UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2003
Commission File Number 0-25882
EZENIA! INC.
(Exact name of registrant as specified in its charter)
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DELAWARE |
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04-3114212 |
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(State or other jurisdiction of incorporation |
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(IRS Employer Identification No.) |
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Northwest Park, 154 Middlesex Turnpike, Burlington, Massachusetts 01803 |
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(Address of principal executive offices, including Zip Code) |
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(781) 505-2100 |
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(Registrant’s telephone number, including area code) |
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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 ý No o
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 o No ý
The number of shares outstanding of the registrant’s Common Stock as of July 31, 2003 was 13,648,630.
EZENIA! INC.
INDEX
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Part I. |
Financial Information |
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Item 1 |
Condensed Consolidated Financial Statements (unaudited) |
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Condensed
Consolidated Balance Sheets |
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Condensed
Consolidated Statements of Cash Flows |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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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 the Management’s Discussion and Analysis section of Ezenia!’s 2002 Annual Report on Form 10-K for the year ended December 31, 2002, such as liquidity, dependence on major customers, reduced demand for traditional videoconferencing products, evolution of the real-time collaboration market, rapid technological change, competition, risks associated with the acquisition of InfoWorkSpace (including the Company’s ability to integrate the InfoWorkSpace product line and workforce) and other considerations.
2
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.
3
EZENIA! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share related data)
(Unaudited)
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June 30, |
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December 31, |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
1,654 |
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$ |
2,403 |
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Accounts receivable, less allowances of $963 at June 30, 2003 and $1,096 at December 31, 2002 |
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1,154 |
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1,780 |
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Inventories |
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— |
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112 |
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Prepaid software licenses |
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1,960 |
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1,008 |
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Prepaid expenses and other current assets |
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312 |
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261 |
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Total current assets |
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$ |
5,080 |
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$ |
5,564 |
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Liabilities and stockholders’ equity |
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Current liabilities |
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Accounts payable |
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544 |
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681 |
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Accrued expenses |
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597 |
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584 |
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Income taxes |
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266 |
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285 |
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Deferred revenue |
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3,068 |
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2,643 |
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Total current liabilities |
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4,475 |
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4,193 |
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Common stock subject to put; no; 290,000 shares issued and outstanding at June 30, 2003 and December 31, 2002 |
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2,875 |
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2,875 |
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Stockholders’ equity (deficit) |
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Preferred stock, $.01 par value; 2,000,000 shares authorized, none issued and outstanding |
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Common stock, $.01 par value, 40,000,000 shares authorized, 14,294,067 issued and 13,633,630 outstanding at June 30, 2003 and December 31, 2002 |
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139 |
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139 |
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Capital in excess of par value |
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60,666 |
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60,666 |
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Accumulated deficit |
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(60,214 |
) |
(59,448 |
) |
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Treasury stock at cost 660,437 shares at June 30, 2003 and December 31, 2002 |
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(2,861 |
) |
(2,861 |
) |
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(2,270 |
) |
(1,504 |
) |
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$ |
5,080 |
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$ |
5,564 |
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See accompanying notes.
