CLEARONE INC - Annual Report: 2003 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
fiscal year ended June 30, 2003
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from ________ to ________
Commission
file number 0-17219
CLEARONE
COMMUNICATIONS, INC.
(Exact
name of registrant as specified in its charter)
|
Utah
|
87-0398877
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
1825
Research Way, Salt Lake City, Utah
|
84119
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number (801)
975-7200
Securities
registered under Section 12(b) of the Act:
None
Securities
registered under Section 12(g) of the Act:
Common
Stock, $0.001 par value
(Title
of
class)
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
¨
No
x
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this
Form 10-K. ¨
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Securities Exchange Act of 1934, as amended). ¨
The
aggregate market value of the 9,495,093 shares of voting common stock held
by
non-affiliates is approximately $37,505,617 at August 10, 2005, based on
the
$3.95 closing price for the Company’s common stock on the Pink Sheets on August
10, 2005.
1
APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13, or 15(d) of the Securities Exchange
Act
of 1934 subsequent to the distribution of securities under a plan confirmed
by a
court. Yes
¨
No
¨
The
number of shares of ClearOne common stock outstanding as of June 30, 2003
and
June 30, 2005, respectively were 11,086,733 and 11,264,233.
DOCUMENTS
INCORPORATED BY REFERENCE
List
hereunder the following documents if incorporated by reference and the part
of
the Form 10-K (e.g.,
Part I,
Part II, etc.) into which the document is incorporated: (1) any annual report
to
security holders; (2) any proxy or information statement; and (3) any prospectus
filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The
listed documents should be clearly described for identification purposes
(e.g.,
annual
report to security holders for fiscal year ended December 24,
1980).
None.
2
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. These statements reflect our views with respect
to future events based upon information available to us at this time. These
forward-looking statements are subject to uncertainties and other factors
that
could cause actual results to differ materially from these statements.
Forward-looking statements are typically identified by the use of the words
“believe,” “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“project,” “propose,” “plan,” “intend,” and similar words and expressions.
Examples of forward-looking statements are statements that describe the proposed
development, manufacturing and sale of our products, statement that describe
our
results of operations, pricing trends, the markets for our products, our
anticipated capital expenditures, our cost reduction and operational
restructuring initiatives, and regulatory developments, statements with regard
to the nature and extent of competition we may face in the future, statements
with respect to the sources of and need for future financing, and statements
with respect to future strategic plans, goals and objectives. Forward-looking
statements are contained in this report under “Item 1. Description of Business,”
and “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” The forward-looking statements are based on present
circumstances and on our predictions respecting events that have not occurred,
that may not occur, or that may occur with different consequences and timing
than those now assumed or anticipated. Actual events or results may differ
materially from those discussed in the forward-looking statements as a result
of
various factors, including the risk factors discussed in this report under
the
caption “Description of Business: Risk Factors.” These cautionary statements are
intended to be applicable to all related forward-looking statements wherever
they appear in this report. The cautionary statements contained or referred
to
in this report should also be considered in connection with any subsequent
written or oral forward-looking statements that may be issued by us or persons
acting on our behalf. Any forward-looking statements are made only as of
the
date of this report and ClearOne assumes no obligation to update forward-looking
statements to reflect subsequent events or circumstances.
CAUTIONARY
STATEMENT REGARDING THE FILING DATE OF THIS REPORT AND THE ANTICIPATED FUTURE
FILINGS OF ADDITIONAL PAST-DUE REPORTS
Due
to
the re-audit of the Company’s financial statements for its 2002 and 2001 fiscal
years, this Annual Report on Form 10-K for the fiscal year ended June 30,
2003
is first being filed in August 2005. The Company is in the process of preparing
its Annual Report on Form 10-K for the fiscal years ended June 30, 2004 and
2005, respectively, and plans to file such reports at the earliest practicable
date. Shareholders and others are cautioned that the financial statements
included in this report are two years old and are not indicative of the
operating results that may be expected for the years ending June 30, 2004
and
2005. Shareholders are also cautioned that since the Company is not current
in
the filing of required reports with the Securities and Exchange Commission
(SEC), the SEC could initiate proceedings against the Company at any time,
including proceedings to suspend trading of the Company’s
securities.
PART I
References
in this Annual Report on Form 10-K to “ClearOne”, “we”, “us” or “the Company”
refer to ClearOne Communications, Inc., a Utah corporation, and, unless the
context otherwise requires or is otherwise expressly stated, its
subsidiaries.
ITEM
1. DESCRIPTION
OF BUSINESS
Overview
We
are an
audio conferencing products company. We develop, manufacture, market and
service
a comprehensive line of audio conferencing products, which range from tabletop
conferencing phones to professionally installed audio systems. We also
manufacture and sell document and education cameras and conferencing furniture.
We have a strong history of product innovation and plan to continue to apply
our
expertise in audio engineering to developing innovative new products. We
believe
the performance and reliability of our high-quality audio products create
a
natural communication environment, which saves organizations of all sizes
time
and money by enabling more effective and efficient communication between
geographically separated businesses, employees and customers.
3
Our
products are used by organizations of all sizes to accomplish effective group
communication. Our end users range from some of the world’s largest and most
prestigious companies and institutions to small and medium sized businesses,
educational institutions, and government organizations. We sell our products
to
these end users primarily through a distribution network of independent
distributors who in turn sell products to dealers, systems integrators and
value-added resellers. The Company also sells products on a limited basis
directly to dealers, systems integrators, value-added resellers and end users.
We
were
incorporated in Utah on July 8, 1983 under the name “Insular, Inc.” On March 26,
1985, we acquired all of the stock of Gentner Electronics Corporation
(“Gentner”) in a transaction treated as a reverse acquisition for accounting
purposes. In connection with the acquisition of Gentner, we changed our name
to
Gentner Electronics Corporation. On July 1, 1991, we changed our name to
Gentner
Communications Corporation. On January 1, 2002, we changed our name to ClearOne
Communications, Inc. Our principal executive offices are located at 1825
Research Way, Salt Lake City, Utah 84119, and our telephone number at this
location is (801) 975-7200. Our Internet website address is www.clearone.com.
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K, and amendments to such reports are available, free of charge, on
our
Internet website under “ClearOne Info—Investor Relations—SEC,” as soon as
reasonably practicable after we file electronically such material with, or
furnish it to, the SEC. Information on our website does not constitute a
part of
this Annual Report on Form 10-K or other periodic reports we file with the
SEC.
The public may also read and copy any materials we file with the SEC at the
SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549.
The public may also obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet
website (www.sec.gov)
that
contains reports, proxy and information statements and other information
regarding ClearOne that we file electronically with the SEC.
For
a
discussion of certain risks applicable to our business, financial condition
and
results of operations, see the risk factors described in “Risk Factors”
below.
Significant
Events
Restatement
of Previously Issued Financial Information
This
report contains our audited consolidated financial statements for the fiscal
year ended June 30, 2003 and our restated audited consolidated financial
statements for the fiscal years ended June 30, 2002 and 2001. In connection
with
the restatement, we performed a comprehensive review of our previously issued
consolidated financial statements for fiscal years 2002 and 2001 and identified
a significant number of errors and adjustments. The restated consolidated
financial statements include restatements of assets, liabilities, stockholders’
equity, results of operations and cash flows, and resulted in cumulative
net
reductions to stockholders’ equity as of June 30, 2002 and 2001 of approximately
$17.4 million and approximately $3.8 million, respectively, and reductions
in
previously reported net income for the years ended June 30, 2002 and 2001
of
approximately $14.1 million and $3.9 million, respectively. The restated
2002
and 2001 financial statements were audited by KPMG LLP (KPMG), who replaced
Ernst & Young LLP (Ernst & Young) as our independent registered public
accounting firm in December 2003. Certain restated quarterly financial
information is included in this report in the section captioned “Item 6.
Selected Financial Data.”
We
have
not amended our prior filings to reflect the restatement. As a result, the
information previously filed in our annual reports on Form 10-K for fiscal
years
2002 and 2001, our quarterly reports on Form 10-Q for the quarterly periods
included in those fiscal years and for the quarter ended September 30, 2002
and
any current filings on Form 8-K, or other disclosures containing fiscal 2003,
2002 or 2001 information filed or made prior to the filing of this 2003 Form
10-K should not be relied upon and have been superceded by this Form
10-K.
Changes
to Management and Board of Directors. Since
January 2003, we have changed all but one member of our executive management
team. Three of our former directors are no longer serving in such positions
and
we have appointed two new directors, both of whom are independent directors
who
serve on our audit committee. In January 2003, Frances Flood, our former
chairman and chief executive officer, and Susie Strohm, our former chief
financial officer, were placed on administrative leave and they subsequently
resigned from their positions. Michael Keough was then appointed as our chief
executive officer, Greg Rand was appointed as our president and chief operating
officer and George Claffey was appointed as our chief financial officer.
All
three subsequently resigned for personal reasons at various times during
2004
and on July 8, 2004, Zeynep “Zee” Hakimoglu was
appointed as our president and chief executive officer and Donald Frederick
was
appointed as our chief financial officer.
4
The
SEC Action. ClearOne’s
previously filed financial statements were the subject of a civil action
filed
by the U.S. Securities and Exchange Commission on January 15, 2003 against
ClearOne and the persons then acting as its chief executive and chief financial
officers. The complaint generally alleged that the defendants had engaged
in a
program of inflating ClearOne’s revenues, net income and accounts receivable by
engaging in improper revenue recognition. On December 4, 2003, we settled
the
SEC action by entering into a consent decree in which, without admitting
or
denying the allegations of the complaint, we consented to the entry of a
permanent injunction prohibiting future securities law violations. No fine
or
penalty was assessed against ClearOne as part of the settlement.
Securities
Delisted from Nasdaq Stock Market. Our
common stock was delisted from the Nasdaq National Market System on April
21,
2003 and since that time has been quoted on the National Quotation Bureau’s Pink
Sheets.
The
Shareholder Class Action. On
June 30, 2003, a consolidated complaint was filed against ClearOne, eight
of our present or former officers and directors, and our former auditor,
Ernst
& Young, by a class consisting of purchasers of the Company’s common stock
during the period from April 17, 2001 through January 15, 2003. The allegations
in the complaint were essentially the same as those contained in the SEC
action
described above. On December 4, 2003, we, on behalf of the Company and all
other
defendants with the exception of Ernst & Young, entered into a settlement
agreement with the class pursuant to which we agreed to pay the class $5.0
million and issue the class 1.2 million shares of our common stock. The cash
payment was made in two equal installments, the first on November 10, 2003
and
the second on January 14, 2005. On May 23, 2005, the court order was amended
to
provide that odd-lot numbers of shares (99 or fewer shares) will not be issued
from the settlement fund and claimants who would otherwise be entitled to
receive 99 or fewer shares will be paid cash in lieu of such odd-lot number
of
shares. As of the date hereof, 228,000 shares of our common stock have been
issued to the class and we plan to complete the issuance of the remaining
shares
in the near future in accordance with the terms of the court order, subject
to
the receipt of any required approvals from state regulatory
authorities.
Changes
in Type and Scope of Operations
Acquisitions
of ClearOne, Inc. and Ivron Systems, Ltd.
We have
been manufacturing and marketing audio conferencing products since 1989,
which
has been our core competency. During fiscal 2001 and fiscal 2002, we attempted
to expand our operations through the acquisitions of ClearOne, Inc. and Ivron
Systems, Ltd., both of which were involved in the development and sale of
video
conferencing technology and products. Such acquisitions proved unsuccessful
and,
as discussed in more detail in Item 1. Description of Business. Acquisitions
and Dispositions,
we
recorded impairment charges related to such acquisitions in the aggregate
amount
of approximately $7.1 million in fiscal 2002.
Acquisitions
of E.mergent, Inc. and OM Video.
During
fiscal 2002 and fiscal 2003, we entered the audio visual integration services
business through the acquisitions of E.mergent, Inc. and Stechyson Electronics,
Ltd., doing business as OM Video. Our management at that time believed such
acquisitions would complement our existing operations and our core competencies
and allow us to acquire market share in this industry. However, our entry
into
the services business was perceived as a threat by our systems integrators
and
value-added resellers, many of whom we began competing against for sales.
The
acquisitions were not successful and the remaining operations were sold in
fiscal 2004 and fiscal 2005. As discussed in more detail in Item 1. Description
of Business. Acquisitions
and Dispositions,
we
recorded impairment charges related to such acquisitions in the aggregate
amount
of approximately $26.0 million in fiscal 2003.
Sale
of our U.S. Audiovisual Integration Services. On
May 6,
2004, we sold certain assets of our U.S. audiovisual integration services
operations to M:Space, Inc. (M:Space) for no cash compensation. M:Space is
a
privately held audiovisual integration services company. In exchange for
M:Space
assuming obligations for completion of certain customer contracts and satisfying
maintenance contract obligations to existing customers, we transferred to
M:Space certain assets including inventory valued at $569,000. We expect
that
the operations of the U.S. audiovisual integration services will be classified
as discontinued operations in the fiscal year 2004. As of June 30, 2003 the
assets of audiovisual integrations services were classified as held and
used.
5
Sale
of Conferencing Services Business.
On July
1, 2004, we sold our conferencing services business segment to Clarinet,
Inc.,
an affiliate of American Teleconferencing Services, Ltd. d/b/a Premier
Conferencing for $21.3 million. Of the purchase price $1.0 million was placed
into an 18-month Indemnity Escrow account and an additional $300,000 was
placed
into a working capital escrow account. We received the $300,000 working capital
escrow funds approximately 90 days after the execution date of the contract.
Additionally, $1.4 million of the proceeds was utilized to pay off equipment
leases pertaining to assets being conveyed to Clarinet. We expect that the
conferencing services operations will be classified as discontinued operations
in the fiscal year 2005. As of June 30, 2003, the assets of conferencing
services were classified as held and used.
Sale
of OM Video.
On
March
4, 2005, we sold all of the issued and outstanding stock of our Canadian
subsidiary, ClearOne Communications of Canada, Inc. (ClearOne Canada) to
6351352
Canada Inc., a Canada corporation (the “OM Purchaser”). ClearOne Canada owned
all the issued and outstanding stock of Stechyson Electronics Ltd., which
conducts business under the name OM Video. We agreed to sell the stock of
ClearOne Canada for $200,000 in cash; a $1.3 million note payable over a
15-month period, with interest accruing on the unpaid balance at the rate
of
5.25% per year; and contingent consideration ranging from 3% to 4% of related
gross revenues over a five-year period. We expect that the operations of
the
Canada audiovisual integration services will be classified as discontinued
operations in fiscal year 2005. As of June 30, 2003, the assets of the Canada
audiovisual integration business were classified as held and used. In June
2005,
we were advised that the OM Purchaser had settled an action brought by the
former employer of certain of OM Purchaser’s owners and employees alleging
violation of non-competition agreements. The settlement reportedly involved
a
cash payment and an agreement not to sell certain products for a period of
one
year. We are evaluating what impact, if any, this settlement may have on
the OM
Purchaser’s ability to make the payment required under the note.
Following
the disposition of operations in the video conferencing, business services
and
conferencing services businesses, we returned to our core competency of
developing, manufacturing and marketing audio conferencing products, which
is
where we intend to keep our focus for the foreseeable future.
Business
Strategy
Our
goal
is to achieve market leadership in group conferencing environments through
the
development of new, competitive products that offer superior quality and
ease of
use. The principal components of our strategy to achieve this goal
are:
Provide
a superior conferencing experience
We
have
been developing audio technologies since 1981 and we believe we have established
a reputation for providing some of the highest quality group audio conferencing
solutions in the industry. Our proprietary Gentner® Distributed Echo
Cancellation® and digital signal processing technologies have been the core of
our installed conferencing products, and are the foundation for our new product
development. We plan to build upon our reputation of being a market leader
and
continue to provide the highest quality products and technologies to the
customers and markets we serve.
Provide
greater value to our customers
To
provide our customers with conferencing products that deliver high value,
we are
leveraging advances in emerging technology trends and applying these advances
specifically to group conferencing environments. By offering high quality
products that are designed to solve ease-of-use issues and are easy to install,
configure and maintain, we believe we can provide greater value to our customers
and reduce their total cost of ownership.
Be
a
leader in audio conferencing innovation
We
have
sharpened our focus on developing cutting edge audio conferencing products
and
are committed to incorporating the latest technologies into our new and existing
product lines. Key to this effort is adopting emerging technologies such
as
Voice over Internet Protocol (VoIP), international standards-based conferencing
protocols, wireless connectivity and the convergence of voice, video and
data
networks.
6
Develop
strong sales channels
We
have
made significant efforts to develop strong domestic and international sales
channels through the addition of key distributors and dealers. We plan to
continue to add new distribution partners, with specific emphasis on bolstering
distribution to the information technology and telecommunications channels,
where we see opportunity for our MAX®
tabletop
audio conferencing products; our new RAV™ audio conferencing systems; our
conferencing peripherals, including the AccuMic®
product
line; and other products currently in development.
Broaden
our product offerings
We
offer
a full range of audio conferencing products, from high-end, professionally
installed audio conferencing systems to conferencing-specific telephones.
We
plan to continue to broaden our product offerings to meet the evolving needs
of
our customers, address changes in the markets we currently serve, and
effectively target new markets for our products.
Develop
strategic partnerships
To
stay
on the leading edge of product development, we plan to continue to identify
partners with technology and expertise in areas strategic to our growth
objectives. We will also work to develop partnerships with leaders in markets
complimentary to conferencing who can benefit from our audio products and
technologies, and through whom we can access new market growth opportunities.
Strengthen
existing customer relationships through dedicated support
We
have
developed outstanding technical and sales support teams that are dedicated
to
providing customers with the best available service and support. We believe
our
technical support is recognized as among the best in the industry, and we
will
continue to invest in the necessary resources to ensure that our customers
have
access to the information and support they need to be successful using our
products.
Markets
and Products
We
currently conduct all our operations in the conferencing products industry.
We
also previously operated in the conferencing services segment until July
1, 2004
when we sold our conferencing services business to American Teleconferencing
Services, Ltd., and in the business services segment until March 4, 2005,
when
we sold the remaining operations in that area to 6351352 Canada Inc. For
additional financial information about our segments see “Note 23. Segment,
Geographic and Revenue Information” to our consolidated financial statements,
which are included in this report.
Products
Segment
The
performance and reliability of our high-quality conferencing products enable
effective and efficient communication between geographically separated
businesses, employees and customers. We offer a full range of audio conferencing
products, from high-end, professionally installed audio conferencing systems
used in executive boardrooms, courtrooms, classrooms and auditoriums, to
conferencing-specific telephones used in small conference rooms and offices.
Our
products feature our proprietary Gentner® Distributed Echo Cancellation® and
noise cancellation technologies to enhance communication during a conference
call by eliminating echo and background noise. They also feature proprietary
audio processing technologies such as adaptive modeling, full duplex,
first-microphone priority and microphone gating, which combine to enable
natural
communication between distant conferencing participants similar to that of
being
in the same room.
7
Principal
drivers of demand for audio conferencing products are: the increasing
availability of easy to use audio conferencing equipment; the improving voice
quality of audio conferencing systems compared to desktop speakerphones;
and the
trend of global, regional and local corporate expansion. Other factors that
we
expect to have a significant impact on the demand for audio conferencing
systems
are the availability of a wider range of affordable audio conferencing products
for small businesses and home offices; the growth of distance learning and
corporate training programs, and the number of teleworkers; the decrease
in the
amount of travel within most enterprises for routine meetings; and the
transition to the Internet Protocol (IP) network from the traditional public
switched telephone network (PSTN). We expect these growth factors to be offset
slightly by direct competition from high-end desktop speakerphones, the
technological volatility of IP-based products and continued pressures on
enterprises to reduce spending.
Professional
Audio Conferencing Products
We
have
been developing high-end, professionally installed audio conferencing products
since 1991 and believe we have established strong brand recognition for these
Professional Audio Conferencing products.
Our
Professional Audio Conferencing products include the XAP®, Audio Perfect® (AP)
and PSR1212 product lines. The XAP® line includes our most powerful,
feature-rich products, with the latest advances in technology and functionality.
It has more processing power than our Audio Perfect® products and contains noise
cancellation technology in addition to our Gentner® Distributed Echo
Cancellation® technology found in the Audio Perfect® product line. The Audio
Perfect® product line offers lower-cost products that still allow users to
experience quality sound in a wide variety of conferencing venues. The PSR1212
is a digital matrix mixer that provides advanced audio processing, microphone
mixing and routing for local sound reinforcement.
The
XAP®,
Audio Perfect® and PSR1212 products are comprehensive audio control systems
designed to excel in the most demanding acoustical environments and routing
configurations. These products are also used for integrating high-quality
audio
with videoconferencing systems.
Out-of-the-Box
Premium Conferencing Systems
In
fiscal
2004, we introduced our RAV™ audio conferencing system. RAV™ is a complete,
out-of-the-box system that includes an audio mixer, loudspeakers, microphones
and a wireless control device. It uniquely combines the sound quality of
a
professionally installed audio system with the simplicity of a conference
phone,
and can be easily connected to industry common rich-media devices, such as
video
or webconferencing systems, to deliver enhanced audio performance.
RAV™
offers many powerful audio processing technologies from our Professional
Audio
Conferencing products without the need for professional installation and
programming. It features Gentner® Distributed Echo Cancellation®, noise
cancellation, microphone gating and a drag-and-drop graphical user interface
for
easy system setup, control and management.
Table
Top Conferencing Phone Systems
In
fiscal
2003, we developed our MAX® line of tabletop conferencing phones. These phones
incorporate the high-end echo cancellation, noise cancellation and audio
processing technologies found in our industry leading professional audio
conferencing products.
The
MAX®
product line is comprised of the MAX® EX, MAX® Wireless, MAXAttach and MAXAttach
wireless tabletop conferencing phones. MAX® Wireless was the first wireless
conferencing phone. Designed for use in executive offices or small conference
rooms with up to eight participants, MAX® Wireless can be moved from room to
room within 150 feet of its base station. MAXAttach is a wired conferencing
phone with unique expansion capabilities. Instead of just adding extension
microphones for use in larger rooms, MAXAttach links up to four complete
phones
together. This provides even distribution of microphones, loudspeakers and
controls for better sound quality and improved user access in medium to large
conference rooms. The MAXAttach wireless is the industry’s first dual unit
wireless conference phone.
8
Other
Products
We
complement our audio conferencing products with microphones, document and
education cameras and conferencing-specific furniture. Our microphones are
designed to improve the audio quality in audio, video and webconferencing
applications. They feature echo cancellation and audio processing technologies
and can be used with personal computers, videoconferencing systems or installed
audio conferencing systems. Our cameras can be used in professional conferencing
or educational settings to enable presentation of materials and images such
as
full-color documents, 3-D objects and images from a variety of sources,
including computers, microscopes, and multimedia devices such as VCR and
DVD
players. Our wide selection of wood, metal and laminate conferencing furniture
features audiovisual carts, plasma screen carts and pedestals, videoconferencing
carts, tables, cabinets and podiums. We also provide custom furniture
design.
Marketing
and Sales
We
sell
our products primarily through a worldwide network of audiovisual, information
technology and telecommunications distributors, who in turn sell our products
to
dealers, systems integrators and value-added resellers. We also sell our
products on a limited basis directly to dealers, systems integrators,
value-added resellers and end users. We use a two-tier distribution model,
in
which we primarily sell our products directly to distributors, who then sell
our
products to independent systems integrators, dealers and value-added resellers,
who in turn work directly with the end users of our products on product
fulfillment and installation. In addition, we regularly participate in
conferencing forums, trade shows and industry promotions.
In
fiscal
2003, approximately $18.6 million, or 68%, of our total product sales were
generated in the United States and product sales of approximately $8.9 million,
or 32%, were generated outside the United States. Revenue from product and
business services customers outside of the United States accounted for
approximately 26% of our total sales from continuing operations for fiscal
2003,
10% for fiscal 2002 and 12% for fiscal 2001. We sell our products in more
than
70 countries worldwide. We anticipate that the portion of our total revenue
from
international sales will continue to increase as we further enhance our focus
on
developing new products, establishing new channel partners, strengthening
our
presence in key growth areas, and improving product localization with
country-specific product documentation and marketing materials.
Distributors
We
sell
our products directly to approximately 90 distributors throughout the world.
Distributors buy our products at a discount to list price and resell them
on a
non-exclusive basis to independent systems integrators, dealers and value-added
resellers. Our distributors maintain their own inventory and accounts
receivable, and are required to provide technical and non-technical support
for
our products to the next level of distribution participants. We work with
our
distributors to establish appropriate inventory stocking levels. We also
work
with our distributors to maintain relationships with our existing systems
integrators, dealers and value-added resellers and to establish new distribution
participant relationships. We also sell our products on a limited basis to
certain systems integrators, dealers and value-added resellers who buy our
products at a discount to list and resell them on a non-exclusive basis to
end
users.
Independent
Integrators and Resellers
Our
distributors sell our products worldwide to approximately 750 independent
systems integrators, dealers and value-added resellers on a non-exclusive
basis.
While dealers, resellers and systems integrators all sell our products directly
to the end users, systems integrators typically add significant value to
each
sale by combining our products with products from other manufacturers as
part of
a complex audiovisual system installation. Dealers and value-added resellers
usually buy our products in large volumes and may bundle our products with
products from other manufacturers for resale to the end user. We maintain
close
working
ties with our distribution participants and offer them education and training
on
our all of our products.
Trade
Shows and Industry Forums
We
regularly attend industry forums and exhibit our products at trade shows
to
ensure our products remain highly visible to distributors and dealers, and
to
keep abreast of market trends.
9
Customers
No
customer accounted for more than 10% of our total revenue during fiscal 2003,
2002 or 2001. In fiscal 2003, revenues in our product segment included sales
to
three distributors that represented approximately 42% of the segment’s revenues.
We currently only report revenues in our product segment and revenues in
that
segment during fiscal 2005 include sales to three distributors that represent
approximately 63% of our revenue. As discussed below, these distributors
facilitate product sales to a large number of end users, none of which is
known
to account for more than 10% of our revenues from product sales. Nevertheless,
the loss of one or more distributors could reduce revenues and have a material
adverse effect on our business and results of operations.
Competition
The
conferencing products market is characterized by intense competition and
rapidly
evolving technology. We have no single competitor for all of our product
and
service offerings, but we compete with various companies with respect to
specific products and services. We believe we compete successfully as a result
of the high quality of our products and technical support services as well
as
the strength of our brand.
With
respect to our products, we believe the principal factors driving sales are
product design, quality and functionality of products, establishment of brand
name recognition, pricing, access to and penetration of distribution channels,
quality of customer support, and a significant customer base.
In
the
audio conferencing systems market, our competitors include Polycom, Biamp
Systems, Sony, Sound Control, Aethra, Cisco and other companies that offer
conferencing systems. According to industry sources, during the 2003 calendar
year, we had the largest share of the installed segment of the conferencing
systems market, which we target with our Professional Audio Conferencing
products. In the markets for our document cameras, competitors include Sony,
Elmo, Ken-a-Vision, Samsung, Wolfvision and other manufacturers. Our microphones
compete with the products of Shure, Audio Technica, Global Media and others.
Our
conferencing furniture products compete primarily with the products of Video
Furniture International, Accuwood and Comlink.
In
each
of the markets in which we compete, most of our competitors may have access
to
greater financial, technical, manufacturing and marketing resources, and
as a
result they could respond more quickly or effectively to new technologies
and
changes in customer preferences. No assurances can be given that we can continue
to compete effectively in the markets we serve.
Product
Development
We
are
committed to research and development, and view our continued investment
in
research and development as a key ingredient to our long-term business success.
Our research and development expenditures were approximately $3.0 million
in
fiscal 2003, $3.8 million in fiscal 2002 and $2.7 million in fiscal
2001.
Our
core
competencies in research and development include many audio technologies,
including telephone echo cancellation, acoustic echo cancellation and noise
cancellation. Our ability to use digital signal processing technology to
perform
audio processing operations is also a core competency. Our research and
development efforts are supported by an internal computer aided design team
that
creates electrical schematics, printed circuit board designs, mechanical
designs
and manufacturing documentation. We believe the technology developed through
this interactive process is critical to the performance of our products.
We also
believe that ongoing development of our core technological competencies is
vital
to maintaining and increasing future sales of our products and to enhancing
new
and existing products.
10
Manufacturing
Prior
to
June 2005, we manufactured and assembled most of our products in our
manufacturing facility located at our corporate headquarters in Salt Lake
City,
Utah. We also subcontracted the manufacture of some products to a third-party
contract manufacturer located in Southeast Asia. We also manufactured and
continue to manufacture our furniture product line in our manufacturing facility
located in Champlin, Minnesota.
We
generally purchase our assembly components from distributors. We also buy
a
limited amount of components directly from fabricators located
near our manufacturing facilities. Many of our suppliers are located in the
United States.
While
it
is our policy to have a minimum of two vendor sources for components, certain
electronic components used in the manufacture of our products can only be
obtained from a single manufacturer and we are solely dependent upon these
manufacturers to deliver such components to our suppliers so that they can
meet
our production needs. We do not have a written commitment from such suppliers
to
fulfill our future requirements. While our suppliers maintain an inventory
of
such components, no assurances can be given that such components will always
be
readily available, available at reasonable prices, available in sufficient
quantities, or delivered in a timely fashion. If such components become
unavailable, it is likely that we will experience delays, which could be
significant, in the production and delivery of our products, unless and until
we
can otherwise procure the required component or components at competitive
prices, if at all, or make product design changes. From time to time, we
experience increased prices and increased lead times on certain of these
key
components that have limited availability. Any lack of availability of these
components could have a material adverse effect on our ability to sell products
and the related increase in prices would likely reduce our profit margins.
Many
of the components utilized by us in our manufacturing process are bonded
by
certain distributors and manufacturers, meaning that the component inventory
will be kept “on-site” at vendor stock locations and managed by the vendors. The
component inventory will then be sold to us on an as-required basis.
On
August
1, 2005, we entered into a Manufacturing Agreement with Inovar, Inc., a
Utah-based electronics manufacturing services provider (“Inovar”), pursuant to
which we agreed to outsource our Salt Lake City manufacturing operations
to
Inovar. The agreement is for an initial term of three years, which shall
automatically be extended for successive and additional terms of one year
each
unless terminated by either party upon 120 days’ advance notice at any time
after the second anniversary of the agreement. The agreement generally provides,
among other things, that Inovar shall: (i) furnish the necessary personnel,
material, equipment, services and facilities to be the exclusive manufacturer
of
substantially all the products that were previously manufactured at our Salt
Lake City, Utah manufacturing facility, and the non-exclusive manufacturer
of a
limited number of products, provided that the total cost to ClearOne (including
price, quality, logistic cost and terms and conditions of purchase) is
competitive; (ii) provide repair service and warranty support and proto-type
services for new product introduction on terms to be agreed upon by the parties;
(iii) purchase certain items of our manufacturing equipment; (iv) lease certain
other items of our manufacturing equipment and have a one-year option to
purchase such leased items; (v) have the right to lease our former manufacturing
employees from a third party employee leasing company; and (vi) purchase
the
parts and materials on hand and in transit at our cost for such items with
the
purchase price payable on a monthly basis when and if such parts and materials
are used by Inovar. The parties also entered into a one-year sublease for
approximately 12,000 square feet of manufacturing space located in our
headquarters in Salt Lake City, Utah, which sublease may be terminated by
either
party upon ninety days’ notice. The agreement provides that products shall be
manufactured by Inovar pursuant to purchase orders submitted by us at purchase
prices to be agreed upon by the parties, subject to adjustment based upon
such
factors as volume, long range forecasts, change orders etc. We also granted
Inovar a right of first refusal to manufacture new products developed by
us at a
cost to ClearOne (including price, quality, logistic cost and terms and
conditions of purchase) that is competitive.
For
risks
associated with our manufacturing strategy please see “Risk Factors” in Item
1.
11
Intellectual
Property and Other Proprietary Rights
We
believe that our success depends in part on our ability to protect our
proprietary rights. We rely on a combination of patent, copyright, trademark
and
trade secret laws and confidentiality procedures to protect our proprietary
rights. The laws of foreign countries may not protect our intellectual property
to the same degree as the laws of the United States.
We
generally require our employees, customers and potential distribution
participants to enter into confidentiality and non-disclosure agreements
before
we disclose any confidential aspect of our technology, services or business.
In
addition, our employees are routinely required to assign to us any proprietary
information, inventions or other technology created during the term of their
employment with us. These precautions may not be sufficient to protect us
from
misappropriation or infringement of our intellectual property.
We
currently have several patents issued or pending covering our conferencing
products and technologies. The expiration dates of issued patents range from
2009 to 2010. We hold registered trademarks for ClearOne, XAP, MAX, AccuMic,
Audio Perfect, Distributed Echo Cancellation, Gentner and others. We have
also
filed for trademarks for RAV and others.
Employees
As
of
July 31, 2005, we had 121 employees, 119 of whom were employed on a full-time
basis, with 47 in sales, marketing and customer support, 40 in product
development, 17 in manufacturing support and 17 in administration, including
finance. None of our employees are subject to a collective bargaining agreement
and we believe our relationship with our employees is good.
Acquisitions
and Dispositions
During
the fiscal year ended June 30, 2001, we completed the acquisition of ClearOne,
Inc., a developer of video conferencing technology and audio conferencing
products. We also completed the sale of the
assets of the remote control portion of our RFM/Broadcast division to Burk
Technology, Inc. During the fiscal year ended June 30, 2002, we completed
the
acquisitions of Ivron Systems, Ltd., a developer of videoconferencing technology
and product, E.mergent, Inc., an integration services provider and manufacturer
of cameras and conferencing furniture, and the sale of our court conferencing
customer list and all contracts relating to our court conferencing services
to
CourtCall LLC. During the fiscal year ended June 30, 2003, we sold our
broadcast telephone interface products, including the digital hybrid and
TS-612
product lines, to Comrex Corporation
and completed the acquisition of Stechyson Electronics Ltd., doing business
as
OM Video, an integration business services company. The total consideration
for
each acquisition was based on negotiations between ClearOne and the acquired
company or its shareholders that took into account a number of factors of
the
business, including historical revenues, operating history, products,
intellectual property and other factors. Each acquisition was accounted for
under the purchase method of accounting. Each acquisition is summarized below
and is discussed in more detail in the footnotes to the audited consolidated
financial statements included in this report.
ClearOne,
Inc. Acquisition. In
May
2000, we entered into an agreement to purchase substantially all of the assets
of ClearOne, Inc. for approximately $3.6 million consisting of $1.8 million
of
cash and 129,871 shares of our restricted common stock valued at $13.97 per
share. The acquisition was consummated on July 5, 2000.
As
of the
acquisition date, we acquired tangible assets consisting of property and
equipment of $473,000, deposits of $59,000, and inventory of $299,000. We
recorded $924,000 of identifiable intangibles, $728,000 of in-process research
and development, and $1.2 million in goodwill, resulting from the difference
between the purchase price plus acquisition costs and the net assets acquired.
We amortized goodwill of $1.2 million on a straight-line basis over four
years
until the adoption of SFAS No. 142 on July 1, 2002. Amortization of goodwill
was
$297,000 for each of the fiscal years ended June 30, 2002 and 2001.
12
We
charged $728,000 to expense representing acquired in-process research and
development that had not yet reached technological feasibility. We anticipated
the technology would require an additional 18 to 20 months of development
at a
minimum cost of $1.2 million. The technology had no alternative future use.
After the acquisition, we initially continued to develop the technology,
however, we experienced significant difficulties in completing the development
of the video conferencing technologies and subsequently determined that the
technology was not viable and never brought the in-process video conferencing
technology to market.
We
continued to sell the acquired teleconferencing product until the fourth
quarter
of the fiscal year ended June 30, 2002. Due to declining sales, negative
margins
beginning in the fourth quarter of the year ended June 30, 2002, and
management’s decision to stop investing in the acquired teleconferencing
product, we determined that a triggering event had occurred in the fourth
quarter of the fiscal year ended June 30, 2002. We performed an impairment
test
and determined that an impairment loss on the ClearOne assets should be
recognized.
Sale
of Assets to Burk Technology.
On April
12, 2001, we sold the assets of the remote control portion of our RFM/Broadcast
division to Burk Technology, Inc. (Burk), a privately held developer and
manufacturer of broadcast facility control systems products. We retained
the
accounts payable of the remote control portion of the RFM/Broadcast division
and
Burk assumed obligations for unfilled customer orders and satisfying warranty
obligations to existing customers and for inventory sold to Burk. However,
we
retained certain warranty obligations to Burk to ensure that all of the assets
sold to Burk were in good operating condition and repair.
Consideration
for the sale consisted of $750,000 in cash at closing, $1.8 million in the
form
of a seven-year promissory note, with interest at the rate of nine percent
per
year, and up to $700,000 as a commission over a period of up to seven years.
The
payments on the promissory note may be deferred based upon Burk not meeting
net
quarterly sales levels established within the agreement. The promissory note
is
secured by a subordinate security interest in the personal property of Burk.
The
gain on the sale is being recognized as cash is collected (as collection
was not
reasonably assured from Burk). The commission is based upon future net sales
of
Burk over base sales established within the agreement. We realized a gain
on the
sale of $200,000 for the 2003 fiscal year, $176,000 for the 2002 fiscal year,
and $123,000 for the 2001 fiscal year. As of June 30, 2003, $1.5 million of
the promissory note remained outstanding and we had received $20,000 in
commissions.
Ivron
Systems, Ltd. Acquisition. On
October 3, 2001, we purchased all of the issued and outstanding shares of
Ivron
Systems, Ltd., of Dublin, Ireland. Under the terms of the original agreement,
the shareholders of Ivron received $6.0 million of cash at closing of the
purchase. As part of the purchase, all outstanding options to purchase Ivron
shares were cancelled in consideration for a cash payment of $650,000. Further,
under that agreement, after June 30, 2002, each former Ivron shareholder
would be entitled to receive approximately .08 shares of our common stock
for
each Ivron share previously held by such shareholder, provided that certain
video product development contingencies were achieved. This represented
approximately 429,000 shares of common stock. Thereafter, for the fiscal
years
ending June 30, 2003 and 2004, the former Ivron shareholders would be entitled
to share in up to approximately $17.0 million of additional cash and stock
consideration provided that certain agreed upon earnings per share targets
were
achieved by us. In addition, former optionees of Ivron who remained with
us were
eligible to participate in a cash bonus program paid by us, based on our
combined performance with Ivron in the fiscal years ending June 30, 2003
and
2004. The maximum amount payable under this cash bonus program was approximately
$1.0 million.
As
of the
acquisition date, we acquired tangible assets consisting primarily of cash
of
$297,000, accounts receivable of $92,000, inventory of $337,000, and property
and equipment of $22,000. We assumed liabilities consisting primarily of
trade
accounts payable of $174,000, and accrued compensation and other accrued
liabilities of $264,000.
On
March
26, 2002, we entered into negotiations with the former shareholders of Ivron
to
modify the terms of the original purchase agreement because, upon further
analysis, certain aspects of the acquired technology did not meet the intended
product objectives established in our original purchase negotiations.
13
The
amendment, which was finalized on April 8, 2002, revised the contingent
consideration that the Ivron shareholders would have been entitled to receive
in
subsequent years so that upon meeting certain gross profit targets for the
“V-There” and “Vu-Link” set-top videoconferencing products, technologies, and
sub-elements thereof (including licensed products), the former Ivron
shareholders had the opportunity to receive up to 109,000 shares of our common
stock, issuable in four installments, on a quarterly basis, through July
15,
2003. No performance targets were met and accordingly no contingent
consideration was or will be paid.
Based
on
the modified purchase price determined under the terms of the amendment,
we
recorded intangible assets of $5.3 million related to developed technology,
$1.1
million related to intellectual property, and goodwill of $218,000. Amortization
expense of $446,000 was recorded for the developed technology for the period
from October 3, 2001 to June 30, 2002. No amortization expense was recorded
for
goodwill. After
the
acquisition, we experienced significant difficulties in selling the acquired
video conferencing products. Due to the phasing out of a product line occasioned
by technological difficulties and negative projected cash flows, we determined
that a triggering event had occurred during the fourth quarter of the fiscal
year ended June 30, 2002. We performed an impairment test and determined
that an
impairment loss on the Ivron assets should be recognized. Subsequent to June
30,
2003, we discontinued selling the “V-There” and “Vu-Link” set-top
videoconferencing products.
Sale
of Court Conferencing Assets. As
part
of our conferencing services segment, our court conferencing customers engaged
in the audio and/or video conferencing of legal proceedings including remote
appearances in state and federal courts and/or administrative tribunals within
the United States. On October 26, 2001, we sold our court conferencing customer
list, including all contracts relating to its court conferencing services
to
CourtCall LLC and recognized a gain of $250,000.
E.mergent
Acquisition. On
May
31, 2002, we completed our acquisition of E.mergent, Inc. pursuant to the
terms
of an Agreement and Plan of Merger dated January 21, 2002 pursuant to which
we
paid $7.3 million of cash and issued 868,691 shares of our common stock valued
at $16.55 per share to the former E.mergent stockholders.
In
addition to the shares of our common stock issued, we assumed all options
to
purchase E.mergent common stock that were vested and outstanding on the
acquisition date. These options were converted into the right to acquire
a total
of 4,158 shares of our common stock at a weighted average exercise price
of
$8.48 per share. A
value
of approximately $49,000 was assigned to these options using the Black-Scholes
option pricing model.
As
of the
acquisition date, we acquired tangible assets consisting primarily of cash
of
$68,000, accounts receivable of $2.2 million, inventory of $3.3 million,
property and equipment of $475,000 and other assets of $1.3 million. We assumed
liabilities consisting primarily of accounts payable of $1.3 million, line
of
credit borrowings of $484,000, unearned maintenance revenue of $873,000,
accrued
compensation (other than severance) and other accrued liabilities of $656,000.
We incurred severance costs of approximately $468,000 related to the termination
of four E.mergent executives and seven other E.mergent employees as a result
of
duplication of positions upon consummation of the acquisition. In June 2002,
$52,000 was paid to such individuals. The severance accrual as of June 30,
2002
of $416,000 was paid during the fiscal year ended June 30, 2003.
We
recorded intangible assets of $1.1 million related to patents, $392,000 related
to customer relationships, $215,000 related to a non-compete agreement, and
goodwill of $17.1 million. Amortization expense of $437,000 was recorded
for the
intangible assets for the period from June 1, 2002 to June 30, 2003. In
accordance with SFAS No. 142, no amortization expense was recorded for goodwill.
Our
management at the time believed the E.mergent acquisition would complement
our
existing operations and our core competencies would allow us to acquire market
share in the audio visual integration industry. However, our entry into the
services business was perceived as a threat by our systems integrators and
value-added resellers, many of whom we began competing against for sales.
