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 SEPTEMBER 30, 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
November 9, 2001 was 13,741,880.
EZENIA! INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000..................................... 3
Condensed Consolidated Statements of Operations
Three months and nine months ended September 30, 2001 and 2000............... 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 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.................................................... 10
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk..................... 13
PART II. OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K............................................... 14
SIGNATURE................................................................................. 15
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 on Form 10-K for the year ended December 31,
2000 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)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents ........................................................... $ 7,604 $ 20,457
Marketable securities ............................................................... 14,286
Accounts receivable, less allowances of $599 and $716 at
September 30, 2001 and December 31, 2000, respectively ............................ 3,921 3,146
Inventories ......................................................................... 3,872 3,287
Receivable from sale of product line ................................................ 1,500
Prepaid software licenses ........................................................... 649
Prepaid expenses and other current assets ........................................... 897 1,889
-------- --------
Total current assets ................................................................... 16,943 44,565
Equipment and improvements, net of accumulated depreciation ............................ 4,730 5,798
Investment in InfoWorkSpace ............................................................ 6,000
Goodwill and other intangible assets, net .............................................. 19,282
Other assets, net ...................................................................... 591 1,391
-------- --------
$ 41,546 $ 57,754
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable ....................................................................... $ 2,000
Accounts payable .................................................................... 2,376 $ 1,989
Accrued expenses .................................................................... 1,365 4,360
Income taxes ........................................................................ 2,773 2,847
Accrued restructuring expenses ...................................................... 340
Deferred revenue .................................................................... 2,011 767
-------- --------
Total current liabilities .............................................................. 10,865 9,963
Common stock subject to put; 400,000 shares issued and outstanding
at September 30, 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;
13,741,880 issued and outstanding at September 30, 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) ............................................................ (30,551) (9,543)
Accumulated other comprehensive loss ................................................... (674) (477)
Treasury stock at cost; 550,000 shares at September 30, 2001 and
500,000 shares at December 31, 2000 ................................................. (1,761) (1,730)
-------- --------
26,706 47,791
-------- --------
$ 41,546 $ 57,754
======== ========
See accompanying notes.
3
EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue
Product revenue .................. $ 4,071 $ 5,533 $ 9,102 $ 19,881
Service revenue .................. 753 973 2,502 3,069
------------ ------------ ------------ ------------
4,824 6,506 11,604 22,950
Cost of revenue
Cost of product revenue .......... 1,870 2,359 4,675 8,663
Cost of service revenue .......... 666 858 2,659 2,781
------------ ------------ ------------ ------------
2,536 3,217 7,334 11,444
------------ ------------ ------------ ------------
Gross profit ........................ 2,288 3,289 4,270 11,506
Operating expenses
Research and development ......... 1,870 3,143 6,385 11,414
Sales and marketing .............. 1,416 2,840 7,268 8,303
General and administrative ....... 615 1,059 2,420 2,985
Amortization of goodwill and
other intangible assets ........ 1,365 2,730
Depreciation ..................... 661 722 2,047 2,299
Occupancy and other facilities
related expenses ............... 609 714 2,504 2,361
Restructuring .................... 2,013
------------ ------------ ------------ ------------
Total operating expenses ............ 6,536 8,478 25,367 27,362
------------ ------------ ------------ ------------
Loss from operations ................ (4,248) (5,189) (21,097) (15,856)
Other income (expense)
Interest income, net ............. 77 677 719 1,943
Litigation settlement ............ 6,500
Loss on sale of fixed assets ..... (25) (25)
Loss on investment ............... (543)
Gain on sale of network access
card product line .............. 3,287 3,287
------------ ------------ ------------ ------------
52 3,964 151 11,730
------------ ------------ ------------ ------------
Loss before income taxes ............ (4,196) (1,225) (20,946) (4,126)
Income taxes ........................ 16 32 62 8,849
------------ ------------ ------------ ------------
Net loss ............................ $ (4,212) $ (1,257) $ (21,008) $ (12,975)
============ ============ ============ ============
Net loss per share:
Basic and diluted ................ $ (0.31) $ (0.09) $ (1.54) $ (0.95)
Weighted average common shares:
Basic and diluted ................ 13,741,880 13,760,897 13,637,475 13,699,898
See accompanying notes.