4
EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share related data)
(Unaudited)
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Three
Months Ended |
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Six Months
Ended |
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2003 |
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2002 |
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2003 |
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2002 |
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Revenues |
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Product revenue |
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$ |
1,964 |
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$ |
2,750 |
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$ |
4,216 |
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$ |
4,914 |
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Service revenue |
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101 |
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457 |
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249 |
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951 |
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2,065 |
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3,207 |
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4,465 |
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5,865 |
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Cost of revenues |
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Cost of product revenue |
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1,071 |
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3,779 |
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1,830 |
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4,922 |
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Cost of service revenue |
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81 |
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336 |
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174 |
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591 |
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1,152 |
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4,115 |
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2,004 |
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5,513 |
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Gross profit (loss) |
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913 |
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(908 |
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2,461 |
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352 |
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Operating expenses |
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Research and development |
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615 |
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1,478 |
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1,329 |
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3,022 |
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Sales and marketing |
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159 |
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1,441 |
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559 |
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2,758 |
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General and administrative |
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469 |
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726 |
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752 |
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1,223 |
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Depreciation |
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— |
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808 |
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— |
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1,681 |
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Occupancy and other facilities related expenses |
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317 |
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1,051 |
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593 |
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1,953 |
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Impairment of long-term assets |
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— |
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2,100 |
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— |
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2,100 |
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Total operating expenses |
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1,560 |
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7,604 |
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3,233 |
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12,737 |
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(Loss) from operations |
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(647 |
) |
(8,512 |
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(772 |
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(12,385 |
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Interest income |
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3 |
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8 |
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6 |
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10 |
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(Loss) before income taxes and cumulative effect of change in accounting principle |
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(644 |
) |
(8,504 |
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(766 |
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(12,375 |
) |
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Income taxes benefit |
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— |
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— |
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— |
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2,651 |
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(Loss) before cumulative effect of change in accounting principle |
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(644 |
) |
(8,504 |
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(766 |
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(9,724 |
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Cumulative effect of change in accounting principle |
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(10,667 |
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Net (loss) |
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$ |
(644 |
) |
$ |
(8,504 |
) |
$ |
(766 |
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$ |
(20,391 |
) |
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Basic and diluted net loss per share: |
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Before cumulative effect of change in accounting principle |
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$ |
(0.05 |
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$ |
(0.62 |
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$ |
(0.06 |
) |
$ |
(0.71 |
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Cumulative effect of change in accounting principle |
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$ |
(0.78 |
) |
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Net loss |
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$ |
(0.05 |
) |
$ |
(0.62 |
) |
$ |
(0.06 |
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$ |
(1.49 |
) |
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Weighted average common shares, basic and diluted |
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13,663,630 |
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13,631,880 |
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13,663,630 |
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13,646,547 |
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See accompanying notes.
5
EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six Months
Ended |
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2003 |
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2002 |
|
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Operating activities |
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Net loss |
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$ |
(766 |
) |
$ |
(20,391 |
) |
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Adjustments to reconcile net loss to net cash provided by (used for) operating activities: |
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Depreciation and amortization |
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— |
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1,723 |
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Write-down of goodwill and long-term assets |
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— |
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12,767 |
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Changes in operating assets and liabilities, less amounts attributable to acquisition of InfoWorkSpace: |
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Accounts receivable |
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626 |
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321 |
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Inventories |
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112 |
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2,239 |
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Prepaid software licenses |
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(952 |
) |
(642 |
) |
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Prepaid expenses and other current assets |
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(51 |
) |
350 |
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Accounts payable and accrued expenses |
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(124 |
) |
(403 |
) |
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Income taxes |
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(19 |
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36 |
|
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Deferred revenue |
|
425 |
|
2,097 |
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Net cash provided by (used for) operating activities |
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(749 |
) |
(1,903 |
) |
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Investing activities |
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Acquisition of InfoWorkSpace |
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— |
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(3,100 |
) |
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Net purchases of equipment and improvements |
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— |
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(100 |
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Other, net |
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— |
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1 |
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Net cash provided by (used for) investing activities |
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— |
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(3,199 |
) |
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Effect of exchange rate on cash and cash equivalents |
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— |
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(74 |
) |
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Decrease in cash and cash equivalents |
|
(749 |
) |
(5,176 |
) |
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Cash and cash equivalents at beginning of period |
|
2,403 |
|
5,531 |
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Cash and cash equivalents at end of period |
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$ |
1,654 |
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$ |
355 |
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See accompanying notes.
6
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 provision for the impairment of long-lived assets (see Note 5). 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 2002 Annual Report on Form 10-K for the year ended December 31, 2002. The results of operations for the interim periods shown are not necessarily indicative of the results for any future interim period or for the entire fiscal year.
2. Going Concern
The Company has incurred substantial recurring operating losses and negative cash flows, and at June 30, 2003, 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 or substantially improve operating margins.