In
order to avoid this conflict and maintain good relationships with our systems
integrators and value-added resellers, we decided to stop pursuing new services
contracts in the fourth quarter of the fiscal year ended June 30, 2003 which
was
considered a triggering event for evaluation of impairment. We ultimately
exited
the U.S. audiovisual integration market and subsequently sold our U.S.
audiovisual integration business to M:Space in May of 2004. Although we continue
to sell camera and furniture products acquired from E.mergent, our decision
to
exit the U.S. integration services market adversely affected the future cash
flows of the E.mergent business unit. We determined that a triggering event
occurred in the fourth quarter of the fiscal year ended June 30, 2003. We
performed an impairment test and determined that an impairment loss on certain
E.mergent assets should be recognized.
14
Sale
of Broadcast Telephone Interface Business to Comrex.
On
August 23, 2002, we entered into an agreement with Comrex Corporation (Comrex).
In exchange for $1.3 million, Comrex received certain inventory associated
with
our broadcast telephone interface product line, a perpetual software license
to
use our technology related to broadcast telephone interface products along
with
one free year of maintenance and support, and transition services for 90
days
following the effective date of the agreement. The transition services included
training, engineering assistance, consultation, and development services.
We
recognized $1.1 million in revenue related to this transaction in the fiscal
year ended June 30, 2003.
We
also
entered into a manufacturing agreement to continue to manufacture additional
product for Comrex for one year following the agreement described above on
a
when-and-if needed basis. Comrex agreed to pay the Company for any additional
product on a per item basis of cost plus 30%.
OM
Video Acquisition. On
August
27, 2002, we purchased all of the outstanding shares of Stechyson Electronics
Ltd., doing business as OM Video, an audiovisual integration firm headquartered
in Ottawa, Canada. Under the terms of the agreement, the shareholders of
OM
Video received $6.3 million in cash at closing. During the fiscal years ended
June 30, 2003 and 2004, we paid an additional $500,000 of a potential $600,000
that was held pending verification of certain representations and warranties
made in connection with the acquisition. During the second quarter of fiscal
2003, we also paid $750,000 of a potential $800,000 earn-out provision. No
further payment related to the holdback or contingent consideration will
be
paid.
As
of the
acquisition date, we acquired tangible assets consisting primarily of cash
of
$193,000, accounts receivable of $470,000, inventory of $122,000, property
and
equipment of $145,000 and prepaid expenses of $6,000. We assumed liabilities
consisting primarily of accrued liabilities of $378,000 and accrued tax
liabilities of $221,000. We also obtained a non-competition agreement with
a
term of two years from the former owner of OM Video.
Our
management at the time believed the OM Video acquisition would complement
our
existing operations and our core competencies would allow us to acquire market
share in the audio visual integration industry. However, our entry into the
services business was perceived as a threat by our systems integrators and
value-added resellers, many of whom we began competing against for sales.
In
order to avoid this conflict and maintain good relationships with our systems
integrators and value-added resellers, we deemphasized the audiovisual
integration market serving the Ottawa Canada region beginning in the fourth
quarter of the fiscal year ended June 30, 2003. This decision was considered
a
triggering event for evaluation of impairment. On March 4, 2005, we sold
all of
our Canadian audio visual integration business. On June 30, 2003, we performed
an impairment test and determined that an impairment loss on the OM Video
assets
should be recognized.
Risk
Factors
Investors
should carefully consider the risks described below. The risks described
below
are not the only ones we face, and there are risks that we are not presently
aware of or that we currently believe are immaterial that may also impair
our
business operations. Any of these risks could harm our business. The trading
price of our common stock could decline significantly due to any of these
risks,
and investors may lose all or part of their investment. In assessing these
risks, investors should also refer to the other information contained or
incorporated by reference in this Annual Report on Form 10-K, including our
consolidated financial statements and related notes.
Risks
Relating to Our Business
We
face intense competition in all of the markets for our products and services,
and our operating results will be adversely affected if we cannot compete
effectively against other companies.
As
described in more detail in the section entitled “Competition,” the markets for
our products and services are characterized by intense competition and pricing
pressures and rapid technological change. We compete with businesses having
substantially greater financial, research and development, manufacturing,
marketing, and other resources. If we are not able to continually design,
manufacture, and successfully introduce new or enhanced products or services
that are comparable or superior to those provided by our competitors and
at
comparable or better prices, we could experience pricing pressures and reduced
sales, profit margins, profits, and market share, each of which could have
a
materially adverse effect on our business.
15
Difficulties
in estimating customer demand in our products segment could harm our profit
margins.
Orders
from our distributors and other distribution participants are based on demand
from end-users. Prospective end user demand is difficult to measure. This
means
that our revenues in any fiscal quarter could be adversely impacted by low
end
user demand, which could in turn negatively affect orders we receive from
distributors and dealers. Our expectations for both short- and long-term
future
net revenues are based on our own estimates of future demand.
Revenues
for any particular time period are difficult to predict with any degree of
certainty. We usually ship products within a short time after we receive
an
order; so consequently, backlog has not been a good indicator of future
revenues. We believe that the current level of backlog will fluctuate dependent
in part on our ability to forecast revenue mix and plan our manufacturing
accordingly. A significant portion of our customers’ orders are received in the
last month of the quarter. We budget the amount of our expenses based on
our
revenue estimates. If our estimates of sales are not accurate and we experience
unforeseen variability in our revenues and operating results, we may be unable
to adjust our expense levels accordingly and our profit margins will be
adversely affected.
Our
profitability may be adversely affected by our continuing dependence on our
distribution channels.
We
market
our products primarily through a network of distributors
who in turn sell our products to systems integrators, dealers and value-added
resellers.
All of
our agreements with such distributors
and other distribution participants are
non-exclusive, terminable at will by either party and generally short-term,
with
the exception of one exclusive installed audio distribution agreement for
the
United Kingdom and Southern Ireland. No assurances can be given that any
or all
such distributors or other distribution participants will continue their
relationship with us. Distributors and to a lesser extent systems integrators,
dealers and value-added resellers cannot easily be replaced and the loss
of
revenues and our inability to reduce expenses to compensate for the loss
of
revenues could adversely affect our net revenues and profit
margins.
Although
we rely on our distribution channels to sell our products, our distributors
and other distribution participants are
not
obligated to devote any specified amount of time, resources or efforts to
the
marketing of our products or to sell a specified number of our products.
There
are no prohibitions on distributors or other resellers offering products
that
are competitive with our products and most do offer competitive products.
The
support of our products by distributors
and other distribution participants may
depend on the competitive strength of our products and the price incentives
we
offer for their support. If our distributors
and other distribution participants are
not
committed to our products, our revenues and profit margins may be adversely
affected.
General
economic conditions may have an adverse impact on our
revenues.
General
economic conditions have, in the past, and may continue to lead to reductions
in
capital expenditures on technology by end user customers of our products.
While
there have been indications of improvement in the global economy and its
impact
on technology spending, constraints still exist and may have an adverse impact
on our future revenues.
We
depend on a limited number of suppliers for components and the inability
to
obtain sufficient supplies of components could adversely affect our product
sales.
While
it
is our policy to have a minimum of two vendor sources for components, certain
components used in the manufacture of our products can only be obtained from
a
single manufacturer and we are solely dependent upon these manufacturers
to
deliver such components to our suppliers so that they can meet our delivery
schedules. We do not have a written commitment from such suppliers to fulfill
our future requirements. While our suppliers maintain an inventory of such
components, no assurances can be given that such components will always be
readily available, available at reasonable prices, available in sufficient
quantities, or delivered in a timely fashion. If such components become
unavailable, it is likely that we will experience delays, which could be
significant, in the production and delivery of our products, unless and until
we
can otherwise procure the required component or components at competitive
prices, if at all. We have experienced increased prices and increased lead
times
on certain of these key components that have limited availability. Any lack
of
availability of these components could have a material adverse effect on
our
ability to sell products and the related increase in prices would likely
reduce
our profit margins.
16
Furthermore,
suppliers of some of these components may become our competitors, which might
also affect the availability of key components to us. It is possible that
other
components required in the future may necessitate custom fabrication in
accordance with specifications developed or to be developed by us. Also,
in the
event we, or any of the manufacturers whose products we expect to utilize
in the
manufacture of our products, are unable to develop or acquire components
in a
timely fashion, our ability to achieve production yields, revenues and net
income may be adversely affected.
Product
obsolescence could harm demand for our products and could adversely affect
our
revenues and our results of operations.
Our
industry is subject to rapid and frequent technological innovations that
could
render existing technologies in our products obsolete and thereby decrease
market demand for such products. If any of our products become slow-moving
or
obsolete and the recorded value of our inventory is greater than its market
value, we will be required to write-down the value of our inventory to its
fair
market value, which would adversely affect our results of
operations.
Product
development delays or defects could harm our competitive position and reduce
our
revenues.
We
have,
in the past, and may again experience technical difficulties and delays with
the
development and introduction of new products. The products we develop contain
sophisticated and complicated components and utilize manufacturing techniques
involving new technologies. Potential difficulties in the development process
that could be experienced by us include difficulty in:
|
·
|
meeting
required specifications;
|
|
·
|
hiring
a sufficient number of developers;
|
|
·
|
developing
and testing products; and
|
|
·
|
achieving
necessary manufacturing efficiencies.
|
Once
new
products reach the market, they may have defects, which could adversely affect
market acceptance of these products and our reputation. If we are not able
to
manage and minimize such potential difficulties, our business could be
negatively affected.
If
we
are unable to protect our intellectual property rights or have insufficient
proprietary rights, our business would be materially impaired.
We
currently rely primarily on a combination of trade secrets, copyrights,
trademarks, patents and nondisclosure agreements to establish and protect
our
proprietary rights in our products. No assurances can be given that others
will
not independently develop similar technologies, or duplicate or design around
aspects of our technology. In addition, we cannot assure you that any patent
or
registered trademark owned by us will not be invalidated, circumvented or
challenged or that the rights granted thereunder will provide competitive
advantages to us. Litigation may be necessary to enforce our intellectual
property rights. We believe our products and other proprietary rights do
not
infringe upon any proprietary rights of third parties. We cannot assure you,
however, that third parties will not assert infringement claims in the future.
Our industry is characterized by vigorous protection of intellectual property
rights. Such claims and litigation are expensive and could divert management’s
attention, regardless of their merit. In the event of a claim, we might be
required to license third party technology or redesign our products, which
may
not be possible or economically feasible.
We
currently hold only a limited number of patents. To the extent that we have
patentable technology for which we have not filed patent applications, others
may be able to use such technology or even gain priority over us by patenting
such technology themselves.
17
International
sales account for a significant portion of our net revenue and risks inherent
in
international sales could harm our business.
International
sales represent a significant portion of our total sales from continuing
operations. For example, international sales represented 26% of our total
sales
from continuing operations for fiscal 2003, 10% for fiscal 2002 and 12% for
fiscal 2001. We anticipate that the portion of our total revenue from
international sales will continue to increase as we further enhance our focus
on
developing new products, establishing new distribution partners, strengthening
our presence in key growth areas, and improving product localization with
country-specific product documentation and marketing materials. Our
international business is subject to the financial and operating risks of
conducting business internationally, including:
|
·
|
unexpected
changes in, or the imposition of, additional legislative or regulatory
requirements;
|
|
·
|
fluctuating
exchange rates;
|
|
·
|
tariffs
and other barriers;
|
|
·
|
difficulties
in staffing and managing foreign subsidiary operations;
|
|
·
|
export
restrictions;
|
|
·
|
greater
difficulties in accounts receivable collection and longer payment
cycles;
|
|
·
|
potentially
adverse tax consequences; and
|
|
·
|
potential
hostilities and changes in diplomatic and trade
relationships.
|
Our
sales
in the international market are denominated in U.S. Dollars, with the exception
of sales through our wholly owned subsidiary, ClearOne Communications of
Canada,
Inc. (ClearOne Canada d.b.a. OM Video), whose sales were denominated in Canadian
Dollars until March 4, 2005, when the subsidiary was sold to a third party.
Consolidation of ClearOne Canada’s financial statements with ours, under U.S.
generally accepted accounting principles, required remeasurement of the amounts
stated in ClearOne Canada’s financial statements to U.S. Dollars, which was
subject to exchange rate fluctuations. We did not undertake hedging activities
that might protect us against such risks.
We
may not be able to hire and retain highly skilled employees, which could
affect
our ability to compete effectively and may cause our revenue and profitability
to decline.
We
depend
on highly skilled technical personnel to research and develop, market and
service new and existing products. To succeed, we must hire and retain employees
who are highly skilled in the rapidly changing communications and Internet
technologies. Individuals who have the skills and can perform the services
we
need to provide our products and services are in great demand. Because the
competition for qualified employees in our industry is intense, hiring and
retaining employees with the skills we need is both time-consuming and
expensive. We might not be able to hire enough skilled employees or retain
the
employees we do hire. Our inability to hire and retain employees with the
skills
we seek could hinder our ability to sell our existing products, systems,
or
services or to develop new products, systems, or services with a consequent
adverse effect on our business.
Our
reliance on third-party technology or license agreements.
We
have
licensing agreements with various suppliers for software and hardware
incorporated into our products. These third-party licenses may not continue
to
be available to us on commercially reasonable terms, if at all. The termination
or impairment of these licenses could result in delays of current product
shipments or delays or reductions in new product introductions until equivalent
designs could be developed, licensed and integrated, if at all possible,
which
would have a material adverse effect on our business.
18
Our
reliance on international outsource manufacturing strategy.
We
have
an agreement with an international manufacturer for the manufacture of our
MAX®
product line. We use a facility in China. Should there be any disruption
in
services due to natural disaster, economic or political difficulties in China,
quarantines or other restrictions associated with infectious diseases, or
other
similar events, or any other reason, such disruption would have a material
adverse effect on our business. A delay in shipping these products due to
an
interruption in the manufacturer’s operations would have a negative impact on
our revenues. Operating in the international environment exposes us to certain
inherent risks, including unexpected changes in regulatory requirements and
tariffs, and potentially adverse tax consequences, which could materially
affect
our results of operations.
Our
sales depend to a certain extent on government funding and
regulation.
In
the
conferencing market, the revenues generated from sales of our audio conferencing
products for distance learning and courtroom facilities are dependent on
government funding. In the event government funding for such initiatives
was
reduced or became unavailable, our sales could be negatively impacted.
Additionally, many of our products are subject to governmental regulations.
New
regulations could significantly impact sales in an adverse manner.
We
may have difficulty in collecting outstanding receivables.
We
grant
credit without requiring collateral to substantially all of our customers.
If
there were a recurrence of economic uncertainty or an economic slowdown,
the
risks relating to the granting of such credit would increase. Although we
monitor and mitigate the risks associated with our credit policies, we cannot
assure you that such mitigation will be effective. We have experienced losses
due to customers failing to meet their obligations. Future losses could be
significant and, if incurred, could harm our business and have a material
adverse effect on our operating results and financial condition.
Interruptions
to our business could adversely affect our operations.
As
with
any company, our operations are at risk of being interrupted by earthquake,
fire, flood, and other natural and human-caused disasters, including terrorist
attacks and disease. Our operations are also at risk of power loss,
telecommunications failure, and other infrastructure and technology based
problems. To help guard against such risks, we carry business interruption
loss
insurance with coverage of up to $5.4 million to help compensate us for losses
that may occur.
Risks
Relating to Our Company
Many
of our officers and key personnel have recently joined the company or have
only
worked together for a short period of time.
We
have
recently made several significant changes to our senior management. In July
2004
we named a new President and Chief Executive Officer, who had been serving
as
our Vice President of Product Development since December 2003. In addition
we
hired a new Chief Financial Officer in July 2004, a Vice President of Worldwide
Sales and Marketing in November 2004, a Vice President of Operations in December
2004. In January 2005, we named a new Vice President of Product Line Management,
who had been serving as our Director of Research and Development. As a result
of
these recent changes in senior management, many of our officers and other
key
personnel have only worked together for a short period of time. The failure
to
successfully integrate senior management could have an adverse impact on
our
business operations, including reduced sales, confusion with our channel
partners and delays in new product introductions.
We
are not current in the filing of reports with the SEC and the SEC could initiate
enforcement proceedings against us at any time.
We
are
not current in the filing of reports with the SEC and the SEC could initiate
enforcement proceedings against us at any time, including proceedings to
suspend
trading of our securities.
19
Our
directors
and officers own 19.6% of the Company and may exert control over
us.
Our
officers and directors together have beneficial ownership of approximately
19.6%
of our common stock (including options that are currently exercisable or
exercisable within 60 days of July 31, 2005). With this significant holding
in
the aggregate, the officers and directors, acting together, could exert control
over us and may be able to delay or prevent a change in control.
Our
stock price fluctuates as a result of the conduct of our business and stock
market fluctuations.
The
market price of our common stock has experienced significant fluctuations
and
may continue to fluctuate significantly. The market price of our common stock
may be significantly affected by a variety of factors, including:
|
·
|
statements
or changes in opinions, ratings or earnings estimates made by brokerage
firms or industry analysts relating to the market in which we do
business
or relating to us specifically;
|
|
·
|
disparity
between our reported results and the projections of
analysts;
|
|
·
|
the
announcement of new products or product enhancements by us or our
competitors;
|
|
·
|
technological
innovations by us or our
competitors;
|
|
·
|
quarterly
variations in our results of
operations;
|
|
·
|
general
market conditions or market conditions specific to technology industries;
|
|
·
|
domestic
and international economic
conditions;
|
|
·
|
our
ability to report financial information in a timely manner;
and
|
|
·
|
the
markets in which our stock is
traded.
|
|
ITEM
2.
|
PROPERTIES
|
Our
principal administrative, sales, marketing, customer support and research
and
development facility is located in our headquarters in Salt Lake City, Utah.
Most of our product manufacturing and warehousing operations are also located
in
our Salt Lake City headquarters. We currently occupy a 51,760 square-foot
facility under the terms of an operating lease expiring in October 2006.
We
believe the facility will be reasonably adequate to meet our needs for the
next
12 months.
From
July
1, 2004 through February 28, 2005, we sublet 5,416 square feet of space in
our
headquarters building to Premiere Conferencing, the purchaser of our
conferencing services business. On August 1, 2005, we entered into a one-year
sublease with Inovar, Inc. with respect to the 12,000 square foot manufacturing
facility in our headquarters building in connection with the outsourcing
of our
manufacturing operations. Such space had been provided to Inovar on a rent-free
basis from June 20 to July 31, 2005, pending execution of definitive agreements.
Our
conference furniture manufacturing and warehousing operations are conducted
from
a facility totaling 17,520 square feet located in Champlin, Minnesota. We
lease
this facility under a lease agreement that expires in September 2007. We
believe
the facility will be reasonably adequate to meet our needs for the next 12
months.
Our
wholly owned United Kingdom subsidiary, ClearOne Communications Limited,
rents
an office in Oxfordshire, England, consisting of 250 square feet. The office
space is rented under a managed office arrangement which requires 90 days
notice
to terminate the agreement.
Our
wholly owned subsidiary, ClearOne Communications of Canada, Inc. d/b/a OM
Video,
leased a facility in Ottawa, Canada consisting of 16,190 square feet. We
leased
this facility under a lease agreement that expires in July 2005. As discussed
herein, we sold this subsidiary in March 2005.
20
Our
wholly owned subsidiary, ClearOne Communications EuMEA, GmbH, leased an office
in Nuremberg, Germany, consisting of 200 square meters. This office was closed
in December 2004 and the lease was terminated.
We
previously rented sales offices located in Des Moines, Iowa on a month-to-month
basis but such leases were terminated in December 2002. We also leased a
sales
office in Westmont, Illinois pursuant to a lease that expired in July 2004.
Our
U.S.
business services operations were conducted from a facility totaling 25,523
square feet located in Golden Valley, Minnesota. We leased these facilities
under a lease agreement that expired in December 2004. We negotiated an early
buyout of the lease effective June 2004.
We
leased
an office in Woburn, Mass. that we initially acquired through the purchase
of
ClearOne, Inc. in July 2000. The facility consisted of 2,206 square feet.
We
negotiated an early buyout of the lease effective September 2003.
Our
wholly owned subsidiary, Gentner Communications Limited, leased an office
in
Dublin, Ireland for research and development related to video conferencing.
The
facility consisted of 431 square meters, of which we sublet 129 square meters
to
a third party effective July 2002. We negotiated an early buyout of the lease
effective November 2002.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
In
addition to the legal proceedings described below, we are also involved from
time to time in various claims and other legal proceedings which arise in
the
normal course of our business. Such matters are subject to many uncertainties
and outcomes that are not predictable. However, based on the information
available to us today, we do not believe any such other proceedings will
have a
material, adverse effect on our financial condition or results of
operations.
The
SEC Action.
On
January 15, 2003, the U.S. Securities and Exchange Commission filed a civil
complaint against ClearOne, Frances Flood, then ClearOne’s Chairman, Chief
Executive Officer and President, and Susie Strohm, then ClearOne’s Chief
Financial Officer, in the U.S. District Court for the District of Utah, Central
Division. The complaint alleged that from the quarter ended March 31, 2001,
the
defendants engaged in a program of inflating ClearOne’s revenues, net income and
accounts receivable by engaging in improper revenue recognition in violation
of
generally accepted accounting principles (GAAP), and Section 17(a) of the
Securities Act of 1933 and Sections 10(b), 13(a) and 13(b) of the Securities
Exchange Act of 1934, and various regulations promulgated thereunder. Following
the filing of the complaint, we placed Ms. Flood and Ms. Strohm on
administrative leave and they subsequently resigned from their positions
with
the Company. On December 4, 2003, we settled the SEC action by entering into
a
consent decree in which, without admitting or denying the allegations of
the
complaint, we consented to the entry of a permanent injunction prohibiting
future securities law violations. No fine or penalty was assessed against
the
Company as part of the settlement.
On
February 20, 2004, Ms. Flood and Ms. Strohm settled the SEC action by entering
into consent decrees wherein, without admitting or denying the allegations
of
the complaint, they each consented to the entry of a permanent injunction
prohibiting future violations of the antifraud, reporting, and issuer books
and
records requirements of the federal securities laws. The order against Ms.
Flood
also provided for disgorgement in the amount of $71,000 along with prejudgment
interest of $2,882, a civil penalty in the amount of $71,000, and prohibited
Flood from acting as an officer or director of any issuer that has a class
of
securities registered pursuant to Section 12 of the Exchange Act or that
is
required to file reports pursuant to Section 15(d) of the Exchange Act. The
order against Ms. Strohm also provided for disgorgement in the amount of
$25,000
together with prejudgment interest in the amount of $1,015 and a civil penalty
in the amount of $25,000. The final settlement of the SEC action as to Ms.
Flood
and Ms. Strohm satisfied the condition precedent contained in the employment
separation agreements entered into by the Company with each of such persons
on
December 5, 2003 (See Item 11. Executive Compensation: Employment Contracts
and
Termination of Employment and Change-in-Control Agreements).
21
The
Whistleblower Action.
On
February 11, 2003, our former vice president of sales filed a whistleblower
claim with the Occupational Safety and Health Administration (OSHA) under
the
employee protection provisions of the Sarbanes-Oxley Act alleging that the
Company had wrongfully terminated his employment for reporting the Company’s
alleged improper revenue recognition practices to the SEC in December 2002,
which precipitated the SEC action against the Company. In February 2004,
OSHA
issued a preliminary order in favor of the former officer, ordering that
he be
reinstated with back pay, lost benefits, and attorney’s fees. The former officer
had also filed a separate lawsuit against the Company in the United States
District Court for the District of Utah, Central Division, alleging various
employment discrimination claims. In May 2004, the Administrative Law Judge
approved a settlement agreement with the former officer pursuant to which
he
released the Company from all claims asserted by him in the OSHA proceeding
and
the federal court action in exchange for a cash payment by the Company. The
settlement did not have a material impact on the Company's results of operations
or financial condition.
The
Shareholders’ Class Action.
On
June 30, 2003, a Consolidated Complaint was filed in the U.S. District
Court for the District of Utah, Central Division, against the Company, eight
present or former officers and directors of the Company, and Ernst & Young
LLP (Ernst & Young), the Company’s former independent registered public
accountants, by a class consisting of purchasers of the Company’s common stock
during the period from April 17, 2001 through January 15, 2003. The action
followed the consolidation of several previously filed class action complaints
and the appointment of lead counsel for the class. The allegations in the
complaint were essentially the same as those contained in the SEC complaint
described above. On December 4, 2003, the Company, on behalf of itself and
all
other defendants with the exception of Ernst & Young, entered into a
settlement agreement with the class pursuant to which we agreed to pay the
class
$5.0 million and issue the class 1.2 million shares of our common stock.
The
cash payment was made in two equal installments, the first on November 10,
2003
and the second on January 14, 2005. On May 23, 2005, the court order was
amended
to provide that odd-lot numbers of shares (99 or fewer shares) will not be
issued from the settlement fund and claimants who would otherwise be entitled
to
receive 99 or fewer shares will be paid cash in lieu of such odd-lot number
of
shares. As of the date hereof, 228,000 shares of our common stock have been
issued to the class and we plan to complete the issuance of the remaining
shares
in the near future in accordance with the terms of the court order, subject
to
the receipt of any required approvals from state regulatory
authorities.
The
Shareholder Derivative Actions.
Between
March and August, 2003, four shareholder derivative actions were filed in
the Third Judicial District Court of Salt Lake County, State of Utah, by
certain
shareholders of the Company against various present and past officers and
directors of the Company and against Ernst & Young. The complaints asserted
allegations similar to those asserted in the SEC action and shareholders’ class
action described above and also alleged that the defendant directors and
officers violated their fiduciary duties to the Company by causing or allowing
the Company to recognize revenue in violation of GAAP and issue materially
misstated financial statements, and that Ernst & Young breached its
professional responsibilities to the Company and acted in violation of GAAP
and
generally accepted accounting standards by failing to identify or prevent
the
alleged revenue recognition violations and by issuing unqualified audit opinions
with respect to the Company’s 2002 and 2001 financial statements. One of these
actions was dismissed without prejudice on June 13, 2003. As to the other
three actions, our board of directors appointed a special litigation committee
of independent directors to evaluate the claims. That committee determined
that
the maintenance of the derivative proceedings against the individual defendants
was not in the best interest of the Company. Accordingly, on December 12,
2003,
we moved to dismiss those claims. In March 2004, our motions were granted,
and the derivative claims were dismissed with prejudice as to all defendants
except Ernst & Young. The Company was substituted as the plaintiff in the
action and is now pursuing in its own name the claims against Ernst & Young.
22
The
Insurance Coverage Action. On
February 9, 2004, ClearOne and Edward Dallin Bagley (Bagley), a director
and significant shareholder of ClearOne, jointly filed an action in the United
States District Court for the District of Utah, Central Division, against
National Union Fire Insurance Company of Pittsburgh, Pennsylvania and Lumbermens
Mutual Insurance Company, the carriers of certain prior period directors
and
officers liability insurance policies, to recover the costs of defending
and
resolving claims against certain of our present and former directors and
officers in connection with the SEC action, the shareholders’ class action and
the shareholder derivative actions described above, and seeking other damages
resulting from the refusal of such carriers to timely pay the amounts owing
under such liability insurance policies. This action has been consolidated
into
a declaratory relief action filed by one of the insurance carriers on
February 6, 2004 against ClearOne and certain of its current and former
directors. In this action, the insurers assert that they are entitled to
rescind
insurance coverage under our directors and officers’ liability insurance
policies, $3.0 million of which was provided by National Union and $2.0 million
which was provided by Lumbermens Mutual, based on alleged misstatements in
our
insurance applications. In February 2005, we entered into a confidential
settlement agreement with Lumbermens Mutual pursuant to which ClearOne and
Bagley received a lump sum cash amount and the plaintiffs agreed to dismiss
their claims against Lumbermens Mutual with prejudice. The cash settlement
will
be held in a segregated account until the claims involving National Union
have
been resolved, at which time the amounts received in the action will be
allocated among the Company and Bagley. The amount distributed to the Company
and Bagley will be determined based on future negotiations between the Company
and Bagley. We are vigorously pursuing our claims against National Union
although no assurances can be given that we will be successful. ClearOne
and
Bagley have entered into a Joint Prosecution and Defense Agreement in connection
with the action.
The
Pacific Technology & Telecommunications Collection Action.
On
August 12, 2003, we initiated a commercial arbitration proceeding against
Pacific Technology & Telecommunications (PT&T), a former distributor,
seeking to collect approximately $1.8 million that PT&T owed ClearOne for
inventory purchased but not paid for. PT&T denied our claim and asserted
counterclaims. Subsequently, on April 20, 2004, PT&T filed for
protection under Chapter 7 of the United States Bankruptcy Code, which had
the
effect of staying the proceeding. Following PT&T’s bankruptcy filing, the
Company successfully negotiated a settlement with the bankruptcy trustee.
Under
the settlement, which has been approved by the bankruptcy court, the Company
paid $25,000 and obtained the right to recover all unsold ClearOne inventory
held by PT&T and the right to pursue on the basis of an assignment any
claims that PT&T may have against any of its own officers or directors,
subject, however, to a maximum recovery of $800,000. The Company is currently
in
the process of investigating whether any such claims exist and, if so, whether
it would be in the Company’s best interest to pursue them given the anticipated
legal expenses and the uncertainties of being able to collect any resulting
favorable judgment. The settlement also resulted in the release and dismissal
with prejudice of all of PT&T’s claims against the Company. To date, the
Company has not recovered any inventory held by PT&T.
U.S.
Attorney’s Investigation. As
previously announced on January 28, 2003, the Company has been advised that
the
U.S. Attorney’s Office for the District of Utah has begun an investigation
stemming from the complaint in the SEC action described above. No pleadings
have
been filed to date and the Company is cooperating fully with the U.S. Attorney’s
Office.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No
matter
was submitted to a vote of our security holders during the fourth quarter
ended
June 30, 2003.
23
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Market
Information
Our
common stock traded under the symbol CLRO on the Nasdaq National Market System
(“NASDAQ”) until April 21, 2003. Our shares were delisted from NASDAQ effective
as of the opening of trading on April 21, 2003, due to our failure to timely
file SEC reports and public interest concerns relating to the SEC complaint
filed on January 15, 2003. Since April 21, 2003, our common stock has been
traded on the National Quotation Bureau’s Pink Sheets under the symbol “CLRO.”
The following table sets forth the high and low sales prices for the common
stock for each quarter during the last three fiscal years. On August 10,
2005,
the closing price for our common stock on the Pink Sheets was
$3.95.
|
2001
|
Market
|
High
|
Low
|
|||||||
|
First
Quarter
|
NASDAQ
|
$
|
17.13
|
$
|
12.00
|
|||||
|
Second
Quarter
|
NASDAQ
|
16.44
|
8.50
|
|||||||
|
Third
Quarter
|
NASDAQ
|
15.69
|
9.75
|
|||||||
|
Fourth
Quarter
|
NASDAQ
|
14.30
|
9.50
|
|||||||
|
2002
|
High
|
Low
|
||||||||
|
First
Quarter
|
NASDAQ
|
$
|
18.72
|
$
|
9.80
|
|||||
|
Second
Quarter
|
NASDAQ
|
22.94
|
15.03
|
|||||||
|
Third
Quarter
|
NASDAQ
|
18.99
|
12.30
|
|||||||
|
Fourth
Quarter
|
NASDAQ
|
18.80
|
13.25
|
|||||||
|
2003
|
High
|
Low
|
||||||||
|
First
Quarter
|
NASDAQ
|
$
|
14.69
|
$
|
3.31
|
|||||
|
Second
Quarter
|
NASDAQ
|
5.45
|
2.82
|
|||||||
|
Third
Quarter
|
NASDAQ/Pink
Sheets
|
4.68
|
1.38
|
|||||||
|
Fourth
Quarter
|
Pink
Sheets
|
3.05
|
0.09
|
|||||||
Shareholders
As
of
July 29, 2005, there were 451 shareholders of record of our common stock,
including broker dealers and clearing corporations who hold shares for their
customers, each of which is counted as a single shareholder.
Dividends
We
have
not paid a cash dividend on our common stock and do not anticipate doing
so in
the foreseeable future. We intend to retain earnings to fund future capital
requirements, growth and product development.
Equity
Compensation Plan Information
The
following table sets forth information as of June 30, 2003 with respect to
compensation plans under which equity securities of ClearOne are authorized
for
issuance.
24
|
Number
of securities to be issued upon exercise of outstanding options,
warrants,
and rights
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
||||
|
(a)
|
(b)
|
(
c )
|
||||
|
Equity
compensation plans approved by security holders
|
2,122,756
|
$6.89
|
496,668
|
|||
|
Equity
compensation plans not approved by security holders
|
0
|
0.00
|
0
|
|||
|
Total
|
2,122,756
|
$6.89
|
496,668
|
Stock
Repurchase program.
During
fiscal 2001, we repurchased 20,300 shares of our common stock on the open
market
at prices ranging from $10.58 to $14.16, for an aggregate purchase price
of
$244,000. All repurchased shares were retired. This stock repurchase program
expired in October 2001.
During
fiscal 2003, we repurchased 125,000 shares on the open market at prices ranging
from $3.06 to $3.60, for an aggregate purchase price of $430,000. All
repurchased shares were retired. This stock repurchase program expired in
October 2003 and we have not repurchased any additional securities since
that
time.
Private
Placement of Common Stock.
On
December 11, 2001, we completed a private placement of 1,500,000 shares of
our
common stock, from which we received net proceeds of approximately $23.8
million, after deducting costs and expenses associated with the private
placement. In connection with the offering, we issued warrants to the placement
agent entitling it to purchase up to 150,000 shares of our common stock at
an
exercise price of $17.00 per share through November 27, 2006.
ITEM
6. SELECTED
FINANCIAL DATA
The
following selected financial data has been derived from our audited Consolidated
Financial Statements. For the fiscal years ended June 30, 2002 and 2001,
the
data in the table below is restated to reflect the restatement of results
for
those years (see below and Note 3. Restatement and reclassifications of
previously issued financial statements in Item 8 of this report). For the
fiscal years ended June 30, 2000 and 1999, the selected financial data in
the
table below is presented on an unaudited basis, to reflect prior period
adjustments resulting from the re-audit of subsequent fiscal years. The results
presented below for the fiscal years ended June 30, 2000 and 1999 have not
been
re-audited and are unaudited. The information set forth below is not necessarily
indicative of results of future operations, and should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements and related notes thereto
included elsewhere in this Form 10-K.
25
SELECTED
CONSOLIDATED FINANCIAL DATA
(in
thousands, except share data)
|
Years
Ended June 30,
|
||||||||||||||||
|
2003
|
2002
|
2001
|
2000
|
1999
|
||||||||||||
|
(restated)
|
(restated)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
|
Operating
results:
|
||||||||||||||||
|
Net
revenue
|
$
|
57,585
|
$
|
43,362
|
$
|
34,137
|
$
|
27,918
|
$
|
20,268
|
||||||
|
Costs
and expenses:
|
||||||||||||||||
|
Cost
of goods sold
|
35,301
|
22,172
|
15,133
|
11,175
|
8,908
|
|||||||||||
|
Marketing
and selling
|
12,187
|
10,739
|
7,711
|
6,200
|
4,313
|
|||||||||||
|
General
and administrative
|
18,011
|
5,345
|
4,198
|
3,214
|
2,545
|
|||||||||||
|
Product
development
|
2,995
|
3,810
|
2,747
|
1,271
|
1,195
|
|||||||||||
|
Impairment
losses
|
26,001
|
7,115
|
-
|
-
|
-
|
|||||||||||
|
Gain
on sale of assets
|
-
|
(250
|
)
|
-
|
-
|
-
|
||||||||||
|
Purchased
in-process research and development
|
-
|
-
|
728
|
-
|
-
|
|||||||||||
|
Operating
income (loss)
|
(36,910
|
)
|
(5,569
|
)
|
3,620
|
6,058
|
3,307
|
|||||||||
|
Other
income (expense)
|
(96
|
)
|
132
|
188
|
153
|
(78
|
)
|
|||||||||
|
Income
(loss) from continuing operations before income taxes
|
(37,006
|
)
|
(5,437
|
)
|
3,808
|
6,211
|
3,229
|
|||||||||
|
Provision
(benefit) for income taxes
|
(834
|
)
|
1,400
|
1,050
|
2,229
|
1,209
|
||||||||||
|
Income
(loss) from continuing operations
|
(36,172
|
)
|
(6,837
|
)
|
2,758
|
3,982
|
2,020
|
|||||||||
|
Income
from discontinued operations, net of applicable income
taxes
|
-
|
-
|
737
|
427
|
524
|
|||||||||||
|
Gain
on disposal of business segment, net of applicable income
taxes
|
200
|
176
|
123
|
-
|
-
|
|||||||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
$
|
4,409
|
$
|
2,544
|
||||
|
Earnings
(loss) per common share:
|
||||||||||||||||
|
Basic
earnings (loss) from continuing operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.32
|
$
|
0.48
|
$
|
0.25
|
||||
|
Diluted
earnings (loss) from continuing operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.30
|
$
|
0.46
|
$
|
0.24
|
||||
|
Basic
earnings from discontinued operations
|
$
|
0.02
|
$
|
0.02
|
$
|
0.10
|
$
|
0.05
|
$
|
0.06
|
||||||
|
Diluted
earnings from discontinued operations
|
$
|
0.02
|
$
|
0.02
|
$
|
0.09
|
$
|
0.04
|
$
|
0.06
|
||||||
|
Basic
earnings (loss)
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
$
|
0.53
|
$
|
0.31
|
||||
|
Diluted
earnings (loss)
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
$
|
0.50
|
$
|
0.30
|
||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
11,183,339
|
9,588,118
|
8,593,725
|
8,269,941
|
8,080,536
|
|||||||||||
|
Diluted
|
11,183,339
|
9,588,118
|
9,194,009
|
8,740,209
|
8,468,884
|
|||||||||||
|
As
of June 30,
|
||||||||||||||||
|
2003
|
2002
|
2001
|
2000
|
1999
|
||||||||||||
|
(restated)
|
(restated)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
|
Financial
data:
|
||||||||||||||||
|
Current
assets
|
$
|
26,917
|
$
|
36,312
|
$
|
17,604
|
$
|
15,116
|
$
|
9,282
|
||||||
|
Property,
plant and equipment, net
|
6,768
|
8,123
|
5,681
|
3,050
|
2,126
|
|||||||||||
|
Total
assets
|
35,276
|
63,876
|
25,311
|
18,220
|
11,519
|
|||||||||||
|
Long-term
debt, net of current maturities
|
931
|
-
|
-
|
-
|
-
|
|||||||||||
|
Capital
leases, net of current maturities
|
1,215
|
2,016
|
1,680
|
230
|
455
|
|||||||||||
|
Total
stockholders' equity
|
18,743
|
53,892
|
20,728
|
15,073
|
8,352
|
|||||||||||
Quarterly
Financial Data (Unaudited)
The
financial data in this Annual Report on Form 10-K for the quarter ended
September 30, 2002, and for each of the quarters in the fiscal years ending
June
30, 2002 and 2001 has been restated from amounts previously reported on Forms
10-Q and Forms 10-K. A discussion of the restatement in relation to the affected
quarters is provided in Note 3 to our audited consolidated financial statements
- Restatement and Reclassification of Previously Issued Consolidated Financial
Statements. An overview of the restatement is provided in the introduction
to
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
26
|
Fiscal
2003 Quarters Ended
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
As
of Sept. 30
|
As
of Dec. 31
|
As
of Mar. 31
|
As
of June 30
|
|||||||||||||
|
(as
previously reported)
|
(restated)
|
|||||||||||||||
|
Net
revenue
|
$
|
12,998
|
$
|
13,818
|
$
|
14,184
|
$
|
15,258
|
$
|
14,325
|
||||||
|
Cost
of goods sold
|
(7,440
|
)
|
(11,922
|
)
|
(6,357
|
)
|
(10,169
|
)
|
(6,853
|
)
|
||||||
|
Operating
expenses
|
(6,398
|
)
|
(6,569
|
)
|
(13,129
|
)
|
(7,120
|
)
|
(6,375
|
)
|
||||||
|
One-time
charges
|
(1,947
|
)
|
-
|
-
|
-
|
-
|
||||||||||
|
Impairment
charges
|
-
|
-
|
-
|
-
|
(26,001
|
)
|
||||||||||
|
Other
(income) expense
|
77
|
(11
|
)
|
(40
|
)
|
(12
|
)
|
(34
|
)
|
|||||||
|
Gain
on sale of product line
|
1,112
|
-
|
-
|
-
|
-
|
|||||||||||
|
Loss
from continuing operations before income taxes
|
(1,598
|
)
|
(4,684
|
)
|
(5,342
|
)
|
(2,043
|
)
|
(24,938
|
)
|
||||||
|
Benefit
for income taxes
|
(439
|
)
|
(314
|
)
|
(358
|
)
|
(137
|
)
|
(25
|
)
|
||||||
|
Loss
from continuing operations
|
(1,159
|
)
|
(4,370
|
)
|
(4,984
|
)
|
(1,906
|
)
|
(24,913
|
)
|
||||||
|
Income
from discontinued operations
|
-
|
59
|
59
|
24
|
58
|
|||||||||||
|
Net
loss
|
$
|
(1,159
|
)
|
$
|
(4,311
|
)
|
$
|
(4,925
|
)
|
$
|
(1,882
|
)
|
$
|
(24,855
|
)
|
|
|
Basic
(loss) per common share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.10
|
)
|
$
|
(0.39
|
)
|
$
|
(0.44
|
)
|
$
|
(0.17
|
)
|
$
|
(2.23
|
)
|
|
|
Discontinued
operations
|
-
|
0.01
|
0.01
|
-
|
0.01
|
|||||||||||
|
Basic
(loss) per common share
|
$
|
(0.10
|
)
|
$
|
(0.38
|
)
|
$
|
(0.43
|
)
|
$
|
(0.17
|
)
|
$
|
(2.22
|
)
|
|
|
Diluted
(loss) per common share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.10
|
)
|
$
|
(0.39
|
)
|
$
|
(0.44
|
)
|
$
|
(0.17
|
)
|
$
|
(2.23
|
)
|
|
|
Discontinued
operations
|
-
|
0.01
|
0.01
|
-
|
0.01
|
|||||||||||
|
Diluted
(loss) per common share
|
$
|
(0.10
|
)
|
$
|
(0.38
|
)
|
$
|
(0.43
|
)
|
$
|
(0.17
|
)
|
$
|
(2.22
|
)
|
|
|
Fiscal
2002 Quarters Ended
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||
|
As
of Sept. 30
|
As
of Dec. 31
|
||||||||||||
|
(as
previously reported)
|
(restated)
|
(as
previously reported)
|
(restated)
|
||||||||||
|
Net
revenue
|
$
|
11,220
|
$
|
9,963
|
$
|
12,582
|
$
|
12,590
|
|||||
|
Cost
of goods sold
|
(4,582
|
)
|
(4,423
|
)
|
(5,057
|
)
|
(5,484
|
)
|
|||||
|
Operating
expenses
|
(4,501
|
)
|
(4,304
|
)
|
(5,211
|
)
|
(4,487
|
)
|
|||||
|
Impairment
charges
|
-
|
-
|
-
|
-
|
|||||||||
|
Other
(income) expense
|
145
|
71
|
66
|
(67
|
)
|
||||||||
|
Income
from continuing operations before income taxes
|
2,282
|
1,307
|
2,380
|
2,552
|
|||||||||
|
Provision
for income taxes
|
870
|
393
|
888
|
766
|
|||||||||
|
Income
from continuing operations
|
1,412
|
914
|
1,492
|
1,786
|
|||||||||
|
Income
from discontinued operations
|
-
|
-
|
-
|
-
|
|||||||||
|
Net
income
|
$
|
1,412
|
$
|
914
|
$
|
1,492
|
$
|
1,786
|
|||||
|
Basic
earnings per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.16
|
$
|
0.11
|
$
|
0.17
|
$
|
0.20
|
|||||
|
Discontinued
operations
|
-
|
-
|
-
|
-
|
|||||||||
|
Basic
earnings per common share
|
$
|
0.16
|
$
|
0.11
|
$
|
0.17
|
$
|
0.20
|
|||||
|
Diluted
earnings per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.16
|
$
|
0.10
|
$
|
0.16
|
$
|
0.18
|
|||||
|
Discontinued
operations
|
-
|
-
|
-
|
-
|
|||||||||
|
Diluted
earnings per common share
|
$
|
0.16
|
$
|
0.10
|
$
|
0.16
|
$
|
0.18
|
|||||
27
|
Fiscal
2002 Quarters Ended
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||
|
As
of Mar. 31
|
As
of June 30
|
||||||||||||
|
(as
previously reported)
|
(restated)
|
(as
previously reported)
|
(restated)
|
||||||||||
|
Net
revenue
|
$
|
14,171
|
$
|
9,316
|
$
|
16,569
|
$
|
11,493
|
|||||
|
Cost
of goods sold
|
(5,587
|
)
|
(4,388
|
)
|
(7,774
|
)
|
(7,876
|
)
|
|||||
|
Operating
expenses
|
(5,430
|
)
|
(4,971
|
)
|
(5,667
|
)
|
(5,884
|
)
|
|||||
|
Impairment
charges
|
-
|
-
|
-
|
(7,115
|
)
|
||||||||
|
Other
(income) expense
|
(71
|
)
|
32
|
369
|
97
|
||||||||
|
Income
(loss) from continuing operations before income taxes
|
3,083
|
(11
|
)
|
3,497
|
(9,285
|
)
|
|||||||
|
Provision
(benefit) for income taxes
|
1,012
|
(3
|
)
|
1,061
|
244
|
||||||||
|
Income
(loss) from continuing operations
|
2,071
|
(8
|
)
|
2,436
|
(9,529
|
)
|
|||||||
|
Income
from discontinued operations
|
-
|
117
|
-
|
59
|
|||||||||
|
Net
income (loss)
|
$
|
2,071
|
$
|
109
|
$
|
2,436
|
$
|
(9,470
|
)
|
||||
|
Basic
earnings (loss) per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.20
|
$
|
-
|
$
|
0.24
|
$
|
(0.90
|
)
|
||||
|
Discontinued
operations
|
-
|
0.01
|
-
|
0.01
|
|||||||||
|
Basic
earnings (loss) per common share
|
$
|
0.20
|
$
|
0.01
|
$
|
0.24
|
$
|
(0.89
|
)
|
||||
|
Diluted
earnings (loss) per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.20
|
$
|
-
|
$
|
0.22
|
$
|
(0.90
|
)
|
||||
|
Discontinued
operations
|
-
|
0.01
|
-
|
0.01
|
|||||||||
|
Diluted
earnings (loss) per common share
|
$
|
0.20
|
$
|
0.01
|
$
|
0.22
|
$
|
(0.89
|
)
|
||||
|
Fiscal
2001 Quarters Ended
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||
|
As
of Sept. 30
|
As
of Dec. 31
|
||||||||||||
|
(as
previously reported)
|
(restated)
|
(as
previously reported)
|
(restated)
|
||||||||||
|
Net
revenue
|
$
|
9,333
|
$
|
5,567
|
$
|
9,680
|
$
|
9,585
|
|||||
|
Cost
of goods sold
|
(3,766
|
)
|
(2,804
|
)
|
(3,971
|
)
|
(3,944
|
)
|
|||||
|
Operating
expenses
|
(3,488
|
)
|
(4,042
|
)
|
(3,873
|
)
|
(3,538
|
)
|
|||||
|
Other
expense
|
64
|
8
|
119
|
88
|
|||||||||
|
Income
(loss) from continuing operations before income taxes
|
2,143
|
(1,271
|
)
|
1,955
|
2,191
|
||||||||
|
Provision
(benefit) for income taxes
|
799
|
(350
|
)
|
752
|
604
|
||||||||
|
Income
(loss) from continuing operations
|
1,344
|
(921
|
)
|
1,203
|
1,587
|
||||||||
|
Income
from discontinued operations
|
186
|
95
|
337
|
245
|
|||||||||
|
Gain
on disposal of business segment
|
-
|
-
|
-
|
-
|
|||||||||
|
Net
income (loss)
|
$
|
1,530
|
$
|
(826
|
)
|
$
|
1,540
|
$
|
1,832
|
||||
|
Basic
earnings (loss) per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.16
|
$
|
(0.11
|
)
|
$
|
0.14
|
$
|
0.18
|
||||
|
Discontinued
operations
|
0.02
|
0.01
|
0.04
|
0.03
|
|||||||||
|
Basic
earnings (loss) per common share
|
$
|
0.18
|
$
|
(0.10
|
)
|
$
|
0.18
|
$
|
0.21
|
||||
|
Diluted
earnings (loss) per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.15
|
$
|
(0.11
|
)
|
$
|
0.13
|
$
|
0.17
|
||||
|
Discontinued
operations
|
0.02
|
0.01
|
0.04
|
0.03
|
|||||||||
|
Diluted
earnings (loss) per common share
|
$
|
0.17
|
$
|
(0.10
|
)
|
$
|
0.17
|
$
|
0.20
|
||||
28
|
Fiscal
2001 Quarters Ended
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||
|
As
of Mar. 31
|
As
of June 30
|
||||||||||||
|
(as
previously reported)
|
(restated)
|
(as
previously reported)
|
(restated)
|
||||||||||
|
Net
revenue
|
$
|
10,212
|
$
|
9,589
|
$
|
10,653
|
$
|
9,396
|
|||||
|
Cost
of goods sold
|
(4,328
|
)
|
(4,168
|
)
|
(4,438
|
)
|
(4,217
|
)
|
|||||
|
Operating
expenses
|
(3,786
|
)
|
(3,805
|
)
|
(3,757
|
)
|
(3,999
|
)
|
|||||
|
Other
expense
|
69
|
39
|
121
|
53
|
|||||||||
|
Income
from continuing operations before income taxes
|
2,167
|
1,655
|
2,579
|
1,233
|
|||||||||
|
Provision
for income taxes
|
808
|
456
|
959
|
340
|
|||||||||
|
Income
from continuing operations
|
1,359
|
1,199
|
1,620
|
893
|
|||||||||
|
Income
(loss) from discontinued operations
|
242
|
250
|
(28
|
)
|
147
|
||||||||
|
Gain
on disposal of business segment
|
-
|
-
|
1,220
|
123
|
|||||||||
|
Net
income
|
$
|
1,601
|
$
|
1,449
|
$
|
2,812
|
$
|
1,163
|
|||||
|
Basic
earnings per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.16
|
$
|
0.14
|
$
|
0.19
|
$
|
0.10
|
|||||
|
Discontinued
operations
|
0.03
|
0.03
|
0.14
|
0.03
|
|||||||||
|
Basic
earnings per common share
|
$
|
0.19
|
$
|
0.17
|
$
|
0.33
|
$
|
0.13
|
|||||
|
Diluted
earnings per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.15
|
$
|
0.13
|
$
|
0.18
|
$
|
0.10
|
|||||
|
Discontinued
operations
|
0.03
|
0.03
|
0.13
|
0.03
|
|||||||||
|
Diluted
earnings per common share
|
$
|
0.18
|
$
|
0.16
|
$
|
0.31
|
$
|
0.13
|
|||||
Discussion of Quarterly Financial Data (Unaudited)
We
have
restated our previously reported consolidated financial statements for the
fiscal years ended June 30, 2002 and 2001. The discussion below relates to
the
changes in the consolidated statements of operations on a quarterly basis
and
are unaudited. Since we have not previously filed our quarterly reports on
Form
10-Q for the quarters ended December 31, 2002 and March 31 and June 30, 2003,
figures for those periods have not been restated.
