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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
COMMISSION FILE NUMBER 0-25882
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EZENIA! INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3114212
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
NORTHWEST PARK, 63 THIRD AVENUE, BURLINGTON, MASSACHUSETTS 01803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(781) 229-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The number of shares outstanding of the registrant's Common Stock as of May 10,
2001 was 13,791,880.
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EZENIA! INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000....................................... 3
Condensed Consolidated Statements of Operations
Three months ended March 31, 2001 and 2000................................. 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000................................. 5
Notes to Condensed Consolidated Financial Statements......................... 6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 8
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk................... 10
PART II. OTHER INFORMATION
ITEM 2 Changes in Securities and Use of Proceeds.................................... 11
ITEM 6 Exhibits and Reports on Form 8K.............................................. 11
SIGNATURE.............................................................................. 12
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject
to certain risks and uncertainties, including without limitation those
discussed in the Company's 2000 Annual Report to Shareholders in the section
titled "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
EZENIA! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
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ASSETS
Current assets
Cash and cash equivalents $ 15,219 $20,457
Marketable securities 7,836 14,286
Accounts receivable, less allowances of $645 and $716 at March 31, 2,008 3,146
2001 and December 31, 2000, respectively
Inventories 4,206 3,287
Receivable from sale of product line 1,500
Prepaid software licenses 1,521
Prepaid expenses and other current assets 1,820 1,889
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Total current assets 32,610 44,565
Equipment and improvements, net of accumulated depreciation 5,817 5,798
Investment in InfoWorkSpace 6,000
Goodwill and other intangible assets 22,450
Other assets, net 610 1,391
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$ 61,487 $57,754
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $ 5,000
Accounts payable 2,811 $ 1,989
Accrued expenses 6,636 7,207
Deferred revenue 2,055 767
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Total current liabilities 16,502 9,963
Common stock subject to put; 400,000 shares issued and
outstanding at March 31, 2001 3,975
Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized,
none issued and outstanding
Common stock, $.01 par value, 40,000,000 shares authorized;
13,391,880 issued and outstanding at March 31, 2001;
13,299,762 issued and outstanding at December 31, 2000 139 138
Capital in excess of par value 59,553 59,403
Retained earnings (deficit) (16,427) (9,543)
Accumulated other comprehensive loss (525) (477)
Treasury stock at cost; 500,000 shares (1,730) (1,730)
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41,010 47,791
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$ 61,487 $57,754
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See accompanying notes.
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EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2001 2000
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Revenues
Product revenue $ 2,579 $ 8,056
Service revenue 780 1,111
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3,359 9,167
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Cost of revenues
Cost of product revenue 1,414 3,408
Cost of service revenue 960 1,024
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2,374 4,432
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Gross profit 985 4,735
Operating expenses
Research and development 2,953 5,070
Sales and marketing 3,411 3,169
General and administrative 1,385 1,205
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Total operating expenses 7,749 9,444
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Loss from operations (6,764) (4,709)
Other income (loss)
Interest income, net 455 622
Loss on investment (543)
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(88) 622
Loss before income taxes (6,852) (4,087)
Income taxes 32 7,814
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Net loss $ (6,884) $ (11,901)
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Net loss per share:
Basic and diluted $ (0.51) $ (0.87)
Weighted average common shares
Basic and diluted 13,378,807 13,645,625
See accompanying notes.
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EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2001 2000
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OPERATING ACTIVITIES
Net loss $(6,884) $(11,901)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 746 948
Deferred income taxes 7,780
Loss on investment 543
Changes in operating assets and liabilities:
Accounts receivable 1,138 609
Inventories (919) (708)
Prepaid software licenses (646)
Other current assets 69 (170)
Accounts payable and accrued expenses 251 1,468
Other current liabilities (17) 242
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Net cash used for operating activities (5,719) (1,732)
INVESTING ACTIVITIES
Cash received from sale of network access card product line 1,500
Acquisition of InfoWorkSpace (7,526)
Net purchases of equipment and improvements (239) (1,451)
Changes in marketable securities, net 6,450 2,392
Change in other assets 193 (18)
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Net cash provided by investing activities 378 923
FINANCING ACTIVITIES
Net proceeds from stock issued under employee stock benefit plans 151 470
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Net cash provided by financing activities 151 470
Effect of exchange rate on cash and cash equivalents (48) (68)
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Decrease in cash and cash equivalents (5,238) (407)
Cash and cash equivalents at beginning of period 20,457 35,095
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Cash and cash equivalents at end of period $15,219 $ 34,688
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See accompanying notes.
