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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, 2002
COMMISSION FILE NUMBER 0-25882
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EZENIA! INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 04-3114212
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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NORTHWEST PARK, 154 MIDDLESEX TURNPIKE, BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices, including Zip Code)
(781) 505-2100
(Registrant's telephone number, including area code)
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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. / /
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of
1934). Yes / / No /X/
The aggregate market value of the voting and non-voting common stock held by
non-affiliates of the Registrant was $1,908,463 (computed by reference to the
price at which the Registrant's common stock was last sold on the Nasdaq
SmallCap Market on June 28, 2002, the last business day of the Registrant's most
recently completed second fiscal quarter).
The number of shares outstanding of the Registrant's common stock as of
March 19, 2003 was 13,633,630.
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 29, 2003
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.
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EZENIA! INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Description of Property..................................... 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 15
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 17
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk....................................................... 23
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 11. Executive Compensation...................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 46
Item 13. Certain Relationships and Related Transactions.............. 47
Item 14. Controls and Procedures..................................... 47
Item 15. Exhibits, Financial Statements Schedules and Reports on Form
8-K........................................................ 47
Signatures................................................................ 50
Certifications............................................................ 51
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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.
Note: Ezenia!, the Ezenia! Logo, InfoWorkSpace, LaunchPad and Encounter are
trademarks of Ezenia! Inc. All other trademarks are property of their respective
companies.
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PART I
ITEM 1. BUSINESS
Founded in 1991, Ezenia! Inc. 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. 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.
We believe Ezenia! offers one of the most comprehensive sets of
collaborative products available. For example, between our legacy ISDN
videoconferencing products and our IP-based Encounter and InfoWorkSpace
products, we enable videoconferencing, voice communication, instant messaging,
whiteboarding and virtual workspaces. Furthermore, because our products include
both software only solutions and configurable hardware solutions, in contrast to
the products offered by our competitors, Ezenia!'s products can be deployed
easily at small sites or in locations with a large number of users.
Ezenia! sells its products worldwide through leading resellers, integrators
and remarketers of collaboration, videoconferencing and networking solutions,
including Tandberg, Sony, General Dynamics and NTT-ME, each of which is widely
acknowledged as a leader in its field. Ezenia! also sells directly to providers
of conferencing services and end-users of collaboration products.
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 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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For the past several years, the Company has been shifting its focus away
from videoconferencing products and towards real-time enterprise collaboration
products. 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,
whiteboarding, 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 and government organizations 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 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 two 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, individuals and teams can collaborate face-to-face,
voice-to-voice, while sharing data such as a presentation or spreadsheet.
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 and also allows for
point-to-point instant messaging between two or more participants. 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 is one of the key requirements for the long-term growth of
the real-time collaboration market.
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. Products may be configured for use in customer premises
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environments or may be configured with specialized packaging for use in a
telephone carrier's central office setting.
The Ezenia! family of products includes:
INFOWORKSPACE--InfoWorkSpace collaboration solution from Ezenia! provides
dispersed workers a secure virtual workspace for team collaboration. Easily
accessible through a Web browser or application client, users meet in virtual
buildings and rooms via the Internet. In these virtual workspaces, they
communicate in real-time using powerful capabilities.
Instant messaging, whiteboarding, screen sharing and text chat are among the
wide array of collaboration tools. The ability to discuss projects, share
information and allow remote users to modify documents can significantly improve
team communication and accelerate the decision-making process.
Users can instantly contact partners in their organization using our on-line
or off-line messaging options and bring them into the environment for real-time
collaboration.
ENCOUNTER--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 or intranets--to create and
participate in group, multimedia conferences. The Encounter NetGate enables
multimedia conferencing between ISDN and IP endpoints.
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. 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.
INFOWORKSPACE
InfoWorkSpace is a suite of Web-enabled collaboration and conferencing
applications that help an organization build an online community and structure
its knowledge management enterprise. The suite is a Web-based package of
collaborative solutions that facilitate communication, data conferencing and
knowledge management among dispersed members of any workgroup. InfoWorkSpace has
been named the collaborative software standard for both the U.S. Air Force and
U.S. Army command and control systems as well as many of the U.S. intelligence
agencies.
InfoWorkSpace applications are written in Java, accessed via a Web browser
or Java Client, and include instant messaging (IM), chat, IP audio, Web video,
application sharing, application casting, desktop conferencing, virtual meetings
and Web presentations. InfoWorkSpace Version 2.5 is the latest generation of
this technology, instituting the lessons learned in global deployments and
during major exercises for the Department of Defense and National Intelligence
Community. InfoWorkSpace 2.5 provides increased functionality, has a redesigned
user interface and provides a more modular and adaptable product for integration
with distinct customer systems and software.
To set up and maintain a virtual work place environment, a dedicated
InfoWorkSpace server is inserted in the existing operation. Its purpose is not
to replace the function of the current operating systems and applications, but
to enhance them. This additional equipment is set up for the primary purpose of
managing and protecting the virtual space, the organization's documents and for
controlling access. The server needs to be powerful enough to meet demanding
needs of a growing or busy organization. Currently, InfoWorkSpace client
software is available for Windows 98/NT/2000/XP and Sun Solaris 2.6--Solaris 9
platforms.
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InfoWorkSpace comes pre-configured with the following modular
components--database server, Web server, optional internal Lightweight Directory
Access Protocol (LDAP) server and a real-time messaging server. These components
form the software architecture that the InfoWorkSpace software relies upon to
provide functionality to the user. For those organizations running Exchange 2000
for scheduling and email, InfoWorkSpace provides conference scheduling
interfaces into the Exchange 2000/Active Directory environment. Other external
LDAP servers can be supported if an organization has already invested in
directory services for their enterprise.
The InfoWorkSpace has a variety of features, some of which are listed below:
- Accessible via either browser (with Java 2 plug-in) or Java application
client.
- Integration between the LaunchPad instant messenger environment and the
InfoWorkSpace meeting rooms provides a seamless collaborative experience
for all users.
- Firewall/Proxy Compatibility--All data can be transmitted across port 80
when necessary. Voice requires the addition of UDP port 8084.
- Federated Servers--The ability of multiple servers to form one seamless
collaborative enterprise with unitary login-in, federated user contact and
seamless navigation.
- Advanced Security--InfoWorkSpace supports the use of Secure Socket Layer
(SSL) encryption (for data transmission privacy) and X.509v3 Digital
Certificates (for authentication purposes).
- Administration--InfoWorkSpace provides extensive administration interfaces
for centralized management of the collaborative environment.
- Application casting via "Shared View."
- Microsoft Outlook integration and virtual session calendar (My Meetings,
My Room's Meetings, etc.).
- Address book with user profiles that can be searched based on user's
experience and knowledge keywords.
- Document management via the room file cabinet and the user's personal
document briefcase.
- Collaborative Tools--Whiteboard, text editor, bulletin board, discussion
groups and text chat (public and private).
- Audio and video (from Web cameras and H.323 conferencing clients).
- Presence detection (whether the user is just using the LaunchPad instant
messenger or the InfoWorkSpace meeting room).
ENCOUNTER SERVER FAMILY
The Company began shipping the first products in its Encounter family of
network servers and gateways in March 1998. The Encounter product family allows
individuals and groups that are geographically distant from each other to
interact in a natural, spontaneous way--voice-to-voice, face-to-face, flexibly
and in real-time. The Encounter family is being used by enterprise customers and
distance learning facilities across the world.
The Encounter product line includes:
- Encounter 3000 NetServer: Real-time collaboration server designed to
support the large enterprise and service provider customers.
- Encounter 3000 NetGate: Gateway solution that allows traditional
videoconferencing systems to participate in IP-based collaboration
sessions.
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ENCOUNTER NETSERVER
The Encounter NetServer is designed to allow groups of users to come
together online. The product allows users to interact in a natural, spontaneous
way--voice-to-voice and face-to-face.
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 NT platform and leverages
Microsoft IIS. It supports as many as 64 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 (MPU2) 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 Microsoft Windows NT or 2000 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 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.
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The Encounter NetServer has a variety of features, some of which are listed
below:
- 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.
- Audio transcoding allows each endpoint to experience optimal voice
quality, while minimizing bandwidth utilized.
- Built-in voice gateway allows up to 24 phone users to participate in
conference sessions.
- Interactive Voice Response (IVR) allows phone users to easily enter their
conference by providing conference and password information using touch
tones (DTMF).
- Password-controlled entry to conferences provides security for conference
participants.
- Conference cascading allows conferences to span between 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.
- With ConferenceNow! endpoint users can create and join multipoint
conferences on Encounter NetServer on an ad-hoc basis, as easily as
placing a point-to-point call.
- 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.
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 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
Microsoft Windows NT platform and leverages Microsoft IIS. It supports as many
as 16 conference sessions.
The Encounter 3000 NetGate 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 (MPU2) 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,
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:
- Supports restricted and unrestricted rates of 2B up to 768 Kbps IMUXed,
allowing for a high-quality conferencing experience.
- Direct Inward Dialing (DID) and IVR facilitate WAN to LAN dialing.
- Dynamically selects best available video standard (supports H.261 and
H.263) per session based on endpoint capabilities.
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- Real-time voice transcoding optimizes performance on a call-by-call basis.
- Direct connection between the Encounter 3000 NetGate and Ezenia!
Series 2000 MCS without incurring costly line charges.
- LAN to WAN, WAN to LAN calls and administrator-initiated gateway calls
supported at all transfer rates, providing call flexibility.
- 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.
SERIES 2000 MCS
The Series 2000 MCS product line of servers designed for switched digital
circuit networks include a number of 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.
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MODEL CAPACITY TARGET MARKET/APPLICATION
- ----- -------- ------------------------------------------------------------
2007 8 users Mid-range CPE for distributed network environments
48 Large CPE/central office network with extensive multimedia
2020 users applications
48 High availability central office server
CO users
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Each of these systems may be interconnected to provide support for larger
conferences.