In July 2002, the Company implemented its most recent 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 11). The July 2002 restructuring 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 and $13.3 million for the years ended December 31, 2002 and 2001, respectively.) Costs of the July 2002 restructuring were approximately $.4 million, principally severance payments to foreign employees, which were 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.
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 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 was secured by the licensed patents and pending applications. The sale of the patents and pending applications was approved by Ezenia! shareholders on October 28, 2002, and the sale 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. Additionally, the Company retained a fully-paid, non-exclusive, non-transferable license for use in connection with its videoconferencing and enterprise collaboration products.
7
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.
Operating costs were in line with the Company’s expectations for the quarter and six months ended June 30, 2003, but the Company did not achieve its revenue target during the quarter ended June 30, 2003. The Company’s success in achieving its goal of being, at a minimum, cash-flow neutral, is largely dependent on whether it can meet its future revenue targets.
There can be no assurance that the Company can achieve the above-mentioned revenue targets. 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. 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.
4. Inventories
Inventories consist of:
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(In thousands) |
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June 30, |
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December 31, |
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Raw materials and subassemblies |
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Software licenses |
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|
|
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Work in process |
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Finished goods |
|
— |
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$ |
112 |
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|
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$ |
0 |
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$ |
112 |
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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. 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.
5. Acquisitions
In March 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, of which the final payment of $2 million was paid on January 4, 2002, 400,000 shares of the Company’s common stock valued, for purposes of the transaction, at $10.00 per share, and, pursuant to the terms of the purchase agreement, the payment by the Company of 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
8
accounted for as a purchase. 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, gave 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, except that the put right would have also expired if at any time before then the last reported closing price of the common stock had been equal to or greater than $11.00 per share for fifteen (15) consecutive trading days. As of December 31, 2002, and June 30, 2003, common stock subject to the put option was reported as temporary equity. For purposes of computing diluted earnings per share, such shares were included in the calculation using the reverse treasury stock method when dilutive.
In July 2003, in connection with an amendment to a software development agreement, the seller agreed to terminate the put agreement it had with the Company. Accordingly, in future periods, the value associated with the 290,000 shares of common stock, that are no longer subject to the put option, will be included within stockholders equity.
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 total purchase price and related acquisition costs were recorded as follows:
|
(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 |
|
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 had 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 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, and 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 in June 2002 as required
9
by SFAS No. 142 and determined that the fair value of its 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 in December 2002, resulting in a write-off of all remaining goodwill. The impairment loss recognized is 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 period to effect the change in accounting.
6. Comprehensive Loss
Total comprehensive loss consists of the following:
|
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
(In thousands) |
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net loss |
|
$ |
(644 |
) |
$ |
(8,504 |
) |
$ |
(766 |
) |
$ |
(20,391 |
) |
|
Foreign currency translation |
|
— |
|
6 |
|
— |
|
(74 |
) |
||||
|
Comprehensive loss |
|
$ |
(644 |
) |
$ |
(8,498 |
) |
$ |
(766 |
) |
$ |
(20,465 |
) |
7. Net Loss Per Share
The Company reports earnings per share in accordance with the SFAS No. 128, “Earnings per Share.” Diluted earnings per share includes the effect of dilutive stock options and shares subject to a put option (see Note 5) when dilutive. Outstanding stock options at June 30, 2003 and 2002 were 2,003,978 and 3,340,281, respectively.
8. 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.
9. 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 prepaid expenses until the sale of the underlying InfoWorkSpace subscription license, at which time they are reported as prepaid licenses and amortized over the subscription period.
10. 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 March 31, 2002.
At June 30, 2003, the Company has available Federal net operating loss carryforwards of approximately
10
$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. July 2002 Restructuring and Cost Reduction Plan
In July 2002, the Company implemented its most recent 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 2002 restructuring was approximately $.4 million, consisting principally of severance payments to foreign service employees, which were paid by December 31, 2002.
