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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 SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-25882
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EZENIA! INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3114212
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRSEMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
NORTHWEST PARK, 63 THIRD AVENUE, BURLINGTON, MASSACHUSETTS 01803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(781) 229-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
The number of shares outstanding of the registrant's Common Stock as of October
16, 2000 was 13,799,762.
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EZENIA! INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999...........................3
Condensed Consolidated Statements of Operations
Three months and nine months ended September 30, 2000 and 1999.....4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999......................5
Notes to Condensed Consolidated Financial Statements.................6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................8
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk..........10
PART II. OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K....................................11
SIGNATURE....................................................................12
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including without limitation those discussed in
the Company's 1999 Annual Report to Shareholders in the section titled "Other
factors which may affect future operations" (which section is incorporated by
reference into the Company's Annual Report on Form 10-K for the year ended
December 31, 1999). Such forward-looking statements speak only as of the date on
which they are made, and the Company cautions readers not to place undue
reliance on such statements.
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EZENIA! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $17,067 $35,095
Marketable securities 23,028 17,985
Accounts receivable, less allowances of $989 and $1,518 at
September 30, 2000 and December 31, 1999, respectively 3,573 6,800
Inventories 3,471 2,610
Deferred income taxes 3,733
Litigation settlement receivable 6,000
Receivable from sale of network access card product line 3,000
Other current assets 1,869 1,183
----------------- ---------------
Total current assets 58,008 67,406
Equipment and improvements, net of accumulated depreciation 6,345 6,461
Deferred income taxes 4,047
Other assets, net 1,480 1,824
----------------- ---------------
$65,833 $79,738
----------------- ---------------
----------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,963 $ 4,750
Accrued expenses 7,568 7,595
Deferred revenue 776 603
----------------- ---------------
Total current liabilities 11,307 12,948
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;
13,794,841 issued and outstanding at September 30, 2000;
13,588,505 issued and outstanding at December 31, 1999 138 136
Capital in excess of par value 59,403 58,483
Retained earnings (deficit) (4,534) 8,441
Accumulated other comprehensive loss (481) (270)
----------------- ---------------
54,526 66,790
----------------- ---------------
$65,833 $79,738
----------------- ---------------
----------------- ---------------
</TABLE>
See accompanying notes.
3
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EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Revenue
Product revenue $5,533 $10,368 $19,881 $40,197
Service revenue 973 1,668 3,069 5,233
------------------- ------------------ ------------------- ------------------
6,506 12,036 22,950 45,430
Cost of revenue
Cost of product revenue 2,359 3,536 8,663 13,960
Cost of service revenue 858 1,174 2,781 3,170
------------------- ------------------ ------------------- ------------------
3,217 4,710 11,444 17,130
------------------- ------------------ ------------------- ------------------
Gross profit 3,289 7,326 11,506 28,300
Operating expenses
Research and development 3,879 4,201 13,996 12,174
Sales and marketing 3,353 3,895 9,765 11,269
General and administrative 1,246 1,357 3,601 3,932
------------------- ------------------ ------------------- ------------------
Total operating expenses 8,478 9,453 27,362 27,375
------------------- ------------------ ------------------- ------------------
Income (loss) from operations (5,189) (2,127) (15,856) 925
Interest income, net 677 622 1,943 1,665
Litigation settlement 6,500
Gain on sale of network access card
product line 3,287 3,287
------------------- ------------------ ------------------- ------------------
Income (loss) before income taxes (1,225) (1,505) (4,126) 2,590
Income taxes 32 (512) 8,849 880
------------------- ---------------------------------------------------------------
Net income (loss) ($1,257) ($993) ($12,975) $ 1,710
=================== ================== =================== ==================
Net income (loss) per share:
Basic ($0.09) ($0.07) ($0.95) $0.13
Diluted ($0.09) ($0.07) ($0.95) $0.12
Shares used in computing net
income (loss) per share:
Basic 13,760,897 13,566,000 13,699,898 13,402,000
Diluted 13,760,897 13,566,000 13,699,898 13,763,000
</TABLE>
See accompanying notes.
