficult to forecast. Also, changes in ordering patterns have resulted in the
Company recognizing a substantial portion of its revenue in a given quarter from
sales booked and shipped in the last weeks of that quarter. All of the above
factors can materially adversely affect the Company's business and operating
results for one quarter or a series of quarters, and are difficult to forecast.
The Company establishes its expenditure levels for product development and other
operating expenses based, in large part, on its expected future sales. As a
result, if revenues fall below expectations, there would likely be a material
adverse effect on the Company's operating results because only a small portion
of the Company's expenses vary with its sales in the short-term.
PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's success depends, to a
large extent, on its ability to protect its proprietary technology. The Company
currently holds eight U.S. patents relating to its existing products and has
several patent applications pending. In addition to its patents, the Company
relies primarily on a combination of contractual rights, trade secrets and
copyrights to protect its intellectual property rights.
RETENTION OF KEY EMPLOYEES. The Company's success depends, to a significant
degree, upon the continuing contributions of its key management, sales,
marketing and research and development personnel, many of whom would be
difficult to replace. The Company does not have employment contracts with most
of its key personnel. The Company believes that its future success will depend
in large part upon its ability to attract and retain such key employees.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company has cash, cash equivalents and marketable
securities of $34.7 million, a decrease of $18.3 million from December 31, 1999.
The Company regularly invests excess funds in short-term money market funds,
government securities and commercial paper. The Company has no long-term debt.
On October 12, 2000, the Company's Board of Directors approved a stock buy-back
program under which the Company is authorized to repurchase up to 10% of its
outstanding shares (or approximately 1.38 million shares) at prevailing market
prices from time-to-time. During the quarter ended December 31, 2000, the
Company repurchased 500,000 shares at prevailing market prices, at an aggregate
cost of approximately $1.7 million.
On December 28, 2000, the Company entered into a purchase agreement to acquire
all of the operating assets and intellectual property of the InfoWorkSpace, a
business unit of General Dynamics Electronic System, for $17 million in cash and
400,000 shares of the Company's common stock. An advance of $6 million was paid
in December 2000, and the balance is due in installments through January 2002.
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.
20
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
PAGE
----
Report of Independent Auditors.................................................................. 22
Consolidated Balance Sheets as of December 31, 2000 and 1999.................................... 23
Consolidated Statements of Operations for the years ended December 31, 2000, 1999
and 1998...................................................................................... 24
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000,
1999, 1998 and 1997........................................................................... 25
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998...................................................................................... 26
Notes to the Consolidated Financial Statements.................................................. 27
21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Ezenia! Inc.
We have audited the accompanying consolidated balance sheets of Ezenia! Inc. and
subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audits provide 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 Ezenia!
Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Boston, Massachusetts
January 31, 2001
22
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share related data)
December 31
2000 1999
-----------------------------------
ASSETS
Current assets
Cash and cash equivalents $20,457 $35,095
Marketable securities 14,286 17,985
Accounts receivable, less allowances of $716 and $1,518
in 2000 and 1999, respectively 3,146 6,800
Inventories 3,287 2,610
Deferred income taxes 3,733
Receivable from sale of product line 1,500
Prepaid expense and other current assets 1,889 1,183
-----------------------------------
Total current assets 44,565 67,406
Equipment and improvements, net of accumulated depreciation 5,798 6,461
Deferred income taxes 4,047
Investment in InfoWorkSpace 6,000
Other assets 1,391 1,824
-----------------------------------
$57,754 $79,738
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,989 $ 4,750
Accrued expenses 7,207 7,595
Deferred revenue 767 603
-----------------------------------
Total current liabilities 9,963 12,948
Commitments and contingencies - Note 10
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;
13,299,762 issued and outstanding in 2000; 13,588,505 issued
and outstanding in 1999 138 136
Capital in excess of par value 59,403 58,483
Retained earnings (deficit) (9,543) 8,441
Accumulated other comprehensive loss (477) (270)
Treasury stock at cost; 500,000 shares (1,730)
-----------------------------------
47,791 66,790
-----------------------------------
$57,754 $79,738
===================================
SEE ACCOMPANYING NOTES.