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The Ezenia! Series 2000 MCS has an extensive number of available software
and hardware features, some of which are listed in the following table.
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APPLICATIONS DESCRIPTION
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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
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MARKET AND CHANNELS
Ezenia! sells its products, technologies and solutions primarily to
large-scale corporations, government entities, 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 a small
group of resellers. In 2002, General Dynamics accounted for 27% of revenue. In
2001, Polycom (which acquired PictureTel), General Dynamics and VTEL accounted
for 13%, 11% and 6% of revenue, respectively. In 2000, PictureTel and VTEL
accounted for 27% and 17% of revenue, respectively. Revenue from international
markets accounted for 24%, 41% and 40% of the Company's revenue for the years
ended December 31, 2002, 2001 and 2000, 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.
RESEARCH AND PRODUCT DEVELOPMENT
The Company believes that its future success depends on its ability to
continue to enhance and expand its existing enterprise collaboration products
and to develop new products that maintain its technology leadership. Ezenia! has
invested, and expects to continue to invest, in the development of products and
core technologies while also leveraging integration of best of breed software
components through strategic partnerships. Extensive product development input
is obtained from resellers, end
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users and partners. The Company carefully monitors migration of industry
standards and remains committed to developing products utilizing such standards.
Ezenia! is currently focused on extending the breadth of supported standards for
all its products. This includes the development of highly interoperable
collaboration products to meet industry needs, while maintaining extremely high
focus on the security aspects of enterprise collaboration, including solutions
in the Web conferencing arena.
At December 31, 2002, Ezenia!'s research and development staff consisted of
24 employees, principally software engineers. The Company's net research and
development expenditures were $4.6 million, $8.2 million and $14.4 million in
2002, 2001 and 2000, representing 41%, 54% and 51% 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, 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 90 days. 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.
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.
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 have a material backlog.
11
<Page>
COMPETITION
The market for multimedia collaboration products is highly competitive. We
consider our primary videoconferencing competitors to be Polycom, RADvision and
Lucent, and we consider our primary real-time collaboration competitors to be
IBM Lotus, eRoom and Groove. We also face competition or potential competition
from companies that provide similar, but not directly competing products, such
as Centra, WebEx, FVC and Latitude, or companies that could expand their
offerings and develop a product similar to ours such as Microsoft. Many of these
companies, as well as other current and potential competitors, have
substantially greater financial, technical and sales and marketing resources
than the Company. If we are unable to convince companies with collaboration and
videoconferencing needs to adopt our videoconferencing, Encounter and
InfoWorkSpace collaboration products over the current technologies marketed by
our competitors, our financial results will suffer, through price reductions and
loss of market share.
The principal competitive factors in the market for multimedia collaboration
are, and should continue to be, breadth of capabilities, security, demonstrated
interoperability, price, performance, network management capabilities,
reliability and customer support. We plan to compete by offering secure
collaboration and enterprise products with a broad range of capabilities and
high performance. However, we cannot be certain that potential customers will be
attracted to our products, especially if our competitors were to invest
substantially more money into their products and technology.
The Company currently competes, or expects to compete, directly or
indirectly with the following category of companies:
- Real-time collaboration companies, such as IBM Lotus, eRoom (now part of
Documentum), Groove, Centra, WebEx, FVC and Latitude
- Conferencing companies, such as Polycom, RADvision and Lucent
PROPRIETARY RIGHTS
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 August 1, 2002, the Company entered into an agreement to sell all patents
and pending applications related to its videoconferencing products. In exchange
for an up-front license fee of $1.25 million, the Company granted Tandberg
Telecom AS a fully-paid, non-exclusive, non-transferable license under the
patents and pending applications relating to the Company's videoconferencing
technology (the video patent portfolio). At the same time, Tandberg loaned the
Company an additional $1.25 million, which was secured by the video patent
portfolio. The sale of the video patent portfolio was approved by Ezenia!
shareholders on October 28, 2002, and the sale was completed on October 30,
2002. At the closing, the Company received an additional $2.4 million and all
amounts due under the $1.25 million secured loan were forgiven. The Company
retained a fully-paid, non-exclusive, non-transferable license for the Company's
use in connection with its videoconferencing and enterprise collaboration
products.
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
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$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, 2002, the Company employed a total of 52 persons, including
24 in research and development, 15 in sales, marketing and customer support, 2
in manufacturing and 11 in finance and administration. None of the Company's
employees are represented by a labor organization.
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, including
Khoa Nguyen, the Company's Chief Executive Officer, President and Chief
Financial Officer. The Company does not have employment contracts with its key
personnel other than Khoa Nguyen. The Company believes that its future success
will depend in large part upon its ability to attract and retain such key
employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
Khoa D. Nguyen, age 49, is the sole executive officer of the Company. Khoa
Nguyen has served as a Director since December 1997 and was named Chairman of
the Board of Directors in March 2000. Mr. Nguyen serves as President and CEO of
the Company since April 1998 and as the Chief Financial Officer since
August 2002. 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 Chief Technology Officer and General Manager of the Group Systems and
Networking Products divisions from February 1994 to August 1996 and Vice
President of Engineering from January 1993 to February 1994. 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.
Officers are elected on an annual basis to serve at the discretion of the
Board of Directors.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate office and principal research, development and
manufacturing facility is located in Burlington, Massachusetts, in an
approximately 9,000 square foot facility. The Company moved into this facility
in July 2002 as part of the effort to reduce expenses and excess capacity. The
Company also has a sales and service office located in Alexandria, Virginia and
a development and service office located in Colorado Springs, Colorado. As of
December 31, 2002, the Company had closed all foreign offices, and therefore, no
longer has any leases outside of the United States.
ITEM 3. LEGAL PROCEEDINGS
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 28, 2002, at a Special Meeting of the Stockholders, the Company's
stockholders met to consider and vote upon a proposal to sell all of the
Company's patents, patent applications and certain related assets relating to
the Company's multipoint videoconferencing business pursuant to an asset
purchase agreement, dated as of August 1, 2002, between the Company and Tandberg
Telecom AS. Results with respect to voting on the proposal were as follows:
<Table>
7,435,143 Votes For
814,428 Votes Against
59,244 Abstentions
</Table>
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq SmallCap 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 SmallCap
Market.
<Table>
<Caption>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
2002
Common stock price--high........................... $ .45 $ .33 $.17 $.48
Common stock price--low............................ $ .21 $ .04 $.06 $.06
2001
Common stock price--high........................... $2.17 $1.46 $.60 $.88
Common stock price--low............................ $1.13 $ .45 $.22 $.38
</Table>
As of March 19, 2003, 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 reinvest
future earnings, if any, and therefore, does not intend to pay dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
<Table>
<Caption>
YEAR ENDED DECEMBER 31
----------------------------------------------------
2002 (1) 2001 (2) 2000 (3) 1999 1998 (4)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA
Revenue...................................... $11,373 $15,107 $28,152 $58,109 $55,939
Income (loss) from operations................ (15,094) (33,621) (21,388) (760) 751
Income (loss) before cumulative effect of
change in accounting principle............. (10,799)
Cumulative effect of change in accounting
principle.................................. (10,667)
Net income (loss)............................ (18,565) (31,340) (17,984) 1,134 1,814
Income (loss) per share before cumulative
effect of change in accounting principle... (.58)
Net income (loss) per share--diluted......... (1.36) (2.29) (1.32) 0.08 0.13
BALANCE SHEET DATA
Cash and marketable securities............... $ 2,403 $ 5,531 $34,743 $53,080 $50,606
Total assets................................. 5,564 28,358 57,403 79,738 80,132
Common stock subject to put.................. 2,875 2,875
Stockholders' equity (deficit)............... (1,504) 16,450 47,791 66,790 64,145
</Table>
- ------------------------
(1) 2002 amounts include a write-down of inventory of $3.7 million, or $0.27 per
share, an impairment of goodwill of $10.7 million, or $0.78 per share
relating to the change in accounting principle, an impairment of fixed
assets of $2.3 million, or $0.17 per share, a tax benefit of $2.7 million,
or $0.19 per share, related primarily to a tax refund, and a gain on sale of
patents of $4.9 million, or $.36 per share.
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<Page>
(2) 2001 amounts include a charge to operations of $2.0 million, or $0.15 per
share, related to the restructuring of certain of the Company's operations,
a write-down of goodwill and other long-term assets totaling $7.1 million,
or $0.52 per share, and a tax benefit of $2.2 million, or $0.16 per share,
relating to the reversal of reserves recorded in prior years.
(3) 2000 amounts include the establishment of a valuation allowance for deferred
tax assets recorded in prior years approximating $7.8 million, or $0.57 per
share, income, net of tax, 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.
(4) 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.
Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This statement affects the Company's treatment of goodwill and other
intangible assets. Had SFAS No. 142 been adopted for the year ended
December 31, 2001, the net loss and loss per share would have been $28,298,000,
or $2.07 per share. No other years presented above would have been affected.
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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
SIGNIFICANT ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, bad debts, inventories and warranty obligations.
We base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. We
believe the following critical accounting policies and the related judgments and
estimates affect the preparation of our consolidated financial statements.
REVENUE RECOGNITION Our policy is to recognize revenue from product sales
upon shipment to our customers and the fulfillment of all contractual terms and
conditions, pursuant to the guidance provided by Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements (SAB 101), issued by the
Securities and Exchange Commission.
Revenue from sales of InfoWorkSpace software licenses and maintenance
agreements is recognized ratably over the subscription contract periods.
Products and software licenses are sold without any contractual right of return
to the customer. Judgments are required in evaluating the creditworthiness of
our customers. Revenue is not recognized until we have determined that the risk
of uncollectibility is minimal.
