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, 2004
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, including zip code)
(801)
975-7200
(Registrant’s
telephone number, including area code)
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
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 10,415,587 shares of voting common stock held
by
non-affiliates is approximately $22,914,291 at November 30, 2005, based on
the
$2.20 closing price for the Company’s common stock on the Pink Sheets on such
date. The number of shares of ClearOne common stock outstanding as of June
30,
2004 and November 30, 2005, were 11,036,233 and 12,184,727,
respectively.
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
¨
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,” “could,” “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; statements 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 “Description of Business” included
in Item 1 of Part I, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Qualitative and Quantitative
Disclosures About Market Risk” included in Items 7 and 7A of Part II of this
Annual Report on Form 10-K. 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
This
Annual Report on Form 10-K for the fiscal year ended June 30, 2004 is first
being filed in December 2005. The Company is in the process of preparing its
Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and plans
to
file such report at the earliest practicable date. Shareholders and others
are
cautioned that the financial statements included in this report are over one
year old and are not necessarily indicative of the operating results that may
be
expected for the year ending June 30, 2005. Shareholders and others should
also
be aware that the staff of the Salt Lake District Office of the Securities
and
Exchange Commission (“SEC”) has advised the Company that it intends to recommend
to the Commission that administrative proceedings be instituted to revoke the
registration of the Company’s common stock based on the Company’s failure to
timely file annual and quarterly reports with the Commission. The Company has
provided the staff with a so-called “Wells Submission” setting forth its
position with respect to the staff’s intended recommendation, which submission
would be considered by the Commission in determining whether or not to authorize
an administrative proceeding. There can be no assurance that the Company will
be
successful in convincing the Commission not to initiate an administrative
proceeding or that the Company would prevail if an administrative proceeding
were initiated.
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 our 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. Gentner Electronics Corporation was incorporated in Utah in 1981.
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 Statements. A
comprehensive review of our previously issued consolidated financial statements
was undertaken during fiscal 2003 after it was determined that the statements
were not prepared in accordance with U.S. generally accepted accounting
principles (“U.S. GAAP”). As a result of this review, we restated our previously
reported consolidated financial statements for the fiscal years ended June
30,
2002 and 2001 as well as our previously reported consolidated financial
statements for the first quarter of fiscal 2003 (“Previously Reported
Statements”). The restated consolidated financial statements include
restatements of revenue, impairments of goodwill, other intangible assets and
property, plant and equipment, and other adjustments made in connection with
our
review. Our restated fiscal 2002 and fiscal 2001 consolidated financial
statements are contained in our Annual Report on Form 10-K for fiscal 2003
filed
with the SEC on August 18, 2005. The restated fiscal 2002 and fiscal 2001
financial statements were audited by KPMG LLP (“KPMG”), who replaced Ernst &
Young LLP (“Ernst & Young”) as our external auditors in December
2003.
Potential
SEC Administrative Action.
ClearOne
has been advised by the staff of the Salt Lake District Office of the SEC that
the staff intends to recommend to the Commission that administrative proceedings
be instituted to revoke the registration of the Company’s common stock based on
the Company’s failure to timely file annual and quarterly reports with the
Commission. The Company has provided the staff with a so-called “Wells
Submission” setting forth its position with respect to the staff’s intended
recommendation, which submission would be considered by the Commission in
determining whether or not to authorize an administrative proceeding. There
can
be no assurance that the Company will be successful in convincing the Commission
not to initiate an administrative proceeding or that the Company would prevail
if an administrative proceeding were initiated.
4
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, Gregory 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. Mr. Frederick resigned on September
15, 2005 and on September 20, 2005, Craig Peeples, our Corporate Controller,
was
appointed as our Interim Chief Financial Officer.
The
SEC Action. ClearOne’s
Previously Reported Statements were the subject of a civil action filed by
the
SEC 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) would not be issued
from the settlement fund and claimants who would otherwise be entitled to
receive 99 or fewer shares would be paid cash in lieu of such odd-lot numbers
of
shares. On September 29, 2005, we completed our obligations under the settlement
agreement by issuing a total of 1,148,494 shares of our common stock to the
plaintiff class, including 228,000 shares previously issued in November 2004,
and paying an aggregate of $126,705 in cash in lieu of shares to those members
of the class who would otherwise have been entitled to receive an odd-lot number
of shares or who resided in states in which there was no exemption available
for
the issuance of shares. The cash payments were calculated on the basis of $2.46
per share which was equal to the higher of (i) the closing price for our common
stock as reported by the Pink Sheets on the business day prior to the date
the
shares were mailed or (ii) the average closing price over the five trading
days
prior to such mailing date.
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 the fiscal 2002 consolidated financial
statements.
Acquisitions
of E.mergent, Inc. and OM Video.
During
fiscal 2002 and fiscal 2003, we entered the audiovisual integration services
business through the acquisitions of E.mergent, Inc. and Stechyson Electronics,
Ltd., doing business as OM Video (“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 the audiovisual integration
services industry. However, our entry into the services business was perceived
as a threat by our systems integrators and value-added resellers, since we
began
competing against many of them 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 the fiscal 2003 consolidated financial
statements.
5
Sale
of our U.S. Audiovisual Integration Services. On
May 6,
2004, we sold certain assets of our U.S. audiovisual integration services
operations (a portion of E.mergent, Inc.) 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 $573,000. The operations of the U.S. audiovisual integration services have
been classified as discontinued operations in the fiscal 2004 consolidated
financial statements.
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. doing business as
Premiere Conferencing (“Premiere”) 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. The conferencing services operations have been classified
as discontinued operations in the fiscal 2004 consolidated financial
statements.
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 receivable which
is
due over a 15-month period, with interest accruing on the unpaid balance at
the
rate of 5.3 percent per year; and contingent consideration ranging from 3
percent to 4 percent of related gross revenues over a five-year period. The
Company expects to present all OM Video activities in discontinued operations
in
the fiscal 2005 consolidated financial statements. As of June 30, 2004, 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. To date, OM Purchaser has made all payments required
under the note and we are continuing to evaluate 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 technology and products,
audiovisual integration 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 maintain market leadership in the installed segment of the conferencing
systems market and 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 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. We hold
numerous registered trademarks including “Distributed Echo Cancellation”,
“Gentner”, and “You’re Virtually There.”
6
Provide
greater value to our customers
To
provide our customers with audio 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 conferencing 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
and
data networks.
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
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 most of our operations in the conferencing products industry.
We also previously operated in the conferencing services segment until July
1,
2004 (fiscal 2005), when we sold our conferencing services business to American
Teleconferencing Services, Ltd., and in the business services segment until
March 4, 2005 (fiscal 2005), when we sold the remaining operations in that
area
to 6351352 Canada Inc. For additional financial information about our segments,
see Notes to 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
and
first-microphone priority, which combine to enable natural communication between
distant conferencing participants similar to that of being in the same room.
7
We
believe the 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® 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 legacy 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 PSR1212 is a digital matrix mixer
that provides advanced audio processing, microphone mixing, and routing for
local sound reinforcement.
The
XAP®
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 video
conferencing systems.
On
March
30, 2005, we formalized our decision to discontinue our Audio Perfect® product
line. The last orders for our Audio Perfect® products were received on June 30,
2005 and the last build of Audio Perfect® products was during the first quarter
of fiscal 2006. We will continue to inventory parts for warranty and warranty
repair service and will continue to service these products for a five-year
period based on a two-year warranty and three-year repair period based on parts
availability.
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. In fiscal 2005, we introduced a wired control
device as a part of our RAV™ audio conferencing system offering. It uniquely
combines the sound quality of a professionally installed audio system with
the
simplicity of a conferencing-specific telephone and can be easily connected
to
industry common rich-media devices, such as video or web conferencing 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.
8
The
MAX®
product line is comprised of the MAX® EX, MAX® Wireless, MAXAttach and MAXAttach
wireless tabletop conferencing phones. MAX® Wireless was one of the industry’s
first wireless conferencing phone on the market. Designed for use in executive
offices or small conference rooms with multiple 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 believed to be
the
industry’s first dual unit wireless conference phone.
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 web conferencing
applications. They feature echo cancellation and audio processing technologies
and can be used with personal computers, video conferencing systems, or
installed audio conferencing systems. Our cameras can be used in professional
conferencing or educational settings. They make possible the 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.
Our wide selection of wood, metal, and laminate conferencing furniture features
audiovisual carts, plasma screen carts and pedestals, video conferencing carts,
tables, cabinets, and podiums. We also provide custom conferencing furniture
design.
Marketing
and Sales
We
use a
two-tier distribution model, in which, we primarily sell our products directly
to a worldwide network of independent audiovisual, information technology,
and
telecommunications 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. We also sell our products on a limited basis directly to certain
dealers, systems integrators, value-added resellers, and end-users. In addition,
we regularly participate in conferencing forums, trade shows, and industry
promotions.
In
fiscal
2004, approximately $21.7 million, or 77.8 percent, of our total product sales
were generated in the United States and product sales of approximately $6.2
million, or 22.2 percent, were generated outside the United States. Revenue
from
product and business services customers outside of the United States accounted
for approximately 36.1 percent of our total sales from continuing operations
for
fiscal 2004, 43.2 percent for fiscal 2003, and 16.1 percent for fiscal 2002.
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 70 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.
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.
9
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.
Customers
No
end-user accounted for more than 10 percent of our total revenue during fiscal
2004, 2003, or 2002. In fiscal 2004, revenues in our product segment included
sales to three distributors that represented approximately 64.6 percent of
the
segment’s revenues. (For additional financial information about our segments or
geographic areas, see Note 25 to Consolidated Financial Statements, which are
included in this report.) As discussed above, these distributors facilitate
product sales to a large number of end-users, none of which is known to account
for more than 10 percent 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. As of June 30, 2004,
our shipped orders on which we had not recognized revenues was $6.2 million.