4
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EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($12,975) $ 1,710
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Gain on sale of network access card product line (3,287)
Depreciation and amortization 2,776 2,768
Deferred income taxes 7,780
Purchased technology write off 1,034
Changes in operating assets and liabilities:
Accounts receivable 3,227 685
Inventories (2,155) 702
Litigation settlement receivable (6,000)
Other current assets 64 292
Accounts payable and accrued expenses (2,267) (2,554)
Other current liabilities 173 (405)
------------------- -------------------
Net cash provided by (used for) operating activities (12,664) 4,232
INVESTING ACTIVITIES
Cash received from sale of network access card product line 1,500
Purchases of equipment and improvements (2,555) (1,965)
Changes in marketable securities, net (5,043) 3,145
Decreases (increases) in other assets 23 (367)
------------------- -------------------
Net cash provided by (used for) investing activities (6,075) 813
FINANCING ACTIVITIES
Net proceeds from stock issued under employee stock benefit plans 922 1,584
------------------- -------------------
Net cash provided by financing activities 922 1,584
Effect of exchange rate on cash and cash equivalents (211) (69)
------------------- -------------------
Increase (decrease) in cash and cash equivalents (18,028) 6,560
Cash and cash equivalents at beginning of year 35,095 23,225
------------------- -------------------
Cash and cash equivalents at end of period $17,067 $29,785
------------------- -------------------
------------------- -------------------
</TABLE>
See accompanying notes
5
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EZENIA! INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. In the opinion of
management, these financial statements contain all adjustments, consisting of
normal recurring adjustments and adjustments for foreign withholding taxes and
deferred tax allowance (See Note 3 of the Notes to Condensed Consolidated
Financial Statements), necessary for a fair presentation of the results of these
interim periods. Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, although the Company believes the disclosures in
these financial statements are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
Company's audited financial statements included in the Company's 1999 Annual
Report to Shareholders and incorporated by reference into the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. The results of
operations for the interim periods shown are not necessarily indicative of the
results for any future interim period or for the entire fiscal year.
2. INVENTORIES
Inventories consist of:
SEPTEMBER 30, DECEMBER 31,
(In thousands) 2000 1999
------------------ -----------------
Raw materials and subassemblies $2,213 $1,790
Work in process 611 565
Finished goods 647 255
------------------ -----------------
$3,471 $2,610
================== =================
3. INCOME TAXES
In the quarter ended June 30, 2000, the Company recorded a provision for income
taxes of $975,000 representing an estimate of foreign withholding taxes related
to the litigation settlement with Accord Networks, Inc. f/k/a Accord Video
Telecommunications, Inc. ("Accord"). Due to reported losses for the quarter
ended March 31, 2000 and the lack of further recoverability of tax benefits in
the allowable carryback period, the Company recorded a valuation allowance of
approximately $7.8 million to reduce the carrying value of deferred tax assets
to zero.
4. LEGAL PROCEEDINGS
On June 16, 2000, the Company settled its patent infringement suit against
Accord in the United States District Court for the District of Massachusetts.
The settlement agreement, among other things, provided that the Company receive
$6,500,000 in return for a covenant not to sue with respect to the patents that
were the subject of the litigation. The Company received $500,000 at the time
the agreement was signed and will receive $6,000,000 after certain tax matters
related to the settlement are resolved with tax authorities in Israel.
6
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5. SALE OF NETWORK ACCESS CARD PRODUCT LINE
On September 15, 2000, the Company completed the sale of assets and technology
associated with its network access card product line to Telco Systems, Inc.
("Telco") for cash of $4.5 million, receivable in installments through March
2001, and $1.5 million of future product to be supplied by Telco. Revenue from
sales of network access card products approximated $.7 million and $1.0 for the
quarters ended and $3.3 million and $4.4 million for the periods of nine months
ended September 30, 2000 and 1999, respectively.
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Net income (loss) ($1,257) ($993) ($12,975) $1,710
Foreign currency translation (127) (25) (211) (69)
------------------- ------------------ ------------------- ------------------
Comprehensive income (loss) ($1,384) ($1,018) ($13,186) $1,641
=================== ================== =================== ==================
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE Revenue decreased to $6.5 million for the quarter ended September
30, 2000 from $12.0 million reported for the quarter ended September 30, 1999.
Revenue decreased to $23.0 million in the nine months ended September 30, 2000
compared to $45.4 million for the nine months ended September 30, 1999. The
decrease in revenue was principally related to a significant decline in sales of
ISDN products and related service revenues as the videoconferencing market
continues to weaken. In particular, sales of ISDN products and related services
to PictureTel Corporation and VTEL Corporation (which customers accounted for
24% and 25%, respectively, of the Company's revenue in 1999) were significantly
lower than in the three and nine month periods ended September 30, 1999. The
sale of the Company's network access card product line also had the effect of
decreasing product revenue during the quarter.
Revenue from international markets, primarily in Europe, accounted for
approximately 40% and 29% of revenue for the quarters ended September 30, 2000
and 1999 respectively, and 38% and 31% for the nine months ended September 30,
2000 and 1999, respectively. The Company expects that revenue from international
markets, which is currently denominated in U.S. dollars, will continue to be a
significant portion of the Company's business.
GROSS PROFIT Gross profit as a percentage of revenue was 50.6% for the
quarter ended September 30, 2000 as compared to 60.9% for the quarter ended
September 30, 1999. For the nine months ended September 30, 2000, gross profit
was 50.1% compared to 62.3% in the corresponding period of 1999. Reduction in
margin for the quarter and nine months ended September 30, 2000 was primarily
attributable to the overall decrease in revenues and the related
disproportionate effect of fixed manufacturing and service costs included in
cost of revenues.