Summary
of restatement items
Errors
in
previously issued financial statements were identified in the following
areas:
Revenue
Recognition and Related Sales Returns, Credit Memos, and Allowances.
We
recognized revenue before the amounts charged to both distributors and
non-distributors were considered fixed and determinable or reasonably
collectible. Accordingly, revenue was inappropriately accelerated.
Beginning
in 2001 and through 2002, we modified our sales channels to include
distributors. These distributors were generally thinly capitalized with little
or no financial resources and did not have the wherewithal to pay for these
products when delivered by us. Furthermore, in a substantial number of cases,
significant amounts of inventories were returned or never paid for and the
payment for product sold (to both distributors and non-distributors) was
regularly subject to final negotiation with our customers. As a result of
such
negotiations, we routinely agreed to significant concessions from the originally
invoiced amounts to facilitate collection. Accordingly, amounts charged to
both
distributors and non-distributors were not considered fixed and determinable
or
reasonably collectible until cash was collected. Accordingly, product revenues
to distributors and non-distributors were restated for the quarter ended
September 30, 2002, and for each of the quarters in the fiscal years ending
June
30, 2002 and 2001.
Related
sales returns and allowances, rebates, and accounts receivables were revised
appropriately given the revenue adjustments.
29
Cutoff
and Period-End Close Adjustments Related to Accrued Liabilities and Prepaid
Assets. We
recorded accruals and amortized certain prepaid assets to operating expenses
during the quarter ended September 30, 2002, and during each of the quarters
in
the fiscal years ending June 30, 2002 and 2001in the improper periods.
Accordingly, adjustments to accrued liabilities, prepaid assets, and operating
expenses were recorded to properly account for these errors.
Tracking
and Valuation of Inventory, Including Controls to Identify and Properly Account
for Obsolete Inventory. As
part
of the restatement process, we discovered that we made errors in the recording
and presentation of inventories, including consigned inventory, obsolete
and
slow-moving inventories, errors in the capitalization of overhead expenses,
errors in recording inventories at the lower of cost or market, and errors
for
inventory shrinkage. As a result, we made adjustments to reflect consigned
inventory, to properly capitalize overhead expenses, physical inventory
adjustments, adjustments to lower of cost or market, and adjustments to reserves
for excess, obsolete and slow-moving inventory. Accordingly, inventories
and
cost of goods sold were restated to properly account for these
errors.
Accounting
for Leases, Including Classification as Operating or Capital. In
evaluating the classification of leases, we did not consider all periods
for
which failure to renew the lease imposes a penalty on the lessee in such
amount
that a renewal appears, at the inception of the leases, to be reasonably
assured. Accordingly, certain leases were classified as operating leases
that
should have been classified as capital leases. The effect of properly recording
the capital leases on our previously reported financial statements is to
record
additional capital lease obligations, property and equipment, and depreciation
expense and reduce rental expense for the quarter ended September 30, 2002,
and
for each of the quarters in the fiscal years ending June 30, 2002 and
2001.
We
did
not consider escalating rent payments and rent holidays for certain operating
leases. Accordingly, rent expense was inappropriately understated. The effect
of
straight-lining rent payments on our previously reported financial statements
is
to record an accrued liability for future rent payments and record additional
rent expense.
Accounting
for Acquisitions. During
the restatement process, we determined that the valuations and purchase price
allocations in connection with its acquisitions of ClearOne, Ivron, and
E.mergent were not performed properly. We engaged independent third-party
valuation specialists to provide valuations and purchase price allocations
on
these acquisitions. We re-examined the purchase price allocations and adjusted
for items that should have been recorded previously.
|
·
|
In
our previously issued consolidated financial statements, we valued
the
129,871 shares of common stock issued in conjunction with the acquisition
of ClearOne at $15.40 per share. We determined that the shares
should have
been valued at $13.97 per share based on the market prices a few
days
before and after the measurement date.
|
|
·
|
We
recorded adjustments to the amounts allocated to certain acquired
intangible assets, including developed technologies, patents and
trademarks, and distribution agreements. We also recorded adjustments
to
the amounts allocated to in-process research and development related
to
the ClearOne acquisition.
|
|
·
|
We
recorded adjustments to the amounts allocated to certain acquired
tangible
assets and assumed liabilities, including cash, accounts receivable,
inventory, property, plant and equipment, deferred tax assets,
and
deferred tax liabilities.
|
|
·
|
The
adjustments to purchase price, as well as the adjustments to the
amounts
allocated to acquired intangible assets, acquired tangible assets,
and
assumed liabilities, resulted in corresponding adjustments to the
amount
allocated to goodwill.
|
30
Accounting
for Equity and Other Significant Non-Routine Transactions.
|
·
|
During
the quarter ended June 30, 2001, we sold our remote control product
line
to Burk Technology. In previously issued consolidated financial
statements, we recognized a gain on the sale of our remote control
product
line that included a significant note receivable from the buyer
at the
time of the sale, and recognized interest income associated with
the note
receivable in periods subsequent to the sale. Based on an analysis
of the
facts and circumstances that existed at the date of the sale, the
recognition of this gain was inappropriate as the buyer did not
have the
wherewithal to pay this note receivable, the operations of the
remote
control product line had not historically generated cash flows
sufficient
to fund the required payments, and there were contingent liabilities
we
had to the buyer. Accordingly, we concluded that the gain should
be
recognized as cash is received from the buyer. As a result, we
have
reduced the gain on sale and eliminated the note receivable at
the time of
the sale, and recognized additional gain on the sale of the product
line
when-and-as cash payments on the note receivable are
obtained.
|
|
·
|
During
the quarter ended June 30, 2002, we experienced certain triggering
events
that indicated that certain long-lived assets related to ClearOne
and
Ivron were impaired. Accordingly, we performed an impairment analysis
in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121. As a result of this analysis, we determined
that
goodwill, intangible assets, and certain property, plant, and equipment
related to the ClearOne and Ivron acquisitions were fully impaired
as of
June 30, 2002. As a result, we recognized an impairment loss equal
to the
carrying value of these assets. In previously issued consolidated
financial statements, we failed to recognize that a triggering
event had
occurred and did not record an impairment loss for these assets.
|
|
·
|
During
the quarter ended March 31, 2001, the terms of certain outstanding
stock
options were modified to allow for their acceleration in the event
we met
certain EPS targets. During the quarter ended June 30, 2001 we
cancelled
certain outstanding stock options and issued a replacement award
with a
lower exercise price, resulting in variable accounting. In previously
issued consolidated financial statements, we did not record compensation
expense in connection with these modifications in accordance with
Accounting Principles Board (APB) No. 25 and Financial Accounting
Standards Board (FASB) Interpretation Number 44, “Accounting for Certain
Transactions involving Stock Compensation” (an interpretation of APB No.
25).
|
|
·
|
On
June 29, 2001, we repurchased 5,000 shares of our previously issued
and
outstanding common shares. In previously issued consolidated financial
statements, we did not record the effects of this transaction until
fiscal
year 2002.
|
Accounting
for Income Taxes.
During
each of the quarters in the fiscal years ending June 30, 2002 and 2001, and
in
the quarter ended September 30, 2002, our income before income taxes was
restated to correct for certain accounting errors, resulting in less pre
tax
book income and correspondingly less income tax expense. In conjunction with
the
restatement, we evaluated the realizability of deferred tax assets. In the
quarter ended June 30, 2002, we recorded an increased domestic valuation
allowance to reflect our determination that not all of our deferred tax assets
were more likely than not realizable pursuant to the provisions of SFAS 109,
“Accounting for Income Taxes”.
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion should be read in conjunction with our Consolidated
Financial Statements and related Notes included in Item 8 of this Annual
Report
on Form 10-K. This discussion contains forward-looking statements based on
current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions, as set forth under “Special Note
Regarding Forward-Looking Statement.” Our actual results and the timing of
events could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth in the
following discussion and under the caption “Factors That Could Affect Our Future
Results” of this Management’s Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this Annual Report on Form 10-K. Unless
otherwise indicated, all references to a year reflect our fiscal year that
ends
on June 30.
31
Business
Overview
We
are an
audio conferencing products company. We develop, manufacture, market and
service
a comprehensive line of audio conferencing products, which range from tabletop
conferencing phones to professionally installed audio systems. We have a
strong
history of product innovation and plan to continue to apply our expertise
in
audio engineering to developing innovative new products. The performance
and
reliability of our high-quality solutions create a natural communication
environment, which saves organizations of all sizes time and money by enabling
more effective and efficient communication between geographically separated
businesses, employees and customers.
Restatements
and Reclassifications of Previously Issued Consolidated Financial
Statements
We
have
restated our previously reported consolidated financial statements for the
quarter ended September 30, 2002, and for fiscal years ended June 30, 2002
and
2001, and each of the quarters therein. The restatement adjustments (including
impairment charges) resulted in a cumulative net reduction to shareholders’
equity of approximately $17.4 million and $3.8 million as of June 30, 2002
and
2001, respectively, and a reduction in previously reported net income of
approximately $14.1 million and $3.9 million for the years ended June 30,
2002
and 2001, respectively. We have also restated the July 1, 2000 opening retained
earnings balance to reflect corrected items that relate to prior periods.
We
have not amended our prior filings to reflect the restatement. As a result,
information previously filed in our annual reports on Form 10-K for fiscal
years
ended June 30, 2002 and 2001, our quarterly reports on Form 10-Q for the
quarterly periods included in those fiscal years and for the quarter ended
September 30, 2002 and any current reports on Form 8-K, or other disclosures,
containing fiscal 2003, 2002 and 2001 information filed or made prior to
the
filing of this 2003 Form 10-K should not be relied upon.
As
discussed below, our previously issued consolidated balance sheets, consolidated
statements of operations and comprehensive income (loss), consolidated
statements of stockholders’ equity and cash flows for the years ended June 30,
2002 and 2001 have been restated to correct for certain accounting
errors.
Summary
of restatement items
Errors
in
previously issued financial statements were identified in the following
areas:
Revenue
Recognition and Related Sales Returns, Credit Memos, and Allowances.
We
recognized revenue before the amounts charged to both distributors and
non-distributors were considered fixed and determinable or reasonably
collectible. Accordingly, revenue was inappropriately accelerated.
Beginning
in 2001 and through 2002, we modified our sales channels to include
distributors. These distributors were generally thinly capitalized with little
or no financial resources and did not have the wherewithal to pay for these
products when delivered by us. Furthermore, in a substantial number of cases,
significant amounts of inventories were returned or never paid for and the
payment for product sold (to both distributors and non-distributors) was
regularly subject to final negotiation with our customers. As a result of
such
negotiations, we routinely agreed to significant concessions from the originally
invoiced amounts to facilitate collection. Accordingly, amounts charged to
both
distributors and non-distributors were not considered fixed and determinable
or
reasonably collectible until cash was collected. Accordingly, product revenues
to distributors and non-distributors were restated for the years ending June
30,
2002 and 2001.
Related
sales returns and allowances, rebates, and accounts receivables were revised
appropriately given revenue adjustments.
Cutoff
and Period-End Close Adjustments Related to Accrued Liabilities and Prepaid
Assets. We
recorded accruals and amortized certain prepaid assets to operating expenses
during the fiscal years ended June 30, 2002 and 2001 in the improper periods.
Accordingly, adjustments to accrued liabilities, prepaid assets, and operating
expenses were recorded for the years ending June 30, 2002 and 2001.
32
Tracking
and Valuation of Inventory, Including Controls to Identify and Properly Account
for Obsolete Inventory. As
part
of the restatement process, we discovered that we made errors in the recording
and presentation of inventories, including consigned inventory, obsolete
and
slow-moving inventories, errors in the capitalization of overhead expenses,
errors in recording inventories at the lower of cost or market, and errors
for
inventory shrinkage. As a result, we made adjustments to reflect consigned
inventory, to properly capitalize overhead expenses, physical inventory
adjustments, adjustments to lower of cost or market, and adjustments to reserves
for excess, obsolete and slow-moving inventory. Accordingly, inventories
and
cost of goods sold were restated to properly account for these
errors.
Accounting
for Leases, Including Classification as Operating or Capital. In
evaluating the classification of leases, we did not consider all periods
for
which failure to renew the lease imposes a penalty on the lessee in such
amount
that a renewal appears, at the inception of the leases, to be reasonably
assured. Accordingly, certain leases were classified as operating leases
that
should have been classified as capital leases. The effect of properly recording
the capital leases on our previously reported financial statements is to
record
additional capital lease obligations, property and equipment, and depreciation
expense and reduce rental expense for fiscal periods ending June 30, 2002
and
2001.
We
did
not consider escalating rent payments and rent holidays for certain operating
leases. Accordingly, rent expense was inappropriately understated. The effect
of
straight-lining rent payments on our previously reported financial statements
is
to record an accrued liability for future rent payments and record additional
rent expense.
Classification
of Cash and Marketable Securities.
In
previously issued consolidated financial statements, we classified municipal
government auction rate notes and auction rate preferred stocks as cash instead
of marketable securities. Accordingly, reclassifications were made to the
2002
cash balances to properly classify those as marketable securities instead
of
cash.
Accounting
for Acquisitions. During
the restatement process, we determined that the valuations and purchase price
allocations in connection with our acquisitions of ClearOne, Ivron, and
E.mergent were not performed properly. We engaged independent third-party
valuation specialists to provide valuations and purchase price allocations
on
these acquisitions. We re-examined the purchase price allocations and adjusted
for items that should have been recorded previously.
|
·
|
In
our previously issued consolidated financial statements, we valued
the
129,871 shares of common stock issued in conjunction with the acquisition
of ClearOne at $15.40 per share. We determined that the shares
should have
been valued at $13.97 per share based on the market prices a few
days
before and after the measurement date.
|
|
·
|
We
recorded adjustments to the amounts allocated to certain acquired
intangible assets, including developed technologies, patents and
trademarks, and distribution agreements. We also recorded adjustments
to
the amounts allocated to in-process research and development related
to
the ClearOne acquisition.
|
|
·
|
We
recorded adjustments to the amounts allocated to certain acquired
tangible
assets and assumed liabilities, including cash, accounts receivable,
inventory, property and equipment, deferred tax assets, and deferred
tax
liabilities.
|
|
·
|
The
adjustments to purchase price, as well as the adjustments to the
amounts
allocated to acquired intangible assets, acquired tangible assets,
and
assumed liabilities, resulted in corresponding adjustments to the
amount
allocated to goodwill.
|
33
Accounting
for Equity and Other Significant Non-Routine Transactions.
|
·
|
During
the year ended June 30, 2001 we sold our remote control product
line to
Burk Technology. In previously issued consolidated financial statements,
we recognized a gain on the sale of our remote control product
line that
included a significant note receivable from the buyer at the time
of the
sale, and recognized interest income associated with the note receivable
in periods subsequent to the sale. Based on an analysis of the
facts and
circumstances that existed at the date of the sale, the recognition
of
this gain was inappropriate as the buyer did not have the wherewithal
to
pay this note receivable, the operations of the remote control
product
line had not historically generated cash flows sufficient to fund
the
required payments, and there were contingent liabilities we had
to the
buyer. Accordingly, we concluded that the gain should be recognized
as
cash is received from the buyer. As a result, we have reduced the
gain on
sale and eliminated the note receivable at the time of the sale,
and
recognized additional gain on the sale of the business segment
when-and-as
cash payments on the note receivable are
obtained.
|
|
·
|
During
the year ended June 30, 2002 we experienced certain triggering
events that
indicated that certain long-lived assets related to ClearOne and
Ivron
were impaired. Accordingly, we performed an impairment analysis
in
accordance with the provisions of SFAS No. 121. As a result of
this
analysis, we determined that goodwill, intangible assets, and certain
property and equipment related to the ClearOne and Ivron acquisitions
were
fully impaired as of June 30, 2002. As a result, we recognized
an
impairment loss equal to the carrying value of these assets. In
previously
issued consolidated financial statements, we failed to recognize
that a
triggering event had occurred and did not record an impairment
loss for
these assets.
|
|
·
|
During
the year ended June 30, 2001 the terms of certain outstanding stock
options were modified to allow for their acceleration in the event
we met
certain EPS targets. During the year ended June 30, 2001 we cancelled
certain outstanding stock options and issued a replacement award
with a
lower exercise price, resulting in variable accounting. In previously
issued consolidated financial statements, we did not record compensation
expense in connection with these modifications in accordance with
APB No.
25 and FASB Interpretation Number 44, “Accounting for Certain Transactions
involving Stock Compensation” (an interpretation of APB No. 25).
|
|
·
|
On
June 29, 2001, we repurchased 5,000 shares of our previously issued
and
outstanding common shares. In previously issued consolidated financial
statements, we did not record the effects of this transaction until
fiscal
year 2002.
|
Accounting
for Income Taxes. During
the fiscal periods ending June 30, 2002 and 2001, our income before income
taxes
was restated to correct for certain accounting errors, resulting in less
pre tax
book income and correspondingly less income tax expense. In conjunction with
the
restatement, we evaluated the realizability of deferred tax assets. In 2002,
we
recorded an increased domestic valuation allowance to reflect our determination
that not all of our deferred tax assets were more likely than not realizable
pursuant to the provisions of SFAS 109, “Accounting for Income
Taxes”.
34
Restated
Financial Statements
Statements
of Operations Adjustments (in thousands)
|
As
of June 30, 2002
|
As
of June 30, 2001
|
||||||||||||
|
As
Previously Reported
|
Restated
|
As
Previously Reported
|
Restated
|
||||||||||
|
Revenue:
|
|||||||||||||
|
Product
|
$
|
37,215
|
$
|
26,253
|
$
|
28,190
|
$
|
22,448
|
|||||
|
Conferencing
services
|
17,328
|
15,583
|
11,689
|
11,689
|
|||||||||
|
Business
services
|
-
|
1,526
|
-
|
-
|
|||||||||
|
Total
revenue
|
54,543
|
43,362
|
39,879
|
34,137
|
|||||||||
|
Cost
of goods sold:
|
|||||||||||||
|
Product
|
15,057
|
10,939
|
10,634
|
8,789
|
|||||||||
|
Product
inventory write-offs
|
-
|
2,945
|
-
|
416
|
|||||||||
|
Conferencing
services
|
7,943
|
7,310
|
5,869
|
5,928
|
|||||||||
|
Business
services
|
-
|
978
|
-
|
-
|
|||||||||
|
Total
cost of goods sold
|
23,000
|
22,172
|
16,503
|
15,133
|
|||||||||
|
Gross
profit
|
31,543
|
21,190
|
23,376
|
19,004
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Marketing
and selling
|
10,705
|
10,739
|
7,753
|
7,711
|
|||||||||
|
General
and administrative
|
6,051
|
5,345
|
4,649
|
4,198
|
|||||||||
|
Research
and product development
|
4,053
|
3,810
|
2,502
|
2,747
|
|||||||||
|
Impairment
losses
|
-
|
7,115
|
-
|
-
|
|||||||||
|
Gain
on sale of court conferencing assets
|
-
|
(250
|
)
|
-
|
-
|
||||||||
|
Purchased
in-process research and development
|
-
|
-
|
-
|
728
|
|||||||||
|
Total
operating expenses
|
20,809
|
26,759
|
14,904
|
15,384
|
|||||||||
|
Operating
income (loss)
|
10,734
|
(5,569
|
)
|
8,472
|
3,620
|
||||||||
|
Other
income, net
|
509
|
132
|
373
|
188
|
|||||||||
|
Income
(loss) from continuing operations before income taxes
|
11,243
|
(5,437
|
)
|
8,845
|
3,808
|
||||||||
|
Provision
for income taxes
|
3,831
|
1,400
|
3,319
|
1,050
|
|||||||||
|
Income
(loss) from continuing operations
|
7,412
|
(6,837
|
)
|
5,526
|
2,758
|
||||||||
|
Discontinued
operations:
|
|||||||||||||
|
Income
from discontinued operations, net of income taxes
|
-
|
-
|
737
|
737
|
|||||||||
|
Gain
on disposal of a component of our business, net of income
taxes
|
-
|
176
|
1,220
|
123
|
|||||||||
|
Net
income (loss)
|
$
|
7,412
|
$
|
(6,661
|
)
|
$
|
7,483
|
$
|
3,618
|
||||
|
Basic
earnings (loss) per common share from continuing
operations
|
$
|
0.77
|
$
|
(0.71
|
)
|
$
|
0.64
|
$
|
0.32
|
||||
|
Diluted
earnings (loss) per common share from continuing
operations
|
$
|
0.74
|
$
|
(0.71
|
)
|
$
|
0.61
|
$
|
0.30
|
||||
|
Basic
earnings per common share from discontinued operations
|
$
|
-
|
$
|
0.02
|
$
|
0.23
|
$
|
0.10
|
|||||
|
Diluted
earnings per common share from discontinued operations
|
$
|
-
|
$
|
0.02
|
$
|
0.22
|
$
|
0.09
|
|||||
|
Basic
earnings (loss) per common share
|
$
|
0.77
|
$
|
(0.69
|
)
|
$
|
0.87
|
$
|
0.42
|
||||
|
Diluted
earnings (loss) per common share
|
$
|
0.74
|
$
|
(0.69
|
)
|
$
|
0.83
|
$
|
0.39
|
||||
35
Balance Sheet Adjustments (in thousands)
|
As
of June 30, 2002
|
As
of June 30, 2001
|
||||||||||||
|
As
Previously Reported
|
As
Restated
|
As
Previously Reported
|
As
Restated
|
||||||||||
|
ASSETS
|
|||||||||||||
|
Current
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
14,248
|
$
|
1,744
|
$
|
6,852
|
$
|
6,851
|
|||||
|
Marketable
securities
|
-
|
12,400
|
-
|
-
|
|||||||||
|
Accounts
receivable, net
|
20,317
|
4,322
|
7,213
|
2,027
|
|||||||||
|
Inventories
|
8,606
|
12,516
|
4,132
|
6,459
|
|||||||||
|
Note
Receivable, current portion
|
196
|
-
|
71
|
-
|
|||||||||
|
Deferred
income tax assets
|
1,293
|
4,709
|
248
|
1,587
|
|||||||||
|
Prepaid
expenses and other
|
610
|
621
|
780
|
680
|
|||||||||
|
Total
current assets
|
45,270
|
36,312
|
19,296
|
17,604
|
|||||||||
|
Property
and equipment, net
|
5,770
|
8,123
|
3,697
|
5,681
|
|||||||||
|
Goodwill,
net
|
20,553
|
17,072
|
2,634
|
890
|
|||||||||
|
Intangibles,
net
|
6,991
|
1,634
|
182
|
616
|
|||||||||
|
Deferred
income tax assets
|
-
|
661
|
-
|
446
|
|||||||||
|
Note
Receivable, net of current portion
|
1,490
|
-
|
1,716
|
||||||||||
|
Other
assets
|
73
|
74
|
73
|
74
|
|||||||||
|
Total
assets
|
$
|
80,147
|
$
|
63,876
|
$
|
27,598
|
$
|
25,311
|
|||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||||||||
|
Current
liabilities:
|
|||||||||||||
|
Line
of credit
|
$
|
196
|
$
|
196
|
$
|
-
|
|||||||
|
Capital
lease obligations
|
60
|
784
|
182
|
619
|
|||||||||
|
Accounts
payable
|
3,053
|
3,056
|
568
|
652
|
|||||||||
|
Accrued
liabilities
|
2,299
|
2,841
|
1,130
|
1,408
|
|||||||||
|
Deferred
revenue
|
607
|
572
|
-
|
-
|
|||||||||
|
Income
taxes payable
|
820
|
265
|
422
|
224
|
|||||||||
|
Total
current liabilities
|
7,035
|
7,714
|
2,302
|
2,903
|
|||||||||
|
Capital
lease obligations, net of current portion
|
41
|
2,016
|
48
|
1,680
|
|||||||||
|
Deferred
revenue, net of current portion
|
277
|
254
|
-
|
-
|
|||||||||
|
Deferred
income tax liabilities
|
1,458
|
-
|
746
|
-
|
|||||||||
|
Total
liabilities
|
8,811
|
9,984
|
3,096
|
4,583
|
|||||||||
|
Commitments
and contingencies
|
|||||||||||||
|
Stockholders'
equity:
|
|||||||||||||
|
Common
stock
|
11
|
11
|
9
|
9
|
|||||||||
|
Additional
paid-in capital
|
48,384
|
48,704
|
8,963
|
8,856
|
|||||||||
|
Deferred
compensation
|
-
|
(147
|
)
|
-
|
(122
|
)
|
|||||||
|
Retained
earnings
|
22,941
|
5,324
|
15,530
|
11,985
|
|||||||||
|
Total
stockholders' equity
|
71,336
|
53,892
|
24,502
|
20,728
|
|||||||||
|
Total
liabilities and stockholders' equity
|
$
|
80,147
|
$
|
63,876
|
$
|
27,598
|
$
|
25,311
|
|||||
Stockholders’
Equity Adjustments
The
restatement adjustments resulted in a cumulative net reduction to stockholders’
equity of approximately $17.4 million and $3.8 million as of June 30, 2002
and
2001, respectively. We have also restated the June 30, 2000 retained earnings
balance to reflect cumulative adjustments through that date.
36
Cash
Flows Adjustments (in thousands)
The
following table presents selected consolidated statements of cash flows
information showing previously reported and restated cash flows, for the
years
ended June 30, 2002 and 2001:
|
Years
ended
June
30,
|
Years
ended
June
30,
|
||||||||||||
|
2002
|
2001
|
||||||||||||
|
As
previously
reported
|
As
restated
|
|
As
previously reported
|
As
restated
|
|||||||||
|
Net
cash from operating activities
|
$
|
105
|
$
|
31
|
$
|
3,708
|
$
|
4,357
|
|||||
|
Net
cash (used in) investing activities
|
(17,044
|
)
|
(29,470
|
)
|
(3,114
|
)
|
(3,285
|
)
|
|||||
|
Net
cash from (used in) financing activities
|
24,335
|
24,156
|
(104
|
)
|
(456
|
)
|
|||||||
Discussion
of Operations
Results
of Operations
The
following table sets forth certain items from our consolidated statements
of
operations (in thousands) for the fiscal years ended June 30, 2003, 2002
and
2001, together with the percentage of total revenue which each such item
represents:
|
Year
Ended June 30,
|
|||||||||||||||||||
|
2003
|
2002
|
2001
|
|||||||||||||||||
|
(Restated)
|
(Restated)
|
||||||||||||||||||
|
%
of Revenue
|
%
of Revenue
|
%
of Revenue
|
|||||||||||||||||
|
Revenues
|
$
|
57,585
|
$
|
43,362
|
$
|
34,137
|
|||||||||||||
|
Cost
of goods sold
|
35,301
|
61.3
|
%
|
22,172
|
51.1
|
%
|
15,133
|
44.3
|
%
|
||||||||||
|
Gross
Profit
|
22,284
|
38.7
|
%
|
21,190
|
48.9
|
%
|
19,004
|
55.7
|
%
|
||||||||||
|
Operating
expenses:
|
|||||||||||||||||||
|
Marketing
and selling
|
12,187
|
21.2
|
%
|
10,739
|
24.8
|
%
|
7,711
|
22.6
|
%
|
||||||||||
|
General
and administrative
|
18,011
|
31.3
|
%
|
5,345
|
12.3
|
%
|
4,198
|
12.3
|
%
|
||||||||||
|
Research
and product development
|
2,995
|
5.2
|
%
|
3,810
|
8.8
|
%
|
2,747
|
8.0
|
%
|
||||||||||
|
Impairment
losses
|
26,001
|
45.2
|
%
|
7,115
|
16.4
|
%
|
-
|
0.0
|
%
|
||||||||||
|
Gain
on sale of court conferencing assets
|
-
|
0.0
|
%
|
(250
|
)
|
-0.6
|
%
|
-
|
0.0
|
%
|
|||||||||
|
Purchased
in-process research and development
|
-
|
0.0
|
%
|
-
|
0.0
|
%
|
728
|
2.1
|
%
|
||||||||||
|
Total
operating expenses
|
59,194
|
102.8
|
%
|
26,759
|
61.7
|
%
|
15,384
|
45.1
|
%
|
||||||||||
|
Operating
income (loss)
|
(36,910
|
)
|
-64.1
|
%
|
(5,569
|
)
|
-12.8
|
%
|
3,620
|
10.6
|
%
|
||||||||
|
Other
income (expense), net:
|
|||||||||||||||||||
|
Interest
income
|
85
|
0.1
|
%
|
293
|
0.7
|
%
|
334
|
1.0
|
%
|
||||||||||
|
Interest
expense
|
(236
|
)
|
-0.4
|
%
|
(179
|
)
|
-0.4
|
%
|
(164
|
)
|
-0.5
|
%
|
|||||||
|
Other,
net
|
55
|
0.1
|
%
|
18
|
0.0
|
%
|
18
|
0.1
|
%
|
||||||||||
|
Income
(loss) from continuing operations before income taxes
|
(37,006
|
)
|
-64.3
|
%
|
(5,437
|
)
|
-12.5
|
%
|
3,808
|
11.2
|
%
|
||||||||
|
Provision
(benefit) for income taxes
|
(834
|
)
|
-1.4
|
%
|
1,400
|
3.2
|
%
|
1,050
|
3.1
|
%
|
|||||||||
|
Income
(loss) from continuing operations
|
(36,172
|
)
|
-62.8
|
%
|
(6,837
|
)
|
-15.8
|
%
|
2,758
|
8.1
|
%
|
||||||||
|
Net
gain from discontinued operations
|
200
|
0.3
|
%
|
176
|
0.4
|
%
|
860
|
2.5
|
%
|
||||||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
-62.5
|
%
|
$
|
(6,661
|
)
|
-15.4
|
%
|
$
|
3,618
|
10.6
|
%
|
|||||
Our
revenues increased 68.7% over the period from $34.1 million in fiscal 2001
to
$57.6 million in fiscal 2003. During this period, we changed our business
mix
through four acquisitions and two dispositions.
The
following is a discussion of our results of operations for our fiscal years
ended June 30, 2003, June 30, 2002 and June 30, 2001. For each of our business
segments, we discuss revenues. All other items are discussed on a consolidated
basis.
37
Revenues
For
the
years ended June 30, 2003, 2002 and 2001, revenues by business segment were
as
follows (in thousands):
|
Year
Ended June 30,
|
|||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
2003
|
2002
|
2001
|
|||||||||||||||||
|
(Restated)
|
(Restated)
|
||||||||||||||||||
|
%
of Revenue
|
%
of Revenue
|
%
of Revenue
|
|||||||||||||||||
|
Product
|
$
|
27,512
|
47.8
|
%
|
$
|
26,253
|
60.5
|
%
|
$
|
22,448
|
65.8
|
%
|
|||||||
|
Conferencing
Services
|
15,268
|
26.5
|
%
|
15,583
|
36.0
|
%
|
11,689
|
34.2
|
%
|
||||||||||
|
Business
Services
|
14,805
|
25.7
|
%
|
1,526
|
3.5
|
%
|
-
|
0.0
|
%
|
||||||||||
|
Total
|
$
|
57,585
|
100.0
|
%
|
$
|
43,362
|
100.0
|
%
|
$
|
34,137
|
100.0
|
%
|
|||||||
Total
Revenue.
Total
revenue increased $14.2 million, or 32.8% in fiscal 2003 compared to fiscal
2002, and increased $9.2 million, or 27.0%, in fiscal 2002 compared to fiscal
2001. The overall increase in revenue during fiscal 2003 was primarily
attributable to revenue from business services which increased $13.3 million
year over year as a result of the acquisitions of E.mergent in late fiscal
2002
and OM Video in early fiscal 2003. The increase in revenue during fiscal
2002
over fiscal 2001 was attributable to increased revenue in all three segments
of
our business.
Product.
Product
revenue increased $1.3 million, or 4.8%, in fiscal 2003 compared to fiscal
2002,
and increased $3.8 million, or 17.0%, in fiscal 2002 compared to fiscal 2001.
The increase in revenue was primarily due to introducing new product lines,
which include the XAP® product, sound reinforcement product and tabletop
conferencing phones. We also introduced additional products lines through
acquisitions, which include our camera and furniture product lines. Beginning
in
2001, the Company moved from a dealer/sales representative customer model
to a
distributor model.
Conferencing
Services.
Conferencing services revenue decreased $0.3 million, or 2.0%, in fiscal
2003
compared to fiscal 2002, and increased $3.9 million, or 33.3%, in fiscal
2002
compared to fiscal 2001. The decrease in revenue in fiscal 2003 compared
to
fiscal 2002 reflects lower price per minute charges due to intense competition
caused primarily by overcapacity in the industry. The increase in revenue
in
fiscal 2002 compared to fiscal 2001 was due primarily to an increased customer
base, including an increase in the number of resellers who sold our
services.
Business
Services. Business
services revenue increased $13.3 million, or 870.2%, in fiscal 2003 compared
to
fiscal 2002. The increase in revenue in fiscal 2003 compared to fiscal 2002
was
primarily due to our acquisitions of E.mergent, Inc. on May 31, 2002 and
OM
Video on August 27, 2003. The increase in revenue in fiscal 2003 was also
due to
the sale of a software license to Comrex with a value of $1.1 million and
was
associated with our telephone interface product. Prior to fiscal 2002, we
did
not have operations in the business services segment.
Revenues
from sales outside of the United States accounted for 26%, 10% and 12% of
total
revenues for fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
No
one
customer accounted for more than 10% of our total net revenues during fiscal
2003, 2002 or 2001. In fiscal 2003, revenues in our product segment included
sales to three distributors that represented approximately 42% of this segment’s
revenues. No one customer accounted for more than 10% of our conferencing
services or business services segment revenues for any fiscal year.
In
fiscal
2003 and fiscal 2002, we introduced several new products in our products
segment
and our conferencing services segment. We also acquired two companies and
entered into the business services segment of our business.
38
Costs
of goods sold - gross profit margin
Costs
of
goods sold (“COGS”) includes expenses associated with the manufacture of our
products, including material and direct labor, our manufacturing organization,
tooling depreciation, warranty expense, freight expense, royalty payments
and
the allocation of overhead expenses; operating and maintaining our conferencing
services networks, including material and direct labor, depreciation, and
an
allocation of overhead expenses; and operating our installations services,
including material and direct labor, depreciation, and an allocation of overhead
expenses. COGS increased by approximately $13.1 million, or 59.2%, to $35.3
million in fiscal 2003 compared with fiscal 2002, and increased by $7.0 million,
or 46.5%, to $22.2 million in fiscal 2002 compared with $15.1 million in
fiscal
2001. As a percentage of revenues, COGS was 61.3%, 51.1% and 44.3% in fiscal
2003, fiscal 2002 and fiscal 2001, respectively.