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 Aethra, Biamp
Systems, Cisco, Polycom, Sony, Sound Control, and other companies that offer
audio 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. Our microphones compete with the products of Audio
Technica, Global Media, Shure, and others. In the markets for our document
cameras, competitors include Elmo, Ken-a-Vision, Samsung, Sony, Wolfvision,
and
other manufacturers. Our conferencing furniture products compete primarily
with
the products of Accuwood, Comlink, and Video Furniture
International.
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.
Seasonality
Our
audio
conferencing products revenue has historically been strongest during the second
and fourth quarters. Our camera product line revenue is usually strongest during
the third and fourth quarters. Our Canadian audiovisual integration services
business revenue is typically strongest during the third quarter due to the
large number of government contracts and their related fiscal spending
schedules. There can be no assurance that any historic sales patterns will
continue and, as a result, sales for any prior quarter are not necessarily
indicative of the sales to be expected in any future quarter.
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 $3.9 million in
fiscal 2004, $3.0 million in fiscal 2003, and $3.8 million in fiscal
2002.
10
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.
Manufacturing
Prior
to
June 20, 2005, we manufactured and assembled most of our products in our
manufacturing facility located at our corporate headquarters in Salt Lake City,
Utah and bought most of our assembly components from distributors and a limited
amount of such components directly from fabricators located near our
manufacturing facilities. We subcontracted and continue to subcontract the
manufacture of our MAX product line to a third-party contract manufacturer
located in Southeast Asia. We continue to manufacture our furniture product
line
in our manufacturing facility located in Champlin, Minnesota.
On
June
20, 2005, we began transitioning the manufacture of most of our products to
a
third-party manufacturer, Inovar, Inc., a Utah-based electronics manufacturing
services provider (“Inovar”). On August 1, 2005, we entered into a Manufacturing
Agreement with 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, 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 90 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.
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 that cover 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.
11
Employees
As
of
June 30, 2004, we had 264 employees, 262 of whom were employed on a full-time
basis, with 68 in sales, marketing, and customer support; 41 in product
development; 40 in manufacturing; 59 in our conference call center, 29 in
administration, including finance, and 27 at OM Video.
As
of
November 30, 2005, following the sale of our conferencing services business,
OM
Video, and the outsourcing of our Salt Lake City manufacturing operations,
we
had 124 employees, 121 of whom were employed on a full-time basis, with 44
in
sales, marketing, and customer support; 45 in product development; 20 in
manufacturing support; and 15 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 video conferencing technology and product; E.mergent, Inc., an
audiovisual 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 audiovisual integration services company. During fiscal 2004,
we
sold our U.S. audiovisual integration services business to M:Space, Inc. During
fiscal 2005, we sold our conferencing services segment to Premiere and we sold
our Canadian audiovisual integration services business to 6351352 Canada Inc.
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. We
entered into an agreement to purchase substantially all of the assets of
ClearOne, Inc., a developer of video conferencing technology and audio
conferencing products, for $3.6 million consisting of $1.8 million 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, we acquired tangible assets consisting of property and
equipment of $473,000, deposits of $59,000, and inventory of $299,000.
In
conjunction with a third-party valuation firm, we determined the useful lives
and amounts of the developed technologies, trademarks and distribution
agreements. 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.
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 Statement
of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other
Intangible Assets.” on
July
1, 2002. 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.
We
charged $728,000 to expense during fiscal 2001 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, it 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 fiscal year ended June 30, 2002, and
our
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 long-lived assets of approximately
$901,000 should be recognized.
12
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, for $750,000 in
cash at closing, $1.8 million in the form of a seven-year promissory note,
with
interest at the rate of 9.0 percent per year, and up to $700,000 as a commission
over a period of up to seven years. We realized a gain on the sale, net of
tax,
of $58,000 for fiscal 2004, $200,000 for fiscal 2003, and $176,000 for fiscal
2002. As of June 30, 2004, $1.5 million of the promissory note remained
outstanding and we had received $20,000 in commissions.
On
August
22, 2005, we entered into a Mutual Release and Waiver Agreement with Burk
pursuant to which Burk paid us $1.3 million in full satisfaction of the
promissory note, which included a discount of approximately $120,000. As part
of
the Mutual Release and Waiver Agreement, we waived any right to future
commission payments from Burk and we granted mutual releases to one another
with
respect to claims and liabilities. Subsequent to June 30, 2004, we anticipate
recognizing a pre-tax gain on the sale of approximately $1.5
million.
Ivron
Systems, Ltd. Acquisition. On
October 3, 2001, we 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 $6.0 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 an aggregate cash payment of
$650,000.
As
of the
acquisition date, we acquired tangible assets consisting 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 of trade accounts
payable of $174,000 and accrued compensation and other accrued liabilities
of
$264,000.
Under
the
original agreement, former Ivron shareholders would be entitled to receive
up to
429,000 shares of common stock after June 30, 2002 if certain video development
contingencies were achieved and 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 during fiscal years 2003 and 2004. In
addition, former optionees of Ivron who remained with us were eligible to
participate in a cash bonus program of up to approximately $1.0 million paid
by
us, based on our combined performance with Ivron in the fiscal years ending
June
30, 2003 and 2004. On April 8, 2002, an amendment to the original purchase
agreement was finalized which revised the performance targets and reduced the
contingent consideration that the Ivron shareholders would be entitled to
receive to a maximum of 109,000 shares of common stock. 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 and
with
the assistance of a third-party valuation firm and after considering the facts
and circumstances surrounding our intentions, we recorded intangible assets
of
$5.3 million related to developed technology, $1.1 million related to
intellectual property, and goodwill of $218,000. The developed technologies
had
estimated useful lives of three to fifteen years and the patents had an
estimated useful life of fifteen years. 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 of approximately $6.2 million should be
recognized. During early fiscal 2004, we discontinued selling the “V-There” and
“Vu-Link” set-top video conferencing products.
E.mergent
Acquisition. On
May
31, 2002, we completed our acquisition of E.mergent pursuant to the terms of
an
Agreement and Plan of Merger dated January 21, 2002 whereby we paid
$7.3 million of cash and issued 868,691 shares of common stock valued at $16.55
per share to former E.mergent stockholders.
13
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 rights 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 with the following assumptions: expected
dividend yield of 0 percent, risk-free interest rate of 2.9 percent, expected
volatility of 81.8 percent, and an expected life of two years.
As
of the
acquisition date, we acquired tangible assets consisting 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 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 of $416,000 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, we recorded intangible assets related
to customer relationships, patents, a non-compete agreement, and goodwill.
Amortization expense of $437,000 was recorded for customer relationships,
patents, and a non-compete agreement during fiscal 2003. 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. 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 that core competencies would allow us to acquire market
share in the audiovisual integration industry. However, our entry into the
services business was perceived as a threat by its systems integrators and
value-added resellers, since we began competing against many of them for sales.
In order to avoid this conflict and to maintain good relationships with its
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.
Ultimately, we exited the U.S. audiovisual integration market and subsequently
sold its U.S. audiovisual integration business to M:Space in May 2004. (See
Sale
of our U.S. Audiovisual Integration Services
below.)
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 future cash flows. 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 the integration
services-related E.mergent assets of approximately $12.5 million should be
recognized. We also determined that an impairment loss on other acquired
E.mergent assets of approximately $5.1 million should be recognized. The U.S.
audiovisual integration business operations and related net assets are included
in discontinued operations in the accompanying consolidated financial
statements.
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.
Sale
of Broadcast Telephone Interface Business to Comrex.
On
August 23, 2002, we entered into an agreement with Comrex Corporation
(“Comrex”), pursuant to which Comrex agreed to pay ClearOne $1.3 million in
exchange for certain inventory associated with our broadcast telephone interface
product line and the provision of 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
approximately $1.1 million in revenue related to this transaction in fiscal
2003
and an additional $130,000 in revenue in fiscal 2004.
We
also
entered into a manufacturing agreement to continue to manufacture additional
product for Comrex until August 2003 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 percent. During fiscal 2004 and fiscal 2003, we have recognized $387,000
and $783,000, respectively, in revenue related to the manufacture of additional
product from Comrex.
14
OM
Video Acquisition. On
August
27, 2002, we purchased all of the outstanding shares of OM Video, 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 certain representations and warranties associated with
the
acquisition. During the second quarter of fiscal 2003, we also paid $750,000
of
a potential $800,000 earn-out provision. The earn-out provision not considered
as part of the original purchase price allocation was recorded as additional
consideration and booked to goodwill. No further payment related to the holdback
or contingent consideration will be paid. Accordingly, the total cash payments
associated with the acquisition were approximately $7.5 million.
As
of the
acquisition date, we acquired tangible assets consisting 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 obtained a non-compete agreement with a term of two years from
a
former owner of OM Video.
Our
management, at the time, believed the OM Video acquisition would complement
the
Company’s existing operations and that core competencies would allow the Company
to acquire market share in the audiovisual integration industry. However, our
entry into the services business was perceived as a threat by its systems
integrators and value-added resellers, since we began competing against many
of
them for sales. In order to avoid this conflict and to maintain good
relationships with its 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
June
30, 2003, we performed an impairment test and determined that an impairment
loss
on the OM Video assets of approximately $8.4 million should be recognized.
On
March 4, 2005, we sold all of our Canadian audiovisual integration business.
(See Subsequent
Dispositions
below.)
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 $573,000.
The operations of our U.S. audiovisual integration services are classified
as
discontinued operations in the fiscal 2004 consolidated financial statements.
We
continue to manufacture and sell the camera and furniture lines acquired with
the E.mergent acquisition.
Subsequent
Dispositions.
