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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 MARCH 31, 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 (IRS Employer Identification No.)
incorporation or organization)
NORTHWEST PARK, 63 THIRD AVENUE, BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices, including Zip Code)
(781) 229-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock as of April
28, 2000 was 13,694,105.
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EZENIA! INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets March 31, 2000 and December 31, 1999............. 3
Condensed Consolidated Statements of Operations Three months ended March 31, 2000
and 1999............................................................................... 4
Condensed Consolidated Statements of Cash Flows Three months ended March 31, 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
</TABLE>
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>
MARCH 31, DECEMBER 31,
2000 1999
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $34,688 $35,095
Marketable securities 15,593 17,985
Accounts receivable, less allowances of $1,518 6,191 6,800
Inventories 3,318 2,610
Deferred income taxes 0 3,733
Other current assets 1,354 1,183
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Total current assets 61,144 67,406
Equipment and improvements, net of accumulated depreciation 7,019 6,461
Deferred income taxes 0 4,047
Other assets, net 1,786 1,824
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$69,949 $79,738
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,363 $ 4,750
Accrued expenses 7,449 7,595
Deferred revenue 845 603
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Total current liabilities 14,657 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;
13,690,448 issued and outstanding at March 31, 2000;
13,588,505 issued and outstanding at December 31, 1999 137 136
Capital in excess of par value 58,952 58,483
Retained earnings (deficit) (3,460) 8,441
Accumulated other comprehensive loss (337) (270)
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55,292 66,790
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$69,949 $79,738
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</TABLE>
See accompanying notes.
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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
MARCH 31,
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2000 1999
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<S> <C> <C>
Revenues
Product revenue $ 8,056 $14,820
Service revenue 1,111 1,742
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9,167 16,562
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Cost of revenues
Cost of product revenue 3,408 5,163
Cost of service revenue 1,024 983
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4,432 6,146
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Gross profit 4,735 10,416
Operating expenses
Research and development 5,070 3,799
Sales and marketing 3,169 3,831
General and administrative 1,205 1,311
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Total operating expenses 9,444 8,941
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Income (loss) from operations (4,709) 1,475
Interest income, net 622 543
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Income (loss) before income taxes (4,087) 2,018
Income taxes 7,814 686
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Net income (loss) ($11,901) $ 1,332
========== ==========
Net income (loss) per share:
Basic ($0.87) $0.10
Diluted ($0.87) $0.10
Weighted average common shares
Basic 13,645,625 13,434,000
Diluted 13,645,625 13,913,000
</TABLE>
See accompanying notes.
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EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($11,901) $ 1,332
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization 948 895
Deferred income taxes 7,780 --
Changes in operating assets and liabilities:
Accounts receivable 609 (1,285)
Inventories (708) 1,084
Other current assets (170) (79)
Accounts payable and accrued expenses 1,468 (626)
Other current liabilities 242 227
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Net cash provided by (used for) operating activities (1,732) 1,548
INVESTING ACTIVITIES
Purchases of equipment and improvements (1,451) (246)
Changes in marketable securities, net 2,392 4,036
Increases in other assets (18) (206)
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Net cash provided by investing activities 923 3,584
FINANCING ACTIVITIES
Net proceeds from stock issued under employee stock benefit plans 470 667
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Net cash provided by financing activities 470 667
Effect of exchange rate on cash and cash equivalents (68) (16)
Increase (decrease) in cash and cash equivalents (407) 5,783
Cash and cash equivalents at beginning of year 35,095 23,225
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Cash and cash equivalents at end of period $34,688 $29,008
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</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 only
of normal recurring adjustments, except for the 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:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(In thousands) 2000 1999
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<S> <C> <C>
Raw materials and subassemblies $2,240 $1,790
Work in process 708 565
Finished goods 370 255
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$3,318 $2,610
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</TABLE>
3. INCOME TAXES
The Company has reported operating losses for three successive quarters due in
part to the transition to IP (Internet Protocol) and internet-based products
from its traditional videoconferencing business. In light of these reported
losses for the quarter ended March 31, 2000 and the resulting 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.
6
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4. LEGAL PROCEEDINGS
On November 20, 1998, the Company commenced an action for patent infringement
against Accord Networks, Inc. f/k/a Accord Video Telecommunications, Inc.
("Accord") in the United States District Court for the District of
Massachusetts. The complaint alleged that Accord was infringing and has
infringed and contributed to and induced infringement of one of the Company's
patents, including by making, using, selling and offering to sell Accord's "MGC"
products. The Company has filed subsequent amendments to the complaint, alleging
that Accord has infringed on three other patents of the Company and that
Accord's affiliate in Israel, Accord Networks, Ltd. f/k/a Accord
Telecommunications, Ltd. also infringed on all four of these patents. The
underlying technology for these patents enables several fundamental
videoconferencing capabilities. The Company is seeking damages and injunctive
relief.