ALLOWANCE FOR DOUBTFUL ACCOUNTS Our policy is to maintain allowances for
estimated losses resulting from the inability of our customers to make required
payments. Credit limits are established through a process of reviewing the
financial history and stability of each customer. Where appropriate, we obtain
credit rating reports and financial statements of the customer when determining
or modifying their credit limits. We regularly evaluate the collectibility of
our trade receivable balances based on a combination of factors. When a
customer's account balance becomes past due, we initiate dialogue with the
customer to determine the cause. If it is determined that the customer will be
unable to meet its financial obligation to us, such as in the case of a
bankruptcy filing, deterioration in the customer's operating results or
financial position or other material events impacting their business, we record
a specific allowance to reduce the related receivable to the amount we expect to
recover given all information presently available.
At December 31, 2002, our accounts receivable balance of $1.8 million is
reported net of allowances of approximately $1.1 million. We believe our
reported allowances are adequate. If the financial conditions of our customers
were to deteriorate, however, resulting in their inability to make payments, we
may need to record additional allowances, which would result in additional
expenses being recorded for the period in which such determination was made.
INVENTORY RESERVES As a designer, developer and manufacturer of real-time
collaboration solutions, we are exposed to a number of economic and industry
factors that could result in portions of our inventory becoming either obsolete
or in excess of anticipated usage. These factors include, but are not limited
to, technological changes in our markets, our ability to meet changing customer
requirements, competitive pressures in products and prices and the availability
of key components from
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<Page>
our suppliers. Our policy is to establish inventory reserves when conditions
exist that suggest that our inventory may be in excess of anticipated demand or
is obsolete based upon our assumptions about future demand for our products and
market conditions. We regularly evaluate the ability to realize the value of our
inventory based on a combination of factors including the following: historical
usage rates, forecasted sales or usage, product end of life dates, estimated
current and future market values and new product introductions. Purchasing
requirements and alternative usage avenues are explored within these processes
to mitigate inventory exposure. When recorded, our reserves are intended to
reduce the carrying value of our inventory to its net realizable value. The
Company recorded a write-down of inventory of approximately $2.3 million in the
year ended December 31, 2002 due to the continued decline in demand relating to
the videoconferencing product line. Based on a settlement agreement negotiated
with a software vendor (see Note 7 to the financial statements), the Company
incurred an additional write-down of inventory of approximately $1.4 million. At
December 31, 2002, our inventory of $112 thousand is stated net of inventory
reserves of approximately $5.1 million. If actual demand for our products or
market conditions change, adjustments to inventory reserves may be required.
IMPAIRMENT The Company reviews the carrying values of long-lived assets and
amortizable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss for an asset to be held and used is recognized
when the estimated fair value of the asset is less than its carrying value. The
fair value of long-lived assets is generally based on estimated future cash
flows from operations. The estimates reflect the Company's assumptions about
selling prices, production and sales volume levels, costs and market conditions
over the estimated remaining operating period, which generally ranges from one
to five years.
PRODUCT WARRANTIES Our products are sold with warranty provisions that
require us to remedy deficiencies in quality or performance of our products over
a specified period of time at no cost to our customers. Our policy is to
establish warranty reserves at the time of sale at levels that represent our
estimate of the costs that will be incurred to fulfill those warranty
requirements. We believe that our recorded liability at December 31, 2002, is
adequate to cover our future cost of materials, labor and overhead for the
servicing of our products sold through that date. If actual product failures, or
material or service delivery costs differ from our estimates, our warranty
liability would need to be revised accordingly.
RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
REVENUE Revenue decreased to $11.4 million in 2002 from $15.1 million in
2001. The decrease in revenue was principally related to a significant decline
in sales of videoconferencing products and related service revenues as the
videoconferencing market continued to weaken. In particular, sales of
videoconferencing products and related services to two of the Company's largest
customers, PictureTel Corporation and VTEL Corporation, were significantly lower
than in the year ended December 31, 2001. Videoconferencing product revenue from
PictureTel was $.2 million in 2002 compared to $1.9 million in 2001.
Videoconferencing product revenue from VTEL was $.3 million in 2002 compared to
$.9 million in 2001. Videoconferencing products and related services are
approximately $6.7 million (59% of total revenues) in 2002 compared to
$13.3 million (88% of total revenues) in 2001. We expect our videoconferencing
product and service revenue will continue to decline.
Revenue decreased to $15.1 million in 2001 from $28.1 million in 2000. The
decrease was primarily related to the decline in sales of videoconferencing
products and related service revenues as the videoconferencing market weakened.
In particular videoconferencing product revenue from sales to PictureTel
decreased to $1.9 million in 2001 from $7.7 million in 2000. Videoconferencing
product revenue from sales to VTEL decreased to $.9 million in 2001 from
$4.8 million in 2000. In addition to the decline in sales of ISDN products and
services, the overall decrease in revenue is also attributable to the sale of
the Company's network access card (NAC) product line in September 2000. Revenue
18
<Page>
from the sales of NAC products approximated $3.3 million during the year ended
December 31, 2000. These decreases were offset by $1.9 million of revenue
associated with the Company's InfoWorkSpace product line acquired in
March 2001.
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 2002 to 27.7% from 37.4% in 2001 and 48.5% in 2000.
Reduction in margin for 2002 is primarily related to a write-down of inventory
of approximately $3.7 million. Excluding the write-down, the gross profit for
2002 would be 60.2%. Excluding the write-down, the increase in margin in 2002
compared to 2001 relates primarily to the reduction of fixed manufacturing and
service costs from the restructuring in 2001 and 2002. Reduction in margin in
2001 from 2000 was primarily attributable to the overall decrease in revenues
and the related disproportionate effect of fixed manufacturing and service costs
included in costs of revenues.
RESEARCH AND DEVELOPMENT Research and development expenses decreased to
$4.6 million for the year ended December 31, 2002 from $8.2 million for the year
ended December 31, 2001. The decreased spending was primarily due to the
elimination of all research and development related to the videoconferencing
product line in July 2002. Research and development expenses decreased to
$8.2 million in 2001 from $14.4 million in 2000. Approximately $6.7 million of
the decrease is attributable to a reduction in staff and related expenses due to
completion of various projects and the Company's restructuring and cost
reduction plan implemented in May 2001 offset by increased costs of
approximately $2.0 million associated with the acquisition of InfoWorkSpace in
March 2001.
SALES AND MARKETING Sales and marketing expenses decreased to $4.0 million
in 2002 from $8.6 million in 2001. The decreased spending was primarily due to
the substantial reduction of sales and marketing related to the
videoconferencing product line in July 2002. Sales and marketing expenses
decreased to $8.6 million in 2001 from $10.7 million in 2000. The decreased
spending was primarily due to the Company's restructuring and cost reduction
plan that went into effect at the end of May 2001. Cost savings achieved from
the restructuring and cost reduction plan were offset by added sales and
marketing expenses of approximately $1.0 million attributable to the
InfoWorkSpace product line acquired in March 2001.
GENERAL AND ADMINISTRATIVE General and administrative expenses decreased to
$2.4 million in 2002 compared to $3.1 million in 2001. The decrease was
primarily due to cost savings associated with the reduction in force implemented
in July 2002 and the adoption of SFAS No. 142, which resulted in no goodwill
amortization. General and administrative expenses decreased to $3.1 million in
2001 from $3.9 million in 2000. The decrease was primarily due to cost savings
associated with the restructuring and cost reduction plan implemented in
May 2001.
OCCUPANCY AND OTHER FACILITIES RELATED EXPENSES Occupancy and other
facilities related expenses represent rent expense and other operating costs
associated with the Company's headquarters and manufacturing facility in
Burlington, Massachusetts, other sales, service and development offices in the
United States, and former sales and service offices in United Kingdom, Hong Kong
and China. Costs are essentially fixed and generally only change when new
offices are opened, closed or leases are renegotiated. The facilities expenses
decreased to $2.7 million in 2002 from $3.1 million in 2001. The decrease was
primarily due to cost savings associated with the relocation of our headquarters
and closing of our foreign offices in connection with the restructuring and cost
reduction plan implemented in July 2002. The increase to $3.5 million in 2001
from $3.2 million in 2000 relates primarily to added occupancy costs associated
with the acquisition of the InfoWorkSpace product line in March 2001.
INTEREST INCOME, NET Interest income, net, consists of interest on cash,
cash equivalents and marketable securities. Interest income decreased to
approximately $14 thousand in 2002 from
19
<Page>
$.9 million in 2001. Interest income in 2000 was $2.5 million. The decreases in
2002 and 2001 were due primarily to reductions in the amounts of cash available
for investment during each of those years.
INCOME TAX The amount reported as income tax benefit in 2002 represented
approximately $2.7 million related to the Federal Job Creation and Worker
Assistance Act of 2002, enacted in March 2002, which allowed the Company to
carryback net operating losses incurred in 2001 for a period of up to five
years, rather than two years as had previously been the case. The additional
carryback period enabled the Company to file a carryback claim in March 2002,
resulting in the utilization of approximately $12.5 million of net operating
losses that would have expired in 2022 and the recovery of approximately
$2.7 million of income taxes paid in prior years, which was received during the
three months ended March 31, 2002. The tax benefit in 2002 also includes
approximately $.2 million for the reversal of tax reserves due to the favorable
settlement of certain tax related matters. The amount reported as income tax
benefit in 2001 relates primarily to the reversal of tax reserves recorded in
prior years. The Company determined that the tax reserves were no longer
required because the related potential tax exposures were favorably resolved
during the fourth quarter of 2001. In 2000 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.
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.
LIQUIDITY. As further described under Liquidity and Capital Resources, the
Company's ability to continue as a going concern is dependent upon its ability
to raise additional capital, increase revenue or substantially improve operating
margins.
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 relatively
small number of customers will continue during 2003. 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.
REDUCED DEMAND FOR TRADITIONAL VIDEOCONFERENCING PRODUCTS. Traditional
videoconferencing technology has had a rapid decline. The Company's
videoconferencing revenue declined to $6.7 million in 2002 from $13.3 million in
2001. The Company has broadened its product offerings with the acquisition of
the InfoWorkSpace product line in March 2001. To date, however, revenues from
sales of these products have not offset the decline in revenues from sales of
videoconferencing products.