Conferencing
Services. In
April
2004, our Board of Directors appointed a committee to explore sales
opportunities to sell the conferencing services business segment. We decided
to
sell this segment primarily because of decreasing margins and investments in
equipment that would have been required in the near future. Conferencing
services revenues, reported in discontinued operations, for the years ended
June
30, 2004, 2003, and 2002 were $15.6 million, $15.3 million, and $15.6 million,
respectively. Conferencing services pretax income, reported in discontinued
operations, for the years ended June 30, 2004, 2003, and 2002, were $2.8
million, $3.4 million, and $4.0 million, respectively.
On
July
1, 2004, we sold our conferencing services business segment to Premiere.
Consideration for the sale consisted of $21.3 million in cash. 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
Premiere. The Company expects to realize a pre-tax gain on the sale of
approximately $17.5 million during fiscal 2005. As of November 30, 2005, the
$1.0 million remained in the Indemnity Escrow account.
OM
Video - Canadian Audiovisual Integration Services.
During
the fourth quarter of the fiscal year ended June 30, 2003, we deemphasized
the
audiovisual integration market serving the Ottawa, Canada region and impaired
the OM Video acquired business services assets. We did not prepare any formal
disposition plan. During fiscal 2005, we decided to sell all the issued and
outstanding stock of our Canadian subsidiary because many of our existing
systems integrators and value-added resellers perceived our entry into the
business services arena as a threat since we began competing against these
same
customers for sales, as well as our desire to return to our core competency
in
the audio conferencing products segment. OM Video audiovisual integration
services revenues for the years ended June 30, 2004 and 2003 were $5.9 million
and $6.1 million, respectively. OM Video audiovisual integration services pretax
income (loss), reported in continuing operations, for the years ended June
30,
2004 and 2003, were $372,000 and ($8.1 million), respectively.
15
On
March
4, 2005, we sold all of the issued and outstanding stock of our Canadian
subsidiary, 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. 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 5.3 percent per year; and contingent consideration ranging from
3.0
percent to 4.0 percent 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 the fiscal year 2005 consolidated
financial statements. As of June 30, 2004, 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. To date, OM Purchaser has made all payments required under the note and
we
are continuing to evaluate what impact, if any, this settlement may have on
the
OM Purchaser’s ability to make the payment required under the
note.
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;
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.
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, unshipped 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 to 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.
16
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.
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.
We
depend on an outsource manufacturing strategy.
In
August
2005, we entered into a manufacturing agreement with Inovar, a domestic
manufacturing services provider, to be the exclusive manufacturer of
substantially all the products that were previously manufactured at our Salt
Lake City, Utah manufacturing facility. Inovar is currently the primary
manufacturer of substantially all of our products, except our MAX®
product
line and our furniture product line, and if Inovar experiences difficulties
in
obtaining sufficient supplies of components, component prices become
unreasonable, an interruption in its operations, or otherwise suffers capacity
constraints, we would experience a delay in shipping these products which would
have a negative impact on our revenues. Currently, we have no second source
of
manufacturing for substantially all of our products.
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.
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. In limited
circumstances, we are required to purchase components that our outsourced
manufacturers use to produce and assemble our products. Should technological
innovations render these components obsolete, we will be required to write-down
the value of this inventory, which could 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. Many of 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 and regulatory standards;
|
|
·
|
meeting
market expectations for
performance;
|
|
·
|
hiring
and keeping a sufficient number of skilled developers;
|
17
|
·
|
having
the ability to identify problems or product defects in the development
cycle; 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; however, we cannot assure
you 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.
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 36.1 percent of our
total sales from continuing operations for fiscal 2004, 43.2 percent for fiscal
2003, and 16.1 percent for fiscal 2002. 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 sales operations;
|
|
·
|
import
and 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, OM Video, whose sales were
denominated in Canadian Dollars until March 4, 2005, when the subsidiary was
sold to a third party. Consolidation of OM Video’s financial statements with
ours, under U.S. GAAP, required remeasurement of the amounts stated in OM
Video’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.
18
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.
Our
sales depend to a certain extent on government funding and
regulation.
In
the
audio conferencing products 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.
Environmental
laws and regulations subject us to a number of risks and could result in
significant liabilities and costs.
The
European Parliament has published a directive on the Restriction on Use of
Hazardous Substances Directive (the “RoHS Directive”), which restricts the use
of certain hazardous
substances in electrical and electronic equipment beginning July 1, 2006. We
may
need to redesign products containing hazardous substances regulated under the
RoHS Directive to reduce or eliminate those regulated hazardous substances
in
our products. The European Parliament has also published a directive on
Electronic and Electrical Waste Management (the “WEEE Directive”), which makes
producers of certain electrical and electronic equipment financially responsible
for collection, reuse, recycling, treatment, and disposal of equipment placed
on
the European Union market after August 13, 2005. We are in the process of
evaluating the impact of these directives on our business and have not yet
estimated the potential costs of compliance.
We
may have difficulty in collecting outstanding receivables.
We
grant
credit without requiring collateral to substantially all of our customers.
In
times of economic uncertainty, the risks relating to the granting of such credit
would typically 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.
19
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
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
shift in sales mix of products that we currently sell to a sales
mix of
lower-margin product offerings;
|
|
·
|
the
level and mix of inventory levels held by our
distributors;
|
|
·
|
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;
|
|
·
|
The
adoption of the new accounting standard, SFAS123R, “Share-Based Payments”
which will require us to record compensation expense for options
issued
under our “1998” Stock Option Plan beginning with options issued after
July 1, 2005;
|
|
·
|
our
ability to report financial information in a timely manner;
and
|
|
·
|
the
markets in which our stock is
traded.
|
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 team. 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, and a Vice-President of
Operations in January 2005. In January 2005, we named a new Vice-President
of
Product Line Management, who had been serving as our Director of Research and
Development. In September 2005, our Chief Financial Officer resigned his
position and our Corporate Controller was named our Interim Chief Financial
Officer. 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.
Our
directors and officers own 18.7 percent of the Company and may exert control
over us.
Our
officers and directors together have beneficial ownership of approximately
18.7
percent of our common stock (including options that are currently exercisable
or
exercisable within 60 days of November 30, 2005). With this significant holding
in the aggregate, the officers and directors, acting together, could exert
a
significant degree of control over us and may be able to delay or prevent a
change in control.
20
|
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 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. Of the 51,760 square feet,
we
sublet 12,000 square feet to Inovar, as discussed below. We believe the facility
will be reasonably adequate to meet our needs through October 2006; however,
we
are currently evaluating our needs for fiscal 2007 and beyond. Prior to the
sale
of our conferencing service business, this segment conducted its business from
our Salt Lake City headquarters.
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 with respect to the 12,000 square foot manufacturing
facility in our headquarters building in connection with the outsourcing of
our
manufacturing operations. Inovar pays rent in the amount of $11,040 per month
and either party may terminate the lease for any reason upon 90 days written
notice or 60 days written notice to the other party of material breach of the
agreement. 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, 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.
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
U.S.
audiovisual integration 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
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
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.
Our
wholly owned subsidiary, ClearOne Communications of Canada, Inc. doing business
as OM Video, leased a facility in Ottawa, Canada consisting of 16,190 square
feet, in which our Canadian audiovisual integration services operations were
conducted. We leased this facility under a lease agreement that expired in
July
2005. As discussed herein, we sold this subsidiary in March 2005.
21
|
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 and after discussions with legal counsel, we do not
believe any such other proceedings will have a material, adverse effect on
our
financial condition or results of operations, except as described
below.
The
SEC Action. On
January 15, 2003, the SEC 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 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 Arrangements).
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.
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.
22
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 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) would not be issued from the settlement
fund and claimants who would otherwise be entitled to receive 99 or fewer shares
would be paid cash in lieu of such odd-lot number of shares. On September 29,
2005, we completed our obligations under the settlement agreement by issuing
a
total of 1,148,494 shares of our common stock to the plaintiff class, including
228,000 shares previously issued in November 2004, and we paid an aggregate
of
$126,705 in cash in lieu of shares to those members of the class who would
otherwise have been entitled to receive an odd-lot number of shares or who
resided in states in which there was no exemption available for the issuance
of
shares. The cash payments were calculated on the basis of $2.46 per share which
was equal to the higher of (i) the closing price for our common stock as
reported by the Pink Sheets on the business day prior to the date the shares
were mailed or (ii) the average closing price over the five trading days prior
to such mailing date.
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 complaint 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 to 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 fiscal 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.
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 (“National
Union”) and Lumbermens Mutual Insurance Company of Berkeley Heights, New Jersey
(“Lumbermens Mutual”), 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 complaint, 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
is
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
between 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. On October 21, 2005, the court granted summary judgment in favor of
National Union on its rescission defense and accordingly entered a judgment
dismissing all of the claims asserted by ClearOne and Mr. Bagley. The Company
and Mr. Bagley have filed a notice of appeal concerning this adverse judgment
and intend to vigorously pursue the appeal and any follow-up proceedings
regarding their claims against National Union, although no assurances can be
given that they will be successful. The Company and Mr. Bagley have entered
into
a Joint Prosecution and Defense Agreement in connection with the action and
the
Company is paying all litigation expenses except litigation expenses which
are
solely related to Mr. Bagley’s claims in the litigation. (See “Item 13. Certain
Relationships and Related Transactions” for additional discussion.)
23
Wells
Submission. We
have
been advised by the staff of the Salt Lake District Office of the SEC that
the
staff intends to recommend to the Commission that administrative proceedings
be
instituted to revoke the registration of our common stock based on our failure
to timely file annual and quarterly reports with the Commission. We have
provided the staff with a so-called “Wells Submission” setting forth our
position with respect to the staff’s intended recommendation, which submission
would be considered by the Commission in determining whether or not to authorize
an administrative proceeding. There can be no assurance that the Company will
be
successful in convincing the Commission not to initiate an administrative
proceeding or that the Company would prevail if an administrative proceeding
were initiated.