23
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
(In thousands, except for share related data) 2000 1999 1998
-------------------------------------------------------------
REVENUES
Product revenue $ 24,167 $ 51,058 $ 50,340
Service revenue 3,985 7,051 5,599
-------------------------------------------------------------
28,152 58,109 55,939
-------------------------------------------------------------
COSTS OF REVENUES
Cost of product revenue 10,502 17,903 17,338
Cost of service revenue 3,985 4,032 4,191
-------------------------------------------------------------
14,487 21,935 21,529
-------------------------------------------------------------
GROSS PROFIT 13,665 36,174 34,410
OPERATING EXPENSES
Research and development 16,930 17,301 14,878
Sales and marketing 13,202 14,412 13,005
General and administrative 4,921 5,221 5,119
Non-recurring charges 657
-------------------------------------------------------------
35,053 36,934 33,659
-------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (21,388) (760) 751
Interest income, net 2,492 2,293 1,998
Litigation settlement 6,500
Gain on sale of network access card product line 3,287
-------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (9,109) 1,533 2,749
Income taxes 8,875 399 935
-------------------------------------------------------------
NET INCOME (LOSS) $ (17,984) $ 1,134 $ 1,814
-------------------------------------------------------------
NET INCOME (LOSS) PER SHARE
Basic $ (1.32) $ 0.08 $ 0.14
Diluted $ (1.32) $ 0.08 $ 0.13
-------------------------------------------------------------
SEE ACCOMPANYING NOTES.
24
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for share related data)
Accumulated
Capital Other
Common Stock in Excess of Retained Comprehensive
Shares Par Value Par Value Earnings Loss
-----------------------------------------------------------------------------
BALANCES AS OF
DECEMBER 31, 1997 13,122,843 $ 131 $ 54,584 $ 5,493 $ (117)
Stock issued under
employee benefit plans
258,903 3 2,066
Tax benefit related to employee
stock plans 70
Foreign currency translation
adjustment 101
NET INCOME 1,814
----------------------------------------------------------------------
Comprehensive income
BALANCES AS OF
DECEMBER 31, 1998
13,381,746 134 56,720 7,307 (16)
Stock issued under
employee benefit plans
206,759 2 1,589
Tax benefit related to employee
stock plans 174
Foreign currency translation (254)
NET INCOME 1,134
----------------------------------------------------------------------
Comprehensive income
BALANCES AS OF
DECEMBER 31, 1999 13,588,505 136 58,483 8,441 (270)
Stock issued under
employee benefit plans 211,257 2 920
Foreign currency translation (207)
Acquisition of treasury stock (500,000)
NET LOSS (17,984)
----------------------------------------------------------------------
Comprehensive loss
BALANCES AS OF
DECEMBER 31, 2000 13,299,762 $ 138 $ 59,403 $ (9,543) $ (477)
----------------------------------------------------------------------
Total Comprehensive
Treasury Stockholders' Income
Stock Equity (Loss)
-----------------------------------------
BALANCES AS OF
DECEMBER 31, 1997 $ 60,091
Stock issued under
employee benefit plans
2,069
Tax benefit related to employee
stock plans 70
Foreign currency translation 101 $ 101
adjustment
NET INCOME 1,814 1,814
---------------------------------------
Comprehensive income $ 1,915
======
BALANCES AS OF
DECEMBER 31, 1998 64,145
Stock issued under
employee benefit plans 1,591
Tax benefit related to employee
stock plans 174
Foreign currency translation (254) $ (254)
NET INCOME 1,134 1,134
---------------------------------------
Comprehensive income $ 880
======
BALANCES AS OF
DECEMBER 31, 1999 66,790
Stock issued under
employee benefit plans 922
Foreign currency translation (207) $ (207)
Acquisition of treasury stock $ (1,730) (1,730)
NET LOSS (17,984) (17,984)
---------------------------------------
Comprehensive loss $(18,191)
======
BALANCES AS OF
DECEMBER 31, 2000 $ (1,730) $ 47,791
---------------------------------------
SEE ACCOMPANYING NOTES.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) YEAR ENDED DECEMBER 31
2000 1999 1998
-----------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (17,984) $ 1,134 $ 1,814
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Gain on sale of network access card product line (3,287)
Depreciation and amortization 3,710 3,768 3,686
Purchased technology write-off 1,034
Deferred income taxes 7,780 (480) (340)
Tax benefit related to stock plan activities 174 70
Changes in operating assets and liabilities:
Accounts receivable 3,654 978 (534)
Inventories (1,971) 1,083 189
Other current assets 44 314 (556)