12. Stock Options
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”). SFAS 148 amends Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation, (“SFAS 123”). SFAS 148 is effective for financial statements for fiscal years ending after December 15, 2002.
The Company has elected to continue to account for its stock based compensation in accordance with the provisions of APB 25 as interpreted by FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, and Interpretation of APB Opinion No. 25”, (“FIN 44”) and present the pro forma disclosures required by SFAS 123, as amended by SFAS 148. Accordingly, no compensation cost is reflected in the Company’s net loss and net loss per share for the quarters ended June 30, 2003 and 2002, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on the Company’s net loss and net loss per common share if the Company had applied the fair-valued-based method of SFAS 123 as amended by SFAS 148 to record expense for stock option compensation.
|
|
|
Three Months Ended |
|
||||
|
(In thousands) |
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Net income, as reported |
|
$ |
(644 |
) |
$ |
(8,504 |
) |
|
Less Compensation expense for option awards determined by the fair-value-based method, net of related tax effects |
|
(214 |
) |
(713 |
) |
||
|
Pro forma net income |
|
$ |
(858 |
) |
$ |
(9,217 |
) |
|
|
|
|
|
|
|
||
|
Net income per common share |
|
|
|
|
|
||
|
Basic and diluted |
|
|
|
|
|
||
|
As reported |
|
$ |
(.05 |
) |
$ |
(.62 |
) |
|
Pro forma |
|
$ |
(.06 |
) |
$ |
(.68 |
) |
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quarter ended June 30, 2003 compared to Quarter ended June 30, 2002
Revenue from international markets, primarily derived from sales of videoconferencing products and related services, accounted for approximately 10% and 31% of revenue for the quarters ended June 30, 2003 and 2002, respectively.
Gross Profit Cost of revenues includes material costs, costs of software licenses, manufacturing labor and overhead and customer support costs. For the quarter 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 as a percentage of revenue was 44.2% for the quarter ended June 30, 2003 as compared to 42.3% (excluding the inventory writedown referred to above) for the quarter ended June 30, 2002. The slight increase in gross profit was primarily attributable to the overall reduction in manufacturing and service costs related to sales of the company’s videoconferencing products that were implemented most recently as a part of the July 2002 restructuring, although this benefit was less significant this quarter, due to the decreased level of videoconferencing product revenues.
Research and Development Research and development expenses decreased to $615,000 for the quarter ended June 30, 2003 from $1.5 million for the quarter ended June 30, 2002. The decrease was primarily due to cost savings associated with the Company’s July 2002 restructuring.
Sales and Marketing Sales and marketing expenses decreased to $159,000 for the quarter ended June 30, 2003 from $1.4 million for the quarter ended June 30, 2002. The decrease was primarily due to cost savings associated with the Company’s July 2002 restructuring, and lower sales commissions in the current quarter as a result of the Company not achieving its revenue target.
General and Administrative General and administrative expenses decreased to $469,000 for the quarter ended June 30, 2003, from $726,000 for the quarter ended June 30, 2002. The decrease was primarily due to cost savings associated with the Company’s July 2002 restructuring.
Depreciation Depreciation for the quarter ended June 30, 2003 was zero compared to $808,000 for the quarter ended June 30, 2002. The decrease to zero is primarily the result of the Company’s July 2002 restructuring and related impairment analysis performed.
Occupancy and Other Facilities Related Expenses Occupancy costs were $317,000 for the quarter ended June 30, 2003 as compared to $1.1 million for the quarter ended June 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 headquarters office space. Occupancy and other facilities related expenses represent rent expense and other operating costs associated with the Company’s respective headquarters location in Burlington, Massachusetts and various other sales and development offices in the United States and, in 2002, the United Kingdom, Hong Kong and China. As of June 30, 2003, apart from its headquarters office space, the Company only occupies space in Colorado and Virginia.
12
Interest Income Interest income consists of interest on cash and cash equivalents. Interest income decreased to $3,000 in the current quarter from $8,000 in the quarter ended June 30, 2002, due to lower market interest rates.