Our
gross
profit margin from continuing operations was 38.7% in fiscal 2003 compared
to
48.9% in fiscal 2002 and 55.7% in fiscal 2001. The decrease in gross margins
from 48.9% in fiscal 2002 to 38.7% in fiscal 2003 is primarily due to the
write
down of excess, obsolete and slow moving inventory, proportionately higher
integration business service revenues resulting from the E.mergent and OM
Video
acquisitions that carry a lower gross margin percentage, proportionally higher
camera and furniture product revenues resulting from the E.mergent acquisition
that carry a lower gross margin percentage, lower conferencing services gross
margins as a result of increased price competition, and general pricing
pressures resulting from difficult economic conditions. The decrease in gross
margins from 55.7% in fiscal 2001 to 48.9% in fiscal 2002 is primarily due
to
the write down of excess, obsolete and slow moving inventory, and the addition
of integration services revenues resulting from E.mergent acquisition that
carry
a lower gross margin percentage than our core products.
Operating
Expenses
Our
operating expenses increased $32.4 million, or 121.2%, to $59.2 million in
fiscal 2003 compared with fiscal 2002 expenses of $26.8 million while fiscal
2002 expenses increased $11.4 million, or 73.9% from $15.4 million in fiscal
2001. As a percentage of revenues, operating expenses were 102.8%, 61.7%
and
45.1% in fiscal 2003, 2002 and 2001, respectively.
Marketing
and selling expenses.
Marketing and selling expenses includes sales, customer service and marketing
expenses. Total marketing and selling expenses increased $1.4 million, or
13.5%,
to $12.2 million in fiscal 2003 compared with fiscal 2002 expenses of $10.7
million while fiscal 2002 expenses increased $3.0 million, or 39.3%, from
$7.7
million in fiscal 2001. As a percentage of revenues, marketing and selling
expenses were 21.2%, 24.8% and 22.6% in fiscal 2003, 2002 and 2001,
respectively. Marketing and selling expenses as a percentage of revenues
remained relatively flat from 2001 to 2003 except for a slight increase in
2002.
The increase in absolute dollars in fiscal 2003 over fiscal 2002 was primarily
due to the addition of our business services segment and the increased headcount
and costs associated with the increased headcount. The increase in absolute
dollars in fiscal 2002 over fiscal 2001 was primarily due to an increased
headcount and associated headcount costs, along with an increase in commissions
to our resellers in our conferencing services segment. Also contributing
was an
increase in our marketing budget to increase momentum in the markets for
our new
products in our products segment and conferencing services segment and to
introduce our new business services segment.
39
General
and administrative expenses.
General
and administrative (G&A) expenses include compensation costs, professional
service fees, allocations of overhead expenses, litigation costs, including
costs associated with the SEC investigation and subsequent litigation, bad
debt
expenses, and corporate administrative costs, including finance and human
resources. Total general and administrative expenses increased $12.7 million,
or
237.0%, to $18.0 million in fiscal 2003 compared with fiscal 2002 expenses
of
$5.3 million while fiscal 2002 expenses increased $1.1 million, or 27.3%,
from
$4.2 million in fiscal 2001. As a percentage of revenues, general and
administrative expenses were 31.3%, 12.3% and 12.3% in fiscal 2003, 2002
and
2001, respectively. We attribute the increase in G&A as a percentage of
revenues from 12.3% in 2002 to 31.3% in 2003 to the following: costs associated
with the Securities and Exchange Commission investigation and subsequent
lawsuits, including a settlement payment associated with the shareholders’ class
action lawsuit in the amount of $5.0 million in cash and $2.52 million in
stock,
legal and accounting fees associated with these lawsuits in the amount of
$1.84
million, as well as writing off all costs associated with our shelf registration
in the amount of $328,000, payments for the early buyout of our leases in
Woburn, MA and Ireland in the total amount of $305,000, an increase in
accounting fees over the previous year of $210,000, an increase in legal
fees in
the amount of $130,000, salary expense increased $459,000 over the previous
fiscal year due primarily to the increase in the number of employees as a
result
of the E.mergent acquisition and an increase in overall general and
administrative expense of $1.27 million due to the OM Video
acquisition.
Research
and product development expenses.
Research
and product development expenses include research and development, product
line
management, engineering services and test and application expenses, including
compensation costs, outside services, expensed materials, depreciation and
an
allocation of overhead expenses. Total research and product development expenses
decreased $0.8 million, or 21.4%, to $3.0 million in fiscal 2003 compared
with
fiscal 2002 expenses of $3.8 million while fiscal 2002 expenses increased
$1.1
million, or 38.7%, from $2.7 million in fiscal 2001. As a percentage of
revenues, research and product development expenses were 5.2%, 8.8% and 8.0%
in
fiscal 2003, 2002 and 2001, respectively. The decrease in research and product
development expenses during fiscal 2003 was due to decreased salaries and
expenses associated with a reduction in personnel related to the closing
of the
Dublin office. Also, as a percentage of revenue, research and product
development dropped from 8.8% to 5.2% due to substantially higher business
services revenues that require little or no additional product development.
The
increase in product development expenses from fiscal 2001 to fiscal 2002
was due
to increased salaries and expenses associated with additional personnel and
development costs associated with new product development.
Impairment
charges.
In
fiscal 2002, impairment charges totaled $72,000 for property and equipment
and
approximately $7.0 million for goodwill and intangible assets. In fiscal
2003,
impairment charges totaled $535,000 for property and equipment and $25.5
million
for goodwill and intangible assets. See Item 1. Description of Business.
Acquisitions
and Dispositions.
Gain
on sale of court conferencing assets.
In
fiscal 2002, we recognized a gain of $250,000 in connection with our sale
of our
court conferencing customer list to CourtCall LLC.
Purchased
in-process research and development.
In the
first quarter of fiscal 2001, we wrote off $728,000 representing purchased
in-process research and development that had not yet reached technological
feasibility related to the ClearOne acquisition.
Operating
income (loss).
For
fiscal 2003, our operating loss increased $31.3 million, or 562.8%, to $36.9
million on revenues of $57.6 million, from an operating loss of $5.6 million
on
revenues of $43.4 million in fiscal 2002. The factors affecting this increase
in
operating loss were an increase in impairment charges for goodwill and other
intangible assets of $18.9 million, an increase in general and administrative
expenses of $12.7 million, an increase in marketing and selling expenses
of $1.4
million, and a decrease in the gain on sale of assets of $0.3 million, offset
by
a decrease in gross profit margin of $1.1 million and a reduction in product
development expenses of $0.8 million.
For
fiscal 2002, our operating loss increased $9.2 million, or 253.8%, to $5.6
million on revenues of $43.4 million, from an operating income of $3.6 million
on revenues of $34.1 million in fiscal 2001. The principal factors affecting
this increase in operating loss include an increase in impairment charges
for
goodwill and other intangible assets of $7.1 million, an increase in marketing
and selling expenses of $3.0 million, an increase in general and administrative
expenses of $1.1 million, and an increase in product development expenses
of
$1.1 million offset by a decrease in gross profit margins of $2.2 million,
a
decrease in purchased in-process research and development of $0.7 million
and an
increase in gain on sale of assets of $0.3 million.
40
Interest
income. Interest
income decreased $208,000, or 71.0%, to $85,000 in fiscal 2003 compared with
fiscal 2002 income of $293,000 while fiscal 2002 income decreased $41,000,
or
12.3%, from $334,000 in fiscal 2001. As a percentage of revenues, interest
income was 0.1%, 0.7% and 1.0% in fiscal 2003, 2002 and 2001, respectively.
The
reduction in interest income was due to the use of cash and cash equivalents
to
complete acquisitions during fiscal 2003 and 2002. The decrease in interest
income was also due to the general decrease in interest rates paid by financial
institutions.
Interest
expense. Interest
expense increased $57,000, or 31.8%, to $236,000 in fiscal 2003 compared
with
fiscal 2002 expense of $179,000 while fiscal 2002 income increased $15,000,
or
9.1%, from $164,000 in fiscal 2001. As a percentage of revenues, interest
expense was (0.4)%, (0.4)% and (0.5)% in fiscal 2003, 2002 and 2001,
respectively. The increase in interest expense is due to higher debt levels
that
resulted from new capital leases on bridging equipment for our conferencing
services business and the loan associated with the implementation of our
Oracle
ERP system.
Net
income (loss) from continuing operations.
Net loss
from continuing operations increased $31.6 million, or 580.6% to $37.0 million
in fiscal 2003 compared with fiscal 2002 net loss from continuing operations
of
$5.4 million while fiscal 2002 income decreased $9.2 million, or 242.8%,
from
net income from continuing operations of $3.8 million in fiscal 2001. As
a
percentage of revenues, net income (loss) from continuing operations was
(64.3)%, (12.5)% and 11.2% in fiscal 2003, 2002 and 2001, respectively. We
attribute the increased loss to the results of operations as described
above.
Provision
(benefit) for income taxes.
Provision (benefit) for income taxes was ($0.8) million, $1.4 million and
$1.1
million for 2003, 2002 and 2001, respectively. Certain expenses in our
consolidated statements of operations are not deductible for income tax
purposes. These expenses include impairment charges, meals and entertainment
expenses and goodwill amortization. In addition, we increased our deferred
tax
asset valuation allowance attributable to losses for which no tax benefit
is
recorded. The combined effects of the nondeductible expenses and the increased
valuation allowance were the primary reasons for our tax expense (benefit)
being
different from the expected tax expense (benefit). The Company has recorded
a
valuation allowance against certain deferred tax assets where it is not
considered more likely than not that the deferred tax assets will be
realized.
Net
gain from discontinued operations.
Net gain
from discontinued operations includes the sale of our remote control product
line to Burk Technology. The gain from discontinued operation, net of income
taxes, increased $24,000 in fiscal 2003 to $200,000 from $176,000 in fiscal
2002, and in fiscal 2002 decreased $684,000 from $860,000 in fiscal 2001.
The
income from discontinued operations during fiscal 2003 and fiscal 2002 consisted
of payments from Burk on their note receivable. The income from discontinued
operations during fiscal 2001 consisted of operating income from discontinued
operations and the gain on the sale to Burk.
Net
income (loss).
For
fiscal 2003, our net loss increased $29.3 million, or 440.0%, to $36.0 million
from $6.7 million in fiscal 2002. The $29.3 million increase in net loss
primarily resulted from an increase in operating loss of $31.3 million, a
decrease in interest income of $208,000 and an increase in interest expense
of
$57,000 partially offset by an increase in benefit for income taxes of $2.2
million, an increase in gain from discontinued operations of $24,000, an
increase in other income of $4,600 and gain on foreign currency transactions
of
$40,000.
For
fiscal 2002, our net loss increased $10.3 million, or 284.1%, to $6.7 million
from a net income of $3.6 million in fiscal 2001. The $10.3 million increase
in
net loss primarily resulted from an increase in operating loss of $9.2 million,
a decrease in gain from discontinued operations of $684,000, a decrease in
interest income of $41,000, an increase in interest expense of $15,000, a
decrease in other income of $46,000, and an increase in the provision for
income
taxes of $350,000 partially offset by an increase in gain on foreign currency
transactions of $46,000.
Effect
on the Company from Acquisitions and Subsequent Related
Dispositions
During
the fiscal years ended June 30, 2003, 2002 and 2001, we acquired four different
companies with the intention of expanding our operations to include the
development, manufacture and distribution of video conferencing products
as well
as adding a business services segment to our business. See Item 1. Description
of Business. Acquisitions
and Dispositions
for more
details. Total consideration paid to acquire these companies was approximately
$39.9 million in cash and the issuance of common stock.
41
As
a
result of the impairment tests performed effective as of the end of fiscal
2003
and fiscal 2002 according to SFAS No. 142 and 144, and 121, respectively,
we
recorded impairment charges for all goodwill, a portion of purchased
intangibles, and substantially all property and equipment for each entity.
Impairment charges totaled approximately $33.1 million on our statements
of
operations. Between the end of fiscal 2002 and the third quarter of fiscal
2005
we had disposed of substantially all the assets and operations of the four
acquired companies due to technology issues and lack of market success. We
experienced a significant decrease in revenue associated with the dispositions
and related cost and expenses. See Item 1. Description of Business. Subsequent
Events
for more
details.
We
have
refocused our organization on our original core competency, which is where
we
intend to keep our focus for the foreseeable future. Our current plans are
to
invest in research and development to release new products that are in line
with
our core competencies and that complement our existing product lines.
Private
Placement
On
December 11, 2001, we received net proceeds of $23.8 million from the private
sale of 1.5 million shares of our common stock, after deducting costs and
expenses associated with the private placement. The proceeds were used to
pay
the cash purchase price of the E.mergent acquisition and the OM Video
acquisition described below, as well as for other corporate purposes. In
connection with the offering, we also issued warrants to our placement agent
entitling it to purchase up to 150,000 shares of our common stock at $17.00
per
share through November 27, 2006. These warrants were valued at approximately
$1.6 million using the Black Scholes method.
Discontinued
Operations
On
April
12, 2001, we sold the assets of the remote control portion of our RFM/Broadcast
division to Burk Technology, Inc. (Burk), a privately held developer and
manufacturer of broadcast facility control systems products. We retained
the
accounts payable of the remote control portion of the RFM/Broadcast division
and
Burk assumed obligations for unfilled customer orders and satisfying warranty
obligations to existing customers and for inventory sold to Burk. However,
we
retained certain warranty obligations to Burk to ensure that all of the assets
sold to Burk were in good operating condition and repair.
Consideration
for the sale consisted of $750,000 in cash at closing, $1.8 million in the
form
of a seven-year promissory note, with interest at the rate of nine percent
per
year, and up to $700,000 as a commission over a period of up to seven years.
The
payments on the promissory note may be deferred based upon Burk not meeting
net
quarterly sales levels established within the agreement. The promissory note
is
secured by a subordinate security interest in the personal property of Burk.
The
gain on the sale is being recognized as cash is collected (as collection
was not
reasonably assured from Burk). The commission is based upon future net sales
of
Burk over base sales established within the agreement. We realized a gain
on the
sale of $200,000 for the 2003 fiscal year, $176,000 for the 2002 fiscal year,
and $123,000 for the 2001 fiscal year. As of June 30, 2003, $1.5 million of
the promissory note remained outstanding and we had received $20,000 in
commissions.
Sale
of Other Assets
Sale
of Court Conferencing Assets
As
part
of our conferencing services segment, our court conferencing customers engaged
in the audio and/or video conferencing of legal proceedings including remote
appearances in state and federal courts and/or administrative tribunals within
the United States. On October 26, 2001, we sold our court conferencing customer
list, including all contracts relating to our court conferencing services
to
CourtCall LLC and recognized a gain of $250,000.
42
Sale
of Broadcast Telephone Interface Product Line
On
August
23, 2002, we entered into an agreement with Comrex Corporation (Comrex).
In
exchange for $1.3 million, Comrex received certain inventory associated with
our
broadcast telephone interface product line, a perpetual software license
to use
our technology related to broadcast telephone interface products along with
one
free year of maintenance and support, and transition services for 90 days
following the effective date of the agreement. The transition services included
training, engineering assistance, consultation, and development services.
We
recognized $1.1 million in revenue related to this transaction in the fiscal
year ended June 30, 2003.
We
also
entered into a manufacturing agreement to continue to manufacture additional
product for Comrex for one year following the agreement described above on
a
when-and-if needed basis. Comrex agreed to pay us for any additional product
on
a per item basis of cost plus 30%.
Subsequent
Events
Sale
of our U.S. Audiovisual Integration Services.
On
May 6,
2004, we sold certain assets of our U.S. audiovisual integration services
operations to M:Space, Inc. (M:Space) for no cash compensation. M:Space is
a
privately held audiovisual integration services company. In exchange for
M:Space
assuming obligations for completion of certain customer contracts, and
satisfying maintenance contract obligations to existing customers, we
transferred to M:Space certain assets including inventory valued at $569,000.
We
expect that the operations of our U.S. audiovisual integration services will
be
classified as discontinued operations in the fiscal year 2004. As of June
30,
2003, the assets of audiovisual integration services were classified as held
and
used. We continue to manufacture and sell the camera and furniture lines
acquired with the E.mergent acquisition.
Sale
of Conferencing Services Business.
On July
1, 2004, we sold our conferencing services business segment to Clarinet,
Inc.,
an affiliate of American Teleconferencing Services, Ltd. d/b/a Premier
Conferencing for $21.3 million. Of the purchase price $1.0 million was placed
into an 18-month Indemnity Escrow account and an additional $300,000 was
placed
into a working capital account. We received the $300,000 working capital
escrow
funds approximately 90 days after the execution date of the contract.
Additionally, $1.4 million of the proceeds was utilized to pay off equipment
leases pertaining to assets being conveyed to Clarinet. We expect that the
conferencing services operations will be classified as discontinued operations
in the fiscal year 2005. As of June 30, 2003, the assets of conferencing
services were classified as held and used.
Closing
of Germany Office. During
December 2004, we closed our Germany office and consolidated those activities
with our United Kingdom office. Costs associated with closing the Germany
office
totaled $305,000 and included operating leases and severance
payments.
Sale
of OM Video.
On
March
4, 2005, we sold all of the issued and outstanding stock of our Canadian
subsidiary, ClearOne Communications of Canada, Inc. (ClearOne Canada) to
6351352
Canada Inc., a Canada corporation (the “OM Purchaser”). ClearOne Canada owned
all the issued and outstanding stock of Stechyson Electronics Ltd., which
conducts business under the name OM Video. We agreed to sell the stock of
ClearOne Canada for $200,000 in cash; a $1.3 million note payable over a
15-month period, with interest accruing on the unpaid balance at the rate
of
5.25% per year; and contingent consideration ranging from 3% to 4% of related
gross revenues over a five-year period. We expect that the operations of
the
Canada audiovisual integration services will be classified as discontinued
operations in fiscal year 2005. As of June 30, 2003, the assets of the Canada
audiovisual integration business were classified as held and used. In June
2005,
we were advised that the OM Purchaser had settled an action brought by the
former employer of certain of OM Purchaser’s owners and employees alleging
violation of non-competition agreements. The settlement reportedly involved
a
cash payment and an agreement not to sell certain products for a period of
one
year. We are evaluating what impact, if any, this settlement may have on
the OM
Purchaser’s ability to make the payment required under the note.
43
Third-Party
Manufacturing Agreement.
On
August 1, 2005, we entered into a Manufacturing Agreement with Inovar, Inc.,
a
Utah-based electronics manufacturing services provider (“Inovar”), pursuant to
which we agreed to outsource our Salt Lake City manufacturing operations
to
Inovar. The agreement is for an initial term of three years, which shall
automatically be extended for successive and additional terms of one year
each
unless terminated by either party upon 120 days’ advance notice at any time
after the second anniversary of the agreement. The agreement generally provides,
among other things, that Inovar shall: (i) furnish the necessary personnel,
material, equipment, services and facilities to be the exclusive manufacturer
of
substantially all the products that were previously manufactured at our Salt
Lake City, Utah manufacturing facility, and the non-exclusive manufacturer
of a
limited number of products, provided that the total cost to ClearOne (including
price, quality, logistic cost and terms and conditions of purchase) is
competitive; (ii) provide repair service and warranty support and proto-type
services for new product introduction on terms to be agreed upon by the parties;
(iii) purchase certain items of our manufacturing equipment; (iv) lease certain
other items of our manufacturing equipment and have a one-year option to
purchase such leased items; (v) have the right to lease our former manufacturing
employees from a third party employee leasing company; and (vi) purchase
the
parts and materials on hand and in transit at our cost for such items with
the
purchase price payable on a monthly basis when and if such parts and materials
are used by Inovar. The parties also entered into a one-year sublease for
approximately 12,000 square feet of manufacturing space located in our
headquarters in Salt Lake City, Utah, which sublease may be terminated by
either
party upon ninety days’ notice. The agreement provides that products shall be
manufactured by Inovar pursuant to purchase orders submitted by us at purchase
prices to be agreed upon by the parties, subject to adjustment based upon
such
factors as volume, long range forecasts, change orders etc. We also granted
Inovar a right of first refusal to manufacture new products developed by
us at a
cost to ClearOne (including price, quality, logistic cost and terms and
conditions of purchase) that is competitive. Costs associated with outsourcing
our manufacturing totaled approximately $429,000 including severance payments,
facilities we no longer use and fixed assets that will be disposed
of..
Liquidity
and Capital Resources
As
of
June 30, 2003, our cash and cash equivalents were approximately $6.1 million,
restricted cash of approximately $200,000 and our marketable securities of
approximately $1.9 million, which represents an overall decrease of $5.9
million
in our balances at June 30, 2002 which were cash and cash equivalents of
approximately $1.7 million and marketable securities totaling approximately
$12.4 million. We had an overall increase of $7.3 million in our cash and
cash
equivalents and marketable securities from fiscal 2001 to fiscal 2002, with
cash
and cash equivalents of approximately $6.9 million and marketable securities
of
$0 at June 30, 2001. In addition, we previously had a $10.0 million line
of
credit with a bank which was unused at June 30, 2003, and had been frozen
by our
bank on May 16, 2003. The line of credit expired on December 22, 2003 and
was
not renewed.
We
generated cash from operating activities totaling $2.5 million in fiscal
2003,
$31,000 in fiscal 2002 and $4.4 million in fiscal 2001. The increase in cash
provided from operating activities in fiscal 2003 over fiscal 2002 was due
primarily to a decrease in inventory and accounts receivable coupled with
an
increase in deferred revenue and income taxes payable. These items were offset
by an increase in accounts payable and a decrease in our income taxes. The
decrease in cash provided from operating activities in fiscal 2002 over fiscal
2001 was due primarily to an increase in our net loss and an increase in
our
inventory.
The
total
net change in cash and cash equivalents for fiscal 2003 was an increase of
$4.3
million. The primary uses of cash during this period were $7.4 million, net
of
cash received for the purchase of OM Video, $1.8 million for the purchases
of
property and equipment and the payment of the earn-out provision and $430,000
for the repurchase of common stock. The primary sources of cash were $2.5
million from operating activities, $10.5 million of net sales of investments,
$1.3 million from proceeds of the sale to Comrex, $318,000 from proceeds
of
discontinued operations, and $95,000 associated with the exercise of stock
options and the issuance of common stock under the employee stock purchase
plan.
The
total
net change in cash and cash equivalents for fiscal 2002 was a decrease of
$5.1
million. The primary uses of cash during this period were $14.4 million for
the
purchases of E.mergent and Ivron, $12.4 million of net purchases of investments,
and $2.8 million for the purchases of property and equipment. The primary
sources of cash were $1.0 million associated with the exercise of stock options
and the issuance of common stock under the employee stock purchase plan,
$23.8
million from the proceeds of a private placement, $250,000 from proceeds
of the
sale to CourtCall LLC, and $280,000 from proceeds of discontinued
operations.
44
The
total
net change in cash and cash equivalents for fiscal 2001 was an increase of
$1.5
million. The primary uses of cash during this period were $1.9 million for
the
purchase of ClearOne, $1.4 million for purchases of property and equipment
and
$244,000 for the repurchase of common stock. The primary sources of cash
were
$4.4 from operating activities, $340,000 associated with the exercise of
stock
options and the issuance of common stock under the employee stock purchase
plan
and $750,000 from the proceeds of discontinued operations.
The
positive cash from operating activities was primarily the result of adjusted
non-cash expenses (such as impairment, depreciation, amortization, the provision
for doubtful accounts, inventory write-downs for excess for obsolescence,
write
off of in-process research and development), increases in income tax receivable
and accrued liabilities. Offsetting the positive effect of these items were
an
increase in net loss, an increase in trade receivables, and a decrease in
accounts payable.
As
discussed herein, on April 12, 2001, we sold the assets of the remote control
portion of our RFM/Broadcast division to Burk Technology, Inc. (Burk).
Consideration for the sale consisted of $750,000 in cash at closing, $1.8
million in the form of a seven-year promissory note, with interest at the
rate
of nine percent per year, and up to $700,000 as a commission over a period
of up
to seven years. The payments on the promissory note may be deferred based
upon
Burk not meeting net quarterly sales levels established within the agreement.
The promissory note is secured by a subordinate security interest in the
personal property of Burk. The gain on the sale is being recognized as cash
is
collected (as collection was not reasonably assured from Burk). The commission
is based upon future net sales of Burk over base sales established within
the
agreement. We realized a gain on the sale of $200,000 for the 2003 fiscal
year,
$176,000 for the 2002 fiscal year, and $123,000 for the 2001 fiscal year.
We
received payments totaling $187,000 for the 2005 fiscal year and $93,000
for the
2004 fiscal year. As of June 30, 2005, $1.5 million of the promissory note
remained outstanding and we had received $20,000 in commissions.
At
June
30, 2003, we had open purchase orders related to our contract manufacturers
and
other contractual obligations of approximately $1.4 million primarily related
to
inventory purchases.
We
have
no off-balance-sheet financing arrangements with related parties and no
unconsolidated subsidiaries. Contractual obligations related to our capital
leases and operating leases at June 30, 2003 are summarized below (in
thousands):
|
Payments
Due by Period
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
One
year
or
less
|
Two
to
Three
Years
|
Four
to
Five
Years
|
After
Five
Years
|
|||||||||||
|
Note
Payable
|
$
|
1,698
|
$
|
728
|
$
|
970
|
$
|
-
|
$
|
-
|
||||||
|
Capital
Leases
|
2,318
|
961
|
1,357
|
-
|
-
|
|||||||||||
|
Operating
Leases
|
1,866
|
828
|
938
|
100
|
-
|
|||||||||||
|
Total
Contractual Cash Obligations
|
$
|
5,882
|
$
|
2,517
|
$
|
3,265
|
$
|
100
|
$
|
-
|
||||||
Beginning
in January 2003 and continuing through the date of this report, we have incurred
significant costs with respect to the defense and settlement of legal
proceedings, and the audit of our consolidated financial statements. Restatement
of fiscal 2002 and fiscal 2001 and the fiscal 2003 audit have been significantly
more complex, time consuming and expensive than we originally anticipated.
The
extended time commitment required to complete the restatement of financial
information continues to be costly and divert our resources, as well as have
a
material effect on our results of operations. We paid $5.0 million in cash
and
agreed to issue 1.2 million shares of our common stock to settle the class
action lawsuit, we have incurred legal fees in the amount of approximately
$1.5
million from January 2003 through the date hereof, and we have incurred audit
and tax fees in the amount of approximately $2.1 million from January 2004
through the date hereof.
Notwithstanding
the foregoing, as of June 30, 2005, we believe that our working capital and
cash
flows from operating activities will be sufficient to satisfy our operating
and
capital expenditure requirements for continuing operations for the next 12
months.
45
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
conformity with U.S. GAAP. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of
revenues and expenses during the reporting period. We evaluate our assumptions
and estimates on an ongoing basis and may employ outside experts to assist
in
our evaluations. We believe that the estimates we use are reasonable; however,
actual results could differ from those estimates. Our significant accounting
policies are described in Note 2 to the consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. The following describes
our most critical accounting policies:
Revenue
and Associated Allowances for Revenue Adjustments and Doubtful
Accounts
We
currently have one source of revenue which is product revenue, primarily
from
product sales to independent distributors, dealers, systems integrators,
value-added resellers and end users. Product revenue is recognized when (i)
the
products are shipped, (ii) persuasive evidence of an arrangement exists,
(iii)
the price is fixed and determinable, and (iv) collection is reasonably assured.
Beginning in 2001, we modified our sales channels to include distributors.
These
distributors were generally thinly capitalized with little or no financial
resources and did not have the wherewithal to pay for these products when
delivered. Furthermore, in a substantial number of cases, significant amounts
of
inventories were returned or never paid for and the payment for product sold
(to
both distributors and non-distributors) was regularly subject to a final
negotiation between us and our customers. As a result of such negotiations,
we
routinely agreed to significant concessions from the originally invoiced
amounts
to facilitate collection. These practices continued to exist through the
end of
fiscal year 2003.
Accordingly,
amounts charged to both distributors and non-distributors were not considered
fixed and determinable or reasonably collectible until cash was collected.
As a
result, the June 30, 2003, 2002, and 2001 balance sheets reflect no accounts
receivable or deferred revenue related to product sales.
As
part
of the restatement process we identified certain deficiencies in our internal
controls over revenue recognition where amounts charged to both distributors
and
non-distributors were not considered fixed and determinable or reasonably
collectible until cash was collected. To address these internal control
deficiencies we have implemented improved credit policies and procedures,
improved the approval process for sales returns and credit memos, established
processes for managing and monitoring of channel inventory levels, and provided
training to our accounting staff. Based upon our implementation of these
internal controls and improved experience with our customers, we expect to
be
able to meet the criteria for revenue recognition prior to cash collection
in
the near future.
We
offer
rebates to certain distributors based upon volume of product by such
distributors. We record rebates as a reduction of revenue in accordance with
Emerging Issues Task Force (EITF) Issue No. 00-22, “Accounting for Points and
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers
for
Free Products or Services to Be Delivered in the Future.” Beginning January 1,
2002, we adopted EITF Issue No. 01-9, “Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor’s Products).” We
continue to record rebates as a reduction of revenue.
We
estimate future product returns based upon historical experience and maintain
an
allowance for estimated returns which has been reflected as a reduction to
accounts receivable. The allowance for estimated returns was $107,000, $0,
and
$0 as of June 30, 2003, 2002, and 2001, respectively.
We
offer
credit terms on the sale of our products to a majority of our customers and
perform ongoing credit evaluations of our customers’ financial condition. We
maintain an allowance for doubtful accounts based upon our historical collection
experience and expected collectibility of all accounts receivable. The allowance
for doubtful accounts was $139,000, $190,000, and $0 as of June 30, 2003,
2002,
and 2001, respectively; however, our actual bad debts in future periods may
differ from our current estimates and the differences may be material, which
may
have an adverse impact on our future accounts receivable and cash
position.
46
Goodwill
and Purchased Intangibles
We
assess
the impairment of goodwill and other identifiable intangibles annually or
whenever events or changes in circumstances indicate that the carrying value
may
not be recoverable. Some factors we consider important which could trigger
an
impairment review include the following:
|
·
|
Significant
underperformance relative to projected future operating
results;
|
|
·
|
Significant
changes in the manner of our use of the acquired assets or the
strategy
for our overall business; and
|
|
·
|
Significant
negative industry or economic
trends.
|
If
we
determine that the carrying value of goodwill and other identified intangibles
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, we would typically measure any impairment based
on a
projected discounted cash flow method using a discount rate determined by
us to
be commensurate
with the risk inherent in our current business model. We evaluate goodwill
for
impairment at least annually.
On
July 1, 2002, we completed our transitional goodwill and purchased intangibles
impairment tests outlined under SFAS 142 which required the assessment of
goodwill and purchased intangibles for impairment, and in the fourth quarter
of
fiscal 2003, we completed our annual impairment tests. As of June 30, 2003,
we
determined that our goodwill assets and purchased intangible assets were
impaired and we recorded an impairment charge of $25.5 million related to
these
assets. We
plan
to conduct our annual impairment tests in the fourth quarter of every fiscal
year, unless impairment indicators exist sooner. Screening for and assessing
whether impairment indicators exist or if events or changes in circumstances
have occurred, including market conditions, operating fundamentals, competition
and general economic conditions, requires significant judgment. Additionally,
changes in the high-technology industry occur frequently and quickly. Therefore,
there can be no assurance that a charge to operations will not occur as a
result
of future purchased intangible impairment tests.
Accounting
for Income Taxes
We
estimate our actual current tax expense together with our temporary differences
resulting from differing treatment of items, such as deferred revenue, for
tax
and accounting purposes. These temporary differences result in deferred tax
assets and liabilities. We must then assess the likelihood that our deferred
tax
assets will be recovered from future taxable income and to the extent we
believe
that recovery is not likely, we must establish a valuation allowance against
these tax assets. Significant management judgment is required in determining
our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. To the
extent
we establish a valuation allowance in a period, we must include and expense
the
allowance within the tax provision in the consolidated statement of operations.
Lower
of Cost or Market Adjustments
We
account for our inventory on a first-in-first-out (FIFO) basis, and make
appropriate adjustments on a quarterly basis to write-down the value of
inventory to the lower of cost or net realizable value.
In
order
to determine what, if any, inventory needs to be written down, we perform
an
analysis of obsolete and slow-moving inventory quarterly. In general, we
write
down our excess and obsolete inventory by an amount that is equal to the
difference between the cost of the inventory and its estimated market value
if
market value is less than cost, based upon assumptions about future product
life-cycles, product demand and market conditions. Those items that are found
to
have a supply in excess of demand are considered to be slow-moving or obsolete
and the appropriate reserve is made to write-down the value of that inventory
to
its realizable value.
47
Issued
but not yet Adopted Accounting
Pronouncements
In
January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable
Interest Entities.” This interpretation establishes new guidelines for
consolidating entities in which a parent company may not have majority voting
control, but bears residual economic risks or is entitled to receive a majority
of the entity’s residual returns, or both. As a result, certain subsidiaries
that were previously not consolidated under the provisions of Accounting
Research Bulletin No. 51 may now require consolidation with the parent company.
This interpretation applies in the first year or interim period beginning
after
June 15, 2003, to variable interest entities in which an enterprise holds
a
variable interest that it acquired before February 1, 2003. We have evaluated
this interpretation but do not expect that it will have a material effect
on our
business, results of operations, financial position, or liquidity.
In
May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures
certain
financial instruments with characteristics of both liabilities and equity.
It
requires that an issuer classify a financial instrument that is within its
scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15,
2003. We have evaluated this statement but do not expect that it will have
a
material effect on our business, results of operations, financial position,
or
liquidity.
In
December 2003, the FASB issued a revision to Interpretation No. 46,
“Consolidation of Variable Interest Entities” (FIN46R). FIN46R clarifies the
application of ARB No. 51, “Consolidated Financial Statements” to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the
entity to finance its activities without additional subordinated financial
support. FIN46R requires the consolidation of these entities, known as variable
interest entities, by the primary beneficiary of the entity. The primary
beneficiary is the entity, if any, that will absorb a majority of the entity's
expected losses, receive a majority of the entity's expected residual returns,
or both.
Among
other changes, the revisions of FIN46R (a) clarified some requirements of
the original FIN46, which had been issued in January 2003, (b) eased
some implementation problems, and (c) added new scope exceptions. FIN46R
deferred the effective date of the Interpretation for public companies, to
the
end of the first reporting period ending after March 15, 2004. The adoption
of this interpretation did not have a material effect on our business, results
of operations, financial position, or liquidity.
In
March
2004, the FASB issued EITF No. 03-01, “The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments,” which provides new
guidance for assessing impairment losses on debt and equity investments.
The new
impairment model applies to investments accounted for under the cost or equity
method and investments accounted for under FAS 115, “Accounting for Certain
Investments in Debt and Equity Securities.” EITF No. 03-01 also includes new
disclosure requirements for cost method investments and for all investments
that
are in an unrealized loss position. In September 2004, the FASB delayed the
accounting provisions of EITF No. 03-01; however the disclosure requirements
remain effective. We will evaluate the effect, if any, of adopting EITF 03-01.
In
November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs—an
amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to
converge U.S. accounting standards for inventories with International Accounting
Standards. FAS No. 151 requires idle facility expenses, freight, handling
costs,
and wasted material (spoilage) costs to be recognized as current-period charges.
It also requires that allocation of fixed production overheads to the costs
of
conversion be based on the normal capacity of the production facilities.
FAS No.
151 will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We do not anticipate that the implementation of this
standard will have a significant impact on our consolidated results of
operations, financial condition or cash flows.
In
December 2004, FASB issued Financial Accounting Standard No. 123R
(“SFAS 123R”), “Share-Based Payment.” SFAS 123R is a revision of SFAS 123. SFAS
123R establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. Primarily,
SFAS
123R focuses on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. It also addresses transactions
in
which an entity incurs liabilities in exchange for goods or services that
are
based on the fair value of the entity’s equity instruments or that may be
settled by the issuance of those equity instruments.
48
SFAS
123R
requires us to measure the cost of employee services received in exchange
for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award—the
requisite service period (usually the vesting period). No compensation cost
is
recognized for equity instruments for which employees do not render the
requisite service. Therefore, if an employee does not ultimately render the
requisite service, the costs recognized related to unvested options will
be
reversed.
In
accordance with Staff Accounting Bulletin 107, SFAS 123R is effective as
of the
beginning of the annual reporting period that begins after June 15, 2005.
Under these guidelines, we will adopt SFAS 123R as of the beginning of the
first
quarter of fiscal year 2006 starting July 1, 2005. We expect this statement
to
have an adverse impact on our future results of operations.
|
ITEM
7A.
|
QUALITATIVE
AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Market
risk represents the risk of changes in the value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. Changes in these factors could cause
fluctuations in the results of our operations and cash flows. In the ordinary
course of business, we are exposed to foreign currency and interest rate
risks.
These risks primarily relate to the sale of products and services to foreign
customers and changes in interest rates on our note payable and capital leases.
We
currently have limited market risk sensitive instruments related to interest
rates. Our note payable and capital lease obligations totaled approximately
$3.6
million at June 30, 2003. We do not have significant exposure to changing
interest rates on the note payable and capital leases because interest rates
for
the majority of the capital leases are fixed. We have not undertaken any
additional actions to cover market interest rate market risk and are not
a party
to any other interest rate market risk management activities. A hypothetical
10%
change in market interest rates over the next year would not impact our earnings
or cash flows as the interest rates on the note payable and the majority
of the
capital leases are fixed.
We
do not
purchase or hold any derivative financial instruments.
Although
our subsidiaries enter into transactions in currencies other than their
functional currency, foreign currency exposures arising from these transactions
are not material. The greatest foreign currency exposure arises from the
remeasurement of our net equity investment in our subsidiaries to U.S. dollars.
The primary currency to which we have exposure is the Canadian Dollar. We
sold
our Canadian subsidiary on March 4, 2005 to a private investment group. The
fair
value of our net foreign investments would not be materially affected by
a 10%
adverse change in foreign currency exchange rates from June 30, 2003
levels.
Market
Risk for Investment Securities
Investment
securities consist of shares in triple-A rated short-term money market funds
that typically invest in U.S. Treasury, U.S. government agency and highly
rated
corporate securities. Since these funds are managed in a manner designed
to
maintain a $1.00 per share market value, we do not expect any material changes
in market values as a result of increase or decrease in interest
rates.
49
| ITEM 8. |
FINANCIAL
STATEMENTS.
|
The
following financial statements are included with this report and are located
immediately following the signature page.
50
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
On
July
21, 2003, Ernst & Young, LLP ("Ernst & Young") was dismissed as the
Company’s independent registered public accountants. The decision to dismiss
Ernst & Young was recommended by the Audit Committee of the Board of
Directors and was approved by the Board of Directors. The Company filed a
current report on Form 8-K with respect to such event on July 25, 2003, which
was subsequently amended on August 11, September 30, October 16, and November
7,
2003.
Ernst
& Young's reports on the Company's financial statements for the two fiscal
years ended June 30, 2002 and 2001 did not contain an adverse opinion or
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles. However, as discussed below, such reports
were subsequently withdrawn and the Company engaged KPMG LLP (KPMG) to reaudit
its financial statements for its 2002 and 2001 fiscal years.
On
January 15, 2003, the Securities and Exchange Commission ("SEC") filed a
complaint in the United States District Court against the Company and two
of its
former officers, which included allegations of improper revenue recognition
from
sales to distributors. The Company provided a copy of the complaint to Ernst
& Young. The SEC complaint contained allegations that, if true, would
materially impact the fairness or reliability of the Company's financial
statements, and the validity of the allegations could not be determined without
further investigation. The Company's representatives discussed with Ernst
&
Young the SEC complaint and the need to issue a press release. On January
21,
2003, the Company issued a press release and filed a current report on Form
8-K
which included statements to the effect that the Company's financial statements
for the fiscal years ended June 30, 2001, and June 30, 2002, and for the
quarters ended March 31, 2001, through and including September 30, 2002,
were
under review and that investment decisions should not be made based on such
financial statements, or on the auditors' report thereon included in the
Company's Annual Report as filed on Form 10K. The Company's representatives
discussed the text of the press release with Ernst & Young prior to its
release.
In
its
letter to the Securities and Exchange Commission dated October 13, 2003,
a copy
of which is included as Exhibit 16.1 to the Company's 8-K/A report filed
on
November 7, 2003, Ernst & Young stated, among other things, that on or about
January 21, 2003, it advised the Company's Audit Committee (through its
designated representative) that the Securities and Exchange Commission’s
complaint dated January 15, 2003 and other information that had come to Ernst
& Young’s attention gave Ernst & Young concern regarding the fairness or
reliability of the Company’s financial statements for the two fiscal years ended
June 30, 2002 and 2001, and that such financial statements and Ernst &
Young’s reports thereon should not be relied upon and needed to be withdrawn and
that Ernst & Young was unwilling to be associated with the previously-issued
financial statements until a sufficient investigation into those allegations
had
been performed and any matters noted in the investigation appropriately
resolved. The Company has no written record of such advice and, except as
described in its 8-K filings, has been unable to corroborate such statements
by
Ernst & Young.
On
December 18, 2003, we engaged KPMG as our new independent registered public
accountants to audit our financial statements for the 2003 fiscal year and
to
reaudit our financial statements for the 2002 and 2001 fiscal years. Those
financial statements are included in this report.
|
CONTROLS
AND PROCEDURES
|
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange
Act
of 1934, as amended (the Exchange Act), is recorded, processed, summarized,
and
reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure.
We
have
restated our consolidated financial statements for the 2002 and 2001 fiscal
years, and the individual restatement adjustments are discussed in “Item 8.
Financial Statements - Note 3. Restatement and Reclassification of Previously
Issued Financial Statements.”
51
As
required by Rule 13a-15 under the Exchange Act, we have completed an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness and the design and operation of our disclosure controls and
procedures. This evaluation has allowed us to make conclusions in 2005, as
set
forth below, regarding the state of our disclosure controls and procedures
as of
June 30, 2003. In conducting this evaluation, we considered matters relating
to
the restatement of our financial statements including actions taken by us
within
the past two years to identify and enhance the effectiveness of our disclosure
controls and procedures and our internal controls over financial reporting.
In
connection with the restatement process, we also identified the internal
controls over financial reporting that could or should have prevented or
mitigated the errors.
We
concluded that as of June 30, 2003, the following material weaknesses in
our
internal controls existed:
We
have a
material weakness with respect to accounting for revenue recognition and
related
sales returns, credit memos, and allowances. Our accounting policies and
practices over revenue recognition and related sales returns, credit memos,
and
allowances were inconsistent with generally accepted accounting principles
in
the U.S. (GAAP). We also have ineffective controls to monitor compliance
with
existing policies and procedures, and have insufficient training of accounting
personnel. As a result, we recognized revenue before the amounts charged
to both
distributors and non-distributors were considered fixed and determinable
or
reasonably collectible. Related sales returns and allowances, rebates, and
accounts receivables were also misstated as a result of the errors in revenue
recognition.
