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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
COMMISSION FILE NUMBER 0-25882
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EZENIA! INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3114212
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
The number of shares outstanding of the registrant's Common Stock as of July 31,
2002 was 13,631,880.
EZENIA! INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001........................... 3
Condensed Consolidated Statements of Operations
Three months and six months ended June 30, 2002 and 2001...... 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001....................... 5
Notes to Condensed Consolidated Financial Statements............ 6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk...... 14
PART II. OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Securities Holders........... 15
ITEM 6 Exhibits and Reports on Form 8-K................................ 15
SIGNATURE.................................................................. 16
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. These risks and uncertainties include our
ability to consummate the proposed sale of the patents and pending applications
related to our videoconferencing products and our ability to further develop or
sell our enterprise collaboration software business. Other risks and
uncertainties include the considerations that are discussed in the Management's
Discussion and Analysis section of Ezenia's 2001 Annual Report on Form 10-K for
the year ended December 31, 2001, such as the evolution of Ezenia's market,
dependence on major customers, rapid technological change and competition, the
ability to successfully implement the Company's restructuring and cost reduction
plan, risks associated with the acquisition of InfoWorkSpace (including the
Company's ability to integrate the InfoWorkSpace product line and workforce) and
other considerations that are discussed further in the Management's Discussion
and Analysis section of our 2001 Annual Report on Form 10-K for the year ended
December 31, 2001 and in the Company's subsequent public filings.
The forward-looking statements contained in this report represent the Company's
judgment as of the date of this report. Ezenia! cautions readers not to place
undue reliance on such statements. The Company undertakes no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
Note: Ezenia! is a registered trademark of Ezenia! Inc., and the Ezenia! Logo
and InfoWorkSpace are trademarks of Ezenia! Inc.
2
EZENIA! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
----------------- -----------------
ASSETS
Current assets
Cash and cash equivalents $ 355 $ 5,531
Accounts receivable, less allowances of $1,167 and $914, respectively 1,992 2,313
Inventories 1,643 3,882
Prepaid software licenses 1,416 774
Prepaid expenses and other current assets 341 691
----------------- -----------------
Total current assets 5,747 13,191
Equipment and improvements, net of accumulated depreciation 418 3,470
Goodwill and other intangible assets, net 11,002 11,673
Other assets, net 23 24
----------------- -----------------
$17,190 $28,358
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable $ 2,000
Accounts payable $ 1,968 1,830
Accrued expenses 1,005 1,546
Income taxes 528 492
Deferred revenue 4,162 2,065
Current portion of common stock subject to put 1,100
----------------- -----------------
Total current liabilities 7,663 9,033
Common stock subject to put; 290,000 shares issued and outstanding at
June 30, 2002; 400,000 shares issued and outstanding at December 31,
2001, less amount classified as current 2,875 2,875
Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized, none
issued and outstanding
Common stock, $.01 par value, 40,000,000 shares authorized,
13,631,880 issued and outstanding at June 30, 2002;
13,741,880 issued and outstanding at December 31, 2001 139 139
Capital in excess of par value 60,666 59,566
Accumulated deficit (50,607) (40,883)
Accumulated other comprehensive loss (685) (611)
Treasury stock at cost 660,000 shares at June 30, 2002 and 550,000
shares at December 31, 2001 (2,861) (1,761)
----------------- -----------------
6,652 16,450
----------------- -----------------
$17,190 $28,358
================= =================
See accompanying notes.
3
EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------------------- ------------------ ------------------- ------------------
Revenue
Product revenue $ 2,750 $ 2,452 $ 4,914 $ 5,031
Service revenue 457 969 951 1,749
------------------- ------------------ ------------------- ------------------
3,207 3,421 5,865 6,780
Cost of revenue
Cost of product revenue 3,779 1,391 4,922 2,805
Cost of service revenue 336 1,033 591 1,993
------------------- ------------------ ------------------- ------------------
4,115 2,424 5,513 4,798
------------------- ------------------ ------------------- ------------------
Gross profit (loss) (908) 997 352 1,982
Operating expenses
Research and development 1,478 2,125 3,022 4,515
Sales and marketing 1,441 2,950 2,758 5,852
General and administrative 726 736 1,223 1,805
Depreciation and amortization 808 2,050 1,681 2,751
Occupancy and other facilities
related expenses 1,051 1,208 1,953 1,895
Impairment of long-term assets 2,100 2,100
Restructuring 2,013 2,013
------------------- ------------------ ------------------- ------------------
Total operating expenses 7,604 11,082 12,737 18,831
------------------- ------------------ ------------------- ------------------
Loss from operations (8,512) (10,085) (12,385) (16,849)
Other income (expense)
Interest income, net 8 187 10 642
Loss on investment (543)
------------------- ------------------ ------------------- ------------------
8 187 10 99
Loss before income taxes (8,504) (9,898) (12,375) (16,750)
Income taxes (benefit) 14 (2,651) 46
------------------- ------------------ --------------------------------------
Net loss ($8,504) ($9,912) ($9,724) ($16,796)
=================== ================== =================== ==================
Net loss per share:
Basic and diluted ($0.62) ($0.72) ($0.71) ($1.24)
Weighted average common shares:
Basic and diluted 13,631,880 13,784,907 13,646,547 13,584,113
See accompanying notes.