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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 Internet-based
collaboration products, in general, and InfoWorkSpace product, 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 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 2003 plans to continue to invest, in product
development and products incorporating certain of these new technologies. Many
other companies 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 multimedia collaboration 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. If the Company is unable
to convince companies with collaboration and videoconferencing needs to adopt
the Encounter and InfoWorkSpace collaboration products over the current
technologies marketed by competitors, the Company's financial results will
suffer, through price reductions and loss of market share.
The principal competitive factors in the market for multimedia collaboration
are, and should continue to be, breadth of capabilities, demonstrated
interoperability, price, performance, network management capabilities,
reliability, customer support and security. The Company plans to compete by
offering collaboration and enterprise products with a broad range of
capabilities and high performance. However, the Company cannot be certain that
potential customers will be attracted to the Company's products, especially if
competitors were to invest substantially more money into their products and
technology.
INFOWORKSPACE ACQUISITION. On March 27, 2001, 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
Systems. The Company entered into the purchase agreement with the expectation
that the transaction would 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. InfoWorkSpace products are currently used primarily by
government organizations, including the Department of Defense and the
Intelligence Community. While continuing to develop the government business, the
Company's intention is to market and sell the InfoWorkSpace collaboration
products commercially. The Company cannot assure that its commercial marketing
efforts will be sufficient or that 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.
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PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's success depends, to a
large extent, on its ability to protect its proprietary technology. The Company
relies primarily on a combination of contractual rights, trade secrets and
copyrights to protect its intellectual property rights, including the
fully-paid, non-exclusive, non-transferable license granted by Tandberg to the
Company for use in connection with its videoconferencing and enterprise
collaboration products.
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, including Khoa Nguyen, the Company's Chief Executive
Officer, President and Chief Financial Officer. The Company does not have
employment contracts with its key personnel other than Khoa Nguyen. 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
The Company has incurred substantial recurring operating losses and negative
cash flows, and there is substantial doubt about the Company's ability to
continue as a going concern. The Company's ability to continue as a going
concern is dependent upon its ability to raise additional capital, increase
revenue or substantially improve operating margins.
At December 31, 2002, the Company had cash and cash equivalents of
approximately $2.4 million. The Company had losses from operations of
$15.1 million and a net loss of $18.6 million for the year ended December 31,
2002.
In May 2001, the Company implemented a restructuring and cost reduction plan
to reduce operating costs in line with then anticipated revenues with the
ultimate objective of improving operating margins and becoming cash-flow neutral
from operations (see Note 12). Since the May 2001 restructuring, revenues have
not materialized in line with the Company's expectations. As a result, in
July 2002 the Company implemented another restructuring and cost reduction plan,
which consisted of the termination of 55 employees (approximately 50% of its
workforce), closing its foreign sales operations and significantly reducing
sales and service operations of its videoconferencing product lines. Costs of
the July restructuring were approximately $.4 million, principally severance
payments to foreign employees, which was paid by December 31, 2002.
In June 2002, the Company negotiated the termination of the lease of its
Burlington, Massachusetts headquarters and manufacturing facility and in
July 2002 moved to more cost-efficient space in Burlington, Massachusetts.
In the quarter ended June 30, 2002, the Company recorded a write-down of
inventory (approximately $2.3 million) associated principally with the
videoconferencing product line and impairment of long-lived assets
(approximately $2.1 million) abandoned as part of the lease termination.
After the July restructuring and lease termination described above, the
Company estimates its cash-flow breakeven point to be approximately
$3.5 million to $4.0 million in revenues per quarter. Future revenues are
expected to be generated primarily from sales and services associated with
InfoWorkSpace products.
The Company rents its primary facility in Burlington, Massachusetts under an
operating lease, which expires in 2006. The Company also leases office space in
Colorado Springs, Colorado and Alexandria, Virginia for sales and development
operations under leases that expire on various dates through April 2006. Future
minimum lease payments at December 31, 2002 under these non-cancelable operating
leases are approximately $469,000 in 2003, $282,000 in 2004, $221,000 in 2005
and $50,000 in 2006.
22
<Page>
On August 1, 2002, the Company entered into an agreement to sell all patents
and pending applications related to its videoconferencing products. In exchange
for an up-front license fee of $1.25 million, the Company granted Tandberg
Telecom AS a fully-paid, non-exclusive, non-transferable license under the
patents and pending applications relating to the Company's videoconferencing
technology (the video patent portfolio). At the same time, Tandberg loaned the
Company an additional $1.25 million, which was secured by the video patent
portfolio. The sale of the video patent portfolio was approved by Ezenia!
shareholders on October 28, 2002, and the sale was completed on October 30,
2002. At the closing, the Company received an additional $2.4 million and all
amounts due under the $1.25 million secured loan were forgiven. The Company
retained a fully-paid, non-exclusive, non-transferable license for the Company's
use in connection with its videoconferencing and enterprise collaboration
products.
In December 2002, the Company renegotiated the terms of the put agreement
entered into with General Dynamics Government Systems Corporation in connection
with the Company's acquisition of the InfoWorkSpace business unit. Under the put
option issued by the Company in connection with its acquisition of the
InfoWorkSpace business, the Company may be required to purchase another
$2.9 million of its common stock in March 2004 (see Note 5 to the financial
statements).
The Company's common stock is presently listed on the Nasdaq SmallCap Market
under the symbol EZEN. All companies with securities listed on the Nasdaq
SmallCap Market are required to comply with certain continued listing standards,
including maintaining a minimum bid price of at least $1.00 per share. The
Company has been unable to meet these listing criteria. Nasdaq has provided the
Company a grace period through May 12, 2003 for compliance with the bid price
requirement. However, the Company does not believe that it is currently in
compliance with all other Nasdaq SmallCap listing criteria, and therefore is at
risk of having its common stock delisted at any time. There can be no assurance
that the Company will be able to satisfy the minimum bid price or other
continued listing criteria at any time in the future or that, if pursued, any
request for continued listing would be granted by Nasdaq. In the event that the
Company's common stock is delisted, the market value and liquidity of the
Company's common stock could be materially adversely affected.
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. A 10%
change in interest rates would not have a material impact on the Company's
financial position, operating results or cash flows. The Company has closed its
foreign offices, and sales to foreign customers from the United States are in
U.S. dollars. Therefore, the Company has no significant foreign currency risk.
23
<Page>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<Table>
<Caption>
PAGE
--------
Report of Independent Auditors.............................. 25
Consolidated Balance Sheets as of December 31, 2002 and
2001...................................................... 26
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000.......................... 27
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended
December 31, 2002, 2001 and 2000.......................... 28
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000.......................... 29
Notes to the Consolidated Financial Statements.............. 30
</Table>
24
<Page>
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, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2002. Our
audits also included the financial statement schedule listed in the Index at
Item 15(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 and schedule 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, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, 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.
The accompanying financial statements have been prepared assuming that
Ezenia! Inc. will continue as a going concern. As more fully described in
Note 2, the Company has incurred substantial recurring operating losses and
negative cash flows. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
As discussed in Note 5 to the consolidated financial statements, on
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS."
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
March 25, 2003
25
<Page>
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31
-------------------------------
2002 2001
-------------- --------------
(IN THOUSANDS,
EXCEPT FOR SHARE RELATED DATA)
ASSETS
Current assets
Cash and cash equivalents................................. $ 2,403 $ 5,531
Accounts receivable, less allowances of $1,096 and $914 in
2002 and 2001, respectively............................. 1,780 2,313
Inventories............................................... 112 3,882
Prepaid software licenses................................. 1,008 774
Prepaid expenses and other current assets................. 261 691
------- -------
Total current assets........................................ 5,564 13,191
Equipment and improvements, net of accumulated
depreciation.............................................. 3,470
Goodwill and other intangible assets, net................... 11,673
Other assets, net........................................... 24
------- -------
$ 5,564 $28,358
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Note payable.............................................. $ 2,000
Accounts payable.......................................... $ 681 1,830
Accrued expenses.......................................... 584 1,445
Income taxes.............................................. 285 492
Accrued restructuring expenses............................ 101
Deferred revenue.......................................... 2,643 2,065
Current portion of common stock subject to put............ 1,100
------- -------
Total current liabilities................................... 4,193 9,033
Common stock subject to put; 290,000 shares issued and
outstanding at
December 31, 2002; 400,000 shares issued and outstanding
at December 31, 2001, less amount classified as current... 2,875 2,875
Commitments and contingencies--Note 13
Stockholders' equity (deficit)
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none issued and outstanding
Common stock, $.01 par value; 40,000,000 shares
authorized; 13,633,630 issued and outstanding in 2002;
13,741,880 issued and outstanding in 2001............... 139 139
Capital in excess of par value............................ 60,666 59,566
Accumulated deficit....................................... (59,448) (40,883)
Accumulated other comprehensive loss...................... (611)
Treasury stock at cost; 660,000 shares in 2002 and 550,000
shares in 2001.......................................... (2,861) (1,761)
------- -------
(1,504) 16,450
------- -------
$ 5,564 $28,358
======= =======
</Table>
See accompanying notes.