We
have a
material weakness related to accounting for cutoff and period-end close
adjustments related to accrued liabilities and prepaid assets. Our accounting
policies and practices over cutoff and period-end close adjustments related
to
accrued liabilities and prepaid assets were inconsistent with GAAP. This
material weakness resulted in recording accruals and amortizing certain prepaid
assets to operating expenses during the fiscal years ended June 30, 2003,
2002
and 2001 in the improper periods.
We
have a
material weakness related to the tracking and valuation of inventory, including
controls to identify and properly account for obsolete inventory. Our accounting
policies and practices over tracking and valuation of inventory, including
controls to identify and properly account for slow moving, obsolete inventory
were inconsistent with GAAP. This material weakness resulted in misstatements
in
the recording and presentation of inventories, including consigned inventory,
obsolete and slow-moving inventories, errors in the capitalization of overhead
expenses, errors in recording inventories at the lower of cost or market,
and
errors for inventory shrinkage.
We
have a
material weakness in accounting for leases, including classification as
operating or capital. Our accounting policies and practices over accounting
for
leases, including proper classification as operating or capital, were
inconsistent with GAAP. In evaluating the classification of leases, the Company
did not consider all periods for which failure to renew the lease imposes
a
penalty on the lessee in such amount that a renewal appears, at the inception
of
the leases, to be reasonably assured. Accordingly, certain leases were
classified as operating leases that should have been classified as capital
leases.
We
have a
material weakness in accounting for non-routine transactions, which include
business combinations, discontinued operations, sale of a business unit (other
than discontinued operations), and evaluation and recognition of impairment
charges. Our accounting policies and practices over accounting for such
non-routine transactions were inconsistent with GAAP. This material weakness
resulted in improper purchase price allocations in business combinations,
improper amortization and depreciation of long-lived assets, improper
identification and recording of activities related to discontinued operations,
improper recording and reporting the sale of business units, improper evaluation
of triggering events associated with impairment of long-lived assets (including
annual impairment tests for goodwill), and; improper calculating and recording
of impairment charges.
We
have a
material weakness in financial reporting. We lack personnel with adequate
experience in preparing financial statements and related footnotes in accordance
with GAAP.
52
The
following actions have been commenced since December 2003 in response to
the
inadequacies noted above:
|
·
|
Termination
or resignation of company officers and various financial and accounting
personnel.
|
|
·
|
Implementation
of policies imposing limits on shipments to distributors based
on an
evaluation of their credit and inventory stocking levels.
|
|
·
|
Initiation
of an evaluation and remediation process with respect to internal
controls
over financial reporting and related processes designed to identify
internal controls that mitigate financial reporting risk and identify
control gaps that may require further
remediation.
|
|
·
|
Reevaluation
of prior policies and procedures and the establishment of new policies
and
procedures for such matters as complex transactions, account
reconciliation procedures and contract management
procedures.
|
|
·
|
Ongoing
training and monitoring by management to ensure operation of controls
as
designed.
|
|
·
|
Adoption
of a Code of Ethics.
|
We
have
committed considerable resources to date to the reviews and remedies described
above, although certain of such items are ongoing and it will take time to
realize all the benefits. Additional efforts will be required to remediate
all
of the deficiencies in our controls. In addition, the effectiveness of any
system of disclosure controls and procedures is subject to certain limitations,
including the exercise of judgment in designing, implementing and evaluating
the
controls and procedures, the assumptions used in identifying the likelihood
of
future events, and the inability to eliminate improper conduct completely.
As a
result, there can be no assurance that our disclosure controls and procedures
will detect all errors or fraud.
Other
than as described above, since the evaluation date, there has been no change
in
our internal controls over financial reporting that has materially affected,
or
is reasonably likely to materially affect, our internal controls over financial
reporting.
53
PART
III
|
ITEM
10.
|
DIRECTORS
AND EXECUTIVE OFFICERS
|
Directors
and Executive Officers
Directors
The
following individuals are directors of ClearOne as of the date of this
report:
|
Name
|
Principal
Occupation during Past Five Years
|
Age
|
Director
Since
|
|||
|
Edward
Dallin Bagley
|
Edward
Dallin Bagley joined our board of directors in April 1994 and was
named
chairman of the board in February 2004. Mr. Bagley also served
as a
director from April 1987 to July 1991. He also currently serves
as a
director of Tunex International. Mr. Bagley has been licensed to
practice
law in Utah since 1965 and holds a juris doctorate degree from
the
University of Utah College of Law. For in excess of the past five
years,
Mr. Bagley has managed his own investments and served as a consultant
from
time to time.
|
66
|
1994
|
|||
|
Brad
R. Baldwin
|
Brad
R. Baldwin joined our board of directors in 1988. Mr. Baldwin is
an
attorney licensed to practice in Utah. Since April 2001, he has
been
engaged in the commercial real estate business with Commerce CRG
in Salt
Lake City. From February 2000 to March 2001, Mr. Baldwin was an
executive
with Idea Exchange Inc. From October 1994 to January 2000, he served
as
president and chief executive officer of Bank One, Utah, a commercial
bank
headquartered in Salt Lake City. Mr. Baldwin holds a degree in
finance
from the University of Utah and a juris doctorate degree from the
University of Washington.
|
49
|
1988
|
|||
|
Larry
R. Hendricks
|
Larry
R. Hendricks joined our board of directors in June 2003. Mr. Hendricks
is
a certified public accountant who retired in December 1992 after
serving
as vice president of finance and general manager of Daily Foods,
Inc., a
national meat processing company. During his 30-year career in
accounting,
he was also a self-employed CPA and worked for the international
accounting firm Peat Marwick & Mitchell. Mr. Hendricks currently
serves on the board of directors for Tunex International and has
served on
the boards of eight other organizations, including Habitat for
Humanity,
Daily Foods and Skin Care International. He earned a bachelor's
degree in
accounting from Utah State University and a master of business
administration degree from the University of Utah. Mr. Hendricks
is
currently a member of the American Institute of Certified Public
Accountants and the Utah Association of CPAs.
|
62
|
2003
|
|||
|
Scott
M. Huntsman
|
Scott
M. Huntsman joined our board of directors in June 2003. Mr. Huntsman
has
served as president and chief executive officer of GlobalSim, a
private
technology and simulation company, since February 2003 and chief
financial
officer from April 2002 to February 2003. Prior to GlobalSim, he
spent 11
years on Wall Street as an investment banker, where he focused
on mergers,
acquisitions and corporate finance transactions. From August 1996
to 2000,
Mr. Huntsman served at Donaldson, Lufkin and Jenrette Securities
Corporation until their merger with Credit Suisse First Boston
where he
served until January 2002. Mr. Huntsman earned a bachelor's degree
from
Columbia University and a master of business administration degree
from
The Wharton School at the University of Pennsylvania. He also studied
at
the London School of Economics as a Kohn Fellowship
recipient.
|
39
|
2003
|
54
|
Harry
Spielberg
|
Harry
Spielberg joined us as a director in January 2001. Since January
1996, Mr.
Spielberg has been the director of Cosentini Information Technologies’
Audiovisual Group, a division of the consulting engineering firm
Cosentini
Associates. Prior to 1996, Mr. Spielberg served as vice president,
engineering for Media Facilities Corp. and Barsky & Associates. Mr.
Spielberg received a bachelor’s degree in psychology from the State
University of New York.
|
53
|
2001
|
Director
Compensation
All
of
our directors serve until their successors are elected and have qualified
to
serve as directors. We pay the chairman of the board $4,000 per month and
all
other directors $2,000 per month for their services to us as directors.
Dal
Bagley, a director, served as a consultant to the Company from November 2002
through January 2004 and was paid $5,000 per month for his services. He
consulted with Company’s management on mergers and financial matters on an as
needed basis. Mr. Bagley’s services were performed pursuant to an oral
agreement, the terms of which were approved by the Board of
Directors.
Director
Committees
Our
board
of directors currently has two standing committees: the audit and compensation
committees.
The
Audit
Committee. The audit committee assists the board in its general oversight
of our
financial reporting, internal controls and audit functions and is directly
responsible for the appointment, retention, compensation and oversight of
our
independent auditor. The audit committee is currently composed of Brad R.
Baldwin, Scott M. Huntsman and Larry R. Hendricks. The board has determined
that
Mr. Hendricks is a financial expert and is independent within the meaning
of
NASDAQ Rule 4200(a)(15).
The
Compensation Committee. The compensation committee makes recommendations
to the
Board of Directors regarding remuneration of our executive officers and
directors, and administers the incentive plans for our directors, officers
and
employees. The compensation committee is currently composed of Brad R. Baldwin,
Scott M. Huntsman and Edward Dallin Bagley.
Meetings
of the Board of Directors and Committees
The
board
of directors held nine meetings during fiscal 2003 and nine meetings during
fiscal 2002. The audit committee held nineteen meetings during fiscal 2003
and
two meetings during fiscal 2002. The compensation committee held three meetings
during fiscal 2003 and one meeting during fiscal 2002. In 2003, each director
attended at least 75% of the meetings of the board of directors and the
committees on which they served, except for Frances Flood who did not attend
any
board meetings after she was placed on administrative leave.
Nomination
of Director Candidates: Security
holders may recommend candidates for nomination as directors. Any such
recommendations should include the nominee’s name, home and business addresses
and other contact information, detailed biographical data, and qualifications
for board membership, along with information regarding any relationships
between
the candidate and ClearOne within the last three fiscal years. Any such
recommendations should be sent to:
ClearOne
Communications, Inc.
1825
Research Way
Salt
Lake
City, Utah 84119
Attention:
Corporate Secretary
55
Executive
Officers
Our
executive officers as of the date of this filing are as follows:
|
Name
|
Age
|
Position
|
||
|
Zee
Hakimoglu
|
51
|
President
and Chief Executive Officer
|
||
|
Donald
Frederick
|
50
|
Chief
Financial Officer
|
||
|
Tracy
Bathurst
|
41
|
Vice
President of Product Line Management
|
||
|
DeLonie
Call
|
52
|
Vice
President of Human Resources
|
||
|
Werner
Pekarek
|
56
|
Vice
President of Operations
|
||
|
Joseph
Sorrentino
|
50
|
Vice
President of Worldwide Sales and
Marketing
|
Zee
Hakimoglu joined us in December 2003 with more than 15 years of executive
and
senior-level, high-tech management experience. She served in a variety of
executive business development, product marketing, and engineering roles
including vice president of product line management for ClearOne from December
2003 to July 2004; vice president of product line management for Oplink
Communications, a publicly traded developer of fiber optic subsystems and
components from December 2001 to December 2002; president of OZ Optics USA,
a
manufacturer of fiber optic test equipment and components from August 2000
to
November 2001; and various management positions including vice president
of
wireless engineering and wireless business unit vice president for Aydin
Corp.,
a telecommunications equipment company, formerly traded on the New York Stock
Exchange from May 1982 until it was acquired in September 1996. Her business
unit at Aydin was the largest provider of digital microwave radios to the
US
Army, which used the radios in Desert Storm and a variety of NATO operations.
She also was vice president of business development for Kaifa Technology
from
October 1998 to August 2000 and was instrumental in its acquisition by E-Tek
Dynamics, then again acquired by JDS Uniphase. Through these acquisitions,
she
held the role of deputy general manager of the Kaifa business unit. Ms.
Hakimoglu earned a bachelor’s degree in physics from California State College,
Sonoma, and a master’s degree in physics from Drexel University.
Donald
Frederick joined us in July 2004 with more than 25 years of financial management
experience. From January 2000 to February 2004, Mr. Frederick was most recently
chief financial officer of Datasweep, Inc., a privately held enterprise software
company. From June 1997 to September 1999, he was chief financial officer
of
ADFlex Solutions, Inc., a publicly held manufacturer of high-tech circuitry
for
consumer electronic products with more than $200 million in revenue. He was
also
vice president of finance for publicly held Flextronics International from
May
1995 to May 1997 and director of finance for Sony Electronics from May 1990
to
May 1995. Mr. Frederick earned a master’s degree in finance from San Jose State
University and a bachelor’s degree in accounting from Michigan Technological
University.
Tracy
Bathurst
joined us in September 1988 and held several positions with us until he was
named Vice President of Product Line Management in January 2005. He was most
recently ClearOne’s director of research and development and has nearly 20 years
experience in defining and developing communications-related products and
technology. Mr. Bathurst has lead the design and development of ClearOne’s high
performance audio and telecommunications equipment. He earned a Bachelor
of
Science degree in industrial technology from Southern Utah
University.
DeLonie
Call joined us in October 2001 with nearly 15 years experience in management
and
executive-level human resources positions. She currently serves as vice
president of human resources. From April 2000 to September 2001, Ms. Call
was
director of human resources for Iomega Corp. and from June 1996 to November
2000
she was vice president of human resources for Vitrex Corp., a start-up
technology company. Ms. Call graduated from Weber State University with a
bachelor’s degree in business management and economics.
56
Werner
Pekarek joined us in January 2005 with more than 15 years of executive level
operations experience, including responsibility for process development,
production planning and implementation, purchasing, supply chain management
and
customer service. Mr. Pekarek held executive operations roles with Siemens
Communications including vice president of operations for Siemens Communications
Devices, Consumer Products from 1997 to 2000, vice president of operations
for
Siemens Information & Communications Networks, Networking Gear from 1992 to
1997, vice president of operations for Siemens Wireless, consumer products
from
1989 to 1992, and various other management positions for Siemens from 1980
to
1989. His expertise includes low volume, high mix networking gear and high
volume consumer wireless and cordless phone products. He was also Vice President
of Operations for start-up high tech companies Break Points from July 2002
to
December 2004 and Optical Micro Machines from November 2000 to June 2002.
Mr.
Pekarek earned a Bachelor of Science degree in electrical engineering from
the
University of Paderborn in Germany.
Joseph
Sorrentino joined us in November 2004 with more than 25 years experience
in
various executive management and sales-related positions. From April 2002
to
November 2004, Mr. Sorrentino was vice president of sales for Polycom’s voice
communications division. In that role, he was responsible for driving sales
of
Polycom’s flagship voice products and launching its IP telephony, wireless and
installed conferencing products. Prior to Polycom, he served as vice president
of worldwide sales for 3Ware, a start-up storage company from July 1999 to
August 2001, and for IBM’s storage systems division from October 1997 to
February 1999, where he managed the company’s largest storage customers. He has
also worked for Motorola, Seagate and Adaptec. Mr. Sorrentino earned a
bachelor’s degree from San Jose State University.
Compliance
with Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and executive officers, and persons who own more than 10% of a registered
class
of our equity securities to file with the SEC initial reports of ownership
on
Form 3 and reports of changes of ownership of our equity securities on Forms
4
and 5. Officers, directors and greater than 10% shareholders are required
to
furnish us with copies of all Section 16(a) reports they file.
Based
solely on a review of the reports and amendments to reports furnished to
us, we
believe that all reports required by Section 16(a) were filed on a timely
basis,
except that the following reports were filed late: (i) the Form 4 dated December
10, 2002 for Frances M. Flood; (ii) the Form 3 dated February 12, 2003 for
Michael D. Keough; (iii) the Form 3 dated June 30, 2003 for Larry R. Hendricks;
(iv) the Form 3 dated June 30, 2003 for Scott M. Huntsman; (v) the Form 3
dated
November 14, 2003 for Charles A. Callis; (vi) the Form 3 dated July 27, 2004
for
David Hubbard; and (vii) the Form 3 dated July 27, 2004 for Donald E. Frederick.
Code
of Ethics
On
November 18, 2004, the board of directors adopted a code of ethics that applies
to our board of directors, executive officers and employees. A copy of our
code
of ethics is included as an exhibit to this report. Copies may also be
requested, free of charge, from our Corporate Secretary at the following
address:
ClearOne
Communications, Inc.
1825
Research Way
Salt
Lake
City, Utah 84119
Attention:
Corporate Secretary
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Summary
Compensation
The
following table sets forth for the periods indicated the compensation paid
to or
accrued for the benefit of each person who served as our Chief Executive
Officer
during fiscal 2003, our next four most highly compensated executive officers
serving as of June 30, 2003 and one executive officer who served in such
position during a portion of 2003 (collectively referred to herein as the
“named
executive officers”). The position identified in the table for each person is
the position they held with us as of June 30, 2003. None of these persons
is
currently employed by us.
57
SUMMARY
COMPENSATION TABLE
|
Annual
Compensation
|
Long-Term
Compensation
|
|||||||||||
|
Awards
|
Payouts
|
|||||||||||
|
Name
and Position
|
Fiscal
Year
|
Salary
|
Bonus
|
Other
Annual Compensation1
|
Securities
Underlying Options /SARS
|
All
Other Compensation2
|
||||||
|
Executive
Officers as of June 30, 2003
|
||||||||||||
|
Frances
Flood President and Chief Executive Officer3
|
2003
|
$231,199
|
-
|
-
|
300,000
|
$1,095
|
||||||
|
2002
|
$179,615
|
$76,006
|
-
|
100,000
|
$2,148
|
|||||||
|
2001
|
$160,000
|
$58,400
|
-
|
-
|
$2,056
|
|||||||
|
Susie
Strohm Vice President and Chief Financial Officer4
|
2003
|
$140,838
|
-
|
-
|
50,000
|
$1,050
|
||||||
|
2002
|
$114,615
|
$30,505
|
-
|
-
|
$2,108
|
|||||||
|
2001
|
$110,000
|
$37,000
|
-
|
-
|
$2,316
|
|||||||
|
Mike
Keough Chief Executive Officer5
|
2003
|
$119,230
|
-
|
-
|
50,000
|
-
|
||||||
|
Greg
Rand President and Chief Operating Officer6
|
2003
|
$130,256
|
-
|
-
|
50,000
|
-
|
||||||
|
Angelina
Beitia Vice President7
|
2003
|
$116,226
|
-
|
$400
|
15,000
|
-
|
||||||
|
2002
|
$118,462
|
$5,000
|
$2,005
|
-
|
$3,900
|
|||||||
|
Former
Executive Officers
|
||||||||||||
|
Timothy
Morrison8
Former
Vice President
|
2003
|
$120,351
|
-
|
-
|
15,000
|
$735
|
||||||
|
2002
|
$159,808
|
$24,500
|
-
|
60,000
|
$637
|
|||||||
____________
|
1
|
The
Company did not pay or provide perquisites or other benefits during
the
periods indicated to any named executive officer in an aggregate
amount
exceeding $50,000.
|
| 2 |
These
amounts reflect our contributions to our deferred compensation
plan
(401(k) plan) on behalf of the named executive
officers.
|
| 3 |
Ms.
Flood’s employment and position as an executive officer terminated on
December 5, 2003.
|
| 4 |
Ms.
Strohm’s employment and position as an executive officer terminated on
December 5, 2003.
|
| 5 |
Mr.
Keough was employed as an executive officer on from November 18,
2002 to
June 24, 2004.
|
| 6 |
Mr.
Rand was employed as an executive officer on from August 12, 2002
to
February 25, 2004.
|
| 7 |
Ms.
Beitia’s employment and position as an executive officer terminated on
July 1, 2004.
|
| 8 |
Mr.
Morrison’s employment and position as an executive officer terminated on
February 4, 2003. The table does not include the amount paid to
Mr.
Morrison in May 2004 in settlement of the so-called “whistleblower action”
described in Item 3. Legal
Proceedings.”
|
58
Stock
Options
The
following table sets forth the stock option grants made to the named executive
officers for fiscal 2003. We did not grant any stock appreciation rights,
or
SARs, to the named executive officers during fiscal 2003.
The
exercise price per share of each option granted was equal to the closing
price
of our common stock on the date of grant.
OPTION
GRANTS IN FISCAL YEAR ENDED JUNE 30, 2003
(INDIVIDUAL
GRANTS)
|
Number
of Securities Underlying Options
|
Percent
of Total Options Granted to Employees
|
Exercise
or Base
|
Expiration
|
Potential
Realizable Value of Assumed Annual Rate of Stock Price Appreciation
for
Option
Term4
|
||||||||
|
Name
and Position
|
Granted
(#)
|
in
Fiscal Year1
|
Price
($/Sh)
|
Date
|
5%($)
|
10%($)
|
||||||
|
Executive
Officers as of June 30, 2003
|
||||||||||||
|
Frances
Flood
|
300,0002,5
|
36%
|
$3.55
|
10/24/2012
|
$756,511
|
$1,973,569
|
||||||
|
Susie
Strohm
|
50,0003,6
|
6%
|
$3.55
|
10/24/2012
|
$126,085
|
$328,928
|
||||||
|
Mike
Keough
|
50,0003
|
6%
|
$3.75
|
11/18/2012
|
$133,189
|
$347,459
|
||||||
|
Gregory
Rand
|
50,0003
|
6%
|
$3.55
|
10/24/2012
|
$126,085
|
$328,928
|
||||||
|
Angelina
Beitia
|
15,0003
|
2%
|
$3.55
|
10/24/2012
|
$37,826
|
$98,678
|
||||||
|
DeLonie
Call
|
15,0003
|
2%
|
$3.55
|
10/24/2012
|
$37,826
|
$98,678
|
||||||
|
Former
Executive Officers
|
||||||||||||
|
Timothy
J. Morrison
|
15,0003
|
2%
|
$3.55
|
10/24/2012
|
$37,826
|
$98,678
|
||||||
____________
|
1.
|
Based
on an aggregate of 835,500 shares subject to options granted to
our
employees in 2003, including the named executive
officers.
|
|
2.
|
The
options have a ten year term with one-third vesting on the day
following
the grant date and the remaining two-thirds vesting in equal installments
on July 22, 2003 and July 22, 2004, respectively. The options vest
immediately upon a change of control as defined in the plan or
our board
of directors has authority to accelerate vesting in the event of
certain
specified corporate transactions.
|
|
3.
|
The
options have a ten year term and vest over a four year period
with
one-fourth vesting on the first anniversary of the grant date
and the
remaining three-fourths vesting in equal monthly installments
over the
remaining 36 month period. The options vest immediately upon
a change of
control as defined in the plan or our board of directors has
authority to
accelerate vesting in the event of certain specified corporate
transactions.
|
59
|
4.
|
Potential
realizable values are computed by (1) multiplying the number of
shares of
common stock subject to a given option by the per-share assumed
stock
value compounded at the annual 5% or 10% appreciation rate shown
in the
table for the entire ten-year term of the option and (2) subtracting
from
that result the aggregate option exercise price. The 5% and 10%
assumed
annual rates of stock price appreciation are mandated by the rules
of the
SEC and do not represent our estimate or projection of the future
prices
of our common stock. Actual gains, if any, on stock option exercises
are
dependent on our future financial performance, overall market conditions,
and the named executive officer’s continued employment through the vesting
periods. The actual value realized may be greater or less than
the
potential realizable value set forth in the
table.
|
|
5.
|
Frances
Flood subsequently surrendered and cancelled a total of 706,434
stock
options, including the 300,000 options above, in accordance with
the
employment separation agreement between the Company and Ms.
Flood.
|
|
6.
|
Susie
Strohm subsequently surrendered and cancelled a total of 268,464
stock
options, including the 50,000 options above, in accordance with
the
employment separation agreement between the Company and Ms.
Strohm.
|
Aggregated
Stock Option/SAR Exercises
The
following table sets forth information concerning stock options exercised
by the
named executive officers during fiscal 2003 and the year-end value of
in-the-money, unexercised options:
AGGREGATED
OPTION EXERCISES IN FISCAL YEAR ENDED JUNE 30, 2003
AND
FISCAL YEAR-END OPTION VALUES
|
Number
of Securities Underlying Unexercised Options at FY-End (#)
|
Value
of Unexercised In-the-Money Options at FY-End ($)
|
|||||||
|
Name
and Position
|
Shares
Acquired on
Exercise (#)
|
Value
Realized
($)1
|
Exercisable/
Unexercisable
|
Exercisable/
Unexercisable2
|
||||
|
Executive
Officers as of June 30, 2003
|
||||||||
|
Frances
Flood
|
10,000
|
$36,600
|
377,333/329,101
|
$233,872/$0
|
||||
|
Susie
Strohm
|
0
|
$0
|
159,463/109,001
|
$94,810/$0
|
||||
|
Mike
Keough
|
0
|
$0
|
0/50,000
|
$0/$0
|
||||
|
Gregory
Rand
|
0
|
$0
|
0/50,000
|
$0/$0
|
||||
|
Angelina
Beitia
|
0
|
$0
|
4,375/140,625
|
$0/$0
|
||||
|
DeLonie
Call
|
0
|
$0
|
3,500/141,500
|
$0/$0
|
||||
|
Former
Executive Officers
|
||||||||
|
Timothy
J. Morrison
|
0
|
$0
|
0/0
|
$0/$0
|
____________
|
1
|
Based
upon the market price of the purchased shares on the exercise date
less
the option exercise price paid for such
shares.
|
|
2
|
Based
on the market price of $2.15 per share, which was the closing
selling
price of our common stock on the Pink Sheets on the last business
day of
our 2003 fiscal year, less the option exercise price payable
per
share.
|
60
Employment Contracts and Termination of Employment and Change-in-Control Arrangements
Employment
Agreement.
On
October 24, 2002, we entered into a three-year employment agreement with
Frances
Flood, which was terminated on December 5, 2003 as discussed below. Under
the
terms of the agreement, Ms. Flood agreed to serve as our Chairman of the
Board,
Chief Executive Officer and President. The agreement provided for the payment
to
Ms. Flood of a base salary of $250,000 per year from October 24, 2002 to
October
23, 2003; $300,000 per year from October 24, 2003 to October 23, 2004; and
$325,000 per year from October 24, 2004 to October 24, 2005, with an annual
bonus of up to 50% of her base salary. She was also granted stock
options.
The
employment agreement provided that if Ms. Flood’s employment were terminated
without “cause,” she would be entitled to her full monthly salary and health and
life insurance premiums as provided in the agreement for three years from
the
date of termination. If Ms. Flood’s employment were terminated upon death or for
“cause,” she would be entitled to receive her salary and other benefits earned
but not yet paid through the date of termination, subject to any legal
requirements. If Ms. Flood’s employment were terminated for disability, she
would continue to receive her full monthly salary and health and life insurance
premiums as provided in the agreement for one year.
The
agreement provided for a cash severance payment in the amount of $875,000
and
accelerated vesting of all remaining stock options granted to Ms. Flood in
the
event of a change in control of the Company.
Employment
Separation Agreements.
On
December 5, 2003, the Company entered into employment separation agreements
with
each of Frances Flood, the Company’s former chairman, chief executive officer
and president, and Susie Strohm, the Company’s former chief financial officer,
which generally provided that such persons would resign from their positions
and
employment with the Company, and the Company would make one-time, lump sum
payments to such persons in consideration of their surrender and delivery
to the
Company of shares of the Company’s common stock and Company stock options and
their release of claims against the Company. Such persons also agreed to
cooperate with the Company in the SEC action and related proceedings and
the
Company agreed to continue to indemnify such persons for attorneys fees incurred
in the SEC action and related proceedings, subject to the limitations imposed
by
Utah law. The Company also released any existing claims against such persons
except such claims as to which indemnification would not be permitted by
Utah
law. The agreement with Ms. Flood provided for a payment to her of $350,000
and
her surrender and delivery to the Company of 35,000 shares of the Company’s
common stock and 706,434 stock options (461,433 of which were vested). The
agreement with Ms. Strohm provided for a payment to her of $75,000 and her
surrender and delivery to the Company of 15,500 shares of the Company’s common
stock and 268,464 stock options (171,963 of which were vested). This summary
description of the employment separation agreements is qualified in its entirety
by reference to the employment separation agreements, copies of which are
included as exhibits to this report.
As
of the
end of fiscal 2003, no other named executive officer was party to an employment
or severance agreement with us, and each named executive officer’s employment
was on an “at-will” basis.
61
Settlement
Agreements and Releases.
We
entered into settlement agreements and releases with four former executive
officers in connection with the cessation of their employment, which generally
provided for their resignations from their positions and employment with
the
Company, the payment of severance in increments in accordance with the regular
payroll schedule, and a general release of claims against the Company by
each of
such persons. On February 27, 2004, an agreement was entered into with Greg
Rand, the Company’s former president and chief operating officer, which
generally provided for a severance payment of $75,000 and an accelerated
vesting
of 25,000 stock options. On April 6, 2004, an agreement was entered into
with
George Claffey, the Company’s former chief financial officer, which generally
provided for a severance payment of $61,192. On June 16, 2004, an agreement
was
entered into with Mike Keough, the Company’s former chief executive officer,
which generally provided for a severance payment of $46,154 and vested options
totaling 18,749 stock options. On July 15, 2004, an agreement was entered
into
with Angelina Beitia, the Company’s former vice president, which generally
provided for a lump sum payment of $100,000. In addition Ms. Beitia surrendered
and delivered to the Company all outstanding vested and unvested options.
In
accordance with the terms of our stock option plans, any unvested stock options
terminated on the date of termination of such persons’ employment with the
Company. This summary description of the settlement agreement and releases
are
qualified in their entirety by reference to the settlement agreement and
releases, copies of which are included as exhibits to this report.
Stock
Option Plans.
Under
the 1998 Stock Option Plan, our board of directors has the authority to
automatically accelerate the vesting of each outstanding option granted to
a
named executive officer in the event of specified corporate transactions,
including a change in control whether or not the outstanding option is assumed
or substituted in connection with the corporate transaction or change in
control. All options outstanding under the 1990 Stock Option Plan are fully
vested and there are no additional options available for grant.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
The
following table sets forth certain information regarding ownership of our
common
stock as of July 31, 2005 by (i) each person known to us to be the beneficial
owner of more than 5% of our outstanding common stock, (ii) each director,
(iii)
the named executive officers, and (iv) all of our executive officers and
directors as a group. Each person has sole investment and voting power with
respect to the shares indicated, subject to community property laws where
applicable, except as otherwise indicated below. The address for each director
and officer is in care of ClearOne Communications, Inc., 1825 Research Way,
Salt
Lake City, Utah 84119.
62
|
Names
of
Beneficial Owners
|
Amount
of
Beneficial Ownership
|
Percentage
of
Class1
|
|||||
|
Directors
and Executive Officers
|
|||||||
|
Edward
Dallin Bagley2
|
1,804,601
|
15.3
|
%
|
||||
|
Brad
R. Baldwin3
|
181,666
|
1.5
|
%
|
||||
|
DeLonie
Call4
|
74,312
|
0.6
|
%
|
||||
|
Zee
Hakimoglu5
|
63,888
|
0.5
|
%
|
||||
|
Harry
Spielberg6
|
59,000
|
0.5
|
%
|
||||
|
Tracy
Bathurst7
|
56,017
|
0.5
|
%
|
||||
|
Don
Frederick8
|
29,166
|
0.2
|
%
|
||||
|
Larry
Hendricks9
|
25,500
|
0.2
|
%
|
||||
|
Scott
Huntsman10
|
25,500
|
0.2
|
%
|
||||
|
Directors
and Executive Officers as a Group (11 people)11
|
2,319,650
|
19.6
|
%
|
||||
|
1
|
For
each individual included in the table, the calculation of percentage
of
beneficial ownership is based on 11,264,233 shares of common stock
outstanding as of July 31, 2005 and shares of common stock that
could be
acquired by the individual within 60 days of July 31, 2005, upon
the
exercise of options or otherwise.
|
|
2
|
Includes
126,166 shares held by Mr. Bagley’s spouse with respect to which he
disclaims beneficial ownership; and options to purchase 134,000
shares
that are exercisable within 60 days after July 31,
2005.
|
|
3
|
Includes
88,666 shares held in the Baldwin Family Trust; 9,000 shares owned
directly, which are held in an IRA under the name of Mr. Baldwin;
and
options to purchase 84,000 shares that are exercisable within 60
days
after July 31, 2005.
|
|
4
|
Includes
options to purchase 73,937 shares that are exercisable within 60
days
after July 31, 2005.
|
|
5
|
Includes
options to purchase 63,888 shares that are exercisable within 60
days
after July 31, 2005.
|
|
6
|
Includes
options to purchase 59,000 shares that are exercisable within 60
days
after July 31, 2005.
|
|
7
|
Includes
options to purchase 55,519 shares that are exercisable within 60
days
after July 31, 2005.
|
|
8
|
Includes
options to purchase 29,166 shares that are exercisable within 60
days
after July 31, 2005.
|
|
9
|
Includes
options to purchase 25,500 shares that are exercisable within 60
days
after July 31, 2005.
|
|
10
|
Includes
options to purchase 25,500 shares that are exercisable within 60
days
after July 31, 2005.
|
|
11
|
Includes
options to purchase a total of 550,510 shares that are exercisable
within
60 days after July 31, 2005 by executive officers and directors.
|
63
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
Indemnification
of Officers and Directors.
The
Company’s by-laws and the Utah Revised Business Corporation Act provide for
indemnification of directors and officers against reasonable expenses incurred
by such persons in connection with civil or criminal actions or proceedings
to
which they have been made parties because they are or were directors or officers
of the Company or its subsidiaries. Indemnification is permitted if the person
satisfies the required standards of conduct. Certain of the litigation matters
described in "Item 3. Legal Proceedings" involved certain of the
Company’s current and former directors and officers, all of whom are covered by
the aforementioned indemnity and if applicable, certain prior period insurance
policies. The Company has indemnified such persons for legal expenses incurred
by them in such actions and has sought reimbursement from its insurance
carriers. The Company cannot predict with certainty the extent to which the
Company will recover the indemnification payments from its insurers. The
Company has made payments to the law firms representing such current and
former
directors and officers in the aggregate amount of approximately $1.5 million
during the period from January 2003 through June 30, 2005.
In
connection with the Insurance Coverage Action described herein under the
caption
“Item 3. Legal Proceedings,” the Company and its counsel entered into a Joint
Prosecution and Defense Agreement dated as of April 1, 2004 with Edward Dallin
Bagley, a director, and his counsel, which generally provides that ClearOne
and
Mr. Bagley will jointly prosecute their claims against the carriers of certain
prior period directors and officers liability insurance policies and jointly
defend the claims made by the insurance carriers in order to reduce litigation
expenses. In the litigation, ClearOne is generally pursuing claims to recover
the policy limits of certain officer and director liability insurance policies
and Mr. Bagley is pursuing related claims to recover losses he incurred as
a
result of such carriers’ refusal to pay the policy limits which refusals caused
ClearOne to enter into a settlement agreement in the class action litigation
that diluted Mr. Bagley’s shareholdings in ClearOne. The agreement, as amended,
provides that the two law firms shall jointly represent ClearOne and Mr.
Bagley,
the parties shall cooperate in connection with the conduct of the litigation
and
that ClearOne shall pay all litigation expenses, including attorneys’ fees of
its counsel and Bagley’s counsel, except litigation expenses which are solely
related to Mr. Bagley’s claims in the litigation. In February 2005, we entered
into a confidential settlement agreement with Lumbermens Mutual pursuant
to
which ClearOne and Bagley received a lump sum cash amount and the plaintiffs
agreed to dismiss their claims against Lumbermens Mutual with prejudice.
The
cash settlement will be held in a segregated account until the claims involving
National Union have been resolved, at which time the amounts received in
the
action will be allocated among the Company and Bagley.
| ITEM 14. |
PRINCIPAL
ACCOUNTING FEES AND
SERVICES
|
ClearOne
engaged KPMG LLP (KPMG) in December 2003 to replace Ernst & Young
LLP as its independent registered public accountants. ClearOne engaged KPMG
to audit its financial statements for its 2003 fiscal year and to reaudit
its
financial statements for its 2002 and 2001 fiscal years, as well as to perform
quarterly reviews on the quarters within each of these fiscal years.
The
fees
for the audits and quarterly reviews related to the June 30, 2003, 2002 and
2001
financial statements, taxes and audit related fees provided by KPMG were
as
follows:
|
Audit
Fees
|
$
|
2,258,913
|
||
|
Audit-Related
Fees
|
13,029
|
|||
|
Tax
Fees
|
126,106
|
|||
|
Total
|
$
|
2,398,048
|
“Audit
Fees” consisted of fees billed for services rendered for the audit of ClearOne’s
annual financial statements, as described above, reviews of quarterly financial
information included herein, and other services normally provided in connection
with statutory and regulatory filings. “Audit-Related Fees” consisted of fees
billed for consents on audit opinions for acquirees of the Company. “Tax Fees”
consisted of fees billed for tax payment planning and tax preparation services.
Our
Audit
Committee Charter provides for pre-approval of non-audit services performed
by
our independent registered public accountants. All of the services performed
by
KPMG described above under the captions "Audit-Related Fees" and "Tax Fees"
were
approved in advance by our Audit Committee.
64
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES
|
|
(a)
|
1.
|
Financial
Statements
|
The
following financial statements are filed as part of this report in a separate
section of this Form 10-K beginning on page F-1.
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of June 30, 2003, 2002 and 2001
Consolidated
Statements of Operations and Comprehensive Income (Loss) for fiscal years
ended
June 30, 2003, 2002 and 2001
Consolidated
Statements of Stockholders’ Equity for fiscal years ended June 30, 2003, 2002
and 2001
Consolidated
Statements of Cash Flows for fiscal years ended June 30, 2003, 2002 and
2001
Notes
to
Consolidated Financial Statements
|
2.
|
Financial
Statement Schedules
|
All
schedules are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements and notes
thereto.
|
3.
|
Exhibits
|
The
following documents are included as exhibits to this report.
|
Exhibit
No.
|
SEC
Ref. No.
|
Title
of Document
|
Location
|
|||||
|
3.1
|
3
|
Articles
of Incorporation and amendments thereto
|
Incorp.
by reference1
|
|||||
|
3.2
|
3
|
Bylaws
|
Incorp.
by reference2
|
|||||
|
10
|
Employment
Separation Agreement between ClearOne Communications, Inc.
and Frances
Flood, dated December 5, 2003.*
|
This
filing
|
||||||
|
10
|
Employment
Separation Agreement between ClearOne Communications, Inc.
and Susie
Strohm, dated December 5, 2003.*
|
This
filing
|
||||||
|
10
|
Share
Purchase Agreement between ClearOne Communications, Inc. and
ClearOne
Communications of Canada, Inc. and 3814149 Canada, Inc., 3814157
Canada,
Inc., Stechyson Family Trust, Jim Stechyson, Norm Stechyson,
and Heather
Stechyson Family Trust, dated as of August 16, 2002
|
This
filing
|
||||||
|
10
|
Asset
Purchase Agreement between ClearOne Communications, Inc. and
Comrex Corp.,
dated as of August 23, 2002.
|
This
filing
|
||||||
|
10.5
|
10
|
Agreement
and Plan of Merger dated January 21, 2003, between ClearOne
Communications, Inc., Tundra Acquisitions Corporation and E.mergent,
Inc.,
and the related Voting Agreement with E.mergent
shareholders
|
Incorp.
by reference3
|
|||||
|
10.6
|
10
|
Share
Purchase Agreement among ClearOne Communications, Inc. (then
named Gentner
Communications Corporation), Gentner Ventures, Inc. and the
shareholders
of Ivron Systems, Ltd. dated October 3, 2001, and amendment
thereto
|
Incorp.
by reference4
|
|||||
|
10
|
Joint
Prosecution and Defense Agreement dated April 1, 2004 between
ClearOne
Communications, Inc., Parsons Behle & Latimer, Edward Dallin Bagley
and Burbidge & Mitchell, and amendment thereto
|
This
filing
|
||||||
|
10
|
Asset
Purchase Agreement dated May 6, 2004 between ClearOne Communications,
Inc.
and M:SPACE, Inc.
|
This
filing
|
||||||
|
10.9
|
10
|
Asset
Purchase Agreement among Clarinet, Inc., American Teleconferencing
Services, Ltd. d/b/a Premier Conferencing, and ClearOne Communications,
Inc., dated July 1, 2004
|
Incorp.
by reference5
|
|||||
|
10
|
Stock
Purchase Agreement dated March 4, 2005 between 6351352 Canada
Inc. and
Gentner Ventures, Inc., a wholly owned subsidiary of ClearOne
Communications, Inc.
|
This
filing
|
||||||
|
10.11
|
10
|
1998
Stock Option Plan
|
Incorp.
by reference6
|
|||||
|
10.12
|
10
|
1990
Stock Option Plan
|
Incorp.
by reference7
|
|||||
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
Gregory Rand dated February 27, 2004.*
|
This
filing
|
||||||
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
George Claffey dated April 6, 2004.*
|
This
filing
|
||||||
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
Michael Keough dated June 16, 2004.*
|
This
filing
|
||||||
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
Angelina Beitia dated July 15, 2004.*
|
This
filing
|
||||||
|
14
|
Code
of Ethics, approved by the Board of Directors on November 18,
2004
|
This
filing
|
||||||
|
21
|
Subsidiaries
of the registrant
|
This
filing
|
||||||
|
31
|
Section
302 Certification of Chief Executive Officer
|
This
filing
|
||||||
|
31
|
Section
302 Certification of Chief Financial Officer
|
This
filing
|
||||||
|
32
|
Section
1350 Certification of Chief Executive Officer
|
This
filing
|
||||||
|
32
|
Section
1350 Certification of Chief Financial Officer
|
This
filing
|
||||||
|
99
|
Audit
Committee Charter, adopted November 18, 2004
|
This
filing
|
||||||
______________
*Constitutes
a management contract or compensatory plan or arrangement.
|
1
|
Incorporated
by reference to the Registrant’s Annual Reports on Form 10-K for the
fiscal years ended June 30, 1989 and June 30,
1991.
|
|
2
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended June 30, 1993.
|
|
3
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed February
6, 2002.
|
|
4
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed October
18, 2001 and the Current Report on Form 8-K filed April 10,
2002.
|
|
5
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed July 1,
2004.
|
|
6
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998.
|
|
7
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-KSB for the
fiscal year ended June 30,
1996.
|
65
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
CLEARONE
COMMUNICATIONS, INC.
|
||
|
August
16, 2005
|
By:
|
/s/
Zeynep Hakimoglu
|
|
Zeynep
Hakimoglu
|
||
|
President
and Chief Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in
the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Zeynep Hakimoglu
|
President
and Chief Executive Officer
|
August
16, 2005
|
||
|
Zeynep
Hakimoglu
|
(Principal
Executive Officer)
|
|||
|
/s/
Donald E. Frederick
|
Chief
Financial Officer
|
August
16, 2005
|
||
|
Donald
E. Frederick
|
(Principal
Financial and Accounting Officer)
|
|||
|
/s/
Edward Dallin Bagley
|
Director
|
August
16, 2005
|
||
|
Edward
Dallin Bagley
|
||||
|
/s/
Brad R. Baldwin
|
Director
|
August
16, 2005
|
||
|
Brad
R. Baldwin
|
||||
|
/s/
Larry R. Hendricks
|
Director
|
August
16, 2005
|
||
|
Larry
R. Hendricks
|
||||
|
/s/
Scott M. Huntsman
|
Director
|
August
16, 2005
|
||
|
Scott
M. Huntsman
|
||||
|
/s/
Harry Spielberg
|
Director
|
August
16, 2005
|
||
|
Harry
Spielberg
|
66
ClearOne
Communications, Inc.