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.
Six Months ended June 30, 2003 compared to Six Months ended June 30, 2002
Revenue from international markets, primarily derived from sales of videoconferencing products and related services, accounted for approximately 18% and 30% for the six months ended June 30, 2003 and 2002, respectively.
Gross Profit Cost of revenues includes material costs, costs of software licenses, manufacturing labor and overhead and customer support costs. For the six months 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 as a percentage of revenue was 55.1% for the six months ended June 30, 2003 as compared to (excluding the inventory writedown referred to above) 44.6% for the six months ended June 30, 2002. The increase in gross profit was primarily attributable to the overall reduction in manufacturing and service costs related to sales of the company’s videoconferencing products that were implemented most recently as a part of the July 2002 restructuring.
Research and Development Research and development expenses decreased to $1.3 million for the six months ended June 30, 2003 from $3.0 million for the six months ended June 30, 2002. The decrease was primarily due to cost savings associated with the Company’s July 2002 restructuring.
Sales and Marketing Sales and marketing expenses decreased to $559,000 for the six months ended June 30, 2003 from $2.8 million for the six months ended June 30, 2002. The decrease was primarily due to cost savings associated with the Company’s July 2002 restructuring.
General and Administrative General and administrative expenses decreased to $752,000 for the six months ended June 30, 2003, from $1.2 million for the six months ended June 30, 2002. The decrease was primarily due to cost savings associated with the Company’s July 2002 restructuring.
Depreciation Depreciation for the six months ended June 30, 2003 was zero compared to $1.7 million for the six months ended June 30, 2002. The decrease to zero is primarily the result of the Company’s July 2002 restructuring and related impairment analysis performed.
Occupancy and Other Facilities Related Expenses Occupancy costs were approximately $593,000 for the six months ended June 30, 2003 as compared to $2.0 million for the comparable period of 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 headquarters office space. Occupancy and other facilities related expenses represent rent expense and other operating costs
13
associated with the Company’s respective headquarters location in Burlington, Massachusetts and various other sales and development offices in the United States and, in 2002, the United Kingdom, Hong Kong and China. As of March 31, 2003, apart from its headquarters office space, the Company only occupies space in Colorado and Virginia.
Interest Income Interest income consists of interest on cash and cash equivalents. Interest income decreased to $6,000 for the six months ended June 30, 2003 as compared to $10,000 for the comparable period of 2002, due to lower market interest rates.
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.
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 June 30, 2003, the Company had cash and cash equivalents of approximately $1.7 million, and a net loss for the quarter of $644,000. The Company had a loss from operations of $15.1 million and a net loss of $18.6 million for the year ended December 31, 2002.
In July 2002, the Company implemented its most recent 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 11 to the financial statements). The July 2002 restructuring 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.
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
14
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.
The Company now 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. Operating costs were in line with the Company’s expectations for the quarter and six months ended June 30, 2003, but the Company did not achieve its revenue target during the quarter ended June 30, 2003. The Company’s success in achieving its goal of being, at a minimum, cash-flow neutral, is largely dependent on whether it can meet its future revenue targets
In May 2003, after failing to comply with certain continued listing standards for the Nasdaq SmallCap Market, including maintaining a minimum bid price of at least $1.00 per share, or the requirement for the company to have a minimum $2.5 million in stockholders equity, the Company received a delisting notification from Nasdaq. The Company exercised its right for an appeal of this determination to a Nasdaq Listing Qualifications Panel. The appeal hearing was held in July 2003, and in August 2003 the Panel determined to delist the Company’s securities from The Nasdaq Stock Market effective with the open of business on Tuesday, August 12, 2003. As of that date, the Company’s common stock has been quoted on the OTC Bulletin Board. The market value and liquidity of the Company’s common stock, as well as the Company’s ability to raise additional capital, could be materially adversely affected by this recent delisting decision.