Accounts payable and accrued expenses (3,602) (2,597) 3,265
Deferred revenue 164 (442) 81
-----------------------------------------------------
Net cash provided by (used for) operating activities (11,492) 4,966 7,675
INVESTING ACTIVITIES
Cash received from sale of network access card product line 3,000
Cash deposit used to purchase InfoWorkSpace (6,000)
Net purchases of equipment and improvements (2,891) (3,093) (4,545)
Purchases of marketable securities (7,374) (3,634) (13,198)
Proceeds from sale of marketable securities 11,073 13,030 7,482
Decrease (increase) in other assets 61 (736) (1,058)
-----------------------------------------------------
Net cash provided by (used for) investing activities (2,131) 5,567 (11,319)
FINANCING ACTIVITIES
Repayment of long-term debt (167)
Net proceeds from issuance of stock under employee benefit plans 922 1,591 2,069
Acquisition of treasury stock (1,730)
-----------------------------------------------------
Net cash provided by (used for) financing activities (808) 1,591 1,902
Effect of exchange rate on cash and cash equivalents (207) (254) 101
-----------------------------------------------------
Increase (decrease) in cash and cash equivalents (14,638) 11,870 (1,641)
Cash and cash equivalents at beginning of year 35,095 23,225 24,866
-----------------------------------------------------
Cash and cash equivalents at end of year $ 20,457 $ 35,095 $ 23,225
=====================================================
Supplementary disclosure of cash flow information:
Interest paid $ 43 $ 86 $ 77
=====================================================
Noncash investing activity
Value of inventory to be received in connection with sale of
network access card product line $ 750
==================
SEE ACCOMPANYING NOTES.
26
1. BUSINESS
Ezenia! Inc. ("Ezenia!" or the "Company") operates in one business segment,
which is the design, development, manufacturing, marketing and sale of real-time
collaboration solutions for corporate networks and eBusiness. Founded in 1991,
Ezenia! develops and markets products that enable organizations to provide
high-quality group communication and collaboration capabilities to commercial,
consumer and institutional users.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. All assets and liabilities of the Company's
foreign subsidiaries are translated at the rate of exchange at the end of the
year, while sales and expenses are translated at the average rates in effect
during the year. The net effect of these translation adjustments is shown in the
accompanying financial statements as a component of stockholders' equity.
SIGNIFICANT ESTIMATES AND ASSUMPTIONS
The preparation of the 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, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment, and the Company's
products are generally delivered without significant post-sale obligations to
the customer. If significant obligations exist, revenue recognition is deferred
until the obligations are satisfied. Estimated product warranty costs are
accrued at the time of sale. Revenue from maintenance agreements is recognized
ratably over the terms of the agreements, and other service revenue is
recognized as the services are performed.
The Company has adopted the provisions of Staff Accounting Bulletin No. 101,
"Revenue Recognition," which did not and does not have a material effect on
financial position or results of operations.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
All of the Company's cash equivalents and marketable securities are classified
as available-for-sale, and accordingly are carried at fair market value based on
quoted market prices. Unrealized gains and losses were not material in 2000,
1999 or 1998. Realized gains and losses are included in net interest income. The
Company considers all liquid investments with a maturity of three months or less
at the date of purchase to be cash equivalents. Cash equivalents and marketable
securities consist of highly rated U.S. and state government securities,
commercial paper and short-term money market funds.
Marketable securities at December 31, 2000, by contractual maturity, include
$7.6 million due in one year or less and $6.7 million due between one year and
two years.
CONCENTRATIONS OF CREDIT RISK
Revenue from two customers accounted for 43%, 49% and 53% of total revenues in
2000, 1999 and 1998, respectively. Accounts receivable from these customers
amounted to approximately $1.6 million and $3.2 million at December 31, 2000 and
1999, respectively. Export sales, primarily to Europe, were $11.3 million, $15.7
million and $15.7 million in 2000, 1999 and 1998, respectively.