Index
to Consolidated Financial Statements
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets as of June 30, 2003, 2002 and 2001
|
F-3
|
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for fiscal
years
ended June 30, 2003, 2002 and 2001
|
F-4
|
|
|
Consolidated
Statements of Stockholders' Equity for fiscal years ended June
30, 2003,
2002, and 2001
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for fiscal years ended June 30, 2003,
2002, and
2001
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-9
|
F-1
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
ClearOne
Communications, Inc.:
We
have audited the accompanying consolidated balance sheets of ClearOne
Communications, Inc. and subsidiaries as of June 30, 2003, 2002, and 2001,
and
the related consolidated statements of operations and comprehensive income
(loss), stockholders’ equity, and cash flows for each of the years then ended.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ClearOne
Communications, Inc. and subsidiaries as of June 30, 2003, 2002, and 2001 and
the results of their operations and their cash flows for each of the years
then
ended in conformity with U. S. generally accepted accounting
principles.
As
discussed in Note 3 to the accompanying consolidated financial statements,
the
consolidated balance sheets as of June 30, 2002 and 2001, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the years then ended, have been restated.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed, effective July 1, 2002, its method of accounting for goodwill and
other
intangible assets as required by Statement of Financial Accounting Standards
No.
142, Goodwill and Other Intangible Assets, Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, and Statement of Financial Accounting Standard No. 141, Business
Combinations.
KPMG
LLP
Salt
Lake City, Utah
August
12, 2005
F-2
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share amounts)
|
June
30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
ASSETS
|
||||||||||
|
Current
assets:
|
||||||||||
|
Cash
and cash equivalents
|
$
|
6,124
|
$
|
1,744
|
$
|
6,851
|
||||
|
Restricted
cash
|
200
|
-
|
-
|
|||||||
|
Marketable
securities
|
1,900
|
12,400
|
-
|
|||||||
|
Accounts
receivable, net of allowances of $246, $190 and $0,
respectively
|
4,208
|
4,322
|
2,027
|
|||||||
|
Inventories,
net
|
8,966
|
12,516
|
6,459
|
|||||||
|
Income
tax receivable
|
2,433
|
-
|
-
|
|||||||
|
Deferred
income tax assets
|
2,531
|
4,709
|
1,587
|
|||||||
|
Prepaid
expenses and other
|
555
|
621
|
680
|
|||||||
|
Total
current assets
|
26,917
|
36,312
|
17,604
|
|||||||
|
Property
and equipment, net
|
6,768
|
8,123
|
5,681
|
|||||||
|
Goodwill,
net
|
-
|
17,072
|
890
|
|||||||
|
Intangibles,
net
|
1,018
|
1,634
|
616
|
|||||||
|
Deferred
income tax assets, net
|
548
|
661
|
446
|
|||||||
|
Other
assets
|
25
|
74
|
74
|
|||||||
|
Total
assets
|
$
|
35,276
|
$
|
63,876
|
$
|
25,311
|
||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||
|
Current
liabilities:
|
||||||||||
|
Line
of credit
|
$
|
-
|
$
|
196
|
$
|
-
|
||||
|
Capital
lease obligations
|
802
|
784
|
619
|
|||||||
|
Note
payable
|
652
|
-
|
-
|
|||||||
|
Accounts
payable
|
1,948
|
3,056
|
652
|
|||||||
|
Accrued
liabilities
|
9,576
|
2,841
|
1,408
|
|||||||
|
Deferred
revenue
|
550
|
572
|
-
|
|||||||
|
Billings
in excess of costs on uncompleted contracts
|
615
|
-
|
-
|
|||||||
|
Income
taxes payable
|
-
|
265
|
224
|
|||||||
|
Total
current liabilities
|
14,143
|
7,714
|
2,903
|
|||||||
|
Capital
lease obligations, net of current portion
|
1,215
|
2,016
|
1,680
|
|||||||
|
Note
payable, net of current portion
|
931
|
-
|
-
|
|||||||
|
Deferred
revenue, net of current portion
|
244
|
254
|
-
|
|||||||
|
Total
liabilities
|
16,533
|
9,984
|
4,583
|
|||||||
|
Commitments
and contingencies (see Notes 11 and 13)
|
||||||||||
|
Stockholders'
equity:
|
||||||||||
|
Common
stock, 50,000,000 shares authorized, par value $0.001, 11,086,733,
11,178,392 and 8,612,978 shares issued and outstanding,
respectively
|
11
|
11
|
9
|
|||||||
|
Additional
paid-in capital
|
48,258
|
48,704
|
8,856
|
|||||||
|
Deferred
compensation
|
(75
|
)
|
(147
|
)
|
(122
|
)
|
||||
|
Accumulated
other comprehensive income
|
1,197
|
-
|
-
|
|||||||
|
Retained
earnings (accumulated deficit)
|
(30,648
|
)
|
5,324
|
11,985
|
||||||
|
Total
stockholders' equity
|
18,743
|
53,892
|
20,728
|
|||||||
|
Total
liabilities and stockholders' equity
|
$
|
35,276
|
$
|
63,876
|
$
|
25,311
|
||||
See
accompanying notes to consolidated financial statements.
F-3
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in
thousands, except share amounts)
|
Years
ended June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Revenue:
|
||||||||||
|
Product
|
$
|
27,512
|
$
|
26,253
|
$
|
22,448
|
||||
|
Conferencing
services
|
15,268
|
15,583
|
11,689
|
|||||||
|
Business
services
|
14,805
|
1,526
|
-
|
|||||||
|
Total
revenue
|
57,585
|
43,362
|
34,137
|
|||||||
|
Cost
of goods sold:
|
||||||||||
|
Product
|
15,940
|
10,939
|
8,789
|
|||||||
|
Product
inventory write-offs
|
2,175
|
2,945
|
416
|
|||||||
|
Conferencing
services
|
7,904
|
7,310
|
5,928
|
|||||||
|
Business
services
|
9,282
|
978
|
-
|
|||||||
|
Total
cost of goods sold
|
35,301
|
22,172
|
15,133
|
|||||||
|
Gross
profit
|
22,284
|
21,190
|
19,004
|
|||||||
|
Operating
expenses:
|
||||||||||
|
Marketing
and selling
|
12,187
|
10,739
|
7,711
|
|||||||
|
General
and administrative
|
18,011
|
5,345
|
4,198
|
|||||||
|
Research
and product development
|
2,995
|
3,810
|
2,747
|
|||||||
|
Impairment
losses
|
26,001
|
7,115
|
-
|
|||||||
|
Gain
on sale of court conferencing assets
|
-
|
(250
|
)
|
-
|
||||||
|
Purchased
in-process research and development
|
-
|
-
|
728
|
|||||||
|
Total
operating expenses
|
59,194
|
26,759
|
15,384
|
|||||||
|
Operating
income (loss)
|
(36,910
|
)
|
(5,569
|
)
|
3,620
|
|||||
|
Other
income (expense), net:
|
||||||||||
|
Interest
income
|
85
|
293
|
334
|
|||||||
|
Interest
expense
|
(236
|
)
|
(179
|
)
|
(164
|
)
|
||||
|
Other,
net
|
55
|
18
|
18
|
|||||||
|
Total
other income (expense), net
|
(96
|
)
|
132
|
188
|
||||||
|
Income
(loss) from continuing operations before income taxes
|
(37,006
|
)
|
(5,437
|
)
|
3,808
|
|||||
|
Provision
(benefit) for income taxes
|
(834
|
)
|
1,400
|
1,050
|
||||||
|
Income
(loss) from continuing operations
|
(36,172
|
)
|
(6,837
|
)
|
2,758
|
|||||
|
Discontinued
operations:
|
||||||||||
|
Income
from discontinued operations, net of income taxes of $439 in
2001
|
-
|
-
|
737
|
|||||||
|
Gain
on disposal of discontinued operations, net of income taxes of $119,
$104
and $72, respectively
|
200
|
176
|
123
|
|||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
See
accompanying notes to consolidated financial
statements.
F-4
|
Years
ended June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Basic
earnings (loss) per common share from continuing
operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.32
|
||
|
Diluted
earnings (loss) per common share from continuing
operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.30
|
||
|
Basic
earnings per common share from discontinued operations
|
$
|
0.02
|
$
|
0.02
|
$
|
0.10
|
||||
|
Diluted
earnings per common share from discontinued operations
|
$
|
0.02
|
$
|
0.02
|
$
|
0.09
|
||||
|
Basic
earnings (loss) per common share
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
||
|
Diluted
earnings (loss) per common share
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
||
|
Comprehensive
Income (Loss):
|
||||||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
|
Foreign
currency translation adjustments
|
1,197
|
-
|
-
|
|||||||
|
Comprehensive
income (loss)
|
$
|
(34,775
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
See
accompanying notes to consolidated financial statements.
F-5
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
thousands, except share amounts)
|
Accumulated
|
Retained
|
|||||||||||||||||||||
|
Additional
|
Other
|
Earnings
|
Total
|
|||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Deferred
|
Comprehensive
|
(Accumulated
|
Stockholders'
|
|||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Income
|
Deficit)
|
Equity
|
||||||||||||||||
|
Balances
at June 30, 2000 (as previously reported)
|
8,427,145
|
$
|
9
|
$
|
6,697
|
$
|
-
|
$
|
-
|
$
|
8,047
|
$
|
14,753
|
|||||||||
|
Adjustments
to opening retained earnings (Note 3)
|
-
|
-
|
-
|
-
|
-
|
320
|
320
|
|||||||||||||||
|
Balances
at June 30, 2000 (restated)
|
8,427,145
|
9
|
6,697
|
-
|
-
|
8,367
|
15,073
|
|||||||||||||||
|
Exercises
of employee stock options
|
75,125
|
-
|
325
|
-
|
-
|
-
|
325
|
|||||||||||||||
|
Income
tax benefits from stock option exercises
|
-
|
-
|
116
|
-
|
-
|
-
|
116
|
|||||||||||||||
|
Issuances
of common stock under employee stock purchase plan
|
1,137
|
-
|
15
|
-
|
-
|
-
|
15
|
|||||||||||||||
|
Issuance
of common stock in a purchase of business
|
129,871
|
-
|
1,814
|
-
|
-
|
-
|
1,814
|
|||||||||||||||
|
Repurchase
and retirement of common stock
|
(20,300
|
)
|
-
|
(244
|
)
|
-
|
-
|
-
|
(244
|
)
|
||||||||||||
|
Deferred
compensation resulting from the modification of stock
options
|
-
|
-
|
133
|
(133
|
)
|
-
|
-
|
-
|
||||||||||||||
|
Amortization
of deferred compensation
|
-
|
-
|
-
|
11
|
-
|
-
|
11
|
|||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
3,618
|
3,618
|
|||||||||||||||
|
Balances
at June 30, 2001 (restated)
|
8,612,978
|
9
|
8,856
|
(122
|
)
|
-
|
11,985
|
20,728
|
||||||||||||||
|
Exercises
of employee stock options
|
195,999
|
-
|
1,020
|
-
|
-
|
-
|
1,020
|
|||||||||||||||
|
Income
tax benefits from stock option exercises
|
-
|
-
|
452
|
-
|
-
|
-
|
452
|
|||||||||||||||
|
Issuances
of common stock under employee stock purchase plan
|
724
|
-
|
13
|
-
|
-
|
-
|
13
|
|||||||||||||||
|
Issuance
of common stock and warrants for cash
|
1,500,000
|
1
|
23,834
|
-
|
-
|
-
|
23,835
|
|||||||||||||||
|
Issuance
of common stock and options in a purchase of business
|
868,691
|
1
|
14,426
|
-
|
-
|
-
|
14,427
|
|||||||||||||||
|
Deferred
compensation resulting from the modification of stock
options
|
-
|
-
|
103
|
(103
|
)
|
-
|
-
|
-
|
||||||||||||||
|
Amortization
of deferred compensation
|
-
|
-
|
-
|
78
|
-
|
-
|
78
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(6,661
|
)
|
(6,661
|
)
|
|||||||||||||
|
Balances
at June 30, 2002 (restated)
|
11,178,392
|
11
|
48,704
|
(147
|
)
|
-
|
5,324
|
53,892
|
||||||||||||||
|
Exercises
of employee stock options
|
31,500
|
-
|
86
|
-
|
-
|
-
|
86
|
|||||||||||||||
|
Issuances
of common stock under employee stock purchase plan
|
1,841
|
-
|
8
|
-
|
-
|
-
|
8
|
|||||||||||||||
|
Repurchase
and retirement of common stock
|
(125,000
|
)
|
-
|
(430
|
)
|
-
|
-
|
-
|
(430
|
)
|
||||||||||||
|
Remeasurement
of stock options
|
-
|
-
|
(110
|
)
|
110
|
-
|
-
|
-
|
||||||||||||||
|
Net
reversal of previously amortized deferred compensation
|
-
|
-
|
-
|
(38
|
)
|
-
|
-
|
(38
|
)
|
|||||||||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
1,197
|
-
|
1,197
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(35,972
|
)
|
(35,972
|
)
|
|||||||||||||
|
Balances
at June 30, 2003
|
11,086,733
|
$
|
11
|
$
|
48,258
|
$
|
(75
|
)
|
$
|
1,197
|
$
|
(30,648
|
)
|
$
|
18,743
|
|||||||
See
accompanying notes to consolidated financial statements.
F-6
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Years
ended June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
|
Results
of discontinued operations, net of income taxes
|
(200
|
)
|
(176
|
)
|
(860
|
)
|
||||
|
Income
from continuing operations
|
$
|
(36,172
|
)
|
$
|
(6,837
|
)
|
$
|
2,758
|
||
|
Adjustments
to reconcile net income (loss) to net cash provided by
operations:
|
||||||||||
|
Loss
on impairment of long-lived assets, goodwill and
intangibles
|
26,001
|
7,115
|
-
|
|||||||
|
Depreciation
and amortization expense
|
3,469
|
3,012
|
2,230
|
|||||||
|
Stock-based
compensation
|
(38
|
)
|
78
|
11
|
||||||
|
Gain
on sale of certain assets
|
-
|
(250
|
)
|
-
|
||||||
|
Write-off
of inventory
|
2,175
|
2,945
|
416
|
|||||||
|
Write-off
of in-process research and development
|
-
|
-
|
728
|
|||||||
|
Income
tax benefits from stock option exercises
|
-
|
452
|
116
|
|||||||
|
Loss
(gain) on disposal of assets and fixed assets write-offs
|
(2
|
)
|
(4
|
)
|
(23
|
)
|
||||
|
Provision
for doubtful accounts
|
312
|
43
|
76
|
|||||||
|
Changes
in operating assets and liabilities, net of effect of
acquisitions:
|
||||||||||
|
Accounts
receivable
|
268
|
46
|
2,361
|
|||||||
|
Inventories
|
1,516
|
(5,395
|
)
|
(3,127
|
)
|
|||||
|
Prepaid
expenses and other assets
|
67
|
168
|
59
|
|||||||
|
Accounts
payable
|
(1,126
|
)
|
946
|
(115
|
)
|
|||||
|
Accrued
liabilities
|
6,142
|
(457
|
)
|
(464
|
)
|
|||||
|
Income
taxes
|
(669
|
) |
(1,783
|
)
|
(650
|
)
|
||||
|
Deferred
revenue
|
553
|
(48
|
)
|
-
|
||||||
|
Net
change in other assets/liabilities
|
47
|
-
|
(19
|
)
|
||||||
|
Net
cash provided by operating activities
|
2,543
|
31
|
4,357
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Restricted
cash
|
(200
|
)
|
-
|
-
|
||||||
|
Purchase
of property and equipment
|
(1,823
|
)
|
(2,805
|
)
|
(1,429
|
)
|
||||
|
Proceeds
from the sale of equipment
|
4
|
11
|
-
|
|||||||
|
Proceeds
from the sale of certain assets
|
80
|
160
|
-
|
|||||||
|
Purchase
of marketable securities
|
(18,500
|
)
|
(30,600
|
)
|
-
|
|||||
|
Sale
of marketable securities
|
29,000
|
18,200
|
-
|
|||||||
|
Cash
paid for acquisitions, net of cash received
|
(7,444
|
)
|
(14,436
|
)
|
(1,856
|
)
|
||||
|
Net
cash provided by (used in) investing activities
|
1,117
|
(29,470
|
)
|
(3,285
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Borrowings
under note payable
|
1,998
|
-
|
-
|
|||||||
|
Principal
payments on capital lease obligation
|
(784
|
)
|
(713
|
)
|
(552
|
)
|
||||
|
Principal
payments on note payable
|
(414
|
)
|
-
|
-
|
||||||
|
Proceeds
from sales of common stock
|
95
|
24,869
|
340
|
|||||||
|
Purchase
and retirement of stock
|
(430
|
)
|
-
|
(244
|
)
|
|||||
|
Net
cash provided by financing activities
|
465
|
24,156
|
(456
|
)
|
||||||
|
Cash
provided by discontinued operations, net of income taxes
|
200
|
176
|
860
|
|||||||
|
Net
changes in cash and cash equivalents
|
4,325
|
(5,107
|
)
|
1,476
|
||||||
|
Effect
of foreign exchange rates on cash and cash equivalents
|
55
|
-
|
-
|
|||||||
|
Cash
and cash equivalents at the beginning of year
|
1,744
|
6,851
|
5,375
|
|||||||
|
Cash
and cash equivalents at the end of year
|
$
|
6,124
|
$
|
1,744
|
$
|
6,851
|
||||
See
accompanying notes to consolidated financial
statements.
F-7
|
Supplemental
disclosure of cash flow information:
|
||||||||||
|
Cash
paid for interest
|
$
|
211
|
$
|
170
|
$
|
162
|
||||
|
Cash
paid (received) for income taxes
|
(79
|
)
|
3,529
|
2,523
|
||||||
|
Tax
benefits from stock option exercises
|
-
|
452
|
116
|
|||||||
|
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||||
|
Equipment
acquired under capital lease
|
$
|
-
|
$
|
1,155
|
$
|
1,021
|
||||
|
Supplemental
disclosure of acquisition activity:
|
||||||||||
|
Fair
value of assets acquired
|
$
|
8,235
|
$
|
33,712
|
$
|
2,942
|
||||
|
IPR&D
acquired
|
-
|
-
|
728
|
|||||||
|
Liabilities
assumed
|
599
|
4,484
|
-
|
|||||||
|
Value
of common shares issued
|
-
|
14,427
|
1,814
|
|||||||
|
Cash
paid for acquisition
|
$
|
7,636
|
$
|
14,801
|
$
|
1,856
|
See
accompanying notes to consolidated financial statements.
F-8
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
1.
|
Organization
and Summary of Significant Accounting
Policies
|
Organization
ClearOne
Communications, Inc. and its subsidiaries (collectively, the Company) develop,
manufacture, market and service a comprehensive line of audio conferencing
products, which range from tabletop conferencing phones to professionally
installed audio systems. The Company’s solutions create a natural communication
environment, designed to save organizations time and money by enabling more
effective and efficient communication between geographically separated
businesses, employees and customers.
The
Company’s customers include some of the world’s largest and most prestigious
companies and institutions, government organizations, educational institutions,
and small and medium sized businesses. The Company sells its products to these
customers directly and through a distribution network of independent
distributors and dealers, including systems integrators and value-added
resellers.
The
Company has restated its consolidated financial statements as of June 30, 2002
and 2001, and for each of the years then ended, as discussed in more detail
in
Note 3. Certain adjustments impacting the Company’s Consolidated Financial
Statements for periods prior to 2001 were also identified, as the Company has
recorded the cumulative effect of adjustments of $320 for 2000 to retained
earnings as of June 30, 2000.
|
2.
|
Summary
of Significant Accounting
Policies
|
Consolidation
-
These consolidated financial statements include the financial statements of
ClearOne Communications, Inc. and its wholly-owned subsidiaries, E.mergent,
Inc., ClearOne Communications EuMEA GmbH, ClearOne Communications of Canada,
Inc., OM Video, ClearOne Communications Limited UK, and Gentner Communications
Ltd. - Ireland. All intercompany balances and transactions have been eliminated
in consolidation.
Use
of Estimates
-
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
these accompanying notes. Actual results could differ from those estimates.
Key
estimates in the accompanying consolidated financial statements include, among
others, allowances for doubtful accounts and product returns, provisions for
obsolete inventory, valuation of long-lived assets including goodwill, and
deferred income tax asset valuation allowances.
Cash
Equivalents
-
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. As of June 30, 2003,
2002,
and 2001, cash equivalents totaled $5,049, $1,174, and $6,611, respectively,
and
consisted primarily of money market funds.
F-9
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Restricted
Cash
-
The Company’s restricted cash relates to obligations from the acquisition of OM
Video. The funds were held until OM Video met certain requirements as outlined
in the purchase agreement. In February 2004, the restricted cash was paid to
OM
Video.
Marketable
Securities
-
The Company’s marketable securities are classified as available-for-sale
securities and are comprised of municipal government auction rate notes and
auction preferred stock that have original maturities of greater than one year.
Management determines the appropriate classifications of investments at the
time
of purchase and reevaluates such designation as of each balance sheet date.
Unrealized holding gains and losses, net of the related tax effect on
available-for-sale securities are excluded from earnings and are reported as
a
separate component of other comprehensive income until realized.
Available-for-sale securities are carried at fair value which approximated
cost.
The
Company considers highly liquid marketable securities with an effective maturity
to the Company of less than one year to be current assets. The Company defines
effective maturity as the shorter of the original maturity to the Company or
the
effective maturity as a result of periodic auction or optional redemption
features of certain of its investments. Such investments are expected to be
realized in cash or sold or consumed during the normal operating cycles of
the
business. As of June 30, 2003 and 2002, all marketable securities were
classified as current assets.
Marketable
securities as of June 30, 2003 and 2002 were as follows:
|
2003
|
2002
|
||||||
|
Municipal
government auction rate notes
|
$
|
1,900
|
$
|
8,400
|
|||
|
Auction
preferred stock
|
-
|
4,000
|
|||||
|
$
|
1,900
|
$
|
12,400
|
||||
The
Company regularly monitors and evaluates the value of its marketable securities.
When assessing marketable securities for other-than-temporary declines in value,
the Company considers such factors, among other things, as how significant
the
decline in value is as a percentage of the original cost, how long the market
value of the investment has been less than its original cost, the collateral
supporting the investments, insurance policies which protect the Company’s
investment position, the interval between auction periods, whether or not there
have been any failed auctions, and the credit rating issued for the securities
by one or more of the major credit rating agencies. A decline in the market
value of any available-for-sale security below cost that is deemed to be
other-than-temporary results in a reduction in carrying amount to fair value.
The impairment is charged to earnings and a new cost basis for the security
is
established.
For
each of the fiscal years ended June 30, 2003 and 2002 realized gains and losses
upon the sale of available-for-sale securities were insignificant. Unrealized
gains and losses on available-for-sale securities are insignificant for all
periods and accordingly have not been recorded as a component of other
comprehensive income. The specific identification method is used to compute
the
realized gains and losses.
Accounts
Receivable
-
Accounts receivable are recorded at the invoiced amount. Credit is granted
to
customers without requiring collateral. The allowance for doubtful accounts
is
the Company’s best estimate of the amount of probable credit losses in the
Company’s existing accounts receivable. Management regularly analyzes accounts
receivable including historical bad debts, customer concentrations, customer
creditworthiness and current economic trends when evaluating the adequacy of
the
allowance for doubtful accounts.
Inventories
-
Inventories are valued at the lower of cost or market computed on a first-in,
first-out (FIFO) basis. Inventoried costs include material, direct engineering
and production costs, and applicable overhead, not in excess of estimated
realizable value. Consigned inventory includes product that has been delivered
to customers for which revenue recognition criteria have not been met.
Consideration is given to obsolescence, excessive levels, deterioration and
other factors in evaluating net realizable value. During the fiscal years ended
June 30, 2003, 2002, and 2001, the Company recorded inventory write-offs of
$2,175, $2,945, and $416, respectively.
F-10
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Property
and Equipment
-
Property and equipment are stated at cost. Costs associated with internally
developed software are capitalized in accordance with Statement of Position
(SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. Depreciation and amortization are calculated over the
estimated useful lives of the respective assets using the straight-line method.
Estimated useful lives are generally two to ten years. Leasehold improvement
amortization is computed using the straight-line method over the shorter of
the
lease term or the estimated useful life of the related assets. Repairs and
maintenance costs are expensed as incurred.
Goodwill
-
The Company amortized goodwill related to the ClearOne, Inc. (ClearOne)
acquisition from the acquisition date through June 30, 2002. During each of
the
fiscal years ended June 30, 2002 and 2001 goodwill amortization was $297, and
was reported in general and administrative expense. In June 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142
eliminates amortization of goodwill and intangible assets with indefinite lives
and instead sets forth methods to periodically evaluate goodwill for impairment.
The nonamortization and amortization provisions of SFAS No. 142 are effective
immediately for goodwill and intangible assets acquired after June 30, 2001.
The
Company adopted the amortization provisions of SFAS No. 142 with respect to
its
fiscal year 2002 acquisitions of Ivron Systems, Ltd. (Ivron) and E.mergent,
Inc.
(E.mergent) and its fiscal year 2003 acquisition of OM Video. With respect
to
goodwill and intangible assets acquired prior to July 1, 2001, the Company
adopted this statement effective July 1, 2002.
The
following unaudited pro forma results of operations data for the years ended
June 30, 2003, 2002, and 2001 are presented as if the provisions of SFAS No.
142
had been in effect for all period presented:
|
Years
Ended June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Reported
net income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
|
Goodwill
amortization, net of income tax
|
-
|
186
|
186
|
|||||||
|
Adjusted
net income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,475
|
)
|
$
|
3,804
|
||
|
Basic
earnings per share:
|
||||||||||
|
As
reported
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
||
|
Goodwill
amortization
|
-
|
0.02
|
0.02
|
|||||||
|
As
adjusted
|
$
|
(3.21
|
)
|
$
|
(0.67
|
)
|
$
|
0.44
|
||
|
Diluted
earnings per share:
|
||||||||||
|
As
reported
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
||
|
Goodwill
amortization
|
-
|
0.02
|
0.02
|
|||||||
|
As
adjusted
|
$
|
(3.21
|
)
|
$
|
(0.67
|
)
|
$
|
0.41
|
||
As
of July 1, 2002, the Company’s gross goodwill balance was $17,072 from the
E.mergent, Inc. acquisition on May 31, 2002. Upon adoption of SFAS No. 142,
there was no impairment of goodwill. As of July 1, 2002, the Company adopted
all
remaining provisions of SFAS No. 142, including the annual impairment evaluation
provisions, and established its annual review for impairment as June 30.
Although goodwill will be tested at least annually for impairment, it is tested
more frequently if events and circumstances indicate that the asset might be
impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset’s fair value. The impairment testing is performed at
the reporting unit level in two steps: (i) the Company determines the fair
value
of a reporting unit and compares it to its carrying amount, and (ii) if the
carrying amount of a reporting unit exceeds its fair value, an impairment loss
is recognized for any excess of the carrying amount of the reporting unit’s
goodwill over the implied fair value of that goodwill. The implied fair value
of
goodwill is determined by allocating the fair value of the reporting unit in
a
manner similar to a purchase price allocation in accordance with SFAS No. 141,
Business Combinations.
F-11
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Prior
to the adoption of SFAS No. 142, the Company evaluated impairment of goodwill
under the provisions of SFAS No. 121, “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of.”
Impairment
of Long-Lived Assets
-
Through June 30, 2002, the Company accounted for long-lived assets, including
intangible assets with definite lives, in accordance with SFAS No.
121.
As
of July 1, 2002, the Company adopted SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” whereby long-lived assets, such as
property, equipment and definite-lived intangibles subject to amortization,
are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Recoverability
of
assets to be held and used is measured by a comparison of the carrying amount
of
an asset or asset group to estimated future undiscounted net cash flows of
the
related asset or group of assets over their remaining lives. If the carrying
amount of an asset exceeds its estimated future undiscounted cash flows, an
impairment charge is recognized for the amount by which the carrying amount
exceeds the estimated fair value of the asset. Impairment of long-lived assets
is assessed at the lowest levels for which there are identifiable cash flows
that are independent of other groups of assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value, less the estimated
costs to sell.
Fair
Value of Financial Instruments
-
The carrying values of cash equivalents, accounts receivable, accounts payable,
and accrued liabilities all approximate fair value due to the short-term
maturities of these assets and liabilities. The carrying values of lines of
credit also approximate fair value because applicable interest rates either
fluctuate based on market conditions or approximate the Company’s borrowing
rate.
Foreign
Currency -
The functional currency for OM Video is the Canadian Dollar. The functional
currency for the Company’s other foreign subsidiaries is the U.S. Dollar. The
results of operations for the Company’s other subsidiaries are recorded by the
subsidiaries in Euro and British Pound and remeasured in the U.S. Dollar. Assets
and liabilities are translated or remeasured into U.S. dollars at the exchange
rate prevailing on the balance sheet date or the historical rate, as
appropriate. Revenue and expenses are translated or remeasured at average rates
of exchange prevailing during the period. Adjustments resulting from the
translation of OM Video amounts are recorded as accumulated other comprehensive
income in the accompanying consolidated balance sheets. The impact from
remeasurement of all other subsidiaries is recorded in the accompanying
consolidated statements of operations.
Revenue
Recognition
-
The Company has three sources of revenue: (i) product revenue, primarily from
product sales to distributors, dealers and end users; (ii) conferencing services
revenue, primarily from full-service conference calling and on-demand,
reservationless conference calling; and (iii) business services revenue which
include technical services such as designing, constructing and servicing of
conference systems and maintenance contracts.
Product
revenue is recognized when (i) the products are shipped, (ii) persuasive
evidence of an arrangement exists, (iii) the price is fixed and determinable,
and (iv) collection is reasonably assured. Beginning in 2001, the Company
modified its sales channels to include distributors. These distributors were
generally thinly capitalized with little or no financial resources and did
not
have the wherewithal to pay for these products when delivered by the Company.
Furthermore, in a substantial number of cases, significant amounts of
inventories were returned or never paid for and the payment for product sold
(to
both distributors and non-distributors) was regularly subject to a final
negotiation between the Company and its customers. As a result of such
negotiations, the Company routinely agreed to significant concessions from
the
originally invoiced amounts to facilitate collection. These practices continued
to exist through the end of fiscal year 2003.
Accordingly,
amounts charged to both distributors and non-distributors were not considered
fixed and determinable or reasonably collectible until cash was collected.
As a
result, the June 30, 2003, 2002, and 2001 balance sheets reflect no accounts
receivable or deferred revenue related to product sales.
Conferencing
services revenue is recognized at the time of customer usage, and is based
upon
minutes used.
F-12
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Business
services activities involve designing and constructing conference systems under
fixed-price contracts. Revenues from fixed-priced construction contracts are
recognized on the completed-contract method. This method is used because the
typical contract is completed in three months or less and financial position
and
results of operations do not vary significantly from those which would result
from use of the percentage-of-completion method. A contract is considered
complete when all costs except insignificant items have been incurred and the
installation is operating according to specification or has been accepted by
the
customer. Contract costs include all direct material and labor costs. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined.
Revenue
from maintenance contracts on conference systems is recognized on a
straight-line basis over the maintenance period pursuant to Financial Accounting
Standards Board Technical Bulletin No. 90-1, “Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts.”
The
Company offers rebates to certain of its distributors based upon volume of
product purchased by such distributors. The Company records rebates as a
reduction of revenue in accordance with Emerging Issues Task Force (EITF) Issue
No. 00-22, “Accounting for Points and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered
in the Future.” Beginning January 1, 2002, the Company adopted EITF Issue No.
01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products).” The Company continues to record rebates as
a reduction of revenue.
The
Company estimates future product returns based upon historical experience and
maintains an allowance for estimated returns which has been reflected as a
reduction to accounts receivable. The allowance for estimated returns was $107,
$0, and $0 as of June 30, 2003, 2002, and 2001, respectively.
Shipping
and Handling Costs - Shipping and handling billed to customers is recorded
as
revenue. Shipping and handling costs are included in cost of goods
sold.
Stock-Based
Compensation
-
The Company accounts for stock-based compensation issued to directors, officers,
and employees in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations. Under APB No. 25, compensation expense is recognized if an
option’s exercise price on the measurement date is below the fair market value
of the Company’s common stock. The compensation, if any, is amortized to expense
over the vesting period.
SFAS
No. 123, “Accounting for Stock-Based Compensation,” required pro forma
information regarding net income (loss) as if the Company had accounted for
its
stock options granted under fair value method prescribed by SFAS No. 123. The
fair value of the options and employee stock purchase rights is estimated using
the Black-Scholes option pricing model. For purposes of the pro forma
disclosures, the estimated fair value of the stock options is amortized over
the
vesting periods of the respective stock options. The following is the pro forma
disclosure and the related impact on the net income (loss) attributable to
common stockholders and net income (loss) per common share for the years ended
June 30, 2003, 2002, and 2001.
In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required
for
fiscal years ending after December 15, 2002.
F-13
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Net
income (loss):
|
||||||||||
|
As
reported
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
|
Stock-based
employee compensation expense included in reported net income (loss),
net
of income taxes
|
(24
|
)
|
49
|
7
|
||||||
|
Stock-based
employee compensation expense determined under the fair-value method
for
all awards, net of income taxes
|
(966
|
)
|
(1,003
|
)
|
(1,139
|
)
|
||||
|
Pro
forma
|
$
|
(36,962
|
)
|
$
|
(7,615
|
)
|
$
|
2,486
|
||
|
Basic
earnings (loss) per common share:
|
||||||||||
|
As
reported
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
||
|
Pro
forma
|
(3.31
|
)
|
(0.79
|
)
|
0.29
|
|||||
|
Diluted
earnings (loss) per common share:
|
||||||||||
|
As
reported
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
||
|
Pro
forma
|
(3.31
|
)
|
(0.79
|
)
|
0.27
|
|||||
Research
and Product Development Costs
-
The Company expenses research and product development costs as incurred.
Advertising
-
The Company expenses advertising costs as incurred. Advertising expenses consist
of trade shows and magazine advertisements. Advertising expenses for the fiscal
years ended June 30, 2003, 2002, and 2001 totaled $361, $693, and $358,
respectively.
Income
Taxes
-
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and
their respective tax bases, and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date. A valuation allowance is provided
when
it is more likely than not that some or all of the deferred tax assets may
not
be realized.
Issued
but not yet Adopted Accounting Pronouncements -
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of
Variable Interest Entities.” This interpretation establishes new guidelines for
consolidating entities in which a parent company may not have majority voting
control, but bears residual economic risks or is entitled to receive a majority
of the entity’s residual returns, or both. As a result, certain subsidiaries
that were previously not consolidated under the provisions of Accounting
Research Bulletin No. 51 may now require consolidation with the parent company.
This interpretation applies in the first year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company has
evaluated this interpretation but does not expect that it will have a material
effect on its business, results of operations, financial position, or liquidity.
In
May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
It
requires that an issuer classify a financial instrument that is within its
scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15,
2003. The Company has evaluated this statement but does not expect that it
will
have a material effect on its business, results of operations, financial
position, or liquidity.
F-14
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
In
December 2003, the FASB issued a revision to Interpretation No. 46,
“Consolidation of Variable Interest Entities” (FIN46R). FIN46R clarifies the
application of ARB No. 51, “Consolidated Financial Statements” to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the
entity to finance its activities without additional subordinated financial
support. FIN46R requires the consolidation of these entities, known as variable
interest entities, by the primary beneficiary of the entity. The primary
beneficiary is the entity, if any, that will absorb a majority of the entity's
expected losses, receive a majority of the entity's expected residual returns,
or both.
Among
other changes, the revisions of FIN46R (a) clarified some requirements of
the original FIN46, which had been issued in January 2003, (b) eased
some implementation problems, and (c) added new scope exceptions. FIN46R
deferred the effective date of the Interpretation for public companies, to
the
end of the first reporting period ending after March 15, 2004. The adoption
of this interpretation did not have a material effect on the Company’s business,
results of operations, financial position, or liquidity.
In
March 2004, the FASB issued EITF No. 03-01, “The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments,” which provides new
guidance for assessing impairment losses on debt and equity investments. The
new
impairment model applies to investments accounted for under the cost or equity
method and investments accounted for under FAS 115, “Accounting for Certain
Investments in Debt and Equity Securities.” EITF No. 03-01 also includes new
disclosure requirements for cost method investments and for all investments
that
are in an unrealized loss position. In September 2004, the FASB delayed the
accounting provisions of EITF No. 03-01; however the disclosure requirements
remain effective. The Company will evaluate the effect, if any, of adopting
EITF
03-01.
In
November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs—an
amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to
converge U.S. accounting standards for inventories with International Accounting
Standards. FAS No. 151 requires idle facility expenses, freight, handling costs,
and wasted material (spoilage) costs to be recognized as current-period charges.
It also requires that allocation of fixed production overheads to the costs
of
conversion be based on the normal capacity of the production facilities. FAS
No.
151 will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company does not anticipate that the implementation
of
this standard will have a significant impact on its consolidated results of
operations, financial condition or cash flows.
In
December 2004, FASB issued Financial Accounting Standard No. 123R
(“SFAS 123R”), “Share-Based Payment.” SFAS 123R is a revision of SFAS 123. SFAS
123R establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. Primarily, SFAS
123R focuses on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. It also addresses transactions
in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity’s equity instruments or that may be
settled by the issuance of those equity instruments.
SFAS
123R requires the Company to measure the cost of employee services received
in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange
for
the award—the requisite service period (usually the vesting period). No
compensation cost is recognized for equity instruments for which employees
do
not render the requisite service. Therefore, if an employee does not ultimately
render the requisite service, the costs recognized related to unvested options
will be reversed.
In
accordance with Staff Accounting Bulletin 107, SFAS 123R is effective as of
the
beginning of the annual reporting period that begins after June 15, 2005.
Under these guidelines, the Company will adopt SFAS 123R as of the beginning
of
the first quarter of fiscal year 2006 starting July 1, 2005. The Company expects
this statement to have an adverse impact on its future results of
operations.
F-15
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
3.
|
Restatement
and Reclassifications of Previously Issued Financial
Statements
|
The
Company’s previously issued consolidated balance sheets, consolidated statements
of operations and comprehensive income (loss), consolidated statements of
stockholders’ equity and cash flows for the years ended June 30, 2002 and 2001
have been restated to correct for certain accounting errors.
Summary
of restatement items
Errors
in previously issued financial statements were identified in the following
areas:
Revenue
Recognition and Related Sales Returns, Credit Memos, and Allowances.
The
Company recognized revenue before the amounts charged to both distributors
and
non-distributors were considered fixed and determinable or reasonably
collectible. Accordingly, revenue was inappropriately accelerated.
Beginning
in 2001 and through 2002, the Company modified its sales channels to include
distributors. These distributors were generally thinly capitalized with little
or no financial resources and did not have the wherewithal to pay for these
products when delivered by the Company. Furthermore, in a substantial number
of
cases, significant amounts of inventories were returned or never paid for and
the payment for product sold (to both distributors and non-distributors) was
regularly subject to final negotiation between the Company and its customers.
As
a result of such negotiations, the Company routinely agreed to significant
concessions from the originally invoiced amounts to facilitate collection.
Accordingly, amounts charged to both distributors and non-distributors were
not
considered fixed and determinable or reasonably collectible until cash was
collected. Accordingly, product revenues to distributors and non-distributors
were restated for the years ending June 30, 2002 and 2001.
Related
sales returns and allowances, rebates, and accounts receivables were revised
appropriately given the revenue adjustments.
Cutoff
and Period-End Close Adjustments Related to Accrued Liabilities and Prepaid
Assets. The
Company recorded accruals and amortized certain prepaid assets to operating
expenses during the fiscal years ended June 30, 2002 and 2001 in the improper
periods. Accordingly, adjustments to accrued liabilities, prepaid assets, and
operating expenses were recorded for the years ending June 30, 2002 and
2001.
Tracking
and Valuation of Inventory, Including Controls to Identify and Properly Account
for Obsolete Inventory. As
part of the restatement process, the Company discovered that it made errors
in
the recording and presentation of inventories, including consigned inventory,
obsolete and slow-moving inventories, errors in the capitalization of overhead
expenses, errors in recording inventories at the lower of cost or market, and
errors for inventory shrinkage. As a result, the Company made adjustments to
reflect consigned inventory, to properly capitalize overhead expenses, physical
inventory adjustments, adjustments to lower of cost or market, and adjustments
to reserves for excess, obsolete and slow-moving inventory. Accordingly,
inventories and cost of goods sold were restated to properly account for these
errors.
Accounting
for Leases, Including Classification as Operating or Capital. In
evaluating the classification of leases, the Company did not consider all
periods for which failure to renew the lease imposes a penalty on the lessee
in
such amount that a renewal appears, at the inception of the leases, to be
reasonably assured. Accordingly, certain leases were classified as operating
leases that should have been classified as capital leases. The effect of
properly recording the capital leases on the Company’s previously reported
financial statements is to record additional capital lease obligations, property
and equipment, and depreciation expense and reduce rental expense for fiscal
periods ending June 30, 2002 and 2001.
The
Company did not consider escalating rent payments and rent holidays for certain
operating leases. Accordingly, rent expense was inappropriately understated.
The
effect of straight-lining rent payments on the Company’s previously reported
financial statements is to record an accrued liability for future rent payments
and record additional rent expense.
F-16
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Classification
of Cash and Marketable Securities.
In previously issued consolidated financial statements, the Company classified
municipal government auction rate notes and auction rate preferred stocks as
cash instead of marketable securities. Accordingly, reclassifications were
made
to the 2002 cash balances to properly classify those as marketable securities
instead of cash.