In August 2003, the Company announced that it had initiated legal proceedings against Datacraft Mexico, S.A. de CV (“Datacraft”), in an attempt to recover approximately $255,000 that is due to the Company with respect to Datacraft’s purchase of videoconferencing equipment that was resold to one of Datacraft’s customers in Mexico, and approximately $25,000 related to consignment equipment never returned to the Company. The Company is seeking recovery of the total $280,000 withheld by Datacraft, plus unspecified damages. The Company’s second quarter 2003 operating results were heavily dependent on Datacraft fulfilling its payment obligation to the Company for the videoconferencing equipment order, and the impact of not receiving this payment on the reported second quarter 2003 revenue, ending cash balance, and reported net loss (to the extent of the Company’s gross profit on this transaction), was severe. Given the acute liquidity and capital resource constraints the Company is facing, management has concluded there is no better option but to move forward with this proceeding, although the economic and management resource time to pursue this initiative may also be significant.
15
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.
Item 4. 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. Earlier in the year, in connection with their audit that for the year ended December 31, 2002, Ernst & Young LLP, the Company’s then current independent auditors, advised the Company of certain matters involving internal control that they considered to be material weaknesses. Specifically, as a result of the July 2002 restructuring and cost reduction plan, the Company terminated 55 employees (approximately 50% of its workforce), including many finance and accounting personnel. This reduction in force had a significant negative impact on internal controls at the Company, resulting in, for example, a reduced ability to perform timely reconciliations and an inadequate segregation of duties. In response to the observations of the Company’s auditors, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures contained certain design deficiencies that should be corrected.
Changes in internal controls. In April 2003, the Company initiated certain enhancements to its internal controls and procedures, which it believes address the issues raised by its auditors. In addition, the Company has also completed certain steps, independent of the matters raised by its auditors, to strengthen its finance and accounting management depth and improve operational efficiencies. The Company believes that, with these changes, its controls and procedures should 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.
16
Item 4. Submission of Matters to a Vote of Security Holders
On May 29, 2003, at the Company’s 2003 Annual Meeting of Stockholders, the Company’s stockholders met to consider and vote upon a proposal to elect Khoa D. Nguyen as a Class II Director to hold office for a three-year term and until his respective successor has been duly elected and qualified. Results with respect to the voting on the proposal were as follows:
|
Votes For |
|
11,902,762 |
|
|
Withheld |
|
477,526 |
|
The terms of office of John A. McMullen, Kevin P. Hegarty, Robert N. McFarland and S. Steven Karalekas, the remaining members of the Board of Directors of the Company, continued after the meeting.
(a) Exhibits
|
Exhibit |
|
Description of Exhibit |
|
|
|
|
|
31.1 |
|
Certificate of Khoa D. Nguyen, President and Chief Executive Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
|
31.2 |
|
Certificate of Khoa D. Nguyen, Chief Financial Officer of the Company, filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
|
32.1 |
|
Certificate of Khoa D. Nguyen, President and Chief Executive Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
|
32.2 |
|
Certificate of Khoa D. Nguyen, Chief Financial Officer of the Company, furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) |
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.
(b) Reports on Form 8-K
A Report on Form 8-K was filed by the Company with the Securities and Exchange Commission on April 2, 2003, reporting the Company’s financial results for the quarter ended March 31, 2003.
A Report on Form 8-K was filed by the Company with the Securities and Exchange Commission on May 7, 2003, reporting a change in its auditors and the nomination of three individuals as new members to its Board of Directors.
A Report on Form 8-K was filed by the Company with the Securities and Exchange Commission on May 15, 2003, reporting the Company’s receipt of a Nasdaq Staff Determination notification indicating that the Company’s common stock would be delisted from the Nasdaq SmallCap Market at the opening of business on May 22, 2003, unless the Company requested a hearing by May 20, 2003 to appeal the delisting determination.
17
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 14, 2003 |
By: |
/s/ Khoa D. Nguyen |
|
|
|
|
Khoa D. Nguyen |
|
|
|
|
Chairman, Chief
Executive Officer and |
|
18