Accord has counterclaimed for declaratory judgement that the patents are invalid
and unenforceable and that the Company has violated the Lanham Act, interfered
with Accord's contractual and prospective business advantage and defamed and
disparaged Accord and its products. In its counterclaim, Accord is seeking
unspecified damages, costs, and injunctive relief. The Company intends to
vigorously defend against Accord's counterclaim.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
REVENUE Revenue decreased to $9.2 million for the quarter ended March 31,
2000 from $16.6 million reported for the quarter ended March 31, 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% of the Company's revenue in 1999) were significantly lower than in
quarters ending March 31, 1999 and December 31, 1999.
Revenues from IP (Internet Protocol) based products also decreased during
the quarter. This decrease was caused principally by a delay to March 24, 2000
in final product release of the Encounter 3000, the second generation of the
Company's IP products.
Revenue from international markets, primarily in Europe, accounted
for approximately 36% and 32% of revenue for the quarters ended March 31, 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 51.7% for the
quarter ended March 31, 2000 as compared to 62.9% for the quarter ended March
31, 1999. Reduction in margin for the quarter ended March 31, 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 increased to
$5.1 million for the quarter ended March 31, 2000 from $3.8 million for the
quarter ended March 31, 1999. The Company's spending increases 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 $3.2 million
for the quarter ended March 31, 2000 from $3.8 million for the quarter ended
March 31, 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 March 31, 2000 from $1.3 million for the
quarter ended March 31, 1999. The decreased spending is 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.
INTEREST INCOME, NET Interest income, net, increased to approximately
$622,000 in the quarter ended March 31, 2000, from approximately $543,000 in the
quarter ended March 31, 1999. The increase was due to an increase in the amount
of cash available for investment and slightly higher rates of return on
investments.
8
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PROVISION FOR INCOME TAXES Provision for income taxes for the quarter
ended March 31, 2000 consists principally of a valuation allowance recorded
during the quarter to reduce the carrying value of deferred tax assets to zero.
(See Note 3 of Notes to Condensed Consolidated Financial Statements.)
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, has recently reported that it is currently
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.
On November 20, 1998, the Company commenced an action for patent
infringement against Accord Networks, Inc. f/k/a Accord Video
Telecommunications, Inc. ("Accord") in the United States District Court for the
District of Massachusetts. The complaint alleged that Accord was infringing and
has infringed and contributed to and induced infringement of one of the
Company's patents, including by making, using, selling and offering to sell
Accord's "MGC" products. The Company has filed subsequent amendments to the
complaint, alleging that Accord has infringed on three other patents of the
Company and that Accord's affiliate in Israel, Accord Networks, Ltd. f/k/a
Accord Telecommunications, Ltd. also infringed on all four of these patents. The
underlying technology for these patents enables several fundamental
videoconferencing capabilities. The Company is seeking damages and injunctive
relief.
Accord has counterclaimed for declaratory judgement that the patents are
invalid and unenforceable and that the Company has violated the Lanham Act,
interfered with Accord's contractual and prospective business advantage and
defamed and disparaged Accord and its products. In its counterclaim, Accord is
seeking unspecified damages, costs, and injunctive relief. The Company intends
to vigorously defend against Accord's counterclaim.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company has cash, cash equivalents and marketable
securities of approximately $50.3 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, together with cash generated from operations will be
sufficient to meet the Company's cash requirements for the foreseeable future.
9
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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
<PAGE> 11
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
March 31, 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: May 12, 2000 By: /s/ Stephen G. Bassett
-----------------------------------------
Stephen G. Bassett
Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer, Authorized Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 34,688
<SECURITIES> 15,593
<RECEIVABLES> 7,709
<ALLOWANCES> (1,518)
<INVENTORY> 3,318
<CURRENT-ASSETS> 61,144
<PP&E> 7,019
<DEPRECIATION> 0
<TOTAL-ASSETS> 69,949
<CURRENT-LIABILITIES> 14,657
<BONDS> 0
0
0
<COMMON> 137
<OTHER-SE> 55,155
<TOTAL-LIABILITY-AND-EQUITY> 69,949
<SALES> 9,167
<TOTAL-REVENUES> 9,167
<CGS> 4,432
<TOTAL-COSTS> 4,432
<OTHER-EXPENSES> 9,444
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,087)
<INCOME-TAX> 7,814
<INCOME-CONTINUING> (11,901)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,901)
<EPS-BASIC> (.87)
<EPS-DILUTED> (.87)
</TABLE>