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
it purchased and received but did not pay 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.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No
matter
was submitted to a vote of our security holders during fiscal 2004.
24
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 bid quotations for the common
stock for the last two fiscal years as provided by Pink Sheets LLC.
|
2004
|
High
|
Low
|
|||||||||
|
First
Quarter
|
Pink
Sheets
|
$
|
2.15
|
$
|
1.70
|
||||||
|
Second
Quarter
|
Pink
Sheets
|
4.35
|
1.78
|
||||||||
|
Third
Quarter
|
Pink
Sheets
|
7.96
|
3.70
|
||||||||
|
Fourth
Quarter
|
Pink
Sheets
|
6.50
|
4.40
|
||||||||
|
|
|||||||||||
|
2003
|
High
|
Low
|
|||||||||
|
First
Quarter
|
NASDAQ
|
$
|
13.76
|
$
|
3.41
|
||||||
|
Second
Quarter
|
NASDAQ
|
5.23
|
2.94
|
||||||||
|
Third
Quarter
|
NASDAQ/Pink
Sheets
|
4.53
|
1.52
|
||||||||
|
Fourth
Quarter
|
Pink
Sheets
|
2.75
|
0.61
|
||||||||
On
November 30, 2005, the high and low sales prices for our common stock on the
Pink Sheets were both $2.20.
Shareholders
As
of
November 30, 2005, there were 12,184,727 shares of our common stock issued
and
outstanding and held by approximately 665 shareholders of record. This number
counts each broker dealer and clearing corporation, who hold shares for their
customers, 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 working
capital requirements, growth, and product development.
Securities
Authorized for Issuance under Equity Compensation Plans
We
currently have two equity compensation plans in effect, our 1990 Incentive
Plan
(the “1990 Plan”) and our 1998 Stock Option Plan (the “1998 Plan”), both of
which provide for the grant of stock options to employees, directors and
consultants. As of June 30, 2004, there were 30,750 options outstanding under
the 1990 Plan with no additional options available for grant under such plan,
and 1,402,437 options outstanding under the 1998 Plan with 796,439 options
available for grant in the future. The Company has determined not to permit
the
exercise of stock options granted under the 1990 Plan or the 1998 Plan until
such time as we are current in the filing of periodic reports with the SEC.
The
Company also provided for an extension of the exercise period of certain options
to prevent them from expiring without the holder having had the opportunity
to
exercise them.
The
following table sets forth information as of June 30, 2004 with respect to
compensation plans under which equity securities of ClearOne are authorized
for
issuance.
25
|
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
|
1,433,187
|
|
$6.37
|
795,439
|
||||||
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|||||||
|
Total
|
1,433,187
|
|
$6.37
|
795,439
|
||||||
Recent
Sales of Unregistered Securities: Use of Proceeds from Registered
Securities.
No sales
of equity securities occurred during fiscal 2004 that were not registered under
the Securities Act of 1933.
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
the
exercise price of $17.00 per share through November 27, 2006.
Issuer
Purchases of Equity Securities.
During
the fiscal year ended June 30, 2004, ClearOne did not purchase any of its equity
securities except as discussed below under Cancellation
of Shares of Executive Officers.
Cancellation
of Shares of Executive Officers.
As
discussed herein in “Item 11: Executive Compensation: Employment Contracts and
Termination of Employment and Change-in-Control Arrangements,” 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. Ms. Flood surrendered and returned
35,000 shares of the Company’s common stock and 706,434 stock options (461,433
of which were vested) and Ms. Strohm surrendered and returned 15,500 shares
of
the Company’s common stock and 268,464 stock options (171,963 of which were
vested) to the Company. These shares were retired in May 2004 and were valued
by
the Company at $63,000 in the fiscal 2004 consolidated statement of
shareholders’ equity.
Employee
Stock Purchase Program.
We have
an Employee Stock Purchase Program (“ESPP”). A total of 500,000 shares of common
stock were reserved for issuance under the ESPP. During the fiscal year ended
June 30, 2004, no shares of common stock were issued under the ESPP and
compensation expense was $0. The program was suspended during fiscal 2003 due
to
the Company’s failure to remain current in its filing of periodic reports with
the SEC.
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The
following selected financial data has been derived from our fiscal years ended
June 30, 2004, 2003, 2002, and 2001 audited consolidated financial statements.
The selected financial data for the fiscal year ended June 30, 2000 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 year ended June 30, 2000 have not been re-audited and
are
unaudited. For the fiscal years ended June 30, 2004, 2003, 2002, 2001, and
2000,
the data in the table below has been adjusted to reflect discontinued operations
of a portion of our business services segment and our conferencing services
segment as held for sale. 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.
26
SELECTED
CONSOLIDATED FINANCIAL DATA
(in
thousands, except share data)
|
Years
Ended June 30,
|
||||||||||||||||
|
2004
|
2003
|
2002
|
2001
|
2000
|
||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Operating
results:
|
||||||||||||||||
|
Revenue
|
$
|
33,894
|
$
|
34,677
|
$
|
26,253
|
$
|
22,448
|
$
|
22,027
|
||||||
|
Costs
and expenses:
|
||||||||||||||||
|
Cost
of goods sold
|
20,431
|
22,170
|
13,884
|
9,204
|
8,237
|
|||||||||||
|
Marketing
and selling
|
8,269
|
6,880
|
7,010
|
5,273
|
4,467
|
|||||||||||
|
General
and administrative
|
12,907
|
15,398
|
4,376
|
2,612
|
2,258
|
|||||||||||
|
Research
and product development
|
3,908
|
2,995
|
3,810
|
2,747
|
1,271
|
|||||||||||
|
Impairment
losses
|
-
|
13,528
|
7,115
|
-
|
-
|
|||||||||||
|
Purchased
in-process research and development
|
-
|
-
|
-
|
728
|
-
|
|||||||||||
|
Operating
(loss) income
|
(11,621
|
)
|
(26,294
|
)
|
(9,942
|
)
|
1,884
|
5,794
|
||||||||
|
Other
(expense) income, net
|
(261
|
)
|
49
|
288
|
188
|
153
|
||||||||||
|
(Loss)
Income from continuing operations before income taxes
|
(11,882
|
)
|
(26,245
|
)
|
(9,654
|
)
|
2,072
|
5,947
|
||||||||
|
Benefit
(provision) for income taxes
|
580
|
1,321
|
173
|
(403
|
)
|
(2,130
|
)
|
|||||||||
|
(Loss)
income from continuing operations
|
(11,302
|
)
|
(24,924
|
)
|
(9,481
|
)
|
1,669
|
3,817
|
||||||||
|
Income
(loss) from discontinued operations
|
1,415
|
(11,048
|
)
|
2,820
|
1,949
|
592
|
||||||||||
|
Net
(loss) income
|
$
|
(9,887
|
)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
$
|
4,409
|
|||
|
Earnings
(loss) per common share:
|
||||||||||||||||
|
Basic
earnings (loss) from continuing operations
|
$
|
(1.02
|
)
|
$
|
(2.22
|
)
|
$
|
(0.99
|
)
|
$
|
0.19
|
$
|
0.46
|
|||
|
Diluted
earnings (loss) from continuing operations
|
$
|
(1.02
|
)
|
$
|
(2.22
|
)
|
$
|
(0.99
|
)
|
$
|
0.18
|
$
|
0.44
|
|||
|
Basic
earnings from discontinued operations
|
$
|
0.13
|
$
|
(0.99
|
)
|
$
|
0.30
|
$
|
0.23
|
$
|
0.07
|
|||||
|
Diluted
earnings from discontinued operations
|
$
|
0.13
|
$
|
(0.99
|
)
|
$
|
0.30
|
$
|
0.21
|
$
|
0.07
|
|||||
|
Basic
earnings (loss)
|
$
|
(0.89
|
)
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
$
|
0.53
|
|||
|
Diluted
earnings (loss)
|
$
|
(0.89
|
)
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
$
|
0.50
|
|||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
11,057,896
|
11,183,339
|
9,588,118
|
8,593,725
|
8,269,941
|
|||||||||||
|
Diluted
|
11,057,896
|
11,183,339
|
9,588,118
|
9,194,009
|
8,740,209
|
|||||||||||
|
As
of June 30,
|
||||||||||||||||
|
2004
|
2003
|
2002
|
2001
|
2000
|
||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Financial
data:
|
||||||||||||||||
|
Current
assets
|
$
|
27,152
|
$
|
29,365
|
$
|
52,304
|
$
|
20,264
|
$
|
14,101
|
||||||
|
Property,
plant and equipment, net
|
4,077
|
4,320
|
4,678
|
3,021
|
3,050
|
|||||||||||
|
Total
assets
|
32,156
|
35,276
|
63,876
|
25,311
|
18,220
|
|||||||||||
|
Long-term
debt, net of current maturities
|
240
|
931
|
-
|
-
|
-
|
|||||||||||
|
Capital
leases, net of current maturities
|
2
|
9
|
41
|
48
|
230
|
|||||||||||
|
Total
shareholders' equity
|
9,006
|
18,743
|
53,892
|
20,728
|
15,073
|
|||||||||||
Quarterly
Financial Data (Unaudited)
The
following table is a summary of the unaudited quarterly financial information
for the years ended June 30, 2004 and 2003.