4
EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
------------- -------------
OPERATING ACTIVITIES
Net loss ........................................................... $(21,008) $(12,975)
Adjustments to reconcile net loss to net cash used for operating
activities:
Gain on sale of network access card product line .............. (3,287)
Depreciation and amortization ................................. 4,814 2,776
Deferred income taxes ......................................... 7,780
Loss on investment ............................................ 543
Loss on sale of fixed assets .................................. 25
Changes in operating assets and liabilities, less amounts
attributable to acquisition of InfoWorkSpace:
Accounts receivable ......................................... (775) 3,227
Inventories ................................................. (585) (2,155)
Litigation settlement receivable ............................ (6,000)
Prepaid software licenses ................................... 385
Other current assets ........................................ 992 64
Accounts payable and accrued expenses ....................... (2,268) (4,330)
Income taxes ................................................ (74) 2,063
Deferred revenue ............................................ (61) 173
-------- --------
Net cash used for operating activities ............................. (18,012) (12,664)
INVESTING ACTIVITIES
Cash received from sale of network access card product line ........ 1,500 1,500
Acquisition of InfoWorkSpace ....................................... (10,526)
Net purchases of equipment and improvements ........................ (525) (2,555)
Changes in marketable securities, net .............................. 14,286 (5,043)
Changes in other assets ............................................ 501 23
-------- --------
Net cash provided by (used for) investing activities ............... 5,236 (6,075)
FINANCING ACTIVITIES
Net proceeds from stock issued under employee stock benefit plans 151 922
Acquisition of treasury stock ...................................... (31)
-------- --------
Net cash provided by financing activities .......................... 120 922
Effect of exchange rate on cash and cash equivalents ............... (197) (211)
-------- --------
Decrease in cash and cash equivalents .............................. (12,853) (18,028)
Cash and cash equivalents at beginning of period ................... 20,457 35,095
-------- --------
Cash and cash equivalents at end of period ......................... $ 7,604 $ 17,067
======== ========
See accompanying notes
5
EZENIA! INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. In the
opinion of management, these financial statements contain all adjustments,
necessary for a fair presentation of the results of these interim periods. In
addition to normal recurring adjustments, the financial statements for 2001
include a provision for loss on investment (see note 4), accrual of
restructuring costs (see note 6) 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 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:
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2001 2000
------------------ -----------------
Raw materials and subassemblies $1,804 $1,890
Software licenses 1,317
Work in process 600 649
Finished goods 151 748
------------------ -----------------
$3,872 $3,287
================== =================
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 valued, for purposes of the
transaction, at $10.00 per share. An advance of $6 million was paid in
December 2000, $6 million was paid at closing, $3 million was paid on July 2,
2001 and the final payment of $2 million is due on January 4, 2002. The
400,000 shares issued were accompanied by an option allowing the seller to
put the shares back to the Company at $10.00 per share. The put agreement, as
amended, gives the seller the option to require the Company to repurchase
110,000 shares beginning January 4, 2002 and expiring February 3, 2002, and
the balance of 290,000 shares beginning December 1, 2002 and expiring
December 31, 2002. The Company has provided the seller with an irrevocable
letter of credit of $1.1 million to secure the value of 110,000 shares. The
put right shall expire 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.
Common stock subject to the put option is reported as temporary equity. For
purposes of computing diluted earnings per share, such shares are included in
the calculation using the reverse treasury stock method when dilutive.
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.