4
EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
2002 2001
------------------- -------------------
OPERATING ACTIVITIES
Net loss ($9,724) ($16,796)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 1,723 2,777
Loss on investment 543
Impairment of long-term assets 2,100
Changes in operating assets and liabilities, less amounts
attributable to acquisition of InfoWorkSpace:
Accounts receivable 321 1,019
Inventories 2,239 (38)
Prepaid software licenses (642) (443)
Prepaid expenses and other current assets 350 58
Accounts payable and accrued expenses (403) (1,125)
Income taxes 36 37
Deferred revenue 2,097 (473)
------------------- -------------------
Net cash used for operating activities (1,903) (14,441)
INVESTING ACTIVITIES
Cash received from sale of network access card product line 1,500
Acquisition of InfoWorkSpace (3,100) (7,526)
Net purchases of equipment and improvements (100) (395)
Changes of marketable securities, net 10,203
Changes in other assets, net 1 486
------------------- -------------------
Net cash provided by (used for) investing activities (3,199) 4,268
FINANCING ACTIVITIES
Net proceeds from issuance of stock under employee benefit plans 151
Acquisition of treasury stock (31)
------------------- -------------------
Net cash provided by financing activities 120
Effect of exchange rate on cash and cash equivalents (74) (112)
------------------- -------------------
Decrease in cash and cash equivalents (5,176) (10,165)
Cash and cash equivalents at beginning of period 5,531 20,457
------------------- -------------------
Cash and cash equivalents at end of period $ 355 $10,292
=================== ===================
See accompanying notes.
5
EZENIA! INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. In the opinion of
management, these financial statements contain all adjustments necessary for a
fair presentation of the results of these interim periods. In addition to normal
recurring adjustments, the financial statements for 2002 include a writedown of
inventory and a provision for impairment of long-lived assets associated with
the Company's videoconferencing product line (see Note 2), the financial
statements for 2001 include a provision for loss on investment (see Note 7) and
accrual of restructuring costs. Certain footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted, although
the Company believes the disclosures in these financial statements are adequate
to make the information presented not misleading. These financial statements
should be read in conjunction with the Company's audited financial statements
included in the Company's 2001 Annual Report on Form 10-K for the year ended
December 31, 2001. The results of operations for the interim periods shown are
not necessarily indicative of the results for any future interim period or for
the entire fiscal year.
Certain amounts in 2001 have been reclassified to permit comparison with 2002
classifications.
2. GOING CONCERN
The Company has incurred substantial recurring operating losses and negative
cash flows, and at June 30, 2002, has limited cash resources. The Company's
ability to continue as a going concern is dependent upon its ability to raise
additional capital, increase revenue and substantially improve operating
margins. 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 (see Note 14). 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 $3.7 million for the six months ended June 30, 2002 and
$6.5 million for the six months ended September 30, 2002.) Estimated costs
of the July restructuring are $.3 million, principally severance payments to
foreign employees, which will be paid by September 30, 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.
As of June 30, 2002, the Company recorded a writedown 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
the Company will receive another $2.5 million in cash if the proposed sale is
consummated (see Note 3).