27
|
Fiscal
2004 Quarters Ended
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
As
of Sept. 30
|
As
of Dec. 31
|
As
of Mar. 31
|
As
of June 30
|
Total
|
||||||||||||
|
Net
revenue
|
$
|
8,944
|
$
|
7,619
|
$
|
9,429
|
$
|
7,902
|
$
|
33,894
|
||||||
|
Cost
of goods sold
|
(5,926
|
)
|
(3,914
|
)
|
(6,403
|
)
|
(4,188
|
)
|
(20,431
|
)
|
||||||
|
Operating
expenses
|
(4,895
|
)
|
(6,963
|
)
|
(8,616
|
)
|
(4,610
|
)
|
(25,084
|
)
|
||||||
|
Other
income (expense)
|
1
|
(65
|
)
|
(2
|
)
|
(195
|
)
|
(261
|
)
|
|||||||
|
Loss
from continuing operations before income taxes
|
(1,876
|
)
|
(3,323
|
)
|
(5,592
|
)
|
(1,091
|
)
|
(11,882
|
)
|
||||||
|
Benefit
for income taxes
|
92
|
162
|
273
|
53
|
580
|
|||||||||||
|
Loss
from continuing operations
|
(1,784
|
)
|
(3,161
|
)
|
(5,319
|
)
|
(1,038
|
)
|
(11,302
|
)
|
||||||
|
Income
(loss) from discontinued operations
|
621
|
4
|
474
|
316
|
1,415
|
|||||||||||
|
Net
loss
|
$
|
(1,163
|
)
|
$
|
(3,157
|
)
|
$
|
(4,845
|
)
|
$
|
(722
|
)
|
$
|
(9,887
|
)
|
|
|
Basic
(loss) earnings per common share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.16
|
)
|
$
|
(0.29
|
)
|
$
|
(0.48
|
)
|
$
|
(0.09
|
)
|
$
|
(1.02
|
)
|
|
|
Discontinued
operations
|
0.06
|
-
|
0.04
|
0.03
|
0.13
|
|||||||||||
|
Basic
(loss) earnings per common share
|
$
|
(0.10
|
)
|
$
|
(0.29
|
)
|
$
|
(0.44
|
)
|
$
|
(0.06
|
)
|
$
|
(0.89
|
)
|
|
|
Diluted
(loss) earnings per common share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.16
|
)
|
$
|
(0.29
|
)
|
$
|
(0.48
|
)
|
$
|
(0.09
|
)
|
$
|
(1.02
|
)
|
|
|
Discontinued
operations
|
0.06
|
-
|
0.04
|
0.03
|
0.13
|
|||||||||||
|
Diluted
(loss) earnings per common share
|
$
|
(0.10
|
)
|
$
|
(0.29
|
)
|
$
|
(0.44
|
)
|
$
|
(0.06
|
)
|
$
|
(0.89
|
)
|
|
|
Fiscal
2003 Quarters Ended
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
As
of Sept. 30
|
As
of Dec. 31
|
As
of Mar. 31
|
As
of June 30
|
Total
|
||||||||||||
|
Net
revenue
|
$
|
8,451
|
$
|
8,291
|
$
|
9,753
|
$
|
8,182
|
$
|
34,677
|
||||||
|
Cost
of goods sold
|
(9,008
|
)
|
(2,740
|
)
|
(7,155
|
)
|
(3,267
|
)
|
(22,170
|
)
|
||||||
|
Operating
expenses
|
(4,507
|
)
|
(11,154
|
)
|
(4,944
|
)
|
(4,668
|
)
|
(25,273
|
)
|
||||||
|
Impairment
charges
|
-
|
-
|
-
|
(13,528
|
)
|
(13,528
|
)
|
|||||||||
|
Other
income (expense)
|
26
|
(3
|
)
|
24
|
2
|
49
|
||||||||||
|
Loss
from continuing operations before income taxes
|
(5,038
|
)
|
(5,606
|
)
|
(2,322
|
)
|
(13,279
|
)
|
(26,245
|
)
|
||||||
|
Benefit
for income taxes
|
447
|
456
|
241
|
177
|
1,321
|
|||||||||||
|
Loss
from continuing operations
|
(4,591
|
)
|
(5,150
|
)
|
(2,081
|
)
|
(13,102
|
)
|
(24,924
|
)
|
||||||
|
Income
(loss) from discontinued operations
|
280
|
225
|
199
|
(11,752
|
)
|
(11,048
|
)
|
|||||||||
|
Net
loss
|
$
|
(4,311
|
)
|
$
|
(4,925
|
)
|
$
|
(1,882
|
)
|
$
|
(24,854
|
)
|
$
|
(35,972
|
)
|
|
|
Basic
(loss) per common share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.41
|
)
|
$
|
(0.45
|
)
|
$
|
(0.19
|
)
|
$
|
(1.17
|
)
|
$
|
(2.22
|
)
|
|
|
Discontinued
operations
|
0.03
|
0.02
|
0.02
|
(1.06
|
)
|
(0.99
|
)
|
|||||||||
|
Basic
(loss) per common share
|
$
|
(0.38
|
)
|
$
|
(0.43
|
)
|
$
|
(0.17
|
)
|
$
|
(2.23
|
)
|
$
|
(3.21
|
)
|
|
|
Diluted
(loss) per common share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.41
|
)
|
$
|
(0.45
|
)
|
$
|
(0.19
|
)
|
$
|
(1.17
|
)
|
$
|
(2.22
|
)
|
|
|
Discontinued
operations
|
0.03
|
0.02
|
0.02
|
(1.06
|
)
|
(0.99
|
)
|
|||||||||
|
Diluted
(loss) per common share
|
$
|
(0.38
|
)
|
$
|
(0.43
|
)
|
$
|
(0.17
|
)
|
$
|
(2.23
|
)
|
$
|
(3.21
|
)
|
|
|
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 to Consolidated Financial Statements
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 “Disclosure Regarding Forward-Looking Statements.” 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 “Risk Factors”
in Item 1. Description of Business 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.
28
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis of our results of operations and financial position
are
based upon our consolidated financial statements, which have been prepared
in
conformity with U.S. GAAP. We review the accounting policies used in reporting
our financial results on a regular basis. 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. We believe
the
following critical accounting policies affect our more significant assumptions
and estimates that we used to prepare our consolidated financial
statements.
Revenue
and Associated Allowances for Revenue Adjustments and Doubtful
Accounts
Included
in continuing operations are two sources of revenue: (i) product revenue,
primarily from product sales to distributors, dealers, and end-users; and (ii)
business services revenue, which includes 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, 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 a 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.
These
practices continued to exist through the fiscal year ended June 30,
2003.
Accordingly,
amounts charged to both distributors and non-distributors were not considered
fixed and determinable or reasonably collectible until cash was collected and
thus, there was a delay in our recognition of revenue and related cost of goods
sold from the time of product shipment until invoices were paid. As a result,
the June 30, 2003 balance sheet reflects no accounts receivable or deferred
revenue related to product sales. During the fiscal year ended June 30, 2004,
we
recognized $5.2 million in revenues and $1.7 million in cost of goods sold
that
were deferred in prior periods since cash had not been collected as of the
end
of the fiscal year ended June 30, 2003.
During
the fiscal year ended June 30, 2004, we had in place improved credit policies
and procedures, an approval process for sales returns and credit memos,
processes for managing and monitoring channel inventory levels, better trained
staff, and discontinued the practice of frequently granting significant
concessions from the originally invoiced amount. As a result of these improved
policies and procedures, we extend credit to customers who we believe have
the
wherewithal to pay.
We
provide a right of return on product sales to distributors. Currently, we do
not
have sufficient historical return experience with our distributors that is
predictive of future events given historical excess levels of inventory in
the
distribution channel. Accordingly, revenue from product sales to distributors
is
not recognized until the return privilege has expired, which approximates when
product is sold-through to customers of the Company’s distributors (dealers,
system integrators, value-added resellers, and end-users). Although, certain
distributors provide certain channel inventory amounts, we make judgments and
estimates with regard to the amount of inventory in the entire channel, for
all
customers and for all channel inventory items, and the appropriate revenue
and
cost of goods sold associated with those channel products. Although these
assumptions and judgments regarding total channel inventory revenue and cost
of
goods sold could differ from actual amounts, we believe that our calculations
are indicative of actual levels of inventory in the distribution channel. As
of
June 30, 2004, we deferred $6.2 million in revenue and $2.4 million in cost
of
goods sold related to invoices sold where return rights had not
lapsed.
We
offer
rebates and market development funds to certain of our distributors based upon
volume of product purchased 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.
29
We
provide advance replacement units to end-users on defective units of certain
products within 90 days of purchase date from the dealer. We record a receivable
from the end-user until the defective unit has been returned. We maintain an
allowance for these estimated returns which has been reflected as a reduction
to
accounts receivable. The allowance for estimated advance replacement returns
was
$91,000 as of June 30, 2004 and $5,000 as of June 30, 2003.
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 for estimated losses resulting
from
the inability or unwillingness of our customers to make required payments based
upon our historical collection experience and expected collectibility of all
accounts receivable. 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.
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
are
subject to income taxes in both the United States and in certain non-U.S.
jurisdictions. We estimate our current tax position together with our future
tax
consequences attributable to temporary differences resulting from differing
treatment of items, such as deferred revenue, depreciation, and other reserves
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, prior year carryback,
or future reversals of existing taxable temporary differences. To the extent
we
believe that recovery is not more likely than not, we establish a valuation
allowance against these deferred 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 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.
30
Lower-of-Cost
or Market Adjustments and Reserves for Excess and Obsolete
Inventory
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 market.
In
order
to determine what, if any, inventory needs to be written down, we perform a
quarterly analysis of obsolete and slow-moving inventory. 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 our estimated 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. These charges are recorded
in
cost of goods sold. At the point of the loss recognition, a new, lower-cost
basis for that inventory is established and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly
established cost basis. If there were to be a sudden and significant decrease
in
demand for our products, or if there were a higher incidence of inventory
obsolescence because of rapidly changing technology and customer requirements,
we could be required to increase our inventory allowances, and our gross profit
could be adversely affected.