6
The total purchase price and related acquisition costs were recorded as follows:
(In thousands)
Equipment and improvements $ 481
Prepaid software licenses 1,187
Goodwill (to be amortized over 5 years) 19,465
Other intangible assets (to be amortized over
1.5 to 3 years) 2,531
Deferred revenue (1,270)
------------------
$ 22,394
==================
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. 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 INCOME (LOSS)
Comprehensive loss consists of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands) 2001 2000 2001 2000
------------------- ------------------ ------------------ ------------------
Net loss $(4,212) $(1,257) $(21,008) $(12,975)
Foreign currency translation (85) (127) (197) (211)
------------------- ------------------ ------------------ ------------------
Comprehensive loss $(4,297) $(1,384) $(21,205) $(13,186)
=================== ================== ================== ==================
6. RESTRUCTURING
The Company's ability to continue as a going concern is dependent upon its
ability to raise additional capital, increase revenue or to improve operating
margins considerably. There is little likelihood of securing additional capital
on reasonable terms, if at all, in the near future. In May 2001, the Company
implemented a restructuring and cost reduction plan to reduce operating costs in
line with anticipated revenues with the ultimate objective of improving
operating margins and becoming cash-flow neutral from operations by the close of
2001. As a result of these actions, the Company recorded charges of
approximately $2.0 million during the quarter ended June 30, 2001, of which
$752,000 was paid during the quarter ended June 30, 2001 and $921,000 was paid
during the quarter ended September 30, 2001. These one-time charges, reported as
restructuring expense, primarily represent estimated severance costs related to
the termination of 90 employees, constituting approximately 50% of the Company's
workforce at the time the cost reduction plan was implemented. The reduction in
workforce (substantially complete at September 30, 2001) covered all functional
areas, including research and development, sales and marketing, general and
administrative, manufacturing and technical support.
Operating costs were in line with the Company's expectations for the quarter
ended September 30, 2001. The Company's success in achieving its goal of
being cash-flow neutral by the close of 2001 is largely dependent on whether
it can meet its revenue target for the fourth quarter. The Company met its
revenue target for the quarter ended September 30, 2001.
In addition, the restructuring and cost reduction plan calls for the Company
to close down its Burlington, Massachusetts facility and move its office
headquarters to a smaller, more cost efficient facility. Because of the
depressed real estate market in Massachusetts at the current time the Company
cannot estimate when such a move will be completed, if at all.
7
The Company has also incurred during the three and nine month periods ended
September 30, 2001, respectively, approximately $.8 million and $1.0 million
of restructuring related expenses principally attributable to salary costs
and retention bonuses for transition employees terminated after
implementation of the Company's restructuring plan. The Company expects
similar restructuring related expenses to be less than $.2 million for the
quarter ending December 31, 2001.
RECONCILIATION OF ACCRUED RESTRUCTURING EXPENSES
RESTRUCTURING BALANCE IN QUARTER
ACCRUAL PAID IN QUARTERS ENDED ENDING
--------------------------------------------------- ------------------------
JUNE 30, 2001 SEPTEMBER 30, 2001 DECEMBER 31, 2001
---------------- ------------------- ------------------------
Severance....... $1,787 $725 $864 $198
Legal........... 24 6 3 15
Other........... 202 21 54 127
------------- ------------ ---------- -------------
Total......... $2,013 $752 $921 $340
============= ============ ========== =============
7. PRO FORMA
Operating results of the InfoWorkSpace product line have been included in the
Company's financial statements from the acquisition date. The following table
presents unaudited pro forma consolidated operating results for the three and
nine months ended September 30, 2001 and 2000 as if the acquisition had occurred
as of the beginning of the periods presented.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(In thousands) 2001 2000 2001 2000
------------------------------ -------------------------------
Revenue............................. $ 4,824 $ 6,808 $ 11,939 $ 23,440
Loss................................ $(4,212) $(4,640) $(24,011) $(22,132)
Basic and diluted loss per share.... $ (.31) $ (.34) $ (1.76) $ (1.62)
The unaudited pro forma consolidated operating results are not necessarily
indicative of the operating results that would have been achieved had the
acquisition been consummated at the beginning of the periods presented, and
should not be construed as representative of future operating results.
8. GOODWILL AMORTIZATION
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangibles." Under SFAS No. 142, goodwill is no longer subject to amortization
over its estimated useful life. But, goodwill is subject to at least an annual
assessment for impairment applying a fair-value based test. Additionally, under
the provisions of the new accounting standard, an acquired intangible asset
should be separately recognized if the benefit of the intangible asset is
obtained through contractual or other legal rights, or if the intangible asset
can be sold, transferred, licensed, rented, or exchanged, regardless of the
acquirer's intent to do so. The Company is required to adopt SFAS No. 142
effective January 1, 2002 and is in the process of determining what impact, if
any, this pronouncement may have on its financial position and results of
operations.