26
<Page>
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------------------
2002 2001 2000
------------ ------------ ------------
(IN THOUSANDS,
EXCEPT FOR PER SHARE RELATED DATA)
REVENUES
Product revenue................................ $ 8,830 $ 11,944 $ 24,167
Service revenue................................ 2,543 3,163 3,985
-------- -------- --------
11,373 15,107 28,152
-------- -------- --------
COSTS OF REVENUES
Cost of product revenue........................ 7,490 6,483 10,502
Cost of service revenue........................ 731 2,970 3,985
-------- -------- --------
8,221 9,453 14,487
-------- -------- --------
GROSS PROFIT..................................... 3,152 5,654 13,665
OPERATING EXPENSES
Research and development....................... 4,641 8,171 14,397
Sales and marketing............................ 3,959 8,556 10,741
General and administrative..................... 2,438 3,099 3,856
Amortization of goodwill and other intangible
assets....................................... 1,005 4,047
Depreciation................................... 1,187 2,831 2,904
Occupancy and other facilities related
expenses..................................... 2,671 3,488 3,155
Impairment of goodwill and other long-term
assets....................................... 2,345 7,070
Restructuring.................................. 2,013
-------- -------- --------
Total operating expenses......................... 18,246 39,275 35,053
-------- -------- --------
LOSS FROM OPERATIONS............................. (15,094) (33,621) (21,388)
Other income (expense)
Interest income, net........................... 14 888 2,492
Litigation settlement.......................... 6,500
Loss on sale of equipment...................... (36)
Loss on investment............................. (543)
Gain on sale of patents........................ 4,900
Loss on liquidation of foreign subsidiaries.... (619)
Gain on sale of network access card product
line......................................... 3,287
Other.......................................... (178)
-------- -------- --------
4,295 131 12,279
-------- -------- --------
Loss before income taxes and cumulative effect of
change in accounting principle................. (10,799) (33,490) (9,109)
Income taxes (benefit)........................... (2,901) (2,150) 8,875
-------- -------- --------
Loss before cumulative effect of change in
accounting principle........................... (7,898)
Cumulative effect of change in accounting
principle...................................... (10,667)
NET LOSS......................................... $(18,565) $(31,340) $(17,984)
======== ======== ========
BASIC AND DILUTED EARNINGS PER SHARE:
Before cumulative effect of change in
accounting principle......................... $ (.58) $ (2.29) $ (1.32)
Cumulative effect of change in accounting
principle.................................... (.78)
-------- -------- --------
Net loss......................................... $ (1.36) $ (2.29) $ (1.32)
======== ======== ========
</Table>
See accompanying notes.
27
<Page>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
COMMON STOCK CAPITAL RETAINED
---------------------- IN EXCESS OF EARNINGS
SHARES PAR VALUE PAR VALUE (DEFICIT)
------ --------- ------------ ---------
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
BALANCES AS OF DECEMBER 31, 1999... 13,588,505 $136 $ 58,483 $ 8,441
Stock issued under employee
benefit plans.................. 211,257 2 920
Foreign currency translation
adjustment.....................
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)
Stock issued under employee
benefit plans.................. 92,118 1 163
Stock issued in connection with
acquisition of InfoWorkSpace... 400,000
Foreign currency translation
adjustment.....................
Acquisition of treasury stock.... (50,000)
NET LOSS......................... (31,340)
---------- ---- -------- --------
Comprehensive loss...............
BALANCES AS OF DECEMBER 31, 2001... 13,741,880 139 59,566 (40,883)
Stock issued under employee
benefit plans.................. 1,750
Foreign currency translation
adjustment.....................
Liquidation of foreign
subsidiaries...................
Exercise of put.................. (110,000)
NET LOSS......................... 1,100 (18,565)
---------- ---- -------- --------
Comprehensive loss.................
BALANCES AS OF DECEMBER 31, 2002... 13,633,630 $139 $ 60,666 $(59,448)
========== ==== ======== ========
<Caption>
ACCUMULATED
OTHER TOTAL COMPREHENSIVE
COMPREHENSIVE TREASURY STOCKHOLDERS' INCOME
LOSS STOCK EQUITY (DEFICIT) (LOSS)
------------- -------- ---------------- -------------
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
BALANCES AS OF DECEMBER 31, 1999... $(270) $66,790
Stock issued under employee
benefit plans.................. 922
Foreign currency translation
adjustment..................... (207) (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... (477) (1,730) 47,791
Stock issued under employee
benefit plans.................. 164
Stock issued in connection with
acquisition of InfoWorkSpace...
Foreign currency translation
adjustment..................... (134) (134) $ (134)
Acquisition of treasury stock.... (31) (31)
NET LOSS......................... (31,340) (31,340)
----- ------- -------- --------
Comprehensive loss............... $(31,474)
========
BALANCES AS OF DECEMBER 31, 2001... (611) (1,761) 16,450
Stock issued under employee
benefit plans..................
Foreign currency translation
adjustment..................... (8) (8) (8)
Liquidation of foreign
subsidiaries................... 619 619
Exercise of put.................. (1,100)
NET LOSS......................... (18,565) (18,565)
----- ------- -------- --------
Comprehensive loss................. $(18,573)
========
BALANCES AS OF DECEMBER 31, 2002... $ 0 $(2,861) $ (1,504)
===== ======= ========
</Table>
See accompanying notes.
28
<Page>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net loss.................................................... $(18,565) $(31,340) $(17,984)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Gain on sale of network access card product line...... (3,287)
Depreciation.......................................... 1,187 3,205 3,710
Amortization.......................................... 1,005 4,047
Loss on investment.................................... 543
Loss on sale of equipment............................. 36
Loss on liquidation of foreign subsidiaries........... 619
Write-down of goodwill and other long-term assets..... 13,012 7,070
Deferred income taxes................................. 7,780
Changes in operating assets and liabilities, less
amounts attributable to acquisition of
InfoWorkSpace:
Accounts receivable............................... 533 833 3,654
Inventories....................................... 3,770 (595) (1,971)
Prepaid software licenses......................... (234) 260
Prepaid expenses and other current assets......... 430 847 (307)
Accounts payable and accrued expenses............. (2,111) (2,622) (3,251)
Income taxes...................................... (207) (2,355)
Deferred revenue.................................. 578 (7) 164
-------- -------- --------
Net cash provided by (used for) operating activities........ 17 (20,078) (11,492)
INVESTING ACTIVITIES
Cash received from sale of network access card product
line...................................................... 1,500 3,000
Acquisition of InfoWorkSpace................................ (3,100) (10,526) (6,000)
Net purchases of equipment and improvements................. (61) (599) (2,891)
Changes in marketable securities, net....................... 14,286 3,699
Other, net.................................................. 24 492 61
-------- -------- --------
Net cash provided by (used for) investing activities........ (3,137) 5,153 (2,131)
FINANCING ACTIVITIES
Net proceeds from issuance of stock under employee benefit
plans..................................................... 164 922
Acquisition of treasury stock............................... (31) (1,730)
-------- -------- --------
Net cash provided by (used for) financing activities........ 133 (808)
Effect of exchange rate on cash and cash equivalents........ (8) (134) (207)
-------- -------- --------
Decrease in cash and cash equivalents....................... (3,128) (14,926) (14,638)
Cash and cash equivalents at beginning of year.............. 5,531 20,457 35,095
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 2,403 $ 5,531 $ 20,457
======== ======== ========
Supplementary disclosure of cash flow information:
Interest paid............................................. $ 0 $ 0 $ 43
-------- -------- --------
Income taxes paid......................................... $ 0 $ 177 $ 1,180
======== ======== ========
Noncash investing activity
Value of inventory to be received in connection with sale
of network access card product line..................... $ 750
========
</Table>
See accompanying notes.
29
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Ezenia! Inc. operates in one business segment, which is the design,
development, manufacturing, marketing and sale of conferencing 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 and government agencies.
2. GOING CONCERN
The Company has incurred substantial recurring operating losses and negative
cash flows, and at December 31, 2002, has limited cash resources. Also, the
Company renegotiated a put agreement entered into in connection with its
acquisition of the InfoWorkSpace business unit (see Note 5). The Company's
ability to continue as a going concern is dependent upon its ability to raise
additional capital, increase revenue or substantially improve operating margins.
In May 2001, the Company implemented a restructuring and cost reduction plan to
reduce operating costs in line with then anticipated revenues with the ultimate
objective of improving operating margins and becoming cash-flow neutral from
operations (see Note 12). Since the May 2001 restructuring, revenues have not
materialized in line with the Company's expectations. As a result, in July 2002
the Company implemented another restructuring and cost reduction plan which
consisted of the termination of 55 employees (approximately 50% of its
workforce), closing its foreign sales operations and significantly reducing
sales and service operations of its videoconferencing product lines. (Revenues
from videoconferencing products and services were $6.7 million, $13.3 million,
and $24.8 million for the years ended December 31, 2002, 2001 and 2000,
respectively.) Costs of the July 2002 restructuring were approximately
$.4 million, principally severance payments to foreign employees, which was paid
by December 31, 2002. The Company also recorded a loss on liquidation of the
foreign subsidiaries of approximately $.6 million relating to the closure of the
foreign sales operations.
In June 2002, the Company negotiated the termination of the lease of its
Burlington, Massachusetts headquarters and manufacturing facility and in
July 2002 moved to more cost-efficient space.
In the quarter ended June 30, 2002, the Company recorded a write-down of
inventory (approximately $2.3 million) associated principally with the
videoconferencing product line and impairment of long-lived assets
(approximately $2.1 million) abandoned as part of the lease termination.
Effective August 1, 2002, the Company entered into a license agreement, a
promissory note and security agreement, and an asset purchase agreement in
connection with the Company's proposal to sell the patents and pending
applications associated with its videoconferencing business. These agreements
resulted in the Company receiving $2.5 million in cash on August 2, 2002, and
another $2.4 million in cash on October 30, 2002 at the closing of the sale (see
Note 4).
After the July restructuring and lease termination described above, the
Company estimates its cash-flow breakeven point to be approximately
$3.5 million to $4.0 million in revenues per quarter. Future revenues are
expected to be generated primarily from sales and services associated with
InfoWorkSpace products.
There can be no assurance that the Company can achieve its revenue goals or
secure additional capital. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible
30
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. GOING CONCERN (CONTINUED)
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
3. 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 inter company 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 expense are translated at the average rate 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
(deficit).
Certain amounts in 2001 and 2000 have been reclassified to permit comparison
with 2002 classifications.
SIGNIFICANT ESTIMATES AND ASSUMPTIONS
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States 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. 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 sales of InfoWorkSpace software
licenses is recognized ratably over the subscription period, generally one year.
Revenue from maintenance agreements is recognized ratably over the terms of the
agreements, and other service revenue is recognized as the services are
performed.