27
Financial instruments, which potentially subject the Company to concentrations
of credit risk, are cash equivalents, marketable securities and accounts
receivable. All of the Company's cash equivalents and marketable securities are
maintained by major financial institutions. Concentration of credit risk with
respect to accounts receivable is limited to certain customers to whom the
Company makes substantial sales. To reduce risk, the Company routinely assesses
the financial strength of its customers. Write-offs related to accounts
receivable have been within management's expectations.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out method.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:
Computer and office equipment 3 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of lease term or estimated
useful life
DEFERRED REVENUE
Deferred revenue represents amounts received from customers under maintenance
agreements or for product sales in advance of revenue recognition.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. To date,
costs of internally developed software eligible for capitalization have been
immaterial and have been expensed as incurred.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes."
NET INCOME (LOSS) PER SHARE
The Company reports earnings per-share in accordance with the SFAS No. 128,
"Earnings per Share." Diluted earnings per-share include the effect of dilutive
stock options.
Shares used in computing basic and diluted net income (loss) per-share are as
follows:
2000 1999 1998
-----------------------------------------------------
BASIC 13,649,245 13,450,000 13,236,000
DILUTED 13,649,245 13,730,000 13,578,000
-----------------------------------------------------
The effect of dilutive stock options on the total shares used to compute diluted
net income per-share was 280,000 in 1999 and 342,000 in 1998.
28
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets," the Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present. On an on-going basis,
management reviews the value and period of amortization or depreciation of
long-lived assets. During this review, the Company reevaluates the significant
assumptions used in determining the original cost of long-lived assets. Although
the assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been a permanent impairment of the
value of long-lived assets based upon events or circumstances that have occurred
since acquisition. The extent of the impairment amount recognized is based upon
a determination of the fair value of the impaired asset.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based compensation plans
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations rather than the
alternative fair value accounting provided under SFAS No. 123, "Accounting for
Stock-Based Compensation." No compensation expense has been recognized by the
Company for its stock option plans and its stock purchase plan.
ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS Nos. 137 and 138, which establishes standards for the recognition,
measurement and reporting of derivatives and hedging activities and is
effective, as amended, for all quarters in fiscal years beginning after December
31, 2000. The Company anticipates that the adoption of this new accounting
standard will not have a material impact on its consolidated financial
statements.
3. ACQUISITIONS
On December 28, 2000, the Company entered into a definitive agreement to
acquire all operating assets and intellectual property of InfoWorkSpace-TM-,
a business unit of General Dynamics Electronic Systems, for $17 million in
cash and 400,000 shares of the Company's common stock. An advance of $6
million was paid in December 2000, and the balance is due in installments
through 2002. The 400,000 shares issued are accompanied by an option allowing
the seller to put the shares back to the Company at $10 per share, beginning
in December 2001. The put right shall expire December 31, 2002 or at such
time as the last reported closing price of the common stock as reported on
the Nasdaq National Market has been equal to or greater than $11.00 per-share
for fifteen (15) consecutive trading days. Under the terms of the agreement,
the Company will acquire the InfoWorkSpace-TM- product line and employ the
management team and core group of developers. The acquisition will be
accounted for as a purchase. Accordingly, the purchase price will be
allocated to the underlying assets and liabilities based upon their estimated
fair values at the date of acquisition. The Company expects the closing to
occur in the first quarter of 2001.
InfoWorkSpace-TM- products provide knowledge workers a secure virtual
workspace for project and team collaboration. InfoWorkSpace-TM- is currently
used primarily by government organizations, including Defense Department
agencies and the Intelligence Community.
4. SALE OF PRODUCT LINE
On September 15, 2000, the Company completed the sale of assets and technology
associated with its network access card product line to Telco Systems, Inc.