8
Currently amortization of goodwill, all associated with the Company's
acquisition of InfoWorkSpace on March 27, 2001, is approximately $1 million
per quarter. Based on its current forecast of sales of InfoWorkSpace products
and the timing of the recent acquisition, the Company does not believe a
reduction in carrying value for impairment of goodwill and other intangible
assets is appropriate at September 30, 2001.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 141, "Business Combinations". SFAS
No. 141 revises the standards of business combinations by eliminating the use of
the pooling-of-interests method and requiring that all business combinations be
accounted for using the purchase method of accounting. SFAS No. 141 also changes
the criteria to recognize intangible assets apart from goodwill. The provisions
of SFAS No. 141 are effective for all business combinations initiated after June
30, 2001. The adoption of this statement had no impact on the Company's
financial position and results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-lived Assets." SFAS No. 143 address
financial accounting and reporting for the retirement obligation of an asset.
SFAS No. 143 states that companies should recognize the asset retirement cost,
at its fair value, as part of the cost of the asset and classify the accrued
amount as a liability in the condensed consolidated balance sheet. The asset
retirement liability is then accreted to the ultimate payout as interest
expense. The initial measurement of the liability would be subsequently updated
for revised estimates of the discounted cash outflows. SFAS No. 143 will be
effective for fiscal years beginning after June 15, 2002. The Company has not
yet determined what effect, if any, SFAS 143 may have on its financial position,
results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets". SFAS No. 144 supercedes SFAS No. 121 by
requiring one accounting model to be used for long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired, and by
broadening the presentation of discontinued operations to include more disposal
transactions. SFAS 144 will be effective for fiscal years beginning after
December 15, 2001. The Company has not yet determined what effect, if any, SFAS
144 may have on its financial position, results of operations, or cash flows.
10. 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 stock
options and shares subject to a put option (see note 3) when dilutive.
Outstanding stock options at September 30, 2001 and 2000 were 2,664,898 and
2,694,781, respectively.
11. REVENUE RECOGNITION
Revenue from sales of InfoWorkSpace software licenses is recognized ratably
over the subscription period, generally one year.
12. SOFTWARE LICENSES
The Company has entered into a license agreement with a software vendor. Under
the terms of the agreement, the Company is obligated to purchase $3.5 million of
software licenses over the twelve month period ending March 27, 2002. The
licenses are resold with the Company's InfoWorkSpace products. Based on the
Company's current sales forecasts, all licenses to be purchased through March
27, 2002 will be used through sales of InfoWorkSpace products. At September 30,
2001, the Company had acquired approximately $1.8 million of licenses under the
agreement.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE Revenue decreased to $4.8 million for the quarter ended
September 30, 2001 from $6.5 million reported for the quarter ended September
30, 2000. Revenue decreased to $11.6 million in the nine months ended
September 30, 2001 compared to $23.0 million for the nine months ended
September 30, 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 the three and
nine month periods ended September 30, 2000. The decrease of ISDN and product
related service revenues approximated $2.3 million and $9.8 million for the
three and nine months ended September 30, 2001, respectively. The network
access card product line, which was sold on September 15, 2000, represented a
reduction of $.7 million and $3.3 million for the three and nine months ended
September 30, 2001, respectively. These reductions were offset by the
introduction of the InfoWorkSpace product line, which revenue approximated
$1.0 million and $1.5 million for the three and nine months ended September
30, 2001, respectively. Revenue from sales of IP based products increased by
$.3 million and $.2 million, respectively, for the three and nine month
periods ended September 30, 2001.
Revenue from international markets accounted for approximately 33% and
40% of revenue for the quarters ended September 30, 2001 and 2000,
respectively, and 43% and 38% for the nine month periods ended September 30,
2001 and 2000, respectively.