6
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 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. 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 has agreed
to grant a fully-paid, non-exclusive, non-transferable license under the
patents and pending applications relating to the Company's videoconferencing
technology. At the same time, the Company received a loan for an additional
$1.25 million, which is secured by the licensed patents and pending
applications. The Company will retain a fully-paid, non-exclusive,
non-transferable license for use in connection with its videoconferencing and
enterprise collaboration products. The sale is subject to Ezenia! shareholder
approval and other customary closing conditions and is expected to occur on
or before October 31, 2002. At the closing, the Company will receive an
additional $2.5 million and all amounts due under the secured loan will be
forgiven. If the closing does not occur, the Company will be required to
immediately repay the loan plus accrued interest at an annual rate of 7.5%;
if not paid when due, the outstanding balance under the note will continue to
accrue interest at a rate of 18% per year.
4. 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.
5. INVENTORIES
Inventories consist of:
JUNE 30, DECEMBER 31,
(In thousands) 2002 2001
----------------- -----------------
Raw materials and subassemblies $ 150 $1,501
Software licenses 1,393 1,806
Work in process 50 458
Finished goods 50 117
----------------- -----------------
$1,643 $3,882
================= =================
As of June 30, 2002, the Company recorded a writedown of inventory
(approximately $2.3 million) associated principally with the
videoconferencing product line.
The Company has entered into a license agreement with a software vendor. Under
the terms of the agreement, the Company is 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. At June 30, 2002, the
Company had acquired approximately $4.5 million of licenses under the agreement.
6. 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
7
per share. The put option with respect to 110,000 shares was exercised by the
seller 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 December 1, 2002 and expiring December 31, 2002. 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 has
been accounted for as a purchase.
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.
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 six month
period ended June 30, 2001 as if the acquisition had occurred as of the
beginning of the period.
(In thousands)
Revenue $ 7,115
Net loss ($19,799)
Basic loss per share ($1.46)
Diluted loss per share ($1.46)
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.
7. LOSS ON INVESTMENT
Loss on investment represents an adjustment recorded during the six month
period ended June 30, 2001, to reduce to zero the carrying value of the
Company's minority investment in a closely-held company.
8. COMPREHENSIVE LOSS
Total comprehensive loss consists of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands) 2002 2001 2002 2001
------------------------------ -------------------------------
Net loss ($8,504) ($9,912) ($9,724) ($16,796)
Foreign currency translation 6 (64) (74) (112)
------------------------------ -------------------------------
Comprehensive loss ($8,498) ($9,976) ($9,798) ($16,908)
============================== ===============================
8
9. GOODWILL AND INTANGIBLES
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
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 as required by SFAS No. 142 and has determined that the fair value of it
sole reporting unit exceeds its net assets indicating potential goodwill
impairment exists. The second step of the transitional goodwill impairment test
will be completed by December 31, 2002. An impairment loss recognized as a
result of a transitional goodwill impairment test, if any, shall be recognized
by the Company as the effect of a change in accounting principle. Accordingly,
if the Company determines that as a result of adopting SFAS No. 142, it has
incurred a transitional impairment loss relating to its goodwill, the Company
will restate its reported 2002 interim periods to effect the change in
accounting.
Had SFAS No. 142 been adopted for the three months and six months periods ending
June 30, 2001, the impact on net loss and loss per share would have been as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands) 2002 2001 2002 2001
----------------------- -----------------------
Net loss ($8,504) ($9,912) ($9,724) ($16,796)
Add back goodwill amortization -- 1,030 -- 1,030
------- ------- ------- --------
Adjusted net loss ($8,504) ($8,882) ($9,724) ($15,766)
======= ======== ======= ========
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(In thousands) 2002 2001 2002 2001
---------------------- ----------------------
Basic and diluted loss per share ($0.62) ($0.72) ($0.71) ($1.24)
Add back goodwill amortization -- $0.08 -- $0.08
------ ------ ------ ------
Adjusted loss per share ($0.62) ($0.64) ($0.71) ($1.16)
====== ====== ====== ======
At June 30, 2002, the components of intangible assets subject to amortization,
which consist principally of purchased technology, are as follows (in
thousands):
Gross carrying value $ 2,010
Accumulated amortization (1,675)
-------
$ 335
=======
Aggregate amortization expense for the six months ended June 30, 2002 was
approximately $.7 million. The Company anticipates that this intangible asset
will be fully amortized by September 30, 2002.
10. 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 6) when dilutive.
Outstanding stock options at June 30, 2002 and 2001 were 3,340,281 and
3,268,035, respectively.
11. 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.
12. 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.
13. INCOME TAXES
The Federal Job Creation and Worker Assistance Act of 2002, enacted in March
2002, 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 June 30, 2002.