(Telco) for cash of $4.5 million, receivable in installments through March 2001,
and $1.5 million of future product to be supplied by Telco. Revenue from sales
of NAC products were $3.3 million, $5.7 million and $9.1 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
29
5. INVENTORIES
Inventories consist of:
December 31
(In thousands) 2000 1999
----------------------------------------
Raw materials and subassemblies $ 1,890 $1,790
Work in process 649 565
Finished goods 748 255
----------------------------------------
$ 3,287 $2,610
========================================
6. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of:
December 31
(In thousands) 2000 1999
---------------------------------------
Computer and office equipment $ 18,724 $ 18,475
Furniture and fixtures 314 408
Leasehold improvements 1,550 926
---------------------------------------
20,588 19,809
Less accumulated depreciation 14,790 13,348
---------------------------------------
$ 5,798 $ 6,461
=======================================
7. ACCRUED EXPENSES
Accrued expenses consist of:
December 31
(In thousands) 2000 1999
---------------------------------------
Employee compensation and benefits $ 1,871 $ 2,042
Professional fees 150 763
Warranties and other customer-related costs 2,010 1,907
Income taxes 2,847 1,448
Other 330 1,435
---------------------------------------
$ 7,207 $ 7,595
=======================================
30
8. INCOME TAXES
The provision for income taxes (benefit) for 2000, 1999 and 1998 is as follows:
Year ended December 31
(In thousands) 2000 1999 1998
-----------------------------------------------------
Current:
Federal $ 619 $ 1,029
State 43 112
Foreign $ 1,095 217 134
-----------------------------------------------------
1,095 879 1,275
Deferred:
Federal 6,769 (382) (298)
State 967 (54) (42)
Foreign 44 (44)
-----------------------------------------------------
7,780 (480) (340)
-----------------------------------------------------
$ 8,875 $ 399 $ 935
=====================================================
Cash payments for income taxes totaled approximately $1,180,000 in 2000,
$1,700,000 in 1999 and $254,000 in 1998. Payments and provision for income taxes
made in 2000 include $975,000 of foreign withholding tax related to the
Company's litigation settlement (See Note 9). This amount is currently held in
escrow until certain matters related to the settlement are resolved with tax
authorities in Israel.
The total income tax expense differs from the income tax at the statutory
federal income tax rate due to the following:
Year ended December 31
(In thousands) 2000 1999 1998
-----------------------------------------------------
Federal income tax at statutory rate $ (3,097) $ 521 $ 935
State income taxes, net of federal benefit (289) 37 164
Foreign taxes, net 119 107 126
Research and development tax credits (606) (261) (92)
Tax-exempt interest income (64) (242)
Other 37 59 44
Valuation allowance 12,711
-----------------------------------------------------
Total income tax expense $ 8,875 $ 399 $ 935
=====================================================
31
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
Year ended December 31
(In thousands) 2000 1999
-----------------------------------------
Deferred tax assets:
Purchased research and development $4,589
Net operating loss carryforwards $ 9,040
Research and development credits 1,231 625
Foreign tax credits 975
Accruals and allowances not currently deductible for tax purposes 965 2,038
Depreciation and other 500 528
Valuation allowance (12,711)
-----------------------------------------
Total deferred tax assets $ 0 $7,780
=========================================
At December 31, 2000, the Company has available net operating loss carryforwards
of approximately $22,600,000 expiring in 2021 and federal research and
development tax credit carryforwards of approximately $606,000 expiring in 2021
and $625,000 expiring in 2020.
9. NON-RECURRING CHARGES AND CREDITS
On June 16, 2000, the Company settled its patent infringement suit against
Accord in the United States District Court for the District of Massachusetts.
The settlement agreement, which was recorded in the quarter ended June 30, 2000,
provided, among other things, 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 the payment in 2000, net of foreign tax
withholding.
In July 1999, the Court of Appeals for the Federal Circuit upheld a Federal
District court's previous ruling in Datapoint's patent infringement case with
PictureTel Corporation, that products sold by PictureTel, including those
manufactured by the Company, do not infringe on any of the Datapoint patents in
the videconferencing field and that the patent claims asserted against
PictureTel are invalid. As a result, in the quarter ended September 30, 1999,
the Company reversed into cost of product revenue an accrual of $1,075,000,
which had been established in prior periods, for estimated potential liability
associated with this litigation.
Also, in the quarter ended September 30, 1999, the Company experienced a
significant decline in revenue associated with technology purchased as part of
the 1997 acquisition of the NAC business unit from Promptus Communications.
Concurrently, the Company introduced products using new network access
technology to replace the products manufactured utilizing the technology
acquired from Promptus Communications. During the quarter ended September 30,
1999, the Company estimated the contribution of the acquired NAC technology to
the future operating results of the Company would be insignificant and
wrote-off, as part of cost of product revenue, approximately $1,034,000 of
related unamortized purchased technology.