SOFTWARE LICENSES
The Company's InfoWorkSpace products incorporate software licenses, which
the Company purchases from other software vendors. Software licenses purchased
from vendors are reported as inventory until the sale of the underlying
InfoWorkSpace subscription license, at which time they are reported as prepaid
licenses and amortized over the subscription period (see Note 7).
CASH EQUIVALENTS
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.
31
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments consist of cash and cash equivalents,
trade receivables, accounts payable, accrued expenses and common stock subject
to put. The carrying value of these financial instruments approximates fair
value due to their short term to maturity. Financial instruments, which
potentially subject the Company to concentrations of credit risk, are cash
equivalents and accounts receivable.
All the Company's cash equivalents 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. The Company maintains an allowance for doubtful accounts based on
accounts past due according to contractual terms and historical collection
experience. Actual losses when incurred are charged to the allowance. Write-offs
related to accounts receivable have been within management's expectations.
Revenue from one customer accounted for 27% of total revenues in 2002.
Revenue from two customers accounted for 24% and 44% of total revenues in 2001
and 2000, respectively. Accounts receivable from these customers amounted to
approximately $.2 million, $1.2 million and $1.0 million at December 31, 2002,
2001 and 2000, respectively. Export sales were $2.9 million, $6.1 million and
$11.3 million in 2002, 2001 and 2000, respectively.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value, 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:
<Table>
Computer and office equipment........ 3 years
Furniture and fixtures............... 5 years
Leasehold improvements............... Shorter of lease term or estimated
useful life
</Table>
DEFERRED REVENUE
Deferred revenue represents amounts received from customers under
subscription software licenses, 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.
32
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 and shares subject to a put option (see Note 5) when dilutive.
Shares used in computing basic and diluted net loss per share are as
follows:
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
BASIC.................................... 13,633,630 13,663,863 13,649,245
DILUTED.................................. 13,633,630 13,663,863 13,649,245
---------- ---------- ----------
</Table>
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144, "ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS," (2002) and SFAS No. 121, "ACCOUNTING FOR IMPAIRMENT OF
LONG-LIVED ASSETS," (2001 and 2000) the Company records 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.
Pro-forma information regarding net loss and loss per share, as if the
Company had used the fair value method of SFAS No. 123 to account for stock
options issued under its various stock option plans, 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 1.62
in 2002, 1.49 in 2001 and 1.29 in 2000; and a weighted-average expected life of
the option of 5.2 years in 2002, 5.3 years in 2001 and 5.3 years in 2000.
33
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For purposes of pro-forma disclosures, the estimated weighted average fair
value of options granted during the year of $.23, $1.30 and $6.10 in 2002, 2001
and 2000, respectively, is amortized to expense over the related vesting period.
Pro-forma information is as follows:
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS EXCEPT FOR PER SHARE
INFORMATION)
Net loss as reported........................... $(18,565) $(31,340) $(17,984)
Deduct: total stock-based employee compensation
determined under fair value based methods.... (2,109) (3,147) (4,465)
-------- -------- --------
Pro-forma net loss $(20,674) $(34,487) $(22,449)
======== ======== ========
Net loss per share as reported
Basic and diluted............................ (1.36) (2.29) (1.32)
======== ======== ========
Pro-forma net loss per share
Basic and diluted............................ (1.51) (2.52) (1.64)
======== ======== ========
</Table>
ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FIN 45, "GUARANTOR'S ACCOUNTING AND
DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF
INDEBTEDNESS OF OTHERS." FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation it
assumes under the guarantee. The disclosure provisions of FIN 45 are effective
for financial statements of interim or annual periods ending after December 15,
2002. The provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year-end. The Company is currently
evaluating the requirements and impact, if any, of FIN 45 on its consolidated
results of operations and financial position.
In June 2002, the FASB issued SFAS No. 146, "COSTS ASSOCIATED WITH EXIT OR
DISPOSAL ACTIVITIES." SFAS No. 146 supercedes EITF Issue No. 94-3, "LIABILITY
RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN
ACTIVITY." SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured initially at fair value
only when the liability is incurred. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption of
SFAS No. 146 is not expected to have a material impact on the Company's
financial position or results of its operations.
In December 2002, the FASB issued SFAS No. 148, "ACCOUNTING FOR STOCK-BASED
COMPENSATION--TRANSITION DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent and more frequent disclosure in financial
statements regarding the effects of stock-based compensation. The provisions of
SFAS No. 148 are effective for fiscal and interim periods ending after
December 15, 2002. The Company will continue to apply APB No. 25 as the method
used to account for stock-based employee compensation arrangements, where
applicable, but will adopt the disclosure requirements of SFAS No. 148 beginning
with the financial statements for its fiscal quarter ending March 31, 2003.
34
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SALE OF PATENTS
On August 1, 2002, the Company entered into an agreement to sell all patents
and pending applications related to its videoconferencing products. In exchange
for an up-front license fee of $1.25 million, the Company granted Tandberg
Telecom AS a fully-paid, non-exclusive, non-transferable license under the
patents and pending applications relating to the Company's videoconferencing
technology (the video patent portfolio). At the same time, Tandberg loaned the
Company an additional $1.25 million, which was secured by the video patent
portfolio. The Company's shareholders approved the sale of the video patent
portfolio on October 28, 2002, and the sale was completed on October 30, 2002.
At the closing, the Company received an additional $2.4 million and all amounts
due under the $1.25 million secured loan were forgiven. The Company retained a
fully-paid, non-exclusive, non-transferable license for the Company's use in
connection with its videoconferencing and enterprise collaboration products.
5. ACQUISITIONS
On March 27, 2001, the Company completed the acquisition of all of the
operating assets and intellectual property of the InfoWorkSpace 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 was paid on January 4, 2002. The 400,000 shares issued were
accompanied by an option allowing the seller to put the shares to the Company at
$10.00 per share. The seller exercised the put option with respect to 110,000
shares on January 4, 2002, and the shares were reacquired at an aggregate price
of $1.1 million on January 25, 2002. The put agreement, as amended, gives the
seller the option to require the Company to repurchase the balance of 290,000
shares beginning March 31, 2004 and expiring April 30, 2004. The put right shall
expire at such time as the last reported closing price of the common stock 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 was accounted for as a purchase.
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.
35
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS (CONTINUED)
The total purchase price and related acquisition costs were recorded as
follows:
<Table>
<Caption>
(IN THOUSANDS)
--------------
Equipment and improvements.................................. $ 481
Prepaid software licenses................................... 1,124
Goodwill (to be amortized over 5 years)..................... 19,504
Other intangible assets (to be amortized over 1.5 to 3
years).................................................... 2,531
Deferred revenue............................................ (1,125)
-------
$22,515
=======
</Table>
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 twelve
months ended December 31, 2001 and 2000 as if the acquisition had occurred as of
the beginning of the periods presented.
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-----------------------
2001 2000
-------- --------
(IN THOUSANDS)
Revenue............................................... $ 15,442 $ 29,232
Net loss.............................................. (34,398) (31,373)
Basic and diluted loss per share...................... (2.52) (2.30)
</Table>
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.
InfoWorkSpace products provide knowledge workers a secure virtual workspace
for project and team collaboration. InfoWorkSpace products are currently used
primarily by government organizations, including Defense Department agencies and
the Intelligence Community.
The continued weakness in the economy and the rapidly changing and
competitive environment in which the Company operates negatively impacted
expected sales of InfoWorkSpace product during 2001. During the fourth quarter
of 2001, the Company determined the fair value of InfoWorkSpace product line has
declined from the value at the date it was acquired. In accordance with SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, the Company evaluated the recoverability of its
long-lived assets, including intangibles related to the InfoWorkSpace
acquisition and determined that the estimated future undiscounted cash flows
were below their carrying value at December 31, 2001. Accordingly, the Company
recorded an impairment charge of approximately $6,293,000 in the fourth quarter
of 2001, to reflect its estimate of the impairment of goodwill associated with
the acquisition of InfoWorkSpace. The estimated fair value was based on
anticipated future cash flows discounted at a rate of 18%, which the Company
considered to be commensurate with the risk involved.
Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standard (SFAS) No. 142, "GOODWILL AND OTHER INTANGIBLE
ASSETS." This statement affects the Company's treatment of goodwill and other
intangible assets. The statement requires that goodwill existing at the date of
adoption be reviewed for possible impairment and that impairment tests be
36
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS (CONTINUED)
periodically repeated, with impaired assets written down to fair value.
Additionally, existing goodwill and intangible assets must be assessed and
classified within the statement's criteria. Intangible assets with finite useful
lives will continue to be amortized over those periods. Amortization of goodwill
and intangible assets with indeterminable lives will cease. As a result, of the
adoption of SFAS No. 142, certain intangible assets totaling approximately
$865 thousand were reclassified as goodwill as they did not meet the requirement
for classification as intangible assets under SFAS No. 142.
The Company completed the first step of the transitional goodwill impairment
test prior to June 30, 2002 as required by SFAS No. 142 and determined that the
fair value of it sole reporting unit was less than its net assets indicating
potential goodwill impairment existed. The second step of the transitional
goodwill impairment test was completed during the three months ended
December 31, 2002, resulting in a write-off of all remaining goodwill. The
impairment loss recognized was included in the accompanying financial statements
as a cumulative effect of a change in accounting principle. Accordingly, the
Company has restated its reported 2002 interim periods to effect the change in
accounting (see Note 16.)
Had SFAS No. 142 been adopted for the years ended December 31, 2001 and
2000, the impact on net loss and loss per share would have been as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-----------------------
2001 2000
-------- --------
(IN THOUSANDS)
Net loss.............................................. $(31,340) $(17,984)
Add back goodwill amortization........................ 3,042
-------- --------
Adjusted net loss..................................... (28,298) $(17,984)
======== ========
Basic and diluted net loss per share.................. $ (2.29) $ (1.32)
Add back goodwill amortization........................ .22
-------- --------
Adjusted basic and diluted net loss per share......... $ (2.07) $ (1.32)
======== ========
</Table>
6. SALE OF PRODUCT LINE
On September 15, 2000, the Company completed the sale of assets and
technology associated with its network access card (NAC) product line to Telco
Systems, Inc. (Telco) for cash of $4.5 million, received 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 for the year ended December 31,
2000.