GROSS PROFIT Gross profit as a percentage of revenue was 47.4% for the
quarter ended September 30, 2001 as compared to 50.6% for the quarter ended
September 30, 2000. For the nine months ended September 30, 2001, gross profit
was 36.8% compared to 50.1% in the corresponding period of 2000. Reductions in
margin are 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
$1.9 million for the quarter ended September 30, 2001 from $3.1 million for
the quarter ended September 30, 2000. For the nine months ended September 30,
2001, research and development expenses were $6.4 million compared to $11.4
million in the corresponding period of 2000. The Company's spending decrease
was partially attributable to the elimination of engineering expenses related
to network access card product line that was sold on September 15, 2000,
which represented $.4 million and $1.5 million of the reduction for the three
and nine months ended September 30, 2001. Also, the reduction of staff and
related expenses due to the completion of various engineering projects and
the restructuring plan represented $1.5 million and $4.9 million of the
reduction for the three and nine months ended September 30, 2001. The
decreases were offset by increased costs associated with the acquisition of
InfoWorkSpace in March 2001, which amounted to $.7 million and $1.4 million
for the three and nine months ended September 30, 2001.
SALES AND MARKETING Sales and marketing expenses decreased to $1.4 million
for the quarter ended September 30, 2001 from $2.8 million for the quarter ended
September 30, 2000. For the nine months ended September 30, 2001, sales and
marketing expenses were $7.3 million compared to $8.3 million in the
corresponding period of 2000. The decrease was primarily due to the Company's
restructuring plan that went into effect at the end of May 2001. Marketing and
related programs represented $1.4 million and $1.3 million of the decrease for
the three and nine months ended September 30, 2001, respectively. Other sales
expenses decreased $.3 million and $.2 million for the three and nine months
ended September 30, 2001. This was offset by an increase of InfoWorkSpace
expenses, which amounted to $.3 million and $.5 million in the three and nine
months ended September 30, 2001.
10
GENERAL AND ADMINISTRATIVE General and administrative expenses were
approximately $.6 million for the quarter ended September 30, 2001 compared to
$1.1 million for the quarter ended September 30, 2000. For the nine months ended
September 30, 2001, general and administrative expenses were $2.4 million
compared to $3.0 million for the corresponding period of 2000. The decrease was
primarily due to the Company's restructuring plan that went into effect at the
end of May 2001.
OCCUPANCY AND OTHER FACILITIES RELATED EXPENSES Occupancy costs declined
marginally to $.6 million during the three month period ended September 30,
2001 as compared $.7 million for the corresponding period of the previous
year. The decrease was due primarily to the Company's restructuring program
implemented in May 2001. For the nine month period ended September 30, 2001,
occupancy costs increased by $.3 million due to facilities costs associated
with the acquisition of InfoWorkSpace in March 2001. This increase was offset
by approximately $.1 million of cost reductions attributable to the
restructuring program.
INTEREST INCOME, NET Interest income, net, decreased to approximately
$77,000 in the quarter ended September 30, 2001, from approximately $677,000 in
the quarter ended September 30, 2000. For the nine months ended September 30,
2001, interest income, net was $719,000 compared to $1,943,000 for the
corresponding period of 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 quarters
ended September 30, 2001 and 2000 and the nine months ended September 30, 2001
represents foreign taxes of the Company's international subsidiary. Provision
for income taxes for the nine months ended September 30, 2000, consists
principally of a valuation allowance recorded during the quarter ended March 31,
2000 to reduce the carrying value of deferred tax assets to zero.
LITIGATION On June 16, 2000, the Company settled its patent infringement
suit against Accord Networks Ltd. 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.
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 on Form 10-K for the year ended
December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company has cash, cash equivalents and
marketable securities of approximately $7.6 million, which are regularly
invested in short-term money market funds, government securities, and
commercial paper. The Company has committed an aggregate of $3.1 million of
this amount to cash collateralize two standby letters of credit as security
for a $2.0 million payment payable in January 2002, in connection with its
acquisition of the InfoWorkSpace business and $1.1 million which could become
payable in January 2002 upon exercise of a put option for 110,000 shares of
the Company's common stock (see Note 3). In addition, in connection with the
put option, the Company may be required to purchase another $2.9 million of
its common stock in December 2002. The Company recorded a net loss of $18.0
million for the year ended December 31, 2000 (which included income of $5.5
million, net of income tax, 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 $21.0 million for the nine months ended
September 30, 2001.