In March 1998, the Company adopted a plan to restructure certain of its
operations to increasingly focus and streamline its product offerings. As a
result of these actions, the Company recorded charges of approximately
$1,300,000 in 1998. These one-time charges included $657,000 reported as
non-recurring restructuring expenses primarily covering estimated severance
costs, $450,000 reported as a part of cost of sales for various write-downs of
excess and obsolete inventory and $193,000 for certain facilities costs reported
as research and development expenses.
32
10. COMMITMENTS AND CONTINGENCIES
The Company rents its primary facility under an operating lease, which expires
in February 2006. The Company also leases sales offices under leases that expire
on various dates through February 2005. Future minimum lease payments at
December 31, 2000 under these non-cancelable operating leases are approximately
$1,038,000 in 2001, $1,049,000 in 2002 and $1,047,000 each in 2003, 2004 and
2005.
Rent expense was approximately $949,000, $916,000 and $997,000 in 2000, 1999 and
1998, respectively.
11. PREFERRED STOCK.
Each series of Preferred Stock shall have such rights, preferences, privileges
and restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences as determined by the Board of
Directors.
12. BENEFIT PLANS
STOCK INCENTIVE PLAN
The Company's Amended and Restated 1991 Stock Incentive Plan (the "1991 Plan")
provides for the sale or award of common stock, or the grant of incentive stock
options or nonqualified stock options for the purchase of common stock, of up to
6,090,541 shares to officers, employees and consultants. The Plan is
administered by the Board of Directors. Options have been granted at a price not
less than the fair market value on the date of grant. The options generally
become exercisable over a four to five-year period and expire over a period not
exceeding ten years. In February 2000, the Board of Director's approved the
acceleration of all outstanding and future options granted pursuant to the 1991
Plan and the Company's Amended and Restated 1994 Non-Employee Director Stock
Option Plan (the "Director Plan") upon a "Change in Control" or an "Acquisition"
(as each such term is defined in the 1991 Plan); provided, however, that the
vesting of no such option shall be so accelerated in the event that the holder
thereof elects to forego such acceleration on or prior to the date of such
Change in Control or Acquisition. Shares issuable increased as of January 1,
2001 by 664,988, which represents five percent of the total number of shares of
common stock issued and outstanding as of December 31, 2000. The current plan
terminates on March 31, 2001.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Director Plan provides that each non-employee director of the Company be
granted an option to acquire 15,000 shares of common stock on the date that
person becomes a director and annually be granted, beginning with the January 1
falling at least twelve months after a Director's initial grant, an option to
purchase an additional 3,000 shares. Options are granted at a price equal to the
fair market value on the date of grant. The options become exercisable over a
four-year period, and expire ten years from the date of grant. The Company has
reserved 200,000 shares of common stock for issuance under the Director Plan and
has granted options issued or issuable for this number of shares. Accordingly,
at present, no additional options may be granted under the Director Plan.
33
A summary of option activity under the 1991 Plan and the Director Plan is as
follows:
Weighted
Average
Exercise
Shares Price
------------------------------------
Outstanding at December 31, 1997 2,189,639 $16.08
Granted 965,500 9.10
Terminated (815,090) 19.63
Exercised (163,192) 7.33
-------------------
Outstanding at December 31, 1998 2,176,857 12.31
Granted 1,472,875 8.45
Terminated (1,192,938) 11.61
Exercised (112,403) 6.60
-------------------
Outstanding at December 31, 1999 2,344,391 10.52
Granted 2,425,477 5.88
Terminated (1,729,657) 9.77
Exercised (47,798) 6.20
-------------------
Outstanding at December 31, 2000 2,992,413 $ 5.79
------------------------------------
Related information for options outstanding and exercisable as of December 31,
2000 under these benefit plans is as follows:
Weighted
Average Weighted
Outstanding Remaining Average
Range of exercise prices Options Contractual Life Exercise Price
-----------------------------------------------------
$ 1.87 - $ 7.94 2,126,267 6.96 $ 3.47
8.00 - 10.00 369,456 8.67 9.18
10.06 - 19.25 473,910 4.93 12.10
23.25 - 43.25 22,780 2.32 35.75
-----------------------------------------------------
2,992,413 $ 5.79
----------------- ------------------
Weighted
Exercisable Average
Range of exercise prices Options Exercise Price
----------------------------------
$ 3.00 - $ 7.94 401,238 $ 2.01
8.00 - 10.00 91,940 9.18
10.06 - 19.25 223,230 12.41
23.25 - 43.25 20,765 35.38
----------------------------------
737,173 $ 6.99
----------------------------------
34
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "Stock Purchase Plan")
under which eligible employees may purchase common stock at a price per share
equal to 85% of the lower of the fair market value of the common stock at the
beginning or end of each offering period. Participation in the offering is
limited to 10% of an employee's compensation (not to exceed amounts allowed
under Section 423 of the Internal Revenue Code), may be terminated at any time
by the employee and automatically ends on termination of employment with the
Company. A total of 600,000 shares of common stock have been reserved for
issuance under this plan.