37
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVENTORIES
Inventories consist of:
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
(IN THOUSANDS)
Raw materials and subassemblies..................... $1,501
Software licenses................................... 1,806
Work in process..................................... 458
Finished goods...................................... $112 117
---- ------
$112 $3,882
==== ======
</Table>
Concurrent with the acquisition of the InfoWorkSpace product line, the
Company entered into a license agreement with a software vendor. Under the terms
of the agreement, the Company was obligated to purchase $7.5 million of software
licenses over the two year period ending March 26, 2003. The licenses are resold
with the Company's InfoWorkSpace products. Through December 31, 2002, the
Company had acquired approximately $2.4 million of licenses under the agreement.
During 2002 the Company's sales consistently fell below the minimum requirements
of the contract. In addition, the Company was unable to meet the minimum payment
obligations. The Company negotiated a settlement with the vendor whereby the
Company is relieved of the minimum purchase requirements. In exchange, the
Company has forfeited any previously purchased licenses that were not activated
as of December 31, 2002. As a result of this settlement, the Company wrote-off
$.3 million of unused licenses as costs of sales.
During 2002, the Company recorded a provision for obsolete and excess
inventory of $2.3 million associated principally with the videoconferencing
product line.
8. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of:
<Table>
<Caption>
DECEMBER 31
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Computer and office equipment............................... -- $19,235
Furniture and fixtures...................................... -- 306
Leasehold improvements...................................... -- 1,550
-------- -------
-- 21,091
Less accumulated depreciation............................... -- 17,621
-------- -------
-- $ 3,470
======== =======
</Table>
In the year ended December 31, 2002, the Company wrote off all equipment and
improvements as a result of impairment and assets abandoned as part of a lease
termination.
38
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ACCRUED EXPENSES
Accrued expenses consist of:
<Table>
<Caption>
DECEMBER 31
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Employee compensation and benefits.......................... $274 $ 922
Warranties and other customer-related costs................. 162 315
Other....................................................... 148 208
---- ------
$584 $1,445
==== ======
</Table>
The Company provides standard warranty coverage on its systems for up to
90 days, providing labor and parts necessary to repair the systems during the
warranty period. The Company accounts for the estimated warranty cost as a
charge to cost of sales when the revenue is recognized. The estimated warranty
cost is based on historical product performance and field expenses. The actual
product performance and/or field expense profiles may differ, and in those cases
the Company adjusts warranty accruals accordingly. The following table shows the
details of the product warranty accrual for the year ended December 31, 2002.
<Table>
<Caption>
(IN THOUSANDS)
Balance at December 31, 2001................................ $315
Warranty expenditures for current period.................... (261)
Provision for warranty costs in the period.................. 108
----
Balance at December 31, 2002................................ $162
====
</Table>
The Company offers service contracts that may be purchased after a standard
warranty has expired. Service contracts are generally for one year periods. The
Company recognizes service contract revenue ratably over the life of the
contract. Actual service contract expenses incurred and charged to service costs
of sales during an interim period may be more or less than the amount of
amortized service contract revenue recognized in that period.
39
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The provision (benefit) for income taxes is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Current:
Federal......................................... $(2,908) $(2,090)
State........................................... (122)
Foreign......................................... 7 62 $1,095
------- ------- ------
(2,901) (2,150) 1,095
Deferred:
Federal......................................... 6,769
State........................................... 967
Foreign......................................... 44
------- ------- ------
7,780
------- ------- ------
$(2,901) $(2,150) $8,875
======= ======= ======
</Table>
The amount reported as income tax benefit in 2002 is primarily a result of
the Federal Job Creation and Worker Assistance Act of 2002, enacted in March
2002, which allowed the Company to carryback net operating losses incurred in
2001 for a period of up to five years. The amount reported as income tax benefit
in 2001 relates primarily to the reversal of tax reserves recorded in prior
years. The Company determined that the tax reserves were no longer required
because the related potential tax exposures were favorably resolved during the
fourth quarter of 2001.
The total income tax expense (benefit) differs from the income tax at the
statutory federal income tax rate due to the following:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Federal income tax at statutory rate............. $ 6,498 $(11,386) $(3,097)
State income taxes, net of federal benefit....... (126) (320) (289)
Foreign taxes, net............................... 7 647 119
Research and development tax credits............. (3,214) (606)
Valuation allowance.............................. 3,978 13,594 12,711
Reversal of reserves recorded in prior years..... (250) (2,212)
Other............................................ (12) 741 37
------- -------- -------
Total income tax expense (benefit)............... $(2,901) $ (2,150) $ 8,875
======= ======== =======
</Table>
40
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Purchased intangibles................................... $ 6,303 $ 2,159
Net operating loss carryforwards........................ 17,651 17,257
Research and development credits........................ 4,360 4,445
Accruals and allowances not currently deductible for tax
purposes.............................................. 1,554 1,889
Depreciation and other.................................. 416 555
Valuation allowance..................................... (30,284) (26,305)
------- -------
Total deferred tax assets................................. $ 0 $ 0
======= =======
</Table>
At December 31, 2002, the Company has available net operating loss
carryforwards of approximately $51,110,000 expiring at various dates through
2022, federal research and development credit carryforwards of approximately
$2,270,000 expiring in varying amounts during the period 2018 through 2022 and
state and research and development credit carryforwards of approximately
$2,090,000 expiring in varying amounts during the period 2006 through 2016.
11. OTHER 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 of $975,000.
12. MAY 2001 AND JULY 2002 RESTRUCTURING AND COST REDUCTION PLANS
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. As a result of these actions, the Company recorded charges of
approximately $2.0 million in the second quarter of 2001. These charges
primarily represented 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 covered all
functional areas, including research and development, sales and marketing,
general and administrative, manufacturing and technical support. These costs
were substantially paid prior to December 31, 2001.
In July 2002, the Company implemented another restructuring and cost
reduction plan, which consisted of the termination of 55 employees
(approximately 50% of its workforce), closing its foreign sales operations and
significantly reducing sales and service operation of its videoconferencing
product lines. The reduction in workforce covered all functional areas,
including research and development, sales and marketing, general and
administrative, manufacturing and technical support. Cost of the July
41
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. MAY 2001 AND JULY 2002 RESTRUCTURING AND COST REDUCTION PLANS (CONTINUED)
restructuring was approximately $.4 million, consisting principally of severance
payments to foreign service employees, which were paid by December 31, 2002.
13. COMMITMENTS AND CONTINGENCIES
The Company rents its primary facility in Burlington, Massachusetts under an
operating lease, which expires in 2006. The Company also leases office space in
Colorado Springs, Colorado and Alexandria, Virginia for sales and development
operations under leases that expire on various dates through April 2006. Future
minimum lease payments at December 31, 2002 under these non-cancelable operating
leases are approximately $469,000 in 2003, $282,000 in 2004, $221,000 in 2005
and $50,000 in 2006.
Rent expense was approximately $1,075,000, $1,483,000 and $949,000 in 2002,
2001 and 2000, respectively.
14. 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.
15. BENEFIT PLANS
STOCK OPTION PLANS
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 1991 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. The 1991 Plan terminated on March 31, 2001,
and no further options are to be granted under the 1991 Plan subsequent to that
date. At December 31, 2002, there were 1,277,452 shares reserved for issuance
under the 1991 Plan.
The 2001 Stock Incentive Plan was approved and adopted by the Board of
Directors on April 11, 2001. The 2001 Stock Incentive Plan provides for the sale
or award of common stock or the grant of non-qualified stock options to
officers, directors, employees and consultants of the Company. The 2001 Stock
Incentive Plan and the terms of grants and awards made pursuant to the 2001
Stock Incentive Plan are administered by the Board of Directors. Vesting of
options granted under the 2001 Stock Incentive Plan accelerate upon change of
control or acquisition as defined in the 2001 Stock Incentive Plan. As of
December 31, 2002, the Company has reserved 5,000,000 shares of common stock for
issuance under the 2001 Stock Incentive Plan, 671,875 shares of which are to be
issued upon exercise of outstanding options granted under such plan. The
Company's officers and directors may not receive a
42
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. BENEFIT PLANS (CONTINUED)
majority of the total shares issued and reserved for issuance under grants and
awards made pursuant to the 2001 Stock Incentive Plan. The 2001 Stock Incentive
Plan will terminate on April 11, 2011.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
In April 1995, the Board of Directors and shareholders approved the Director
Plan, which was most recently amended by the Board of Directors on June 5, 2002.
The Director Plan provides that the Board of Directors, at its discretion, is
permitted to grant options to non-employee directors, subject to terms and
conditions as determined by the Board of Directors. No options may be granted
after the tenth anniversary of the date of adoption of the Director Plan and no
person may be granted options under the Director Plan to purchase more than an
aggregate of 45,000 shares of Common Stock. Options are granted at a price equal
to the fair market value on the date of grant. Unless otherwise specified by the
Board of Directors at the time of grant, options granted under the Director Plan
become exercisable over a four-year period, and the term of the options is ten
years from the date of grant. Two hundred thousand shares of Common Stock have
been reserved for issuance under the Director Plan, of which 43,000 were
available for future grant as of December 31, 2002.