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EZENIA! INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. In the opinion of
management, these financial statements contain all adjustments, necessary for a
fair presentation of the results of these interim periods. In addition to normal
recurring adjustments, the financial statements for 2001 include provision for
loss on investment (see note 4) and for 2000 include the write-off of deferred
tax assets. Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, although the Company believes the disclosures in
these financial statements are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
Company's audited financial statements included in the Company's 2000 Annual
Report to Shareholders on Form 10-K for the year ended December 31, 2000. The
results of operations for the interim periods shown are not necessarily
indicative of the results for any future interim period or for the entire fiscal
year.
2. INVENTORIES
Inventories consist of:
MARCH 31, DECEMBER 31,
(In thousands) 2001 2000
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Raw materials and subassemblies $2,816 $1,890
Work in process 1,005 649
Finished goods 385 748
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$4,206 $3,287
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3. INFOWORKSPACE ACQUISITION
On March 27, 2001, the Company completed the acquisition of all of the operating
assets and intellectual property of the InfoWorkSpace-TM- 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, an additional $6 million was paid at closing, and the balance is due in
installments through 2002. The 400,000 shares issued were 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. Pursuant to the terms of
the purchase agreement, the Company paid approximately $1 million at the closing
to cover the seller's transitional operating costs (net of revenue earned during
the period) for the period between the signing of the purchase agreement and the
closing of the transaction. The acquisition has been accounted for as a
purchase. For the purpose of allocating the total purchase price, the Company
determined the fair value of the tangible and intangible assets acquired from
General Dynamics Electronic Systems. Goodwill and other intangible assets
relating to the acquisition will be amortized over periods not to exceed 5
years.
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.
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4. LOSS ON INVESTMENT
Loss on investment represents an adjustment recorded during the period ended
March 31, 2001, to reduce to zero the carrying value of the Company's minority
investment in a closely-held company which had informed the Company during the
first quarter of 2001 that it was experiencing financial difficulties.
5. COMPREHENSIVE LOSS
Total comprehensive loss consists of the following:
THREE MONTHS ENDED
MARCH 31,
(In thousands) 2001 2000
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Net loss $(6,884) $(11,833)
Foreign currency translations (48) (68)
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Comprehensive loss $(6,932) $(11,969)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE Revenue decreased to $3.4 million for the quarter ended
March 31, 2001 from $9.2 million reported for the quarter ended March 31,
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 continues to weaken. In particular, sales of ISDN
products and related services to PictureTel Corporation and VTEL Corporation
(which customers accounted for 26% and 17% of the Company's revenue in 2000,
respectively) were significantly lower than in quarters ended March 31, 2000
and December 31, 2000.
Revenue from international markets accounted for approximately 51% and
36% of revenue for the quarters ended March 31, 2001 and 2000 respectively.
GROSS PROFIT Gross profit as a percentage of revenue was 29.3% for the
quarter ended March 31, 2001 as compared to 51.7% for the quarter ended March
31, 2000. Reduction in margin for the quarter ended March 31, 2001 was primarily
attributable to the overall decrease in revenues and the related
disproportionate effect of fixed manufacturing and service costs included in
cost of revenues.
RESEARCH AND DEVELOPMENT Research and development expenses decreased to
$3.0 million for the quarter ended March 31, 2001 from $5.1 million for the
quarter ended March 31, 2000. The Company's spending decrease was primarily
attributable to the completion of various engineering projects and the reduction
of costs related to the sale in September 2000 of the network access card
product line.
SALES AND MARKETING Sales and marketing expenses increased to $3.4
million for the quarter ended March 31, 2001 from $3.2 million for the quarter
ended March 31, 2000. The increase was primarily due to the Company's continued
hiring of sales and marketing personnel, focused on IP and Internet products
rather than ISDN products.