PRO-FORMA INFORMATION FOR STOCK-BASED COMPENSATION
Pro-forma information regarding net income (loss) and earnings (loss) per-share,
as if the Company had used the fair value method of SFAS 123 to account for
stock options issued under its 1991 Plan and Director Plan, and shares purchased
under the Stock Purchase Plan, is presented below. The fair value of stock
activity under these plans was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions as of the date
of grant: risk-free interest rates equal to the then available rate for
zero-coupon U.S. government issues with a remaining term equal to the expected
life of the options; no dividend yields; an average volatility factor of the
expected market price of the Company's common stock over the expected life of
the option of 1.29 in 2000, .86 in 1999 and .85 in 1998; and a weighted-average
expected life of the option of 5.3 years in 2000, 5.4 years in 1999 and 5.3
years in 1998.
For purposes of pro-forma disclosures, the estimated weighted average fair value
of options granted during the year of $6.10, $7.22 and $6.47 in 2000, 1999 and
1998, respectively, is amortized to expense over the related vesting period.
Pro-forma information is as follows:
(In thousands except for per-share information)
2000 1999 1998
------------------------------------------------------
Pro-forma net loss $ (22,449) $ (2,813) $ (2,375)
Pro-forma net loss per share
Basic (1.64) (0.21) (0.18)
Diluted (1.64) (0.21) (0.18)
SAVINGS PLAN
The Company sponsors a savings plan for its employees, which has been qualified
under Section 401(k) of the Internal Revenue Code. Eligible employees are
permitted to contribute to the 401(k) plan through payroll deductions within
statutory and plan limits. Contributions from the Company are made at the
discretion of the Board of Directors and approximated $236,000 in 2000, $293,000
in 1999 and $227,000 in 1998.
35
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------
2000
Revenue $ 9,167 $ 7,277 $ 6,506 $ 5,202
Gross profit 4,735 3,482 3,289 2,159
Operating loss (4,709) (5,957) (5,189) (5,533)
Net income (loss) (11,901) 183 (1,257) (5,009)
Net income (loss) per share - basic (.87) .01 (.09) (.37)
Net income (loss) per share - diluted (.87) .01 (.09) (.37)
1999
Revenue $ 16,562 $ 16,832 $ 12,036 $ 12,680
Gross profit 10,416 10,558 7,326 7,877
Operating income (loss) 1,475 1,577 (2,127) (1,683)
Net income (loss) 1,332 1,371 (993) (574)
Net income (loss) per share - basic 0.10 0.10 (0.07) (0.04)
Net income (loss) per share - diluted 0.10 0.10 (0.07) (0.04)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- --------------------------------------------------------------------------------
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors and compliance with Section 16(a) of
the Securities Exchange Act may be found in the sections captioned, "Proposal
No. 1 - Election of Directors" and "Section 16(a) - Beneficial Ownership
Reporting Compliance" appearing in the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held on May 30, 2001. Such information is incorporated herein by
reference. Information with respect to Executive Officers may be found under the
section captioned, "Executive Officers of the Registrant" in Part I.