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The Company's ability to continue as a going concern is dependent upon its
ability to raise additional capital, increase revenue or to improve operating
margins considerably. There is little likelihood of securing additional capital
on reasonable terms, if at all, in the near future. In May 2001, the Company
implemented a restructuring and cost reduction plan to reduce operating costs in
line with anticipated revenues with the ultimate objective of improving
operating margins and becoming cash-flow neutral from operations by the close of
2001. As a result of these actions, the Company recorded charges of
approximately $2.0 million during the quarter ended June 30, 2001, of which
$752,000 was paid during the quarter ended June 30, 2001 and $921,000 was paid
during the quarter ended September 30, 2001. These one-time charges, reported as
restructuring expense, primarily represent estimated severance costs related to
the termination of 90 employees, constituting approximately 50% of the Company's
workforce at the time the cost reduction plan was implemented. The reduction in
workforce (substantially complete at September 30, 2001) covered all functional
areas, including research and development, sales and marketing, general and
administrative, manufacturing and technical support.
Operating costs were in line with the Company's expectations for the
quarter ended September 30, 2001. The Company's success in achieving its goal of
being cash-flow neutral by the close of 2001 is largely dependent on whether it
can meet its revenue target for the fourth quarter. The Company met its revenue
target for the quarter ended September 30, 2001.
After implementation of its restructuring and cost reduction program, the
Company's cash used in operations was approximately $3.6 million for the quarter
ended September 30, 2001. Of this amount approximately $1.8 million represented
an increase in accounts receivable caused by the timing of the Company's sales
occurring near the end of the period. The Company also paid nonrecurring
restructuring costs of approximately $.9 million and nonrecurring restructuring
related costs of approximately $.8 million during the quarter. Accrued
restructuring costs at September 30, 2001, to be paid in the fourth quarter,
approximate $.3 million and the Company expects restructuring related expenses
for the same period to be less than $.2 million.
In addition, the restructuring and cost reduction plan calls for the
Company to close down its Burlington, Massachusetts facility and move its office
headquarters to a smaller, more cost efficient facility. Because of the
depressed real estate market in Massachusetts at the current time the Company
cannot estimate when such a move will be completed, if at all.
There can be no assurance that any actions implemented by the Company will
reduce expenses or increase revenue to the extent desired or that any reduction
in expenses or increase in revenue will materially extend the Company's ability
to continue operations.
The Company's common stock is presently listed on the Nasdaq National
Market ("Nasdaq NMS") under the symbol EZEN. All companies listed on Nasdaq are
required to comply with certain continued listing standards, including
maintaining a minimum bid price of at least $1.00. As of June 29, 2001, the
Company did not meet this standard since its common stock had not traded at a
minimum bid price of at least $1.00 over the previous 30 consecutive trading
days. Pursuant to the rules of The Nasdaq Stock Market, the Company had until
September 27, 2001 to meet the required $1.00 minimum bid price for its common
stock for at least 10 consecutive trading days. Nasdaq has notified the Company
that it has implemented a moratorium on certain listing standards including
minimum bid price requirements until January 2, 2002 and that the notification
of its previous deficiency has been withdrawn.
There can be no assurance that the Company's common stock will meet the
required $1.00 minimum bid price at any time in the future or that any appeal by
the Company of any delisting determination would be successful. In the event
that the Company's common stock is delisted from Nasdaq NMS, the market value
and liquidity of the Company's common stock could be materially adversely
affected.
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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
interest-bearing debt. Therefore, the Company believes the market risks
associated with these financial instruments are immaterial.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Put Agreement dated as of March 27, 2001 (as amended to date) by
and between the Company and General Dynamics Government Systems
Corporation.
(b) No reports on Form 8-K were filed during the three month period ended
September 30, 2001.
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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: November 14, 2001 By: /S/ STEPHEN G. BASSETT
---------------------------------
Stephen G. Bassett
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)
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