Accounting
for Acquisitions. During
the restatement process, the Company determined that the valuations and purchase
price allocations in connection with its acquisitions of ClearOne, Ivron, and
E.mergent were not performed properly. The Company engaged independent
third-party valuation specialists to provide valuations and purchase price
allocations on these acquisitions. The Company re-examined the purchase price
allocations and adjusted for items that should have been recorded
previously.
|
·
|
In
the Company’s previously issued consolidated financial statements, the
Company valued the 129,871 shares of common stock issued in conjunction
with the acquisition of ClearOne at $15.40 per share. The Company
determined that the shares should have been valued at $13.97 per
share
based on the market prices a few days before and after the measurement
date.
|
|
·
|
The
Company recorded adjustments to the amounts allocated to certain
acquired
intangible assets, including developed technologies, patents and
trademarks, and distribution agreements. The Company also recorded
adjustments to the amounts allocated to in-process research and
development related to the ClearOne
acquisition.
|
|
·
|
The
Company recorded adjustments to the amounts allocated to certain
acquired
tangible assets and assumed liabilities, including cash, accounts
receivable, inventory, property and equipment, deferred tax assets,
and
deferred tax liabilities.
|
|
·
|
The
adjustments to purchase price, as well as the adjustments to the
amounts
allocated to acquired intangible assets, acquired tangible assets,
and
assumed liabilities, resulted in corresponding adjustments to the
amount
allocated to goodwill.
|
Accounting
for Equity and Other Significant Non-Routine Transactions.
|
·
|
During
the year ended June 30, 2001, the Company sold its remote control
product
line to Burk Technology. In previously issued consolidated financial
statements, the Company recognized a gain on the sale of its remote
control product line that included a significant note receivable
from the
buyer at the time of the sale, and recognized interest income associated
with the note receivable in periods subsequent to the sale. Based
on an
analysis of the facts and circumstances that existed at the date
of the
sale, the recognition of this gain was inappropriate as the buyer
did not
have the wherewithal to pay this note receivable, the operations
of the
remote control product line had not historically generated cash flows
sufficient to fund the required payments, and there were contingent
liabilities the Company had to the buyer. Accordingly, the Company
concluded that the gain should be recognized as cash is received
from the
buyer. As a result, the Company has reduced the gain on sale and
eliminated the note receivable at the time of the sale, and recognized
additional gain on the sale of the product line when-and-as cash
payments
on the note receivable are
obtained.
|
|
·
|
During
the year ended June 30, 2002, the Company experienced certain triggering
events that indicated that certain long-lived assets related to ClearOne
and Ivron were impaired. Accordingly, the Company performed an impairment
analysis in accordance with the provisions of SFAS No. 121. As a
result of
this analysis, the Company determined that goodwill, intangible assets,
and certain property and equipment related to the ClearOne and Ivron
acquisitions were fully impaired as of June 30, 2002. As a result,
the
Company recognized an impairment loss equal to the carrying value
of these
assets. In previously issued consolidated financial statements, the
Company failed to recognize that a triggering event had occurred
and did
not record an impairment loss for these assets.
|
|
·
|
During
the year ended June 30, 2001, the terms of certain outstanding stock
options were modified to allow for their acceleration in the event
the
Company met certain EPS targets. During the year ended June 30, 2001
the
Company cancelled certain outstanding stock options and issued a
replacement award with a lower exercise price, resulting in variable
accounting. In previously issued consolidated financial statements,
the
Company did not record compensation expense in connection with these
modifications in accordance with APB No. 25 and FASB Interpretation
Number
44, “Accounting for Certain Transactions involving Stock Compensation” (an
interpretation of APB No. 25).
|
F-17
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
·
|
On
June 29, 2001, the Company repurchased 5,000 shares of its previously
issued and outstanding common shares. In previously issued consolidated
financial statements, the Company did not record the effects of this
transaction until fiscal year 2002.
|
Accounting
for Income Taxes.
During the fiscal periods ending June 30, 2002 and 2001, the Company’s income
before income taxes was restated to correct for certain accounting errors,
resulting in less pre tax book income and correspondingly less income tax
expense. In conjunction with the restatement, the Company evaluated the
realizability of deferred tax assets. In 2002, the Company recorded an increased
domestic valuation allowance to reflect its determination that not all of its
deferred tax assets were more likely than not realizable pursuant to the
provisions of SFAS 109, “Accounting for Income Taxes”.
F-18
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Restated
Financial Statements
Impact
on Consolidated Statements of Operations
|
As
of June 30, 2002
|
As
of June 30, 2001
|
||||||||||||
|
As
Previously Reported
|
Restated
|
As
Previously Reported
|
Restated
|
||||||||||
|
Revenue:
|
|||||||||||||
|
Product
|
$
|
37,215
|
$
|
26,253
|
$
|
28,190
|
$
|
22,448
|
|||||
|
Conferencing
services
|
17,328
|
15,583
|
11,689
|
11,689
|
|||||||||
|
Business
services
|
-
|
1,526
|
-
|
-
|
|||||||||
|
Total
revenue
|
54,543
|
43,362
|
39,879
|
34,137
|
|||||||||
|
Cost
of goods sold:
|
|||||||||||||
|
Product
|
15,057
|
10,939
|
10,634
|
8,789
|
|||||||||
|
Product
inventory write-offs
|
-
|
2,945
|
-
|
416
|
|||||||||
|
Conferencing
services
|
7,943
|
7,310
|
5,869
|
5,928
|
|||||||||
|
Business
services
|
-
|
978
|
-
|
-
|
|||||||||
|
Total
cost of goods sold
|
23,000
|
22,172
|
16,503
|
15,133
|
|||||||||
|
Gross
profit
|
31,543
|
21,190
|
23,376
|
19,004
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Marketing
and selling
|
10,705
|
10,739
|
7,753
|
7,711
|
|||||||||
|
General
and administrative
|
6,051
|
5,345
|
4,649
|
4,198
|
|||||||||
|
Research
and product development
|
4,053
|
3,810
|
2,502
|
2,747
|
|||||||||
|
Impairment
losses
|
-
|
7,115
|
-
|
-
|
|||||||||
|
Gain
on sale of court conferencing assets
|
-
|
(250
|
)
|
-
|
-
|
||||||||
|
Purchased
in-process research and development
|
-
|
-
|
-
|
728
|
|||||||||
|
Total
operating expenses
|
20,809
|
26,759
|
14,904
|
15,384
|
|||||||||
|
Operating
income (loss)
|
10,734
|
(5,569
|
)
|
8,472
|
3,620
|
||||||||
|
Other
income, net
|
509
|
132
|
373
|
188
|
|||||||||
|
Income
(loss) from continuing operations before income taxes
|
11,243
|
(5,437
|
)
|
8,845
|
3,808
|
||||||||
|
Provision
for income taxes
|
3,831
|
1,400
|
3,319
|
1,050
|
|||||||||
|
Income
(loss) from continuing operations
|
7,412
|
(6,837
|
)
|
5,526
|
2,758
|
||||||||
|
Discontinued
operations:
|
|||||||||||||
|
Income
from discontinued operations, net of income taxes
|
-
|
-
|
737
|
737
|
|||||||||
|
Gain
on disposal of a component of our business, net of income
taxes
|
-
|
176
|
1,220
|
123
|
|||||||||
|
Net
income (loss)
|
$
|
7,412
|
$
|
(6,661
|
)
|
$
|
7,483
|
$
|
3,618
|
||||
|
Basic
earnings (loss) per common share from continuing
operations
|
$
|
0.77
|
$
|
(0.71
|
)
|
$
|
0.64
|
$
|
0.32
|
||||
|
Diluted
earnings (loss) per common share from continuing
operations
|
$
|
0.74
|
$
|
(0.71
|
)
|
$
|
0.61
|
$
|
0.30
|
||||
|
Basic
earnings per common share from discontinued operations
|
$
|
-
|
$
|
0.02
|
$
|
0.23
|
$
|
0.10
|
|||||
|
Diluted
earnings per common share from discontinued operations
|
$
|
-
|
$
|
0.02
|
$
|
0.22
|
$
|
0.09
|
|||||
|
Basic
earnings (loss) per common share
|
$
|
0.77
|
$
|
(0.69
|
)
|
$
|
0.87
|
$
|
0.42
|
||||
|
Diluted
earnings (loss) per common share
|
$
|
0.74
|
$
|
(0.69
|
)
|
$
|
0.83
|
$
|
0.39
|
||||
F-19
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Impact
on Consolidated Balance Sheets
|
As
of June 30, 2002
|
As
of June 30, 2001
|
||||||||||||
|
As
Previously Reported
|
As
Restated
|
As
Previously Reported
|
As
Restated
|
||||||||||
|
ASSETS
|
|||||||||||||
|
Current
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
14,248
|
$
|
1,744
|
$
|
6,852
|
$
|
6,851
|
|||||
|
Marketable
securities
|
-
|
12,400
|
-
|
-
|
|||||||||
|
Accounts
receivable, net
|
20,317
|
4,322
|
7,213
|
2,027
|
|||||||||
|
Inventories
|
8,606
|
12,516
|
4,132
|
6,459
|
|||||||||
|
Note
receivable, current portion
|
196
|
-
|
71
|
-
|
|||||||||
|
Deferred
income tax assets
|
1,293
|
4,709
|
248
|
1,587
|
|||||||||
|
Prepaid
expenses and other
|
610
|
621
|
780
|
680
|
|||||||||
|
Total
current assets
|
45,270
|
36,312
|
19,296
|
17,604
|
|||||||||
|
Property
and equipment, net
|
5,770
|
8,123
|
3,697
|
5,681
|
|||||||||
|
Goodwill,
net
|
20,553
|
17,072
|
2,634
|
890
|
|||||||||
|
Intangibles,
net
|
6,991
|
1,634
|
182
|
616
|
|||||||||
|
Deferred
income tax assets
|
-
|
661
|
-
|
446
|
|||||||||
|
Note
Receivable, net of current portion
|
1,490
|
-
|
1,716
|
||||||||||
|
Other
assets
|
73
|
74
|
73
|
74
|
|||||||||
|
Total
assets
|
$
|
80,147
|
$
|
63,876
|
$
|
27,598
|
$
|
25,311
|
|||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||||||||
|
Current
liabilities:
|
|||||||||||||
|
Line
of credit
|
$
|
196
|
$
|
196
|
$
|
-
|
|||||||
|
Capital
lease obligations
|
60
|
784
|
182
|
619
|
|||||||||
|
Accounts
payable
|
3,053
|
3,056
|
568
|
652
|
|||||||||
|
Accrued
liabilities
|
2,299
|
2,841
|
1,130
|
1,408
|
|||||||||
|
Deferred
revenue
|
607
|
572
|
-
|
-
|
|||||||||
|
Income
taxes payable
|
820
|
265
|
422
|
224
|
|||||||||
|
Total
current liabilities
|
7,035
|
7,714
|
2,302
|
2,903
|
|||||||||
|
Capital
lease obligations, net of current portion
|
41
|
2,016
|
48
|
1,680
|
|||||||||
|
Deferred
revenue, net of current portion
|
277
|
254
|
-
|
-
|
|||||||||
|
Deferred
income tax liabilities
|
1,458
|
-
|
746
|
-
|
|||||||||
|
Total
liabilities
|
8,811
|
9,984
|
3,096
|
4,583
|
|||||||||
|
Commitments
and contingencies
|
|||||||||||||
|
Stockholders'
equity:
|
|||||||||||||
|
Common
stock
|
11
|
11
|
9
|
9
|
|||||||||
|
Additional
paid-in capital
|
48,384
|
48,704
|
8,963
|
8,856
|
|||||||||
|
Deferred
compensation
|
-
|
(147
|
)
|
-
|
(122
|
)
|
|||||||
|
Retained
earnings
|
22,941
|
5,324
|
15,530
|
11,985
|
|||||||||
|
Total
stockholders' equity
|
71,336
|
53,892
|
24,502
|
20,728
|
|||||||||
|
Total
liabilities and stockholders' equity
|
$
|
80,147
|
$
|
63,876
|
$
|
27,598
|
$
|
25,311
|
|||||
Impact
on Stockholders’ Equity
The
restatement adjustments resulted in a cumulative net reduction to stockholders’
equity of $17,444 and $3,774 as of June 30, 2002 and 2001, respectively. The
Company has also restated the June 30, 2000 retained earnings balance to reflect
cumulative adjustments through that date of $320.
F-20
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Impact
on Cash Flows
The
following table presents selected consolidated statements of cash flows
information showing previously reported and restated cash flows, for the years
ended June 30, 2002 and 2001:
|
Years
ended June 30,
|
Years
ended June 30,
|
||||||||||||
|
2002
|
2001
|
||||||||||||
|
As
previously reported
|
As
restated
|
As
previously reported
|
As
restated
|
||||||||||
|
Net
cash from (used in) operating activities
|
$
|
105
|
$
|
31
|
$
|
3,708
|
$
|
4,357
|
|||||
|
Net
cash (used in) investing activities
|
(17,044
|
)
|
(29,470
|
)
|
(3,114
|
)
|
(3,285
|
)
|
|||||
|
Net
cash from (used in) financing activities
|
24,335
|
24,156
|
(104
|
)
|
(456
|
)
|
|||||||
|
4.
|
Inventories
|
Inventories,
net of reserves, consist of the following as of June 30, 2003, 2002 and 2001:
|
June
30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Raw
materials
|
$
|
3,881
|
$
|
2,159
|
$
|
2,655
|
||||
|
Finished
goods
|
3,343
|
2,977
|
1,414
|
|||||||
|
Consigned
inventory
|
1,742
|
7,380
|
2,390
|
|||||||
|
Total
inventory
|
$
|
8,966
|
$
|
12,516
|
$
|
6,459
|
||||
Consigned
inventory represents inventory at distributors and other customers where revenue
recognition criteria have not been achieved.
|
5.
|
Costs
and Estimated Earnings on Uncompleted
Contracts
|
Information
with respect to uncompleted contracts is as follows as of June 30,
2003:
|
2003
|
||||
|
Costs
incurred on uncompleted contracts
|
$
|
416
|
||
|
Less
billings on uncompleted contracts
|
(1,031
|
)
|
||
|
$
|
(615
|
)
|
||
The
above amounts are reported in the consolidated balance sheet in billings in
excess of costs on uncompleted contracts.
|
6.
|
Property
and Equipment
|
Major
classifications of property and equipment and estimated useful lives are as
follows as of June 30, 2003, 2002 and 2001:
F-21
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
Estimated
|
June
30,
|
||||||||||||
|
useful
lives
|
2003
|
2002
|
2001
|
||||||||||
|
(Restated)
|
(Restated)
|
||||||||||||
|
Office
furniture and equipment
|
3
to 10 years
|
$
|
7,309
|
$
|
7,381
|
$
|
4,904
|
||||||
|
Manufacturing
and test equipment
|
2
to 10 years
|
3,276
|
2,622
|
2,305
|
|||||||||
|
Telephone
bridging equipment
|
5
to 7 years
|
4,693
|
4,545
|
3,212
|
|||||||||
|
Vehicles
|
3
to 5 years
|
9
|
9
|
-
|
|||||||||
|
15,287
|
14,557
|
10,421
|
|||||||||||
|
Accumulated
depreciation and amortization
|
(8,519
|
)
|
(6,434
|
)
|
(4,740
|
)
|
|||||||
|
Net
property and equipment
|
$
|
6,768
|
$
|
8,123
|
$
|
5,681
|
|||||||
During
2003, the Company recorded impairment losses of $270 and $265 related to
property and equipment associated with the E.mergent and the OM Video asset
groupings, respectively. During 2002, the Company recorded impairment losses
of
$72 related to property and equipment associated with the Ivron asset
grouping.
|
7.
|
Acquisitions
|
During
the fiscal year ended June 30, 2001, the Company completed the acquisition
of
ClearOne, a developer of video conferencing technology and audio conferencing
products. During the fiscal year ended June 30, 2002, the Company completed
the
acquisitions of Ivron, a developer of videoconferencing technology and product,
and E.mergent, a developer and manufacturer of document cameras, a manufacturer
of conferencing furniture and an integration services business. During the
fiscal year ended June 30, 2003, the Company completed the acquisition of
Stechyson Electronics Ltd., doing business as OM Video, an integration business
services company. The total consideration for each acquisition was based on
negotiations between the Company and the acquired company’s shareholders that
took into account a number of factors of the business, including historical
revenues, operating history, products, intellectual property and other factors.
Each acquisition was accounted for under the purchase method of accounting.
The
operations of each acquisition are included in the accompanying statements
of
operations for the period since the date of each acquisition.
Accounting
for the acquisition of a business requires an allocation of the purchase price
to the assets acquired and the liabilities assumed in the transaction at their
respective estimated fair values. The Company use information available at
the
date of the acquisitions to estimate the individual fair values of properties,
equipment, identifiable intangible assets and liabilities to make these fair
value determinations and, for significant business acquisitions, engaged
third-party valuation firms to assist in the fair value determinations of the
acquired net assets. The following summarizes the consideration and purchase
price allocations of each acquisition:
|
ClearOne
|
Ivron
|
E.mergent
|
OM
Video
|
||||||||||
|
(Restated)
|
(Restated)
|
(Restated)
|
|||||||||||
|
Cash
|
$
|
1,758
|
$
|
6,650
|
$
|
7,300
|
$
|
6,276
|
|||||
|
Holdback
account
|
-
|
-
|
-
|
600
|
|||||||||
|
Common
stock and fully-vested options
|
1,814
|
-
|
14,427
|
-
|
|||||||||
|
Direct
acquisition costs
|
98
|
248
|
603
|
110
|
|||||||||
|
Total
consideration
|
$
|
3,670
|
$
|
6,898
|
$
|
22,330
|
$
|
6,986
|
|||||
|
Net
tangible assets acquired
|
$
|
831
|
$
|
310
|
$
|
3,591
|
$
|
337
|
|||||
|
Intangible
assets:
|
|||||||||||||
|
In-process
research and development
|
728
|
-
|
-
|
-
|
|||||||||
|
Developed
technologies
|
680
|
5,260
|
-
|
-
|
|||||||||
|
Patents
and trademarks
|
207
|
1,110
|
1,060
|
-
|
|||||||||
|
Customer
relationships
|
37
|
-
|
392
|
-
|
|||||||||
|
Non-compete
agreements
|
-
|
-
|
215
|
574
|
|||||||||
|
Goodwill
|
1,187
|
218
|
17,072
|
6,075
|
|||||||||
|
Total
purchase price allocation
|
$
|
3,670
|
$
|
6,898
|
$
|
22,330
|
$
|
6,986
|
|||||
F-22
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
ClearOne,
Inc.
In
May 2000, the Company entered into an agreement to purchase substantially all
of
the assets of ClearOne, Inc. for $3,572 consisting of $1,758 of cash and 129,871
shares of restricted common stock valued at $13.97 per share. The acquisition
was consummated on July 5, 2000.
As
of the acquisition date, the Company acquired tangible assets consisting of
property and equipment of $473, deposits of $59 and inventory of
$299.
In
conjunction with a third-party valuation firm, the Company determined the useful
lives and amounts of the developed technologies, trademarks and distribution
agreements. The developed technologies, trademarks and distribution agreement
had estimated useful lives of three years. Goodwill was being amortized on
a
straight-line basis over four years until the adoption of SFAS No. 142 on July
1, 2002.
The
Company charged $728 to expense representing acquired in-process research and
development that had not yet reached technological feasibility. The Company
anticipated the technology would require an additional 18 to 20 months of
development at a minimum cost of $1,150. The technology had no alternative
future use. After the acquisition, the Company initially continued to develop
the technology; however, it experienced significant difficulties in completing
the development of the videoconferencing technologies and subsequently
determined that the technology was not viable and never brought the in-process
videoconferencing technology to market.
The
Company continued to sell the acquired teleconferencing product until the fourth
quarter of the fiscal year ended June 30, 2002. Due to declining sales, negative
margins beginning in the fourth quarter of the fiscal year ended June 30, 2002,
and management’s decision to stop investing in the acquired teleconferencing
product, the Company determined that a triggering event had occurred in the
fourth quarter of the fiscal year ended June 30, 2002. The Company performed
an
impairment test and determined that an impairment loss on the ClearOne assets
should be recognized (see Note 9 below).
Ivron
Systems, Ltd.
On
October 3, 2001, the Company purchased all of the issued and outstanding shares
of Ivron. Ivron was located in Dublin, Ireland. Under the terms of the original
agreement, the shareholders of Ivron received $6,000 of cash at closing of
the
purchase. As part of the purchase, all outstanding options to purchase Ivron
shares were cancelled in consideration for an aggregate cash payment of $650.
Further, under that agreement, after June 30, 2002, each former Ivron
shareholder would be entitled to receive approximately .08 shares of the
Company’s common stock for each Ivron share previously held by such shareholder,
provided that certain video product development contingencies were achieved.
This represented approximately 429,000 shares of common stock. Thereafter,
for
the fiscal years ending June 30, 2003 and 2004, the former Ivron shareholders
would be entitled to share in up to approximately $17,000 of additional cash
and
stock consideration provided that certain agreed upon earnings per share targets
for the Company were achieved. In addition, former optionees of Ivron who
remained with the Company were eligible to participate in a cash bonus program
paid by the Company, based on the combined performance of the Company and Ivron
in the fiscal years ending June 30, 2003 and 2004. The maximum amount payable
under this cash bonus program was approximately $1,000.
As
of the acquisition date, the Company acquired tangible assets consisting of
cash
of $297, accounts receivable of $92, inventory of $337, and property and
equipment of $22. The Company assumed liabilities consisting of trade accounts
payable of $174 and accrued compensation and other accrued liabilities of $264.
On
March 26, 2002, the Company entered into negotiations with the former
shareholders of Ivron to modify the terms of the original purchase agreement
because, upon further analysis, certain aspects of the acquired technology
did
not meet the intended product objectives established by the Company in its
original purchase negotiations.
The
amendment, which was finalized on April 8, 2002, revised the contingent
consideration that the Ivron shareholders would have been entitled to receive
in
subsequent years such that upon meeting certain gross profit targets for the
“V-There” and “Vu-Link” set-top videoconferencing products, technologies, and
sub-elements thereof (including licensed products), the former Ivron
shareholders had the opportunity to receive up to 109,000 shares of common
stock, issuable in four installments, on a quarterly basis, through July 15,
2003. No performance targets were met and accordingly, no contingent
consideration was or will be paid.
F-23
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
With
the assistance of a third-party valuation firm and after considering the facts
and circumstances surrounding the Company’s intentions, the Company determined
the useful lives and amounts of the developed technologies and patents. The
developed technologies had estimated useful lives of three to fifteen years
and
the patents had an estimated useful life of fifteen years.
After
the acquisition, the Company experienced significant difficulties in selling
the
acquired videoconferencing products. Due to the phasing out of a product line
occasioned by technological difficulties and negative projected cash flows,
the
Company determined that a triggering event had occurred during the fourth
quarter of the fiscal year ended June 30, 2002. The Company performed an
impairment test and determined that an impairment loss on the Ivron assets
should be recognized. Subsequent to June 30, 2003, the Company discontinued
selling the “V-There” and “Vu-Link” set-top videoconferencing products.
E.mergent,
Inc.
On
May 31, 2002, the Company completed its acquisition of E.mergent pursuant to
the
terms of an Agreement and Plan of Merger dated January 21, 2002 where by the
Company paid $7,300 of cash and issued 868,691 shares of common stock valued
at
$16.55 per share to former E.mergent stockholders.
In
addition to the shares of the Company’s common stock issued, the Company assumed
all options to purchase E.mergent common stock that were vested and outstanding
on the acquisition date. These options were converted into rights to acquire
a
total of 4,158 shares of the Company’s common stock at a weighted average
exercise price of $8.48 per share. A
value of approximately $49 was assigned to these options using the Black-Scholes
option pricing model with the following assumptions: expected dividend yield
of
0%, risk free interest rate of 2.9%, expected volatility of 81.8% and an
expected life of two years.
As
of the acquisition date, the Company acquired tangible assets consisting of
cash
of $68, accounts receivable of $2,201, inventory of $3,270, property and
equipment of $475 and other assets of $1,341. The Company assumed liabilities
consisting of accounts payable of $1,284, line of credit borrowings of $484,
unearned maintenance revenue of $873, accrued compensation (other than
severance) and other accrued liabilities of $656. The Company incurred severance
costs of approximately $468 related to the termination of four E.mergent
executives and seven other E.mergent employees as a result of duplication of
positions upon consummation of the acquisition. In June 2002, $52 was paid
to
such individuals. The severance accrual of $416 as of June 30, 2002 was paid
during the fiscal year ended June 30, 2003. With the assistance of a third-party
valuation firm and after considering the facts and circumstances surrounding
the
acquisition, the Company recorded intangible assets related to customer
relationships and patents. Customer relationships had estimated useful lives
of
18 months to three years and patents had estimated useful lives of fifteen
years. The term of the non-compete agreement was three years.
The
Company’s management at the time believed the E.mergent acquisition would
complement its existing operations and its core competencies would allow the
Company to acquire market share in this industry. However, the Company’s entry
into the services business was perceived as a threat by its systems integrators
and value-added resellers, many of whom the Company began competing against
for
sales. In order to avoid this conflict and maintain good relationships with
its
systems integrators and value-added resellers, the Company decided to stop
pursuing new services contracts in the fourth quarter of the fiscal year ended
June 30, 2003 which was considered a triggering event for evaluation of
impairment. Ultimately, the Company exited the U.S. audiovisual integration
market and subsequently sold its U.S. audiovisual integration business to
M:Space in May 2004 (see Note 24 - Subsequent Events). Although the Company
continues to sell camera and furniture products acquired from E.mergent, its
decision to exit the U.S. integration services market adversely affected future
cash flows. The Company determined that a triggering event occurred in the
fourth quarter of the fiscal year ended June 30, 2003. The Company performed
an
impairment test and determined that an impairment loss on certain E.mergent
assets should be recognized.
F-24
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
OM
Video
On
August 27, 2002, the Company purchased all of the outstanding shares of
Stechyson Electronics Ltd., doing business as OM Video, an audiovisual
integration firm headquartered in Ottawa, Canada. Under the terms of the
agreement, the shareholders of OM Video received $6,276 in cash at closing.
During the fiscal years ended June 30, 2003 and 2004, the Company paid an
additional $500 of a potential $600 that was held pending certain
representations and warranties associated with the acquisition. During the
second quarter of fiscal 2003, the Company also paid $750 of a potential $800
earn-out provision. The earn-out provision was recorded as additional
consideration and booked to goodwill. No further payment related to the holdback
or contingent consideration will be paid.
As
of the acquisition date, the Company acquired tangible assets consisting of
cash
of $193, accounts receivable of $470, inventory of $122, property and equipment
of $145 and prepaid expenses of $6. The Company assumed liabilities consisting
of accrued liabilities of $378 and accrued tax liabilities of $221.
The
Company obtained a non-compete agreement with a term of two years from the
former owner of OM Video.
The
Company’s management believed the OM Video acquisition would complement its
existing operations and its core competencies would allow the Company to acquire
market share in this industry. However, the Company’s entry into the services
business was perceived as a threat by its systems integrators and value-added
resellers, many of whom the Company began competing against for sales. In order
to avoid this conflict and maintain good relationships with its systems
integrators and value-added resellers, the Company deemphasized the audiovisual
integration market serving the Ottawa Canada region beginning in the fourth
quarter of the fiscal year ended June 30, 2003. This decision was considered
a
triggering event for evaluation of impairment. On March 4, 2005, the Company
sold all of its Canadian audio visual integration business (see Note 24 -
Subsequent Events). On June 30, 2003, the Company performed an impairment test
and determined that an impairment loss on the OM Video assets should be
recognized.
Pro
forma financial information
The
following unaudited pro forma combined financial information reflects operations
as if the acquisitions of ClearOne, Ivron and E.mergent had occurred as of
July
1, 2000 and as if the acquisition of OM Video had occurred as of July 1, 2001.
The unaudited pro forma combined financial information is presented for
illustrative purposes only and is not indicative of what the Company’s actual
results of operations may have been had the acquisitions been consummated on
July 1, 2000 and 2001, respectively.
|
June
30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Revenue
from continuing operations
|
$
|
58,728
|
$
|
72,327
|
$
|
58,085
|
||||
|
Loss
from continuing operations
|
(36,234
|
)
|
(9,022
|
)
|
(4,396
|
)
|
||||
|
Net
loss
|
(36,034
|
)
|
(8,846
|
)
|
(3,536
|
)
|
||||
|
Basic
and diluted loss per common share from continuing
operations
|
$
|
(3.24
|
)
|
$
|
(0.94
|
)
|
$
|
(0.51
|
)
|
|
|
Basic
and diluted loss per common share from net income
|
(3.22
|
)
|
(0.92
|
)
|
(0.41
|
)
|
||||
|
8.
|
Goodwill
and Other Intangible
Assets
|
The
Company had goodwill and definite-lived intangible assets related to the
acquisition of ClearOne in 2001, the acquisitions of Ivron and E.mergent in
2002
and the acquisition of OM Video in 2003.
F-25
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Goodwill
The
following presents details of the Company’s goodwill by reporting unit for the
years ended June 30, 2003, 2002 and 2001:
|
Products
|
Business
Services
|
Total
|
||||||||
|
Balances
as of June 30, 2000
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Acquisition
of ClearOne
|
1,187
|
-
|
1,187
|
|||||||
|
Amortization
of ClearOne goodwill
|
(297
|
)
|
-
|
(297
|
)
|
|||||
|
Balances
as of June 30, 2001
|
890
|
-
|
890
|
|||||||
|
Acquisition
of Ivron
|
218
|
-
|
218
|
|||||||
|
Acquisition
of E.mergent
|
5,026
|
12,046
|
17,072
|
|||||||
|
Amortization
of ClearOne goodwill
|
(297
|
)
|
-
|
(297
|
)
|
|||||
|
Impairment
of ClearOne and Ivron goodwill
|
(811
|
)
|
-
|
(811
|
)
|
|||||
|
Balances
as of June 30, 2002
|
5,026
|
12,046
|
17,072
|
|||||||
|
E.mergent
goodwill purchase price adjustment
|
-
|
20
|
20
|
|||||||
|
Acquisition
of OM Video
|
-
|
6,725
|
6,725
|
|||||||
|
Foreign
currency translation related to OM Video goodwill
|
-
|
1,049
|
1,049
|
|||||||
|
Impairment
of E.mergent and OM Video goodwill
|
(5,026
|
)
|
(19,840
|
)
|
(24,866
|
)
|
||||
|
Balances
as of June 30, 2003
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
Acquired
Intangibles
The
following table presents the Company’s intangible assets as of June 30, 2003,
2002, and 2001:
|
2003
|
2002
|
2001
|
||||||||||||||||||||
|
Useful
Lives
|
Gross
Value
|
Accumulated
Amortization
|
Gross
Value
|
Accumulated
Amortization
|
Gross
Value
|
Accumulated
Amortization
|
||||||||||||||||
|
Developed
technologies
|
3
to 15 years
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
680
|
$
|
(227
|
)
|
||||||||
|
Patents
and trademarks
|
3
to 15 years
|
1,060
|
(75
|
)
|
1,060
|
(6
|
)
|
207
|
(69
|
)
|
||||||||||||
|
Customer
relationships
|
18
months to 3 years
|
-
|
-
|
392
|
(22
|
)
|
37
|
(12
|
)
|
|||||||||||||
|
Non-compete
agreements
|
2
to 3 years
|
52
|
(19
|
)
|
215
|
(5
|
)
|
-
|
-
|
|||||||||||||
|
Total
|
$
|
1,112
|
$
|
(94
|
)
|
$
|
1,667
|
$
|
(33
|
)
|
$
|
924
|
$
|
(308
|
)
|
|||||||
Amortization
of intangible assets was $680, $787, and $308 for the years ended June 30,
2003,
2002, and 2001, respectively. Amortization of costs related to developed
technologies and patents was reported in product cost of goods sold.
Amortization of costs related to trademarks, customer and partner relationships,
and non-compete agreements was reported in general and administration expense
and marketing and selling expense.
F-26
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Estimated
future amortization expense is as follows:
|
Years
Ending June 30,
|
||||
|
2004
|
$
|
88
|
||
|
2005
|
87
|
|||
|
2006
|
71
|
|||
|
2007
|
71
|
|||
|
2008
|
71
|
|||
|
Thereafter
|
630
|
|||
|
Total
estimated amortization expense
|
$
|
1,018
|
||
|
9.
|
Impairments
|
During
the fiscal year ended June 30, 2002, the Company experienced declining sales
from the teleconferencing products acquired in the ClearOne acquisition.
Although sales declined throughout the year, through March 31, 2002, gross
margins and cash flows remained positive. However, during the fourth quarter
of
the fiscal year ended June 30, 2002, the gross margins and cash flows became
negative as sales continued to decline. Additionally, in the fourth quarter
of
fiscal 2002, the Company also made a decision to stop investing in the acquired
teleconferencing products. Furthermore, during the fourth quarter of the fiscal
year ended June 30, 2002, the Company experienced difficulties in selling the
acquired videoconferencing products acquired in the Ivron acquisition. The
difficulties were due to the phasing out of an older product line occasioned
by
technological difficulties of product implementation. Such triggering events
required an impairment analysis to be performed in accordance with SFAS No.
121.
The estimated undiscounted future cash flows generated by the long-lived asset
groupings related to ClearOne and Ivron were less than their carrying values.
The analysis resulted in an impairment loss of $7,115 for the fiscal year ended
June 30, 2002. Management estimated the fair market value of the long-lived
assets using the present value of expected future discounted cash
flows.
During
the fourth quarter of the fiscal year ended June 30, 2003, the Company decided
to deemphasize the audiovisual integration services. The Company entered into
the audiovisual integration services through the E.mergent and OM Video
acquisitions. At the time of the acquisitions, management believed that the
audiovisual integration services would complement existing core competencies
and
allow the Company to acquire market share in this market segment. However,
the
Company’s entry into the audiovisual integration services was perceived as a
threat by its systems integrators and value-added resellers, many of whom the
Company began competing against for sales. In order to avoid this conflict,
the
Company decided to deemphasize the audiovisual integration services beginning
in
the fourth quarter of the fiscal year ended June 30, 2003.
These
changes in facts and circumstances as well as the change in our business
environment constituted a triggering event requiring an impairment analysis
to
be performed in accordance with SFAS No. 142 and SFAS No. 144. The estimated
fair value of the reporting units, for purposes of evaluating goodwill for
impairment, was less than their carrying values. Additionally, the estimated
undiscounted future cash flows generated by certain other long-lived assets,
excluding goodwill, was less than their carrying values. The impairment analyses
performed in accordance with SFAS No. 142 and SFAS No. 144, resulted in an
impairment loss of $26,001 for the fiscal year ended June 30, 2003. Management
estimated the fair value of reporting units using third-party appraisals.
Management estimated the fair market value of the long-lived assets, excluding
goodwill, using the present value of expected future discounted cash flows.
F-27
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
impairment losses relate to the following:
|
Year
Ended June 30,
|
|||||||
|
2003
|
2002
|
||||||
|
(Restated)
|
|||||||
|
Goodwill:
|
|||||||
|
ClearOne
|
$
|
-
|
$
|
593
|
|||
|
Ivron
|
-
|
218
|
|||||
|
E.mergent
- Business Services
|
12,066
|
-
|
|||||
|
E.mergent
- Products
|
5,026
|
-
|
|||||
|
OM
Video
|
7,774
|
-
|
|||||
|
24,866
|
811
|
||||||
|
Intangible
assets:
|
|||||||
|
ClearOne
|
-
|
308
|
|||||
|
Ivron
|
-
|
5,924
|
|||||
|
E.mergent
- Business Services
|
195
|
-
|
|||||
|
E.mergent
- Products
|
18
|
-
|
|||||
|
OM
Video
|
387
|
-
|
|||||
|
600
|
6,232
|
||||||
|
Property
and equipment:
|
|||||||
|
Ivron
|
-
|
72
|
|||||
|
E.mergent
- Business Services
|
212
|
-
|
|||||
|
E.mergent
- Products
|
58
|
-
|
|||||
|
OM
Video
|
265
|
-
|
|||||
|
535
|
72
|
||||||
|
Total
|
$
|
26,001
|
$
|
7,115
|
|||
|
10.
|
Lines
of Credit
|
As
of June 30, 2003, the Company maintained a revolving line of credit in the
amount of $10,000 with a commercial bank. Prior to November 22, 2002, the line
of credit was in the amount of $5,000. The line of credit was secured by the
Company’s accounts receivable and inventory. The interest rate on the line of
credit was a variable interest rate (250 basis points over the London Interbank
Offered Rate (LIBOR) or prime less 0.25%, at the Company’s option). The
borrowing rate was 3.62% as of June 30, 2003. The weighted average interest
rate
for the fiscal years ended June 30, 2003, 2002 and 2001, was 3.98%, 5.17% and
8.14%, respectively. The terms of the line of credit prohibited the payment
of
dividends and required the Company to maintain other defined financial ratios
and restrictive covenants. The Company was not in compliance with the debt
coverage ratio as of June 30, 2002 or June 30, 2003, however the Company
obtained a waiver from the lender under the revolving credit facility. No
compensating balance arrangements were required. Amounts outstanding under
the
line of credit were $0, $196 and $0 as of June 30, 2003, 2002 and 2001,
respectively.
On
May 16, 2003, the bank froze the line of credit as the Company had not provided
the bank with financial statements for the quarter ended December 31, 2002.
The
line of credit expired on December 22, 2003 and was not renewed.
On
October 14, 2002, the Company entered into a note payable in the amount of
$2,000. The note payable encompassed previous expenditures related to our Oracle
ERP implementation. The term of the note was 36 months with monthly payments
of
$60. The Company had $1,583 outstanding under the note payable as of June 30,
2003. The Company paid the balance of the note payable in October
2004.
F-28
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
11.
|
Leases
|
The
Company has capital leases with finance companies which facilitated the purchase
of equipment. Additionally, the Company has noncancelable operating leases
related to facilities and vehicles.
Future
minimum lease payments under capital leases and noncancelable operating leases
with initial terms of one year or more are as follows as of June 30,
2003:
|
Capital
|
Operating
|
||||||
|
For
years ending June 30:
|
|||||||
|
2004
|
$
|
961
|
$
|
828
|
|||
|
2005
|
920
|
676
|
|||||
|
2006
|
437
|
262
|
|||||
|
2007
|
-
|
80
|
|||||
|
2008
|
-
|
20
|
|||||
|
Total
minimum lease payments
|
2,318
|
$
|
1,866
|
||||
|
Less
use taxes
|
(141
|
)
|
|||||
|
Net
minimum lease payments
|
2,177
|
||||||
|
Less
amount representing interest
|
(160
|
)
|
|||||
|
Present
value of net minimum lease payments
|
2,017
|
||||||
|
Less
current portion
|
(802
|
)
|
|||||
|
Long
term capital lease obligation
|
$
|
1,215
|
|||||
Certain
operating leases contain rent escalation clauses based on the consumer price
index. Rental expense is recognized on a straight-line basis. Rental expense,
which was composed of minimum payments under operating lease obligations, was
$1,328, $755 and $720 for the years ended June 30, 2003, 2002 and 2001,
respectively.
Property
and equipment under capital leases are as follows:
|
June
30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Office
furniture and equipment
|
$
|
1,051
|
$
|
1,077
|
$
|
983
|
||||
|
Manufacturing
and test equipment
|
471
|
471
|
479
|
|||||||
|
Telephone
bridging equipment
|
3,816
|
3,816
|
2,749
|
|||||||
|
5,338
|
5,364
|
4,211
|
||||||||
|
Accumulated
amortization
|
(3,099
|
)
|
(2,270
|
)
|
(1,558
|
)
|
||||
|
Net
property and equipment under capital leases
|
$
|
2,239
|
$
|
3,094
|
$
|
2,653
|
||||
Depreciation
expense for assets recorded under capital leases was $841, $739 and $569 for
the
years ended June 30, 2003, 2002 and 2001, respectively.
|
12.
|
Accrued
Liabilities
|
Accrued
liabilities consist of the following as of June 30, 2003, 2002 and
2001:
|
As
of June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Accrued
salaries and bonuses
|
$
|
883
|
$
|
759
|
$
|
410
|
||||
|
Legal
contingencies
|
147
|
-
|
-
|
|||||||
|
Class
action settlement
|
7,326
|
-
|
-
|
|||||||
|
Other
accrued liabilities
|
1,220
|
2,082
|
998
|
|||||||
|
Total
|
$
|
9,576
|
$
|
2,841
|
$
|
1,408
|
||||
F-29
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
13.
|
Commitments
and Contingencies
|
In
addition to the legal proceedings described below, the Company is also involved
from time to time in various claims and other legal proceedings which arise
in
the normal course of business. Such matters are subject to many uncertainties
and outcomes that are not predictable. However, based on the information
available to the Company today, the Company does not believe any such other
proceedings will have a material, adverse effect on its financial condition
or
results of operations.
The
SEC Action.
On January 15, 2003, the U.S. Securities and Exchange Commission (SEC) filed
a
civil complaint against the Company, Frances Flood, then the Company’s chairman,
chief executive officer and president, and Susie Strohm, then the Company’s
chief financial officer. The complaint alleged that from the quarter ended
March
31, 2001, the defendants engaged in a program of inflating the Company’s
revenues, net income and accounts receivable by engaging in improper revenue
recognition in violation of generally accepted accounting principles (GAAP),
and
Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a) and 13(b)
of the Securities Exchange Act of 1934, and various regulations promulgated
thereunder. Following the filing of the complaint, the Company placed Ms. Flood
and Ms. Strohm on administrative leave and they subsequently resigned from
their
positions with the Company. On December 4, 2003, the Company settled the SEC
action by entering into a consent decree in which, without admitting or denying
the allegations of the complaint, it consented to the entry of a permanent
injunction prohibiting future securities law violations. No fine or penalty
was
assessed against the Company as part of the settlement.
The
Whistleblower Action.
On February 11, 2003, the Company’s former vice president of sales filed a
whistleblower claim with the Occupational Safety and Health Administration
(OSHA) under the employee protection provisions of the Sarbanes-Oxley Act
alleging that the Company had wrongfully terminated his employment for reporting
the Company’s alleged improper revenue recognition practices to the SEC in
December 2002, which precipitated the SEC action against the Company. In
February 2004, OSHA issued a preliminary order in favor of the former officer,
ordering that he be reinstated with back pay, lost benefits, and attorney’s
fees. The former officer had also filed a separate lawsuit against the Company
in the United States District Court for the District of Utah, Central Division,
alleging various employment discrimination claims. In May 2004, the
Administrative Law Judge approved a settlement agreement with the former officer
pursuant to which he released the Company from all claims asserted by him in
the
OSHA proceeding and the federal court action in exchange for a cash payment
by
the Company. The settlement did not have a material impact on the Company's
results of operations or financial condition.
The
Shareholders’ Class Action.
On June 30, 2003, a consolidated complaint was filed against the Company,
eight present or former officers and directors of the Company, and Ernst &
Young LLP (Ernst & Young), the Company’s former independent accountants, by
a class consisting of purchasers of the Company’s common stock during the period
from April 17, 2001 through January 15, 2003. The action followed the
consolidation of several previously filed class action complaints and the
appointment of lead counsel for the class. The allegations in the complaint
were
essentially the same as those contained in the SEC complaint described above.
On
December 4, 2003, the Company, on behalf of itself and all other defendants
with
the exception of Ernst & Young, entered into a settlement agreement with the
class pursuant to which the Company agreed to pay the class $5,000 and issue
the
class 1,200,000 shares of its common stock. The cash payment was made in two
equal installments, the first on November 10, 2003 and the second on January
14,
2005. On May 23, 2005, the court order was amended to require the Company to
pay
cash in lieu of stock to those members of the class who would otherwise have
been entitled to receive fewer than 100 shares of stock. As of June 30, 2005,
228,000 shares of the Company’s common stock had been issued to the class and
the Company plans to issue the remaining shares in the near future, subject
to
the receipt of any required approvals from state regulatory
authorities.