GENERAL AND ADMINISTRATIVE General and administrative expenses
increased to $1.4 million for the quarter ended March 31, 2001 from $1.2 million
for the quarter ended March 31, 2000. The increase was attributable principally
to professional fees.
INTEREST INCOME, NET Interest income, net, decreased to approximately
$455 thousand in the quarter ended March 31, 2001, from approximately $622
thousand in the quarter ended March 31, 2000. The decrease was due principally
to a decrease in the amount of cash available for investment.
PROVISION FOR INCOME TAXES Provision for income taxes for the quarter
ended March 31, 2001 represents foreign taxes of the Company's international
subsidiary. In the quarter ended March 31, 2000, the Company recorded a
valuation allowance of approximately $7.8 million to reduce the carrying value
of its deferred tax asset to zero.
OTHER FACTORS WHICH MAY AFFECT FUTURE OPERATIONS There are a number of
business factors which singularly or combined may affect the Company's future
operating results. Some of them, including dependence on major customers, market
growth and the risks and uncertainties related to an evolving market, rapid
technological change, competition, integration of the technology, personnel, and
operation of the InfoWorkSpace business, variability of quarterly results,
protection of proprietary technology, and retention of key employees have been
outlined in the Company's 2000 Annual Report to Shareholders on Form 10-K for
the year ended December 31, 2000.
8
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, the Company has cash, cash equivalents and
marketable securities of approximately $23.1 million, which are regularly
invested in short-term money market funds, government securities, and commercial
paper. On March 27, 2001, the Company committed an aggregate of $5.0 million of
this amount to cash collateralize two standby letters of credit as security for
$3.0 million and $2.0 million payments payable, in July 2001 and January 2002,
respectively, in connection with its acquisition of the InfoWorkSpace business.
The Company recorded a net loss of $18.0 million for the year ended December 31,
2000 (which included net income of $5.5 million from the settlement of patent
litigation and a gain of $3.3 million from the sale of the Company's network
access card product line) and a net loss of $6.9 for the quarter ended March 31,
2001.
The Company's ability to continue as a going concern is dependent upon its
ability to raise additional capital or to improve operating margins
considerably. There is little likelihood of securing additional capital on
reasonable terms, if at all, in the near future. Accordingly, the Company is in
the process of identifying actions to be taken to improve operating margins.
These actions may include narrowing sales and marketing efforts to focus on the
most promising products, consolidating back-office systems, and reducing
headcount among other things. There can be no assurance that any actions
implemented by the Company will reduce expenses or increase revenue to the
extent desired or whether such reduction, if any, will materially extend the
Company's ability to continue operations. In addition, the Company has engaged
an investment banking firm to advise management in exploring alternatives for
maximizing shareholder value.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To date, the Company has not utilized derivative financial instruments or
derivative commodity instruments. The Company invests cash in highly liquid
investments, consisting of highly rated U.S. and state government securities,
commercial paper, and short-term money market funds. These investments are
subject to minimal credit and market risk and the Company has no debt.
Therefore, the Company believes the market risks associated with these financial
instruments are immaterial.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On March 27, 2001, the Company issued 400,000 shares of its common stock,
par value $0.01 per share (the "Shares"), to General Dynamics Government Systems
Corporation ("GD") in connection with the closing of a certain Asset Purchase
Agreement, dated as of December 28, 2000 (the "Agreement"), between the Company
and GD.
Pursuant to the Agreement, the Company acquired the operating assets
(including, without limitation, intellectual property) and specified contractual
liabilities relating to certain assets used by the Electronic Systems Division
of GD in the conduct of its InfoWorkSpace products and technology business. The
total consideration paid by the Company for the assets was $21,000,000 plus
certain other direct costs of acquisition. The Shares are subject to a certain
Put Agreement, dated as of March 27, 2001, between the Company and GD, pursuant
to which GD has the right to require the Company to redeem the Shares at a price
of $10.00 per share on specified future dates.
The Shares were sold in a private offering which the Company believes
qualifies as a transaction by an issuer not involving a public offering within
the meaning of Section 4(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EZENIA! INC.
Date: May 15, 2001 By: /s/ Stephen G. Bassett
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Stephen G. Bassett
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)
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