RESEARCH AND DEVELOPMENT Research and development expenses decreased to
$3.9 million for the quarter ended September 30, 2000 from $4.2 million for the
quarter ended September 30, 1999. For the nine months ended September 30, 2000,
research and development expenses were $14.0 million compared to $12.2 million
in the corresponding period of 1999. The Company's spending decrease for the
three months ended September 30, 2000 was primarily attributable to completion
of various engineering projects. The Company's spending increases for the nine
months ended September 30, 2000 were primarily attributable to development of
its IP and internet products. The Company expects to continue to commit
substantial resources to research and development in the future.
SALES AND MARKETING Sales and marketing expenses decreased to $3.4 million
for the quarter ended September 30, 2000 from $3.9 million for the quarter ended
September 30, 1999. For the nine months ended September 30, 2000, sales and
marketing expenses were $9.8 million compared to $11.3 million in the
corresponding period of 1999. The decreased spending was primarily due to the
current transition of sales and marketing personnel from an ISDN product focus
to a concentration on IP and internet products. The Company expects to
significantly increase sales and marketing spending in the future as it broadens
its channels of distribution and continues to emphasize development of the
market for IP and internet-based products.
GENERAL AND ADMINISTRATIVE General and administrative expenses decreased
to $1.2 million for the quarter ended September 30, 2000 from $1.4 million for
the quarter ended September 30, 1999. For the nine months ended September 30,
2000, general and administrative expenses were $3.6 million compared to $3.9
million for the corresponding period of 1999. The decreased spending was
primarily attributed to reduction of expenditures related to the Company's
corporate-wide financial accounting, manufacturing, and sales and distribution
system, which was implemented during 1999.
8
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INTEREST INCOME, NET Interest income, net, increased to approximately
$677,000 in the quarter ended September 30, 2000, from approximately $622,000 in
the quarter ended September 30, 1999. For the nine months ended September 30,
2000, interest income, net was $1,943,000 compared to $1,665,000 for the
corresponding period of 1999. The increase was due to slightly higher rates of
return on investments.
LITIGATION On June 16, 2000, the Company settled its patent infringement
suit against Accord in the United States District Court for the District of
Massachusetts. The settlement agreement, among other things, provided that the
Company receive $6,500,000 in return for a covenant not to sue with respect to
the patents that were the subject of the litigation. The Company received
$500,000 at the time the agreement was signed and will receive $6,000,000 after
certain tax matters related to the settlement are resolved with tax authorities
in Israel.
GAIN ON SALE OF NETWORK ACCESS CARD PRODUCT LINE On September 15, 2000,
the Company completed the sale of assets and technology associated with its
network access card product line to Telco Systems, Inc. ("Telco") for cash of
$4.5 million, receivable in installments through March 2001, and $1.5 million of
future product to be supplied by Telco. Revenue from sales of network access
card products approximated $.7 million and $1.0 for the quarter ended and $3.3
million and $4.4 million for the periods of nine months ended September 30, 2000
and 1999, respectively.
PROVISION FOR INCOME TAXES Provision for income taxes for the nine months
ended September 30, 2000 consists principally of an estimate of $975,000 for
foreign withholding taxes related to the litigation settlement with Accord and a
valuation allowance recorded during the quarter ended March 31, 2000 to reduce
the carrying value of deferred tax assets to zero.
OTHER FACTORS WHICH MAY AFFECT FUTURE OPERATIONS There are a number of
business factors which singularly or combined may affect the Company's future
operating results. Some of them, including dependence on major customers (one of
which, PictureTel Corporation, earlier in the year 2000 reported that it is
experiencing financial difficulties), market growth and the risks and
uncertainties related to an evolving market, rapid technological change,
competition, variability of quarterly results, protection of proprietary
technology, retention of key employees, and uncertainties regarding patents have
been outlined in the Company's 1999 Annual Report to Shareholders, incorporated
by reference into the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company has cash, cash equivalents and
marketable securities of approximately $40.1 million. The Company regularly
invests excess funds in short-term money market funds, government securities,
and commercial paper. The Company believes that its existing cash, cash
equivalents and marketable securities will be sufficient to meet the Company's
cash requirements for the foreseeable future.
On October 12, 2000, the Company's board of directors approved a stock
buy-back program under which the Company is authorized to repurchase up to 10%
of its outstanding shares (or approximately 1.38 million shares) at prevailing
market prices from time to time. Execution of the program will be dependent on a
number of factors, including the availability of shares and their trading price.
Accordingly, there can be no certainty as to the number of shares to be
repurchased or the price and timing of any purchases.
9
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To date, the Company has not utilized derivative financial instruments or
derivative commodity instruments. The Company invests cash in highly liquid
investments, consisting of highly rated U.S. and state government securities,
commercial paper, and short-term money market funds. These investments are
subject to minimal credit and market risk and the Company has no debt.
Therefore, the Company believes the market risks associated with these financial
instruments are immaterial.
10
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27: Financial Data Schedule.
(b) No reports on Form 8-K were filed during the three-month period ended
September 30, 2000.
11
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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: October 20, 2000 By: /S/ STEPHEN G. BASSETT
---------------------------------
Stephen G. Bassett
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)
12