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.
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, 2004, 2003, and
2002, together with the percentage of total revenue which each such item
represents:
|
Year
Ended June 30,
|
|||||||||||||||||||
|
2004
|
2003
|
2002
|
|||||||||||||||||
|
%
of Revenue
|
%
of Revenue
|
%
of Revenue
|
|||||||||||||||||
|
Revenue
|
$
|
33,894
|
100.0
|
%
|
$
|
34,677
|
100.0
|
%
|
$
|
26,253
|
100.0
|
%
|
|||||||
|
Cost
of goods sold
|
20,431
|
60.3
|
%
|
22,170
|
63.9
|
%
|
13,884
|
52.9
|
%
|
||||||||||
|
Gross
profit
|
13,463
|
39.7
|
%
|
12,507
|
36.1
|
%
|
12,369
|
47.1
|
%
|
||||||||||
|
Operating
expenses:
|
|||||||||||||||||||
|
Marketing
and selling
|
8,269
|
24.4
|
%
|
6,880
|
19.8
|
%
|
7,010
|
26.7
|
%
|
||||||||||
|
General
and administrative
|
12,907
|
38.1
|
%
|
15,398
|
44.4
|
%
|
4,376
|
16.7
|
%
|
||||||||||
|
Research
and product development
|
3,908
|
11.5
|
%
|
2,995
|
8.6
|
%
|
3,810
|
14.5
|
%
|
||||||||||
|
Impairment
losses
|
-
|
0.0
|
%
|
13,528
|
39.0
|
%
|
7,115
|
27.1
|
%
|
||||||||||
|
Total
operating expenses
|
25,084
|
74.0
|
%
|
38,801
|
111.9
|
%
|
22,311
|
85.0
|
%
|
||||||||||
|
Operating
loss
|
(11,621
|
)
|
-34.3
|
%
|
(26,294
|
)
|
-75.8
|
%
|
(9,942
|
)
|
-37.9
|
%
|
|||||||
|
Other
(expense) income, net
|
(261
|
)
|
-0.8
|
%
|
49
|
0.1
|
%
|
288
|
1.1
|
%
|
|||||||||
|
Loss
from continuing operations before income taxes
|
(11,882
|
)
|
-35.1
|
%
|
(26,245
|
)
|
-75.7
|
%
|
(9,654
|
)
|
-36.8
|
%
|
|||||||
|
Benefit
for income taxes
|
580
|
1.7
|
%
|
1,321
|
3.8
|
%
|
173
|
0.7
|
%
|
||||||||||
|
Loss
from continuing operations
|
(11,302
|
)
|
-33.3
|
%
|
(24,924
|
)
|
-71.9
|
%
|
(9,481
|
)
|
-36.1
|
%
|
|||||||
|
Discontinued
operations, net of tax
|
1,415
|
4.2
|
%
|
(11,048
|
)
|
-31.9
|
%
|
2,820
|
10.7
|
%
|
|||||||||
|
Net
loss
|
$
|
(9,887
|
)
|
-29.2
|
%
|
$
|
(35,972
|
)
|
-103.7
|
%
|
$
|
(6,661
|
)
|
-25.4
|
%
|
||||
31
Our
revenue increased 29.1 percent over the three-year period from $26.3 million
in
fiscal 2002 to $33.9 million in fiscal 2004. During the fiscal years ended
June
30, 2004, 2003, and 2002, we introduced several new products in our products
segment. During this period, we changed our business mix through four
acquisitions and one disposition. Additionally, we reclassified our conferencing
services segment and our U.S. audiovisual integration services business segment
to discontinued operations.
The
following is a discussion of our results of operations for our fiscal years
ended June 30, 2004, 2003, and 2002. For each of our business segments, we
discuss revenue and gross profit. All other items are discussed on a
consolidated basis.
Revenue
For
the
fiscal years ended June 30, 2004, 2003, and 2002, revenues by business segment
were as follows (in thousands):
|
Year
Ended June 30,
(in
thousands)
|
|||||||||||||||||||
|
2004
|
2003
|
2002
|
|||||||||||||||||
|
%
of Revenue
|
%
of Revenue
|
%
of Revenue
|
|||||||||||||||||
|
Product
|
$
|
27,836
|
82.1
|
%
|
$
|
27,512
|
79.3
|
%
|
$
|
26,253
|
100.0
|
%
|
|||||||
|
Business
services
|
6,058
|
17.9
|
%
|
7,165
|
20.7
|
%
|
-
|
0.0
|
%
|
||||||||||
|
Total
|
$
|
33,894
|
100.0
|
%
|
$
|
34,677
|
100.0
|
%
|
$
|
26,253
|
100.0
|
%
|
|||||||
Product.
Product
revenue increased $324,000, or 1.2 percent, in fiscal 2004 compared to fiscal
2003 and increased $1.3 million, or 4.8 percent, in fiscal 2003 compared to
fiscal 2002. The increase in revenue was primarily due to introducing new
product lines, which include the MAX, RAV, and XAP® products. During fiscal
2002, we also introduced additional product offerings through the acquisition
of
E.mergent, Inc. in fiscal 2002, which includes our camera and furniture product
lines.
During
the fiscal year ended June 30, 2004, we recognized $5.2 million in revenues
and
$1.7 million in cost of goods sold that were deferred in prior periods since
cash had not been collected as of the end of the fiscal year ended June 30,
2003. As of June 30, 2004, we deferred $6.2 million in revenues and $2.4 million
in cost of goods sold related to invoices sold where return rights had not
lapsed.
Business
Services.
Business
services revenue decreased $1.1 million, or 15.5 percent, in fiscal 2004
compared to fiscal 2003. During fiscal 2003, we recognized revenue due to the
sale of a software license associated with our telephone interface products
to
Comrex with a value of $1.1 million while we recognized $130,000 in fiscal
2004.
Excluding the Comrex revenue, the audiovisual integration services revenue
was
consistent from fiscal 2003 to fiscal 2004. Prior to fiscal 2003, we did not
have continuing operations in the business services segment.
Total
Revenue.
Total
revenue decreased $783,000, or 2.3 percent, in fiscal 2004 compared to fiscal
2003 and increased $8.4 million, or 32.1 percent, in fiscal 2003 compared to
fiscal 2002. The overall decrease in revenue during fiscal 2004 was primarily
attributable to a one-time sale of $1.1 million of software license in our
business services segment during fiscal 2003. The increase in revenue during
fiscal 2003 over fiscal 2002 was primarily attributable to revenue from business
services which increased $6.1 million as a result of the acquisition of OM
Video
in early fiscal 2003.
Revenue
from sales outside of the United States accounted for 36.1 percent of total
revenue for fiscal 2004, 43.2 percent of total revenue for fiscal 2003, and
16.1
percent of total revenue for the fiscal 2002.
Costs
of Goods Sold and Gross Profit
Costs
of
goods sold (“COGS”) from the product segment includes expenses associated with
the manufacture of our products, including material and direct labor, our
manufacturing organization, tooling amortization, warranty expense, freight
expense, royalty payments, and the allocation of overhead expenses. COGS from
the business services segment includes expenses associated with operating our
installations services, including material and direct labor, depreciation,
and
an allocation of overhead expenses.
32
|
Year
Ended June 30,
(in
thousands)
|
|||||||||||||||||||
|
2004
|
2003
|
2002
|
|||||||||||||||||
|
%
of Revenue
|
%
of Revenue
|
%
of Revenue
|
|||||||||||||||||
|
Cost
of goods sold
|
|||||||||||||||||||
|
Product
|
$
|
16,379
|
48.3
|
%
|
$
|
18,115
|
52.2
|
%
|
$
|
13,884
|
52.9
|
%
|
|||||||
|
Business
services
|
4,052
|
12.0
|
%
|
4,055
|
11.7
|
%
|
-
|
0.0
|
%
|
||||||||||
|
Total
|
$
|
20,431
|
60.3
|
%
|
$
|
22,170
|
63.9
|
%
|
$
|
13,884
|
52.9
|
%
|
|||||||
|
Gross
profit
|
|||||||||||||||||||
|
Product
|
$
|
11,457
|
33.8
|
%
|
$
|
9,397
|
27.1
|
%
|
$
|
12,369
|
47.1
|
%
|
|||||||
|
Business
services
|
2,006
|
5.9
|
%
|
3,110
|
9.0
|
%
|
-
|
0.0
|
%
|
||||||||||
|
Total
|
$
|
13,463
|
39.7
|
%
|
$
|
12,507
|
36.1
|
%
|
$
|
12,369
|
47.1
|
%
|
|||||||
COGS
decreased by approximately $1.8 million, or 7.8 percent, to $20.4 million in
fiscal 2004 compared with fiscal 2003, and increased by $8.3 million, or 59.7
percent, to $22.2 million in fiscal 2003 compared with $13.9 million in fiscal
2002.
Our
gross
profit from continuing operations was 39.7 percent in fiscal 2004 compared
to
36.1 percent in fiscal 2003, and 47.1 percent in fiscal 2002. The increase
in
gross profit from 36.1 percent in fiscal 2003 to 39.7 percent in fiscal 2004
is
primarily due to reduced inventory write-offs and scrap, outside processing
expenses, and warranty costs. The decrease in gross profit from 47.1 percent
in
fiscal 2002 to 36.1 percent 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 profit percentage, proportionally higher camera and
furniture product revenues resulting from the E.mergent acquisition that carry
a
lower gross profit percentage, lower conferencing services gross profit margins
as a result of increased price competition, and general pricing pressures
resulting from difficult economic conditions.