9
14. MAY 2001 RESTRUCTURING AND COST REDUCTION PLAN
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, of which all but
approximately $79 thousand had been paid by June 30, 2002. 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE Revenue decreased to $3.2 million for the quarter ended June 30,
2002 from $3.4 million reported for the quarter ended June 30, 2001. Revenue
decreased to $5.9 million in the six months ended June 30, 2002 compared to $6.8
million for the six months ended June 30, 2001. The decrease in revenue was
principally related to a significant decline in sales of videoconferencing
products and related service revenues, which accounted for revenue of $1.8
million and $3.7 million for the three and six month periods ended June 30,
2002, respectively, as compared to $3.4 million and $6.5 million for the
comparable periods of the prior year. This decrease was offset by increases in
revenues related to sales of the Company's InfoWorkSpace products of $1.4
million and $2.2 million for the three and six month periods ended June 30,
2002, respectively.
Revenue from international markets accounted for approximately 31% and 35%
of revenue for the quarters ended June 30, 2002 and 2001, respectively, and 30%
and 43% for the six month periods ended June 30, 2002 and 2001, respectively.
GROSS PROFIT Cost of revenues includes material costs, costs of
software licenses, manufacturing labor and overhead and customer support
costs. For the periods ended June 30, 2002, cost of revenues also included a
charge of approximately $2.3 million representing a writedown of inventory
principally used in the manufacture of videoconferencing products (see Note
2). Gross profit, excluding the inventory writedown referred to above, as a
percentage of revenue was 42.3% for the quarter ended June 30, 2002 as
compared to 29.1% for the quarter ended June 30, 2001. For the six months
ended June 30, 2002, gross profit, excluding the inventory writedown referred
to above, was 44.6% compared to 29.2% in the corresponding period of 2001.
The increase in margin is primarily attributable to the overall decrease in
manufacturing and service costs that were reduced as part of the
restructuring and cost reduction plan implemented in May 2001.
RESEARCH AND DEVELOPMENT Research and development expenses decreased to
$1.5 million for the quarter ended June 30, 2002 from $2.1 million for the
quarter ended June 30, 2001. For the six months ended June 30, 2002, research
and development expenses were $3.0 million compared to $4.5 million in the
corresponding period of 2001. The decrease is related to the Company's
restructuring and cost reduction plan implemented in May 2001. This decrease is
offset by increased costs attributable to the InfoWorkSpace product line
acquired in March 2001 of $.7 million for six month period ended June 30, 2002.
SALES AND MARKETING Sales and marketing expenses decreased to $1.4 million
for the quarter ended June 30, 2002 from $3.0 million for the quarter ended June
30, 2001. For the six months ended June 30, 2002, sales and marketing expenses
were $2.8 million compared to $5.9 million in the corresponding period of 2001.
The decrease was primarily due to the Company's restructuring and cost reduction
plan implemented in May 2001. Cost savings achieved from the restructuring and
cost reduction plan were offset by added sales and marketing expenses of
approximately $.5 million attributable to the InfoWorkSpace product line
acquired in March 2001.
GENERAL AND ADMINISTRATIVE General and administrative expenses were
approximately $.7 million for the quarters ended June 30, 2002 and 2001. For
the six months ended June 30, 2002, general and administrative expenses were
$1.2 million compared to $1.8 million in the corresponding period of 2001.
The decrease was primarily due to cost savings associated with the Company's
restructuring and cost reduction plan implemented in May 2001.
OCCUPANCY AND OTHER FACILITIES RELATED EXPENSES Occupancy costs were
approximately $1.1 million during the three month period ended June 30, 2002 as
compared to $1.2 million for the corresponding period of the previous year. The
increase is related primarily to additional facilities costs for the six
month period ended June 30, 2002, associated with the acquisition of
InfoWorkSpace
11
product line in March 2001. 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 and various
other sales and development offices in the United States, United Kingdom, Hong
Kong and China.
INTEREST INCOME, NET Interest income, net, consists of interest on cash,
cash equivalents and marketable securities. Interest income, net, decreased to
approximately $8 thousand in the quarter ended June 30, 2002, from approximately
$187 thousand in the quarter ended June 30, 2001. For the six months ended June
30, 2002, interest income, net was $10 thousand compared to $642 thousand for
the corresponding period of 2001. The decrease was due principally to a decrease
in the amount of cash available for investment.