The
Shareholder Derivative Actions.
Between March and August, 2003, four shareholder derivative actions were
filed, by certain shareholders of the Company against various present and past
officers and directors of the Company and against Ernst & Young. The
complaints asserted allegations similar to those asserted in the SEC action
and
shareholders’ class action described above and also alleged that the defendant
directors and officers violated their fiduciary duties to the Company by causing
or allowing the Company to recognize revenue in violation of GAAP and issue
materially misstated financial statements, and that Ernst & Young breached
its professional responsibilities to the Company and acted in violation of
generally accepted auditing standards by failing to identify or prevent the
alleged revenue recognition violations and by issuing unqualified audit opinions
with respect to the Company’s 2002 and 2001 financial statements. One of these
actions was dismissed without prejudice on June 13, 2003. As to the other
three actions, the Company’s board of directors appointed a special litigation
committee of independent directors to evaluate the claims. That committee
determined that the maintenance of the derivative proceedings was not in the
best interest of the Company. Accordingly, on December 12, 2003, the Company
moved to dismiss the actions. In March 2004, the Company’s motions were
granted, and the derivative claims were dismissed with prejudice as to all
defendants except Ernst & Young. The Company was substituted as the
plaintiff in the action and is now pursuing in its own name the claims against
Ernst & Young.
F-30
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Employment
Separation Agreements.
On December 5, 2003, the Company entered into employment separation agreements
with Frances Flood, the Company’s former chairman, chief executive officer and
president, and Susie Strohm, the Company’s former chief financial officer, which
generally provided that these individuals would resign from their positions
and
employment with the Company, and the Company would make one-time, lump sum
payments in consideration of their surrender and delivery to the Company of
shares of the Company’s common stock and Company stock options and their release
of claims against the Company. Ms. Flood and Ms. Strohm also agreed to cooperate
with the Company in the SEC action and related proceedings and the Company
agreed to continue to indemnify such persons for attorneys fees incurred in
the
SEC action and related proceedings, subject to the limitations imposed by Utah
law. The Company also released any existing claims against such persons except
such claims as to which indemnification would not be permitted by Utah law.
The
agreement with Ms. Flood provided for a payment to her of $350 and her surrender
and delivery to the Company of 35,000 shares of the Company’s common stock and
706,434 stock options (461,433 of which were vested). The agreement with Ms.
Strohm provided for a payment to her of $75 and her surrender and delivery
to
the Company of 15,500 shares of the Company’s common stock and 268,464 stock
options (171,963 of which were vested).
Indemnification
of Officers and Directors.
The Company’s by-laws and the Utah Revised Business Corporation Act provide for
indemnification of directors and officers against reasonable expenses incurred
by such persons in connection with civil or criminal actions or proceedings
to
which they have been made parties because they are or were directors or officers
of the Company or its subsidiaries. Indemnification is permitted if the person
satisfies the required standards of conduct. The litigation matters described
above involved certain of the Company’s current and former directors and
officers, all of whom are covered by the aforementioned indemnity and if
applicable, certain prior period insurance policies. The Company has indemnified
such persons for legal expenses incurred by them in such actions and, as
discussed below, has sought reimbursement from its insurance carriers. However,
as also discussed below the Company cannot predict with certainty the extent
to
which the Company will recover the indemnification payments from its
insurers. Pursuant to these agreements, the Company has made payments to
the law firms representing such current and former directors and officers in
the
aggregate amount of approximately $1.5 million during the period from January
2003 through June 30, 2005.
The
Insurance Coverage Action. On
February 9, 2004, the Company and Edward Dallin Bagley (Bagley), the chairman
of
the board of directors and a principal shareholder of the Company, jointly
filed
an action against National Union Fire Insurance Company of Pittsburgh,
Pennsylvania and Lumbermens Mutual Insurance Company, the carriers of certain
prior period directors and officers liability insurance policies, to recover
the
costs of defending and resolving claims against certain of the Company’s present
and former directors and officers in connection with the SEC action, the
shareholders’ class action and the shareholder derivative actions described
above, and seeking other damages resulting from the refusal of such carriers
to
timely pay the amounts owing under such liability insurance policies. This
action has been consolidated into a declaratory relief action filed by one
of
the insurance carriers on February 6, 2004 against the Company and certain
of
its current and former directors. In this action, the insurers assert that
they
are entitled to rescind insurance coverage under our directors and officers
liability insurance policies, $3,000 of which was provided by National Union
and
$2,000 of which was provided by Lumbermens Mutual, based on alleged
misstatements in the Company’s insurance applications. In February 2005, the
Company entered into a confidential settlement agreement with Lumbermens Mutual
pursuant to which the Company and Bagley received a lump sum cash amount and
the
plaintiffs agreed to dismiss their claims against Lumbermens Mutual with
prejudice. The cash settlement will be held in a segregated account until
the claims involving National Union have been resolved, at which time the
amounts received in the action will be allocated among the Company and Bagley.
The amount distributed to the Company and Bagley will be determined based on
future negotiations between the Company and Bagley. The Company cannot currently
estimate the amount of the settlement which it will ultimately receive. Upon
determining the amount of the settlement which the Company will ultimately
receive, the Company will record this as a contingent gain. The Company and
Bagley are vigorously pursuing their claim against National Union although
no
assurances can be given that they will be successful. The Company and Bagley
have entered into a Joint Prosecution and Defense Agreement in connection with
the action.
F-31
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
Pacific Technology & Telecommunications Collection Action.
On August 12, 2003, the Company initiated a commercial arbitration
proceeding against Pacific Technology & Telecommunications (PT&T), a
former distributor, seeking to collect approximately $1,754 that PT&T owed
the Company for inventory purchased but not paid for. PT&T denied the
Company’s claim and asserted counterclaims. Subsequently, on April 20,
2004, PT&T filed for protection under Chapter 7 of the United States
Bankruptcy Code, which had the effect of staying the proceeding. Following
PT&T’s bankruptcy filing, the Company successfully negotiated a settlement
with the bankruptcy trustee. Under the settlement, which has been approved
by
the bankruptcy court, the Company paid $25 and obtained the right to recover
all
unsold ClearOne inventory held by PT&T and the right to pursue on the basis
of an assignment any claims that PT&T may have against any of its own
officers or directors, subject, however, to a maximum recovery of $800. The
Company is currently in the process of investigating whether any such claims
exist and, if so, whether it would be in the Company’s best interest to pursue
them given the anticipated legal expenses and the uncertainties of being able
to
collect any resulting favorable judgment. The settlement also resulted in the
release and dismissal with prejudice of all of PT&T’s claims against the
Company. To date, the Company has not recovered any inventory held by PT&T.
U.S.
Attorney’s Investigation. On
January 28, 2003, the Company was advised that the U.S. Attorney’s Office for
the District of Utah has begun an investigation stemming from the complaint
in
the SEC action described above. No pleadings have been filed to date and the
Company is cooperating fully with the U.S. Attorney’s Office.
The
Company establishes contingent liabilities when a particular contingency is
both
probable and estimable. For the contingencies noted above the Company has
accrued amounts considered probable and estimable. The Company is not aware
of
pending claims or assessments, other than as described above, which may have
a
material adverse impact on the Company’s financial position or results of
operations.
|
14.
|
Stockholders’
Equity
|
Private
Placement
On
December 11, 2001, the Company closed a private placement of 1,500,000 shares
of
common stock. Gross proceeds from the private placement were $25,500, before
costs and expenses associated with this transaction, which totaled
$1,665.
The
Company also issued warrants to purchase 150,000 shares of its common stock
at
$17.00 per share to its financial advisor. Such warrants vested immediately
and
were valued at $1,556 using the Black-Scholes option pricing model with the
following assumptions: expected dividend yield of 0%, risk-free interest rate
of
4.4%, expected price volatility of 68.0% and contractual life of five years.
The
warrants expire on November 27, 2006.
Stock
Repurchase Program
During
April 2001, the Company’s board of directors approved a stock repurchase program
to purchase up to 500,000 shares of the Company’s common stock over the
following six months on the open market or in private transactions. During
the
fiscal year ended June 30, 2001, the Company repurchased 20,300 shares on the
open market for $244. All repurchased shares were retired. During October 2002,
the Company’s board of directors approved a stock repurchase program to purchase
up to 1,000,000 shares of the Company’s common stock over the following 12
months on the open market or in private transactions. During the fiscal year
ended June 30, 2003, the Company repurchased 125,000 shares on the open market
for $430. All repurchased shares were retired. The stock repurchase program
expired in October 2003 and no additional shares were repurchased.
Stock
Options
The
Company’s 1990 Incentive Plan (the 1990 Plan) has shares of common stock
available for issuance to employees and directors. Provisions of the 1990 Plan
include the granting of stock options. Generally, stock options vest over a
five-year period at 10%, 15%, 20%, 25% and 30% per year. Certain other stock
options vest in full after eight years. As of June 30, 2003, there were 271,548
options outstanding under the 1990 Plan and no additional options were available
for grant under such plan.
F-32
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
Company also has a 1998 Stock Option Plan (the 1998 Plan). Provisions of the
1998 Plan include the granting of stock options. Of the options granted through
December 1999, 1,066,000 will cliff vest after 9.75 years; however, such vesting
may be accelerated if earnings per share goals through the fiscal year ended
June 30, 2003 were met. Of the options granted subsequent to December 1999
through June 2002, 1,248,250 will cliff vest after six years; however, such
vesting may be accelerated if earnings per share goals through the fiscal year
ending June 30, 2005 are met. Under the 1998 Plan, 2,500,000 shares were
authorized for grant. The 1998 Plan expires June 10, 2008, or when all the
shares available under the plan have been issued if this occurs earlier. As
of
June 30, 2003, there were 1,701,208 options outstanding under the 1998 Plan
and
496,668 options available for grant in the future.
Stock
option information for the fiscal years ending June 30, 2003, 2002 and 2001
with
respect to the Company’s stock option plans is as follows:
|
Stock
Options
|
Number
of Shares
|
Weighted
Average Exercise Price
|
|||||
|
Outstanding
at June 30, 2000
|
1,508,548
|
$
|
7.01
|
||||
|
Options
granted (as restated)
|
515,500
|
12.73
|
|||||
|
Options
expired and canceled (as restated)
|
(198,125
|
)
|
10.97
|
||||
|
Options
exercised
|
(75,125
|
)
|
4.33
|
||||
|
Outstanding
at June 30, 2001
|
1,750,798
|
8.37
|
|||||
|
Options
granted
|
366,908
|
13.24
|
|||||
|
Options
expired and canceled
|
(402,751
|
)
|
13.04
|
||||
|
Options
exercised
|
(195,999
|
)
|
5.21
|
||||
|
Outstanding
at June 30, 2002
|
1,518,956
|
8.71
|
|||||
|
Options
granted
|
835,500
|
3.57
|
|||||
|
Options
expired and canceled
|
(350,200
|
)
|
11.57
|
||||
|
Options
exercised
|
(31,500
|
)
|
2.72
|
||||
|
Outstanding
at June 30, 2003
|
1,972,756
|
$
|
6.12
|
||||
F-33
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
following table summarizes information about stock options outstanding as of
June 30, 2003:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Exercise
Price Range
|
Options
Outstanding
|
Weighted
Average Contractual Remaining Life
|
Weighted
Average Exercise Price
|
Options
Exercisable
|
Weighted
Average Exercise Price
|
|||||||||||
|
$0.00
to $2.04
|
271,548
|
0.5
years
|
$
|
0.78
|
271,548
|
$
|
0.78
|
|||||||||
|
$2.05
to $4.09
|
1,084,850
|
3.8
years
|
3.34
|
369,669
|
3.08
|
|||||||||||
|
$4.10
to $8.18
|
3,081
|
8.9
years
|
7.15
|
3,081
|
7.15
|
|||||||||||
|
$8.19
to $10.22
|
15,256
|
6.3
years
|
9.67
|
6,144
|
9.65
|
|||||||||||
|
$10.23
to $12.26
|
204,000
|
3.2
years
|
11.33
|
45,235
|
11.34
|
|||||||||||
|
$12.27
to $14.31
|
176,321
|
7.0
years
|
13.45
|
75,214
|
13.56
|
|||||||||||
|
$14.32
to $16.35
|
180,200
|
3.2
years
|
15.25
|
62,387
|
15.25
|
|||||||||||
|
$16.36
to $18.40
|
35,750
|
7.0years
|
17.15
|
5,005
|
17.15
|
|||||||||||
|
$18.41
to $20.45
|
1,750
|
1.9
years
|
18.97
|
1,588
|
18.90
|
|||||||||||
|
Total
|
1,972,756
|
3.6
years
|
$
|
6.12
|
839,871
|
$
|
4.80
|
|||||||||
The
following are the options exercisable at the corresponding weighted average
exercise price as of June 30, 2003, 2002 and 2001, respectively: 839,871 at
$4.80, 793,965 at $6.10 and 741,219 at $5.44.
The
grant date weighted average fair value of options granted during the years
ended
June 30, 2003, 2002 and 2001 was $2.50, $9.33 and $9.45, respectively. The
fair
value of options was determined using the Black-Scholes option pricing model
with the following weighted average assumptions for the fiscal years ended
June
30, 2003, 2002 and 2001: expected dividend yield, 0% for each year; risk-free
interest rate was 2.46%, 4.09% and 4.85%, respectively; expected price
volatility, 89.98%, 81.16%, and 82.75%; and expected life of options, 4.90,
5.54, and 6.25 years.
During
fiscal 2001, the Company modified 25,000 options to reduce the exercise price
of
the award. The award is being accounted for as variable and the intrinsic value
of the award is remeasured until the date the award is exercised, is forfeited,
or expires unexercised. Compensation cost with respect to a variable award
is
being recognized on an accelerated basis in accordance with Financial Accounting
Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans.
Due
to the Company’s failure to remain current in its filing of periodic reports
with the SEC, employees, executive officers and directors are currently not
allowed to exercise options under either the 1990 Plan or the 1998 Plan. In
June
2004, individual grants that had been affected by this situation were modified
to extend the life of the option through the date the Company becomes current
in
its filings with the SEC and options again become exercisable.
Employee
Stock Purchase Program
The
Company has an Employee Stock Purchase Plan (ESPP). A total of 500,000 shares
of
common stock were reserved for issuance under the ESPP. The Company’s board of
directors or a committee established by the board of directors administers
the
ESPP and has authority to interpret the terms of the ESPP and determine
eligibility. The ESPP is intended to qualify under Section 423 of the Internal
Revenue Code. All employees were eligible after thirty days
employment.
Employees
can purchase common stock through payroll deductions of up to 10% of their
base
pay. Amounts deducted and accumulated by the employees are used to purchase
shares of common stock on the last day of each month. The Company directs a
participating broker to conduct open market purchases of the common stock and
the purchase price is the price of the employee’s shares. The Company
contributes to the account of the employee one share of common stock for every
nine shares purchased by the employee under the ESPP. An employee may end
participation at any time. Participation in the ESPP ends upon termination
of
employment. During the fiscal years ended June 30, 2003, 2002 and 2001, 1,841,
724 and 1,137 share of common stock were issued under the ESPP. The ESPP is
compensatory under APB 25. Compensation expense from the ESPP was $8, $13,
and
$15 for the years ended June 30, 2003, 2002, and 2001, respectively. The program
was suspended during 2003 due to the Company’s failure to remain current in its
filing of periodic reports with the SEC.
F-34
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
15.
|
Sale
of Assets
|
Court
Conferencing. As
part of the Company’s conferencing services segment, its court conferencing
customers engaged in the audio and/or video conferencing of legal proceedings
including remote appearances in state and federal courts and/or administrative
tribunals within the United States. On October 26, 2001, the Company sold its
court conferencing customer list, including all contracts relating to its court
conferencing services to CourtCall LLC and recognized a gain of
$250.
|
16.
|
Income
Taxes
|
Income
(loss) from continuing operations and before income taxes consisted of the
following:
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Domestic
|
$
|
(28,583
|
)
|
$
|
956
|
$
|
3,686
|
|||
|
Foreign
|
(8,423
|
)
|
(6,393
|
)
|
122
|
|||||
|
$
|
(37,006
|
)
|
$
|
(5,437
|
)
|
$
|
3,808
|
|||
The
provision (benefit) for income taxes on income from continuing operations
consisted of the following:
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
(3,055
|
)
|
$
|
3,390
|
$
|
2,582
|
|||
|
State
|
(50
|
)
|
456
|
378
|
||||||
|
Foreign
|
47
|
22
|
67
|
|||||||
|
Stock
Option Benefit Credited to Paid in Capital
|
-
|
452
|
116
|
|||||||
|
Total
Current
|
(3,058
|
)
|
4,320
|
3,143
|
||||||
|
Deferred:
|
||||||||||
|
Federal
|
2,174
|
(3,180
|
)
|
(1,751
|
)
|
|||||
|
State
|
50
|
259
|
(341
|
)
|
||||||
|
Foreign
|
-
|
1
|
(1
|
)
|
||||||
|
Total
Deferred
|
2,224
|
(2,920
|
)
|
(2,093
|
)
|
|||||
|
$
|
(834
|
)
|
$
|
1,400
|
$
|
1,050
|
||||
F-35
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
following table presents the principal reasons for the difference between the
actual effective income tax rate and the expected U.S. federal statutory income
tax rate of 34% on income from continuing operations:
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
U.S.
federal statutory income tax rate
|
$
|
(12,582
|
)
|
$
|
(1,849
|
)
|
$
|
1,295
|
||
|
State
income tax rate, net of federal income tax effect
|
-
|
512
|
35
|
|||||||
|
Extraterritorial
income exclusion
|
-
|
(79
|
)
|
(111
|
)
|
|||||
|
Research
and development credit
|
-
|
(46
|
)
|
(144
|
)
|
|||||
|
Foreign
earnings or losses taxed at different rates
|
255
|
132
|
24
|
|||||||
|
Impairment
of investment in foreign subsidiary
|
2,596
|
2,112
|
-
|
|||||||
|
Impairment
of E.mergent goodwill
|
5,811
|
-
|
-
|
|||||||
|
Change
in federal valuation allowance attributable to operations
|
2,946
|
534
|
-
|
|||||||
|
Non-deductible
items and other
|
140
|
84
|
(49
|
)
|
||||||
|
Total
|
$
|
(834
|
)
|
$
|
1,400
|
$
|
1,050
|
|||
Deferred
income taxes are determined based on the differences between the financial
reporting and income tax bases of assets and liabilities using enacted income
tax rates expected to apply when the differences are expected to be settled
or
realized. As of June 30 significant components of the net U.S. deferred income
tax assets and liabilities were as follows:
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Deferred
income tax assets:
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Net
operating loss carryforwards
|
724
|
293
|
-
|
|||||||
|
Accrued
liabilities
|
2,980
|
253
|
25
|
|||||||
|
Allowance
for sales returns and doubtful accounts
|
155
|
141
|
-
|
|||||||
|
Inventory
reserve
|
1,939
|
1,380
|
101
|
|||||||
|
Deferred
revenue
|
1,796
|
4,046
|
1,218
|
|||||||
|
Installment
sale
|
128
|
149
|
149
|
|||||||
|
Accumulated
research and development credits
|
142
|
142
|
66
|
|||||||
|
Basis
difference in intangible assets
|
852
|
712
|
524
|
|||||||
|
Other
|
162
|
381
|
196
|
|||||||
|
Subtotal
|
8,878
|
7,497
|
2,279
|
|||||||
|
Valuation
allowance
|
(5,252
|
)
|
(1,726
|
)
|
-
|
|||||
|
Deferred
income tax assets
|
3,626
|
5,771
|
2,279
|
|||||||
|
Deferred
income tax liabilities:
|
||||||||||
|
Basis
difference in fixed assets
|
(458
|
)
|
(401
|
)
|
(237
|
)
|
||||
|
Other
|
(89
|
)
|
-
|
(9
|
)
|
|||||
|
Deferred
income tax liabilities
|
(547
|
)
|
(401
|
)
|
(246
|
)
|
||||
|
Net
deferred income tax assets
|
$
|
3,079
|
$
|
5,370
|
$
|
2,033
|
||||
F-36
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Deferred
income tax assets and liabilities were netted by income tax jurisdiction and
were reported in the consolidated balance sheets as of June 30 as
follows:
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Current
deferred income tax assets
|
$
|
2,531
|
$
|
4,709
|
$
|
1,587
|
||||
|
Non-current
deferred income tax assets
|
548
|
661
|
446
|
|||||||
|
Current
deferred income tax liabilities
|
-
|
-
|
-
|
|||||||
|
Non-current
deferred income tax liabilities
|
-
|
-
|
-
|
|||||||
|
Net
deferred income tax assets
|
$
|
3,079
|
$
|
5,370
|
$
|
2,033
|
||||
The
Company has not provided for U.S. deferred income taxes or foreign withholding
taxes on the undistributed earnings of its non-U.S. subsidiaries since these
earnings are intended to be reinvested indefinitely and therefore, the foreign
currency translation adjustment included in other comprehensive income has
not
been tax effected. It is not practical to estimate the amount of additional
taxes that might be payable on such undistributed earnings. Total undistributed
earnings from foreign subsidiaries were $56, $152 and $205 for 2001, 2002 and
2003, respectively.
As
of June 30, 2003, the Company has a net operating loss (“NOL”) and research
credit carryforward for U.S. federal income tax reporting purposes of $697
and
$121 respectively, which will expire in 2021. These carryforwards were generated
by E.mergent before it was acquired by the Company and are subject to a full
valuation allowance. When these carryforwards are subsequently recognized,
the
tax benefit will be credited to operations since the intangible assets of
E.mergent were all impaired at June 30, 2003. The Company also has state NOL
and
research and development tax credit carryforwards of approximately $9,739 and
$21, respectively, which expire depending on the rules of the various states
to
which the carryovers relate. The Company also has a NOL carryover in its Irish
subsidiary. However, the Company is in the process of closing its Irish
subsidiary and does not anticipate ever being able to use these losses and
has
not separately reported these amounts. The Company also has a small amount
of
deferred tax assets, subject to a full valuation allowance, at its Canadian
subsidiary. As discussed in Footnote 24, the Company has sold its Canadian
subsidiary and therefore has not separately reported these amounts.
The
Internal Revenue Code contains provisions that reduce or limit the availability
and utilization of NOL and credit carryforwards if certain changes in ownership
have taken place. As a result of an ownership change associated with the
acquisition of E.mergent, utilization of E.mergent’s NOL and research and
development credit carryfowards, arising prior to the ownership change date,
will be limited to an amount not to exceed the value of E.mergent on the
ownership change date multiplied by the Federal long-term tax-exempt rate.
If
the annual limitation of $1,088 is not utilized in any particular year, it
will
remain available on a cumulative basis through the expiration date of the
applicable NOL and credit carryforwards. Management does not believe that these
rules will adversely impact the Company’s ability to utilize these losses.
Certain states also have rules that could limit the Company’s ability to use its
state NOL and research credit carryovers.
SFAS
No. 109, Accounting
for Income Taxes,
requires that a valuation allowance be established when it is more likely than
not that all or a portion of a deferred tax asset will not be realized.
For
the year ended June 30, 2002, the NOL and research and development credit
generated by E.mergent prior to acquisition are subject to a full valuation
allowance recorded as part of E.mergent’s purchase price allocation.
Additionally, for the years ended June 30, 2002 and 2003, the Company has also
recorded a valuation allowance against a portion of its deferred tax assets
due
to the uncertainty of realization of the assets based upon a number of factors,
including lack of profitability in 2002 and 2003 and the limited taxable income
in carryback years as permitted by the tax law. No valuation allowance was
recorded to the extent that the reversal of the deferred tax assets would
generate a NOL that could be carried back to prior tax years.
The
net change in the Company’s domestic valuation allowance was $0 for 2001, and an
increase of $1,726 and $3,526, in 2002 and 2003 respectively.
F-37
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
17.
|
Discontinued
Operations
|
On
April 12, 2001, the Company sold the assets of the remote control portion of
the
RFM/Broadcast division to Burk Technology, Inc. (Burk), a privately held
developer and manufacturer of broadcast facility control systems products.
The
Company retained the accounts payable of the remote control portion of the
RFM/Broadcast division. Burk assumed obligations for unfilled customer orders
and satisfying warranty obligations to existing customers and for inventory
sold
to Burk. However, the Company retained certain warranty obligations to Burk
to
ensure that all of the assets sold to Burk were in good operating condition
and
repair.
Consideration
for the sale consisted of $750 in cash at closing, $1,750 in the form of a
seven-year promissory note, with interest at the rate of nine percent per year,
and up to $700 as a commission over a period of up to seven years. The payments
on the promissory note may be deferred based upon Burk not meeting net quarterly
sales levels established within the agreement. The promissory note is secured
by
a subordinate security interest in the personal property of Burk. Based on
an
analysis of the facts and circumstances that existed on April 12, 2001, and
considering the guidance from Topic 5U of the SEC Rules and Regulations, Gain
Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged
Entity, the gain is being recognized as cash is collected (as collection was
not
reasonably assured, and the Company had contingent liabilities to Burk). The
commission is based upon future net sales of Burk over base sales established
within the agreement. The Company realized a gain on the sale of $200 (net
of
applicable income taxes of $119), $176 (net of applicable income taxes of $104)
and $123 (net of applicable income taxes of $72) for the fiscal years ended
June
30, 2003, 2002 and 2001, respectively. As of June 30, 2003, $1,505 of the
promissory note remains outstanding and the Company has received $20 in
commissions.
Summary
operating results of the discontinued operations are as follows:
|
Year
Ended June 30, 2001
|
||||
|
(restated)
|
||||
|
Revenue
- product
|
$
|
2,369
|
||
|
Cost
of goods sold - product
|
806
|
|||
|
Marketing
and selling expenses
|
282
|
|||
|
Product
development expenses
|
105
|
|||
|
Income
before income taxes
|
1,176
|
|||
|
Provision
for income taxes
|
(439
|
)
|
||
|
Income
from discontinued operations, net of income taxes
|
$
|
737
|
||
|
18.
|
Sale
of Broadcast Telephone
Interface
|
On
August 23, 2002, the Company entered into an agreement with Comrex Corporation
(Comrex). In exchange for $1,300, Comrex received certain inventory associated
with the broadcast telephone interface product line, a perpetual software
license to use the Company’s technology related to broadcast telephone interface
products along with one free year of maintenance and support, and transition
services for 90 days following the effective date of the agreement. The
transition services included training, engineering assistance, consultation,
and
development services.
The
software license included in the arrangement is more than incidental to the
products and services as a whole. All products and services are considered
software and software related. Consequently, the agreement has been accounted
for pursuant to Statement of Position (SOP) 97-2, Software Revenue Recognition.
As the software is essential to the functionality of other elements in the
agreement and there is not vendor specific objective evidence for the fair
value
of the maintenance and support, the Company recognized the software license
revenue, products, and services over time as services are performed, using
the
percentage-of-completion method of accounting based on a zero estimate of
profit.
F-38
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
As
this is the first time the Company has licensed software in this manner, it
was
impractical to estimate the final outcome of the agreement except to assure
that
no loss will be incurred. Consequently, the Company recognized revenue equal
to
cost until maintenance and support was the only undelivered element of the
agreement. Once maintenance and support was the only undelivered element of
the
agreement, the remaining revenue was recognized ratably over the remaining
maintenance and support period in accordance with SOP 97-2. The Company
recognized $1,054 in revenue related to this transaction in the fiscal year
ended June 30, 2003.
The
Company has entered into a manufacturing agreement to continue to manufacture
additional product for Comrex distribution one year following the agreement
described above on a when-and-if needed basis. Comrex will pay the Company
for
any additional product on a per item basis of cost plus 30%. Given the future
revenue stream associated with each unit produced, revenue will be recognized
when-and-if received.
|
19.
|
Earnings
Per Share
|
The
following table sets forth the computation of basic and diluted net income
(loss) per common share:
|
Year
Ended June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
|
(restated)
|
(restated)
|
||||||||
|
Numerator:
|
||||||||||
|
Income
(loss) from continuing operations
|
$
|
(36,172
|
)
|
$
|
(6,837
|
)
|
$
|
2,758
|
||
|
Discontinued
operations
|
200
|
176
|
860
|
|||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
|
Denominator:
|
||||||||||
|
Basic
weighted average shares
|
11,183,339
|
9,588,118
|
8,593,725
|
|||||||
|
Dilutive
common stock equivalents using treasury stock method
|
-
|
-
|
600,284
|
|||||||
|
Diluted
weighted average shares
|
11,183,339
|
9,588,118
|
9,194,009
|
|||||||
|
Basic
earnings (loss) per common share:
|
||||||||||
|
Continuing
operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.32
|
||
|
Discontinued
operations
|
0.02
|
0.02
|
0.10
|
|||||||
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
|||
|
Diluted
earnings (loss) per common share:
|
||||||||||
|
Continuing
operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.30
|
||
|
Discontinued
operations
|
0.02
|
0.02
|
0.09
|
|||||||
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
|||
Options
to purchase 1,972,756, 1,518,956 and 663,250 shares of common stock were
outstanding as of June 30, 2003, 2002 and 2001, respectively, but were not
included in the computation of diluted earnings per share as the effect would
be
anti-dilutive. Warrants to purchase 150,000 shares of common stock were
outstanding as of June 30, 2003 and 2002, but were not included in the
computation of diluted earnings per share as the effect would be
anti-dilutive.
|
20.
|
Related
Party Transactions
|
Edward
Dallin Bagley, a director and significant shareholder of the Company, served
as
a consultant to the Company from November 2002 through January 2004 and was
paid
$5,000 per month for his services. He consulted with Company’s management on
mergers and financial matters on an as needed basis. Mr. Bagley’s services were
performed pursuant to an oral agreement, the terms of which were approved by
the
Board of Directors.
F-39
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
Company and Edward Dallin Bagley jointly filed an action against National Union
Fire Insurance Company and Lumbermens Mutual Insurance Company. See Note 13.
Commitments and Contingencies. The
Insurance Coverage Action.
The
Company was a general partner in two limited partnerships, Gentner Research
Ltd.
(GRL) and Gentner Research II, Ltd. (GR2L). GRL owned rights to a proprietary
interest in a remote control product. The Company obtained rights to utilize
the
proprietary interest under royalty agreements. Royalty expense under the
agreements with GRL for the year ended June 30, 2001 was $4. GRL was dissolved
in February 2001 after consent to dissolution and liquidation was received
by a
majority of the partners of GRL. The product line, which incorporated the
proprietary interest, was deemed no longer integral to the Company’s business.
GR2L
owned rights to a proprietary interest in a new remote control product. The
Company obtained rights to utilize the proprietary interest under a royalty
agreement. Royalty expense under this agreement with GR2L for the year ended
June 30, 2001 was $91. The Company paid $179 to GR2L in the year ended June
30,
2001, representing GR2L’s royalty on the gain on the sale of the remote control
product line. This amount is included in the determination of gain on disposal
of discontinued operations in the year ended June 30, 2001.
|
21.
|
Significant
Customers
|
As
of June 30, 2003, 2002 and 2001 and for the periods then ended, the Company
did
not have any customers that accounted for more than 10% of total revenue and/or
accounts receivable balances.
|
22.
|
Retirement
Savings and Profit Sharing
Plan
|
The
Company has a 401(k) retirement savings and profit sharing plan to which it
makes discretionary matching contributions, as authorized by the Board of
Directors. All full-time employees who are at least 21 years of age and have
a
minimum of sixty days of service with the Company are eligible to participate
in
the plan. Matching contributions are 20% up to 6% of the employee’s earnings,
paid bi-weekly. Prior to the fiscal year ended June 30, 2003, the Company paid
matching contributions at fiscal year end. The Company’s retirement plan
contribution expense for the fiscal years ended June 30, 2003, 2002 and 2001
totaled $0, $72 and $66, respectively.
|
23.
|
Segment
and Geographic Information
|
Operating
Segments
The
Company has three operating segments - products, conferencing services, and
business services. The Company’s Chief Executive Officer and senior management
rely on internal management reports that provide financial and operational
information by operating segment. The Company’s management makes financial
decisions and allocates resources based on the information it received from
these internal management reports. The business services segment was established
in 2002 as a result of the acquisition of E.mergent and includes certain
operations of E.mergent and the operations of OM Video.
The
products segment includes products for audio conferencing products,
videoconferencing products, sound reinforcement products, broadcast telephone
interface products and assistive listening system products. The conferencing
services segment includes full-service conference calling; on-demand,
reservationless conference calling; Web conferencing; audio and video streaming;
and, customer training and education. The business services segment provided
services in the United States and Canada, including technical services such
as
design, installation and services of systems, maintenance, and value added
services such as proactive field support, training, system consulting and help
desk.
The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
For
operating segments, segment profit (loss) is measured based on income from
continuing operations before provision (benefit) for income taxes. Other income
(expense), net is unallocated.
F-40
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
Company’s segments are strategic business units that offer products and services
to satisfy different customer needs. They are managed separately because each
segment requires focus and attention on its market and distribution channel.
The
United States was the only country to contribute more than 10% of total revenues
in each fiscal year. Canada contributed more than 10% of total revenues in
the
fiscal year ended June 30, 2003. There were no significant long-lived assets
held outside the United States.
The
following tables summarize the segment and geographic information:
Operating
Segment
|
Fiscal
Year
|
Products
|
Conferencing
Services
|
Business
Services
|
Corporate
|
Totals
|
||||||||||||||
|
Net
revenue
|
2003
|
$
|
27,512
|
$
|
15,268
|
$
|
14,805
|
$
|
-
|
$
|
57,585
|
||||||||
|
2002
|
26,253
|
15,583
|
1,526
|
-
|
43,362
|
||||||||||||||
|
2001
|
22,448
|
11,689
|
-
|
-
|
34,137
|
||||||||||||||
|
Operating
income (loss)
|
2003
|
(13,099
|
)
|
31
|
(23,842
|
)
|
-
|
(36,910
|
)
|
||||||||||
|
2002
|
(8,666
|
)
|
2,827
|
270
|
-
|
(5,569
|
)
|
||||||||||||
|
2001
|
1,884
|
1,736
|
-
|
-
|
3,620
|
||||||||||||||
|
Discontinued
operations, net of taxes
|
2003
|
200
|
-
|
-
|
-
|
200
|
|||||||||||||
|
2002
|
176
|
-
|
-
|
-
|
176
|
||||||||||||||
|
2001
|
860
|
-
|
-
|
-
|
860
|
||||||||||||||
|
Identifiable
assets
|
2003
|
14,255
|
4,153
|
2,779
|
14,089
|
35,276
|
|||||||||||||
|
2002
|
23,497
|
5,325
|
15,294
|
19,760
|
63,876
|
||||||||||||||
|
2001
|
11,491
|
4,849
|
-
|
8,971
|
25,311
|
||||||||||||||
|
Depreciation
and amortization
|
2003
|
2,192
|
999
|
278
|
-
|
3,469
|
|||||||||||||
|
2002
|
2,176
|
802
|
34
|
-
|
3,012
|
||||||||||||||
|
2001
|
1,697
|
533
|
-
|
-
|
2,230
|
||||||||||||||
Geographic
|
Fiscal
Year
|
United
States
|
Canada
|
All
Other Countries
|
Totals
|
||||||||||||
|
Net
revenue
|
2003
|
$
|
42,591
|
$
|
6,316
|
$
|
8,678
|
$
|
57,585
|
|||||||
|
2002
|
39,144
|
474
|
3,744
|
43,362
|
||||||||||||
|
2001
|
30,076
|
973
|
3,088
|
34,137
|
||||||||||||
|
Long-Lived
Assets
|
2003
|
7,747
|
-
|
39
|
7,786
|
|||||||||||
|
2002
|
26,788
|
-
|
41
|
26,829
|
||||||||||||
|
2001
|
7,161
|
-
|
26
|
7,187
|
||||||||||||
F-41
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
24.
|
Severance
Charges
|
During
the fiscal year ended June 30, 2003, the Company recorded a total of $362
in
severance and other related costs associated with a reduction of 43 employees
in
the United States and Ireland. Such costs were included in operating
expenses during the year ended June 30, 2003. The Company paid out this
entire amount during the year ended June 30, 2003.
|
25.
|
Subsequent
Events
|
Early
Buyout of Operating Lease Agreements. The Company leased an office
in Woburn, Mass. that it initially acquired through the purchase of ClearOne,
Inc. in July 2000. The facility consisted of 2,206 square feet. The Company
negotiated an early buyout of the lease effective September 2003. The Company's
U.S. business services operations were conducted from a facility totaling
25,523
square feet located in Golden Valley, Minnesota. The Company leased these
facilities under a lease agreement the expired in December 2004. The Company
negotiated an early buyout of the lease effective June 2004.
Settlement
Agreements and Releases. We
entered into settlement agreements and releases with four former executive
officers in connection with the cessation of their employment, which generally
provided for their resignations from their positions and employment with the
Company, the payment of severance in increments in accordance with the regular
payroll schedule, and a general release of claims against the Company by each
of
such persons. On February 27, 2004, an agreement was entered into with Greg
Rand, the Company’s former president and chief operating officer, which
generally provided for a severance payment of $75 and an accelerated vesting
of
25,000 stock options. On April 6, 2004, an agreement was entered into with
George Claffey, the Company’s former chief financial officer, which generally
provided for a severance payment of $61. On June 16, 2004, an agreement was
entered into with Mike Keough, the Company’s former chief executive officer,
which generally provided for a severance payment of $46 and vested options
totaling 18,749 stock options. On July 15, 2004, an agreement was entered into
with Angelina Beitia, the Company’s former vice president, which generally
provided for a lump sum payment of $100. In addition Ms. Beitia surrendered
and
delivered to the Company all outstanding vested and unvested options. In
accordance with the terms of our stock option plans, any unvested stock options
terminated on the date of termination of such persons’ employment with the
Company. This summary description of the settlement agreement and releases
are
qualified in their entirety by reference to the settlement agreement and
releases, copies of which are included as exhibits to this report.
Sale
of U.S. Audiovisual Integration Services. On May 6, 2004, the
Company sold certain assets of its U.S. audiovisual integration services
operations to M:Space, Inc. (M:Space) for no cash compensation. M:Space is
a
privately held audiovisual integration services company. In exchange for M:Space
assuming obligations for completion of certain customer contracts, and
satisfying maintenance contract obligations to existing customers, the Company
transferred to M:Space certain assets including inventory valued at $569. The
Company expects that the operations of the U.S. audiovisual integration services
will be classified as discontinued operations in the fiscal year 2004. As of
June 30, 2003 the assets of audiovisual integration services were classified
as
held and used.
Sale
of Conferencing Services Business. On July 1, 2004, the Company
sold its conferencing services business segment to Clarinet, Inc., an affiliate
of American Teleconferencing Services, Ltd. d/b/a Premier Conferencing for
$21,300. Of the purchase price $1,000 was placed into an 18-month Indemnity
Escrow account and an additional $300 was placed into a working capital escrow
account. We received the $300 working capital escrow funds approximately 90
days
after the execution date of the contract. Additionally, $1,365 of the proceeds
was utilized to pay off equipment leases pertaining to assets being conveyed
to
Clarinet. The Company expects that the conferencing services operations will
be
classified as discontinued operations in the fiscal year 2005. As of June 30,
2003, the assets of conferencing services were classified as held and
used.
Closing
of Germany Office. During December 2004, the Company closed its
Germany office and consolidated its activity with the United Kingdom office.
Costs associated with closing the Germany office totaled $305 and included
operating leases and severance payments.
Sale
of OM Video.
On March 4, 2005, the Company sold all of the issued and outstanding stock
of
its Canadian subsidiary, ClearOne Communications of Canada, Inc. (ClearOne
Canada) to 6351352 Canada Inc., a Canada corporation. ClearOne Canada owned
all
the issued and outstanding stock of Stechyson Electronics Ltd., which conducts
business under the name OM Video. The Company agreed to sell the stock of
ClearOne Canada for $200 in cash; a $1,256 note payable over a 15-month period,
with interest accruing on the unpaid balance at the rate of 5.25% per year;
and
contingent consideration ranging from 3% to 4% of related gross revenues over
a
five-year period. The Company expects that the operations of the Canada
audiovisual integration services will be classified as discontinued operations
in fiscal year 2005. As of June 30, 2003, the assets of the Canada audiovisual
integration business were classified as held and used. In June 2005, we were
advised that the OM Purchaser had settled an action brought by the former
employer of certain of OM Purchaser's owners and employees alleging violation
of
non-competition agreements. The settlement reportedly involved a cash payment
and an agreement not to sell certain products for a period of one year. We
are
evaluating what impact, if any, this settlement may have on the OM Purchaser's
ability to make the payment required under the note.
F-42
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Third-Party
Manufacturing Agreement.
On August 1, 2005, ClearOne Communications, Inc. (the “Company”) entered into a
Manufacturing Agreement with Inovar, Inc., a Utah-based electronics
manufacturing services provider (“Inovar”), pursuant to which the Company agreed
to outsource its Salt Lake City manufacturing operations to Inovar. The
agreement is for an initial term of three years, which shall automatically
be
extended for successive and additional terms of one year each unless terminated
by either party upon 120 days’ advance notice at any time after the second
anniversary of the agreement. The agreement generally provides, among other
things, that Inovar shall: (i) furnish the necessary personnel, material,
equipment, services and facilities to be the exclusive manufacturer of
substantially all the Company’s products that were previously manufactured at
its Salt Lake City, Utah manufacturing facility, and the non-exclusive
manufacturer of a limited number of products, provided that the total cost
to
the Company (including price, quality, logistic cost and terms and conditions
of
purchase) is competitive; (ii) provide repair service and warranty support
and
proto-type services for new product introduction on terms to be agreed upon
by
the parties; (iii) purchase certain items of the Company’s manufacturing
equipment; (iv) lease certain other items of the Company’s manufacturing
equipment and have a one-year option to purchase such leased items; (v) have
the
right to lease the Company’s former manufacturing employees from a third party
employee leasing company; and (vi) purchase the Company’s parts and materials on
hand and in transit at the Company’s cost for such items with the purchase price
payable on a monthly basis when and if such parts and materials are used by
Inovar. The parties also entered into a one-year sublease for approximately
12,000 square feet of manufacturing space located in the Company’s headquarters
in Salt Lake City, Utah, which sublease may be terminated by either party upon
ninety days’ notice. The agreement provides that products shall be manufactured
by Inovar pursuant to purchase orders submitted by the Company at purchase
prices to be agreed upon by the parties, subject to adjustment based upon such
factors as volume, long range forecasts, change orders etc. The Company also
granted Inovar a right of first refusal to manufacture new products developed
by
the Company at cost to the Company (including price, quality, logistic cost
and
terms and conditions of purchase) that is competitive. Costs associated with
outsourcing the Company’s manufacturing totaled $429 including severance
payments, facilities no longer used by the Company and fixed assets that will
be
disposed of.
F-43