Operating
Expenses
Our
operating expenses were $25.1 million in fiscal 2004, a decrease of $13.7
million, or 35.4 percent, from $38.8 million in fiscal 2003. Our operating
expenses were $38.8 million in fiscal 2003, an increase of $16.5 million or
73.9
percent, from $22.3 million in fiscal 2002. The decrease in operating expenses
from fiscal 2003 to fiscal 2004 is primarily related to a decrease in impairment
losses and SEC investigation and subsequent litigation-related expenses
partially offset by increased marketing and selling and research and product
development expenses. The increase in operating expenses from fiscal 2002 to
fiscal 2003 is primarily related to increased SEC investigation and subsequent
litigation-related expenses, increased other general and administrative
expenses, and increased impairment losses partially offset by decreased research
and product development and marketing and selling expenses. The following is
a
more detailed discussion of expenses related to marketing and selling, general
and administrative, research and product development, and impairment
losses.
Marketing
and selling expenses.
Marketing and selling expenses include selling, customer service, and marketing
expenses such as employee-related costs, allocations of overhead expenses,
trade
shows, and other advertising and selling expenses. Total marketing and selling
expenses increased $1.4 million, or 20.2 percent, to $8.3 million in fiscal
2004
compared with fiscal 2003 expenses of $6.9 million. Total marketing and selling
expenses decreased $130,000, or 1.9 percent, to $6.9 million in fiscal 2003
compared with fiscal 2002 expenses of $7.0 million. As a percentage of revenues,
marketing and selling expenses were 24.4 percent in fiscal 2004, 19.8 percent
in
fiscal 2003, and 26.7 percent in fiscal 2002. The increase in marketing and
selling expenses from fiscal 2003 to fiscal 2004 was primarily attributable
to
an increase in our United Kingdom sales operations, as well as an increase
in
U.S. employee-related expenses due to an increase of nine employees in the
marketing and sales departments at the end of fiscal 2004 over fiscal 2003.
Marketing and selling expenses remained relatively flat from fiscal 2002 to
fiscal 2003 in absolute dollars but decreased 6.9 percent as a percentage of
revenue.
33
General
and administrative expenses.
General
and administrative (“G&A”) expenses include employee-related costs,
professional service fees, allocations of overhead expenses, litigation costs,
including costs associated with the SEC investigation and subsequent litigation,
and corporate administrative costs, including finance and human resources.
Total
G&A expenses decreased $2.5 million, or 16.2 percent, to $12.9 million in
fiscal 2004 compared with fiscal 2003 expenses of $15.4 million. Total G&A
expenses increased $11.0 million, or 251.9 percent, to $15.4 million in fiscal
2003 compared with fiscal 2002 expenses of $4.4 million. As a percentage of
revenues, G&A expenses were 38.1 percent in fiscal 2004, 44.4 percent in
fiscal 2003, and 16.7 percent in fiscal 2002.
|
Year
Ended June 30,
(in
thousands)
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
Settlement
in shareholders' class action
|
$
|
4,080
|
$
|
7,325
|
$
|
-
|
||||
|
Professional
fees (SEC investigation and subsequent litigation)
|
936
|
1,844
|
-
|
|||||||
|
Professional
fees (Other)
|
1,944
|
1,270
|
586
|
|||||||
|
Other
general and administrative expense
|
7,770
|
7,574
|
4,758
|
|||||||
|
Total
G&A before discontinued operations
|
$
|
14,730
|
$
|
18,013
|
$
|
5,344
|
||||
|
Allocation
of G&A to conferencing services
|
(1,036
|
)
|
(974
|
)
|
(809
|
)
|
||||
|
Allocation
of G&A to business services
|
(787
|
)
|
(1,641
|
)
|
(159
|
)
|
||||
|
Total
G&A from continuing operations
|
$
|
12,907
|
$
|
15,398
|
$
|
4,376
|
||||
We
attribute the decrease in G&A as a percentage of revenues from 44.4 percent
in 2003 to 38.1 percent in 2004 mainly to a $3.2 million reduction in costs
associated with the shareholders’ class action settlement and a $908,000
reduction in professional fees associated with the SEC investigation and
subsequent litigation. These G&A expense reductions were partially offset by
an increase in other professional fees, including accounting and audit fees,
of
$674,000. Additionally, other G&A expenses increased $196,000 including
$544,000 in severance payments to previous Company officers, an increase
of
$231,000 in directors and officers insurance premiums, and an increase of
$110,000 related to increased payments to directors related to an increase
in
the number of meetings and additional interaction with the Company offset
by
decreases in the day-to-day operations associated with our U.S. operations
of
$258,000, the Ireland office of $237,000, and the OM Video office of $157,000.
The $4.1 million in settlement in shareholders’ class action expenses during
fiscal 2004 related to a quarterly mark-to-market of the liability associated
with the 1.2 million shares of common stock to be issued to class members
and
their legal counsel as part of the December 2003 settlement agreement. This
mark-to-market of the stock to reflect the current liability amount associated
with the 1.2 million shares based upon the closing price of the Company’s common
stock at the end of each quarter will continue on a quarterly basis until
the
shares are actually issued.
We
attribute the increase in G&A as a percentage of revenues from 16.7 percent
in 2002 to 44.4 percent in 2003 to the following: costs associated with the
SEC
investigation and subsequent litigation, including a settlement payment
associated with the shareholders’ class action lawsuit in the amount of $5.0
million in cash, $2.5 million of which was paid in January 2005, and $2.5
million in stock and professional fees associated with these lawsuits in the
amount of $1.8 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, increased salary expense of $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
G&A expense of $1.3 million due to the OM Video acquisition and the costs
associated with their day-to-day operations.
Research
and product development expenses.
Research
and product development expenses include research and development, product
management, engineering services, and test and application expenses, including
employee-related costs, outside services, expensed materials, depreciation,
and
an allocation of overhead expenses. Total research and product development
expenses increased $913,000, or 30.5 percent, to $3.9 million in fiscal 2004
compared with fiscal 2003 expenses of $3.0 million. Total research and product
development expenses decreased $815,000, or 21.4 percent, to $3.0 million in
fiscal 2003 compared with fiscal 2002 expenses of $3.8 million. As a percentage
of revenues, research and product development expenses were 11.5 percent in
fiscal 2004, 8.6 percent in fiscal 2003, and 14.5 percent in fiscal 2002. The
increase in product development expenses from fiscal 2003 to fiscal 2004 was
due
to increased salaries and expenses associated with additional personnel and
development costs associated with new audio conferencing product development,
including products in the XAP, RAV, and MAX families, as well as the next
generation ceiling document camera. 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, Ireland office of the acquired Ivron subsidiary. Also, as a percentage
of total revenue, research and product development expenses dropped from 14.5
percent in fiscal 2002 to 8.6 percent in fiscal 2003 due to the addition of
business services revenue in fiscal 2003 that required little or no additional
research-related expenses.
34
Impairment
losses.
In
fiscal 2003, impairment charges related to the conferencing furniture
manufacturing business and Canadian audiovisual integration services business
totaled $323,000 for property and equipment and $13.2 million for goodwill
and
intangible assets. We entered into the conferencing furniture manufacturing
business through the E.mergent acquisition. We entered into the Canadian
audiovisual integration services business through the OM Video acquisition.
The
estimated fair value of the reporting unit, for purposes of evaluating goodwill
for impairment, was less than its carrying values. Additionally, the estimated
undiscounted future cash flows generated by certain other long-lived assets,
excluding goodwill, was less than its carrying value. The impairment analysis
performed in accordance with SFAS No. 142 and SFAS No. 144, resulted in an
impairment loss of $5.1 million for the fiscal year ended June 30, 2003.
Management estimated the fair value of reporting unit 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.
We
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 us to acquire market share in this market segment. However, our entry
into the audiovisual integration services business was perceived as a threat
by
our systems integrators and value-added resellers, since we began competing
against many of them for sales. During the fourth quarter of the fiscal year
ended June 30, 2003, we decided to stop pursuing new U.S. business service
contracts and to de-emphasize the audiovisual integration market serving the
Ottawa, Canada region.
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 $8.4 million for the fiscal year ended June 30, 2003 related
to the OM Video acquisition. 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.
In
fiscal
2002, impairment charges related to the ClearOne and Ivron acquisitions totaled
$72,000 for property and equipment and approximately $7.0 million for goodwill
and intangible assets. During the fiscal year ended June 30, 2002, we
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, we 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, we experienced difficulties in selling
the
acquired video conferencing 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.
Management estimated the fair market value of the long-lived assets using the
present value of expected future discounted cash flows. The analysis resulted
in
an impairment loss of $7.1 million for the fiscal year ended June 30, 2002.
Operating
loss.
For
fiscal 2004, our operating loss decreased $14.7 million, or 55.8 percent, to
$11.6 million on revenue of $33.9 million, from an operating loss of $26.3
million on revenue of $34.7 million in fiscal 2003. The factors affecting this
decrease in operating loss were a decrease in impairment charges for goodwill
and other long-lived assets of $13.5 million, a decrease in general and
administrative expenses of $2.5 million, and an increase in gross profit of
$956,000, partially offset by an increase in marketing and selling expenses
of
$1.4 million and an increase in research and product development expenses of
$913,000.
35
For
fiscal 2003, our operating loss increased $16.4 million, or 164.5 percent,
to
$26.3 million on revenues of $34.7 million, from an operating loss of $9.9
million on revenues of $26.3 million in fiscal 2002. The factors affecting
this
increase in operating loss were an increase in impairment charges for goodwill
and other long-lived assets of $6.4 million and an increase in general and
administrative expenses of $11.0 million, partially offset by a reduction in
research and product development expenses of $815,000, an increase in gross
profit of $138,000, and a decrease in marketing and selling expenses of
$130,000.
Other
income (expense), net.