ITEM 11. EXECUTIVE COMPENSATION
The information required with respect to this item may be found in the
sections captioned "Executive Compensation and Other Information Concerning
Directors and Executive Officers" appearing in the definitive Proxy Statement to
be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held on May 30, 2001. Such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required with respect to this item may be found in the
section captioned, "Security Ownership of Certain Beneficial Owners and
Management" appearing in the definitive Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
May 30, 2001. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required with respect to this item may be found in the
section captioned, "Certain Transactions" appearing in the definitive Proxy
Statement to be delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held on May 30, 2001. Such information is incorporated
herein by reference.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF FORM 10-K
1. CONSOLIDATED FINANCIAL STATEMENTS.
The following consolidated financial statements and supplementary data
are included in Part II-Item 8 filed as part of this report:
o Consolidated Balance Sheets as of December 31, 2000 and 1999
o Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998
o Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
o Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 o Notes to Consolidated Financial
Statements
o Quarterly Financial Information (unaudited)
o Report of Independent Auditors
2. FINANCIAL STATEMENT SCHEDULE.
o Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable, not required or the information required is shown in the
consolidated financial statements or the notes thereto.
3. LIST OF EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.1* Form of Amended and Restated Certificate of Incorporation of the Registrant.
3.2* Amended and Restated By-Laws of the Registrant.
4.1* Specimen Stock Certificate.
10.1* Amended and Restated 1991 Stock Incentive Plan of the Registrant.
10.2* Amended and Restated 1994 Non-Employee Director Option Plan of the Registrant.
10.3* 1995 Employee Stock Purchase Plan of the Registrant.
10.15* License Agreement dated January 2, 1995 between the Registrant and Datapoint
Corporation.
10.16* Letter Agreement dated December 31, 1994 between the Registrant and Fleet Bank
of Massachusetts, N.A.
10.17** Lease for 63 Third Avenue, Burlington, MA dated as
of March 1, 1996 between the Registrant and the
Trustees of Building #27 Associates.
10.19*** Employment Agreement dated January 22, 1998 between the Registrant and
Khoa D. Nguyen.
10.20 Asset Purchase Agreement, dated as of December 28, 2000 between Ezenia! Inc. and General
Dynamics Government Systems Corporation, as amended.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
38
(Note: The Company agrees to furnish to the Securities and Exchange Commission
upon request a copy of any instrument with respect to long-term debt of the
Company or any of its subsidiaries which is not filed herewith or listed herein
since it relates to outstanding debt in an amount not greater than 10% of the
total assets of the Company and its subsidiaries on a consolidated basis.)
* Incorporated by reference from the Company's Registration
Statement on Form S-1.
** Incorporated by reference from the Company's Form 10-K filed
with the Securities and Exchange Commission for the year ended
December 31, 1995.
*** Incorporated by reference to the Company's Form 10-K filed with
the Securities and Exchange Commission for the year ended
December 31, 1998.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended December
31, 2000.
39
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.
EZENIA! INC.
/s/ KHOA D. NGUYEN
----------------------------------------------
Khoa D. Nguyen
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
Date: March 7, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on its behalf of the registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ KHOA D. NGUYEN Chairman, Chief Executive Officer March 7, 2001
- ------------------------------------------- (Principal Executive Officer)
Khoa D. Nguyen and President
/s/ STEPHEN G. BASSETT Chief Financial Officer March 7, 2001
- ------------------------------------------- (Principal Financial
Stephen G. Bassett and Accounting Officer)
/s/ WILLIAM E. FOSTER Director March 7, 2001
- -------------------------------------------
William E. Foster
/s/ JOHN F. KEANE, JR. Director March 7, 2001
- -------------------------------------------
John F. Keane, Jr.
/s/ JOHN A. McMULLEN Director March 7, 2001
- -------------------------------------------
John A. McMullen
/s/ ROY G. PERRY Director March 7, 2001
- -------------------------------------------
Roy G. Perry
40
EZENIA! INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A - DESCRIPTION COLUMN B COLUMN C - ADDITIONS COLUMN D COLUMN E
- ---------------------- -------- -------------------- -------- --------
DEDUCTIONS -
BALANCE AT CHARGED TO CHARGED TO UNCOLLECTIBLE BALANCE AT
BEGINNING OF COSTS AND OTHER ACCOUNTS END
ACCOUNTS RECEIVABLE ALLOWANCES PERIOD EXPENSES ACCOUNTS WRITTEN-OFF OF PERIOD
- ------------------------------------- --------------- --------------- --------------- --------------- ---------------
Year Ended December 31, 2000 $ 1,518,179 $ -- $ -- $ (801,941) $ 716,238
Year Ended December 31, 1999 1,534,311 -- 7,460 (23,592) 1,518,179
Year Ended December 31, 1998 1,338,311 5,000 191,000 - 1,534,311
41