INCOME TAXES The Federal Job Creation and Worker Assistance Act of 2002,
enacted in March 2002, 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. Provision for income taxes for the three and six month periods
ended June 30, 2001 represent foreign taxes of the Company's international
subsidiary.
OTHER FACTORS WHICH MAY AFFECT FUTURE OPERATIONS There are a number of
business factors which singularly or combined may affect the Company's future
operating results. Some of them, including our ability to consummate the
proposed sale of the patents and pending applications related to our
videoconferencing products, our ability to further develop or sell our
enterprise collaboration software business, liquidity, dependence on major
customers, reduced demand for traditional videoconferencing products,
evolving market, rapid technological change, competition, the ability to
successfully implement the Company's restructuring and cost reduction plan,
InfoWorkSpace acquisition, protection of proprietary technology and retention
of key employees have been outlined in the Company's 2001 Annual Report on
Form 10-K for the year ended December 31, 2001.
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.
At June 30, 2002, the Company had cash, cash equivalents and marketable
securities of approximately $.4 million.
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 December 2002 (see Note 6). The Company had
losses from operations of $12.4 million and a net loss of $9.7 million for
the six months ended June 30, 2002.
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 anticipated revenues with
the ultimate objective of improving operating margins and becoming cash-flow
neutral from operations. 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 $3.7 million for the six
months ended June 30, 2002 and $6.5 million for the six months ended June 30,
2001.) Estimated costs of the July restructuring are $.3 million, principally
severance payments to foreign employees, which will be paid by September 30,
2002.
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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.
As of June 30, 2002, the Company recorded a writedown 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.
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 has agreed to grant a
fully-paid, non-exclusive, non-transferable license under the patents and
pending applications relating to the Company's videoconferencing technology. At
the same time, the Company received a loan for an additional $1.25 million,
which is secured by the licensed patents and pending applications. The Company
will retain a fully-paid, non-exclusive, non-transferable license for use in
connection with its videoconferencing and enterprise collaboration products. The
sale is subject to Ezenia! shareholder approval and other customary closing
conditions and is expected to occur on or before October 31, 2002. At the
closing, the Company will receive an additional $2.5 million and all amounts due
under the secured loan will be forgiven.
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. However,
Nasdaq has provided the Company a grace period through February 10, 2003 for
compliance with the bid price requirement. On August 14, 2002, Nasdaq
notified the Company that, if the Company is unable to satisfy the $1.00
minimum bid price requirement within the allotted time period or, prior to
that time, if the Company is otherwise unable to meet the continued listing
criteria of the Nasdaq SmallCap Market, the Company's common stock will be
subject to delisting. The Company does not believe that it is currently in
compliance with all listing criteria other than the $1.00 minimum bid price
requirement, and therefore is also at risk of having its common stock
delisted for failure to comply with Nasdaq SmallCap Market listing criteria.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To date, the Company has not utilized derivative financial instruments or
derivative commodity instruments. The Company invests cash in highly liquid
investments, consisting of highly rated U.S. and state government securities,
commercial paper and short-term money market funds. These investments are
subject to minimal credit and market risk and the Company has no
interest-bearing debt. Therefore, the Company believes the market risks
associated with these financial instruments are immaterial.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On May 22, 2002, at the Company's 2002 Annual Meeting of
Stockholders, the Company's stockholders met to consider and vote
upon the following two proposals:
(1) A proposal to elect one Class I Director to hold office for a
three-year term and until his/her respective successor has been
duly elected and qualified.
(2) A proposal to ratify the appointment of the firm of Ernst &
Young LLP, as independent auditors for the Company for the
fiscal year ending December 31, 2002.
Results with respect to the voting on each of the above proposals
were as follows:
Proposal 1:
John A. McMullen
11,949,542 Votes For
----------
593,089 Withheld
----------
The terms of office of John F. Keane, Jr., Khoa D. Nguyen and Roy G.
Perry, the remaining members of the Board of Directors of the
Company, continued after the meeting.
Proposal 2:
11,981,492 Votes For
----------
529,059 Votes Against
----------
32,080 Abstentions
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EZENIA! INC.
Date: August 22, 2002 By: /s/ KHOA D. NGUYEN
---------------------------------
Khoa D. Nguyen
Chairman, Chief Executive Officer and
Chief Financial Officer
(Principal Financial and Accounting
Officer, Authorized Officer)
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