A summary of option activity under the 2001 Plan, the 1991 Plan and the
Director Plan is as follows:
<Table>
<Caption>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
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
Granted............................................... 847,475 1.30
Terminated............................................ (1,201,876) 6.27
----------
Outstanding at December 31, 2001........................ 2,638,012 $ 5.74
Granted............................................... 1,259,475 .23
Terminated............................................ (1,811,410) 3.17
Exercised............................................. (1,750) .29
----------
Outstanding at December 31, 2002........................ 2,084,327 $ 4.66
==========
</Table>
43
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. BENEFIT PLANS (CONTINUED)
Related information for options outstanding and exercisable as of
December 31, 2002 under these benefit plans is as follows:
<Table>
<Caption>
WEIGHTED AVERAGE
OUTSTANDING REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE
- ------------------------ ----------- ---------------- ----------------
..1$1 -- $.90.......... 720,475 9.37 $ .22
1.25 -- 3.00......... 270,075 8.15 1.61
3.63 -- 7.88......... 616,652 6.42 6.76
9.13 -- 13.13........ 477,125 4.09 10.37
---------
2,084,327 $4.66
=========
</Table>
<Table>
<Caption>
WEIGHTED
EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES OPTIONS EXERCISE PRICE
- ------------------------ ----------- --------------
..1$1 -- $.90.......... 180,584 $ .30
1.25 -- 3.00......... 130,469 1.73
3.63 -- 7.88......... 504,508 7.02
9.13 -- 13.13........ 398,825 10.62
---------
1,214,386 $ 6.64
=========
</Table>
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 900,000 shares of common stock have been reserved for
issuance under the Stock Purchase Plan. No shares were issued under the Stock
Purchase Plan during fiscal year 2002. As of December 31, 2002, 555,081 shares
have been issued pursuant to the Stock Purchase Plan.
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 $85,220 in 2002, $182,000
in 2001 and $236,000 in 2000.
44
<Page>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
QUARTER ENDED
------------------------------------------------------
MARCH 31(1) JUNE 30 SEPTEMBER 30(2) DECEMBER 31
----------- -------- --------------- -----------
2002
Revenue....................... $ 2,658 $ 3,207 $2,650 $ 2,858
Gross profit (loss)........... 1,260 (908) 1,282 1,518
Loss from operations.......... (3,873) (8,512) (2,212) (497)
Income (loss) before
cumulative effect of change
in accounting principle..... (1,220) (8,504) (1,595) 3,421
Cumulative effect of change in
accounting principle........ (10,667)
Net income (loss)............. (11,887) (8,504) (1,595) 3,421
Income (loss) per share before
cumulative effect of change
in accounting principle..... (.09) (.62) (.12) .25
Net income (loss) per share--
basic and diluted........... (.87) (.62) (.12) .25
2001
Revenue....................... $ 3,359 $ 3,421 $4,824 $ 3,503
Gross profit.................. 985 997 2,288 1,384
Loss from operations.......... (6,764) (10,085) (4,248) (12,524)
Net loss...................... (6,884) (9,912) (4,212) (10,332)
Net loss per share--basic and
diluted..................... (.51) (.72) (.31) (.75)
</Table>
- ------------------------
(1) The operating results for the first quarter of fiscal 2002 has been restated
to reflect the cumulative effect of $10.7 million related to the adoption of
SFAS 142 "Goodwill and Other Intangible Assets."
(2) The operating results for the third quarter of fiscal 2002 have been
restated to reflect the loss on liquidation of foreign subsidiaries of
$619 thousand.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
<Page>
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 29, 2003. 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 29, 2003. Such information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information 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 29, 2003 is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information as of December 31, 2002 about the
Company's equity compensation plans under which shares of its common stock are
authorized for issuance.
<Table>
<Caption>
NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE OF EXERCISE PRICE OF UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
- ------------- -------------------------- -------------------- ------------------------------
(A) (B) (C)
Equity compensation plans
approved by security
holders.................... 1,412,452(1) $6.77 387,919(2)
Equity compensation plans not
approved by security
holders.................... 671,875(3) $0.22 4,326,375(4)
Total.................... 2,084,327 $4.66 4,714,294
</Table>
- ------------------------
(1) Includes 1,277,452 shares of common stock to be issued upon exercise of
outstanding options under the Amended and Restated 1991 Stock Incentive Plan
and 135,000 shares of common stock to be issued upon exercise of outstanding
options under the 1994 Non-Employee Director Option Plan.
(2) Includes 43,000 shares of common stock remaining available for future
issuance under the 1994 Non-Employee Director Option Plan and 344,919 shares
of common stock remaining available for future issuance under the 1995
Employee Stock Purchase Plan. The Amended and Restated 1991 Stock Incentive
Plan terminated on March 31, 2001, and no additional options may be granted
under that plan.
46
<Page>
(3) Represents shares of common stock to be issued upon exercise of outstanding
options under the 2001 Stock Incentive Plan.
(4) Represents shares of common stock remaining available for future issuance
under the 2001 Stock Incentive Plan.
A description of the 2001 Stock Incentive Plan is included in Note 15 to the
Company's Consolidated Financial Statements set forth herein.
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 29, 2003. Such information is incorporated
herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within the 90 days prior
to the date of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures contained certain design
deficiencies that were corrected by December 31, 2002, and which we believe will
be effective in the future in timely alerting them to material information
relating to the Company (including its subsidiaries) required to be included in
the Company's periodic SEC filings.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in our
internal controls or to our knowledge, in other factors that could significantly
affect such internal controls subsequent to the date of their evaluation.
ITEM 15. 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:
- Report of Independent Auditors
- Consolidated Balance Sheets as of December 31, 2002 and 2001
- Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000
- Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 2002, 2001 and 2000
- Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001and 2000
- Notes to Consolidated Financial Statements
- Quarterly Financial Information (unaudited)
2. FINANCIAL STATEMENT SCHEDULE.
- Schedule II--Valuation and Qualifying Accounts
47
<Page>
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.
<Table>
<Caption>
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 154 Middlesex Turnpike, Burlington, MA dated as of
June 26, 2002 between the Registrant and Peter C. Nordblom
and John Macomber, as Trustees of N.W. Building 24 Trust.
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 the Registrant and General Dynamics Government
Systems Corporation, as amended.
10.21(a)***** Put Agreement dated as of March 27, 2001 (as amended to
date) by and between the Registrant and General Dynamics
Government Systems Corporation.
10.21(b) Agreement and Release dated as of December 31, 2002 by and
between the Registrant and General Dynamics Government
Systems Corporation.
10.22******+ 2001 Stock Incentive Plan of the Registrant.
10.23******* Asset Purchase Agreement dated as of August 1, 2002 between
the Registrant and Tandberg Telecom AS.
10.24******* License Agreement dated as of August 1, 2002 between the
Registrant and Tandberg Telecom AS.
10.25******* Promissory Note dated as of August 1, 2002 made by the
Registrant in favor of Tandberg Telecom AS.
10.26******* Security Agreement dated as of August 1, 2002 between the
Registrant and Tandberg Telecom AS.
10.27******* Ezenia! License Agreement dated as of October 30, 2002
between the Registrant and Tandberg Telecom AS.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP
99.1 Certification of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
</Table>
Copies of any of these exhibits are available without charge upon written
request to Investor Relations, Ezenia! Inc., Northwest Park, 154 Middlesex
Turnpike, Burlington, MA 01803.
(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
48
<Page>
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.)
<Table>
+ Management contract for compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant
to Item 15(c) of this report.
* 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 from the Company's Form 10-K filed
with the Securities and Exchange Commission for the year
ended December 31, 1998.
**** Incorporated by reference from the Company's Form 10-K filed
with the Securities and Exchange Commission for the year
ended December 31, 2000.
***** Incorporated by reference from the Company's Form 10-Q for
the quarter ended September 30, 2001.
****** Incorporated by reference from the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on December 21, 2001.
******* Incorporated by reference from the Company's Form 10-Q for
the quarter ended September 30, 2002.
</Table>
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 31, 2002.
(C) EXHIBITS
The response to this portion of Item 14 is submitted as a separate section
of this report.
(D) FINANCIAL STATEMENT SCHEDULES
The response to this portion of Item 14 is submitted as a separate section
of this report.
49
<Page>
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.
<Table>
EZENIA! INC.
By: /s/ KHOA D. NGUYEN
------------------------------------------------
Khoa D. Nguyen
CHAIRMAN, CHIEF EXECUTIVE OFFICER, PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER,
AUTHORIZED OFFICER)
DATE: MARCH 31, 2003
</Table>
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.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
Chairman, Chief Executive Officer,
/s/ KHOA D. NGUYEN President and Chief Financial
------------------------------------ Officer (Principal Financial and March 31, 2003
Khoa D. Nguyen Accounting Officer, Authorized
Officer)
/s/ JOHN F. KEANE, JR.
------------------------------------ Director March 31, 2003
John F. Keane, Jr.
/s/ JOHN A. MCMULLEN
------------------------------------ Director March 31, 2003
John A. McMullen
/s/ ROY G. PERRY
------------------------------------ Director March 31, 2003
Roy G. Perry
</Table>
50
<Page>
CERTIFICATIONS
I, Khoa D. Nguyen, the President and Chief Executive Officer of Ezenia! Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Ezenia! Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
<Table>
Date: March 31, 2003 /s/ KHOA D. NGUYEN
---------------------------------------------
Khoa D. Nguyen
CHIEF EXECUTIVE OFFICER
</Table>
51
<Page>
I, Khoa D. Nguyen, the Chief Financial Officer of Ezenia! Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Ezenia! Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
<Table>
Date: March 31, 2003 /s/ KHOA D. NGUYEN
---------------------------------------------
Khoa D. Nguyen
CHIEF FINANCIAL OFFICER
</Table>
52
<Page>
EZENIA! INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
COLUMN A--DESCRIPTION COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------- ------------ ----------------------- ------------- ----------
DEDUCTIONS--
BALANCE AT CHARGED TO CHARGED TO UNCOLLECTIBLE BALANCE AT
BEGINNING OF COSTS AND OTHER ACCOUNTS END OF
ACCOUNTS RECEIVABLE ALLOWANCES PERIOD EXPENSES ACCOUNTS WRITTEN-OFF PERIOD
- ------------------------------------ ------------ ---------- ---------- ------------- ----------
Year Ended December 31, 2002........ $ 914,018 $250,000 -- $ (68,009) $1,096,009
Year Ended December 31, 2001........ 716,238 100,000 97,780 -- 914,018
Year Ended December 31, 2000........ 1,518,179 -- -- (801,941) 716,238
</Table>
53