Other
income (expense), net, includes our interest income, interest expense, capital
gains, gain (loss) on the disposal of assets, and currency gain (loss). Other
expense was ($261,000) in fiscal 2004, an increase of $310,000, or 632.7
percent, from income of $49,000 in fiscal 2003. Other income was $49,000 in
fiscal 2003, a decrease of $239,000, or 83.0 percent, from other income of
$288,000 in fiscal 2002. The increase in other expense in fiscal 2004 was
primarily due to an increase in interest expense related to our Oracle
system-related note payable and an approximate $113,000 loss on disposal of
certain property and equipment. The decrease in other expense in fiscal 2003
was
primarily due to a reduction of interest income based on lower cash and cash
equivalents partially offset by increased interest expense related to our Oracle
system-related note payable.
Net
loss from continuing operations before income taxes.
Net loss
from continuing operations decreased $14.3 million, or 54.7 percent to $11.9
million in fiscal 2004 compared with fiscal 2003 net loss from continuing
operations of $26.2 million. Net loss from continuing operations increased
$16.5
million, or 171.9 percent, to $26.2 million in fiscal 2003 compared with fiscal
2002 net loss from continuing operations of $9.7 million. As a percentage of
revenues, net loss from continuing operations was 35.1 percent in fiscal 2004,
75.7 percent in fiscal 2003, and 36.8 percent in fiscal 2002. We attribute
the
change in loss to the results of operations as described above.
Benefit
for income taxes.
Benefit
for income taxes from continuing operations was $580,000 in fiscal 2004, $1.3
million in fiscal 2003, and $173,000 in fiscal 2002. The benefit for income
taxes from fiscal 2004 and 2003 resulted primarily from losses from continuing
operations that were available for carryback for tax refunds from prior years
and from offsetting the current year income from discontinued operations. The
benefit for income taxes from fiscal 2002 resulted from offsetting losses from
continuing operations against income from discontinued operations. Certain
expenses in our consolidated statements of operations are not deductible for
income tax purposes. These expenses include impairment charges, certain meals
and entertainment expenses, and certain 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 non-deductible
expenses and the increased valuation allowance were the primary reasons for
our
tax benefit being different from the expected tax (expense) benefit. Given
the
Company’s history of three consecutive years of operating losses, we followed
the guidance of SFAS 109, “Accounting for Income Taxes,” and 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.
As of June 30, 2004, we fully reserved against our net deferred tax assets.
(Loss)
income from discontinued operations, net of tax. (Loss)
income from discontinued operations, net of tax, includes our conferencing
services segment which was sold on July 1, 2004, our U.S. audiovisual
integration services business which was sold on May 6, 2004, and payments
received on our note receivable and commissions related to the sale of our
remote control product line to Burk Technology in April 2001. The income from
discontinued operations was $1.4 million in fiscal 2004, an increase of $12.4
million or 112.8 percent, from ($11.0 million) loss in fiscal 2003. Conferencing
services revenue were $15.6 million in fiscal 2004, an increase of $310,000,
from revenue of $15.3 million in fiscal 2003. Conferencing services income,
net
of tax, was $1.8 million for fiscal 2004, a decrease of $354,000, from income,
net of tax, of $2.1 million in fiscal 2003. U.S. audiovisual integration
services business revenue were $3.6 million in fiscal 2004, a decrease of $4.0
million, from revenue of $7.6 million in fiscal 2003. U.S. audiovisual
integration services business loss, net of tax, was ($399,000) in fiscal 2004,
a
decrease of $13.0 million, from a loss, net of tax, of ($13.4) million in fiscal
2003. The decrease in the loss was mostly due to an impairment charge of $12.5
million in fiscal 2003 not being repeated in fiscal 2004 and a reduction in
new
U.S. business services contracts being pursued. We realized a gain, net of
tax,
on the Burk sale of $58,000 for fiscal 2004, a decrease of $142,000, from a
gain, net of tax, of $200,000 in fiscal 2003. The decrease was due to Burk
deferring payments on the promissory note based on their quarterly net sales
not
meeting levels established within the agreement.
36
The
loss
from discontinued operations was ($11.0 million) in fiscal 2003, an increase
of
$13.8 million or 491.8 percent, from income from discontinued operations of
$2.8
million in fiscal 2002. Conferencing services revenue were $15.3 million in
fiscal 2003, a decrease of $315,000, from revenue of $15.6 million in fiscal
2002. Conferencing services income, net of tax, was $2.1 million for fiscal
2003, a decrease of $372,000, from income, net of tax, of $2.5 million in fiscal
2002. U.S. audiovisual integration services business revenue were $7.6 million
in fiscal 2003, an increase of $6.1 million, from revenue of $1.5 million in
fiscal 2002. The increase was due to our acquisition of E.mergent on May 31,
2002 and recognizing revenue for twelve months in fiscal 2003 rather than one
month as in fiscal 2002. U.S. audiovisual integration services business loss,
net of tax, was ($13.4 million) in fiscal 2003, a decrease of $13.5 million,
from income, net of tax, of $162,000 in fiscal 2002. The increase in the loss
was mostly due to impairment charges of $12.5 million in fiscal 2003. We
realized income, net of tax, on the Burk sale of $200,000 for fiscal 2003,
an
increase of $24,000, from income, net of tax, of $176,000 in fiscal 2002. The
increase was associated with a commission payment and a partial note payment
received during fiscal 2003.
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 an audiovisual integration business services segment to our
business. See Item 1. Description of Business. Acquisitions
and Dispositions
for more
details. Total consideration paid in cash and through the issuance of common
stock to acquire these companies was approximately $39.9 million.
As
a
result of the impairment tests performed effective as of the end of fiscal
2003
and fiscal 2002 according to SFAS No. 121, 142, and 144, we recorded impairment
charges for all goodwill, a portion of purchased intangibles, and substantially
all property and equipment for each entity. Impairment losses totaled
approximately $33.1 million on our statements from continuing and discontinued
operations. Between the end of fiscal 2002 and the third quarter of fiscal
2005,
we had disposed of or abandoned substantially all the assets and operations
of
the four acquired companies due to technology issues and the 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
and
Discontinued
Operations
below
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 product development to release new products that are
in-line with our core competencies and that complement our existing product
lines.
DISCONTINUED
OPERATIONS
Burk
Technology, Inc.
On
April
12, 2001, we sold the assets of the remote control portion of our RFM/Broadcast
division to Burk Technology, Inc. (“Burk”) for $750,000 in cash at closing, $1.8
million in the form of a seven-year promissory note, with interest at the rate
of 9.0 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 could be deferred based
upon
Burk not meeting net quarterly sales levels established within the agreement.
We
realized a gain, net of tax, on the sale of $58,000 for fiscal 2004, $200,000
for fiscal 2003, and $176,000 for fiscal 2002. As of June 30, 2004, $1.5 million
of the promissory note remained outstanding and we had received $20,000 in
commissions.
On
August
22, 2005, we entered into a Mutual Release and Waiver Agreement with Burk
pursuant to which Burk paid us $1.3 million in full satisfaction of the
promissory note, which included a discount of approximately $120,000. As part
of
the Mutual Release and Waiver Agreement, we waived any right to future
commission payments from Burk and we granted mutual releases to one another
with
respect to claims and liabilities. Subsequent to June 30, 2004, we anticipate
recognizing a pre-tax gain on the sale of approximately $1.5
million.
37
M:Space,
Inc. - U.S. Audiovisual Integration Services
During
the fourth quarter of the fiscal year ended June 30, 2003, we decided to stop
pursuing new U.S. business services contracts and impaired the U.S. acquired
business services assets. We did not prepare any formal disposition plan and
existing customers continued to be serviced. We decided to sell the U.S.
audiovisual integrations services because many of our existing systems
integrators and value-added resellers perceived our entry into the business
services arena as a threat since we began competing against these same customers
for sales, as well as our desire to return to our core competency in the audio
conferencing products segment. U.S. audiovisual integration services revenue,
reported in discontinued operations, were $3.6 million in fiscal 2004, $7.6
million in fiscal 2003, and $1.5 million in fiscal 2002. U.S. audiovisual
integration services pretax (loss) income, reported in discontinued operations,
were ($360,000) for the year ended June 30, 2004, ($14.1 million) for the year
ended June 30, 2003, and $258,000 for the year ended June 30, 2002.
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 $573,000.
We
realized a pre-tax loss on the sale of $276,000 for the fiscal year ended June
30, 2004.
Conferencing
Services
In
April
2004, our Board of Directors appointed a committee to explore sales
opportunities to sell the conferencing services business segment. We decided
to
sell this segment primarily because of decreasing margins and investments in
equipment that would have been required in the near future. The proceeds from
the sale will be used to fund product development as we return to our core
competency in the audio conferencing products segment. Conferencing services
revenue, reported in discontinued operations, were $15.6 million in fiscal
2004,
$15.3 million in fiscal 2003, and $15.6 million in fiscal 2002. Conferencing
services pretax income, reported in discontinued operations, were $2.8 million
for the year ended June 30, 2004, $3.4 million for the year ended June 30,
2003,
and $4.0 million for the year ended June 30, 2002.
On
July
1, 2004, we sold our conferencing services business segment to Premiere.
Consideration for the sale consisted of $21.3 million in cash. 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
Premiere. We expect to realize a pre-tax gain on the sale of approximately
$17.5
million during the fiscal year ended June 30, 2005. As of November 30, 2005,
the
$1.0 million remained in the Indemnity Escrow account.
SALE
OF OTHER ASSETS
Sale
of Court Conferencing Assets
As
part
of our conferencing services operating 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.
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 $130,000 in fiscal 2004 and $1.1 million in fiscal 2003 in revenue
related to this transaction.
38
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 percent. Given the future revenue stream
associated with each unit produced, revenue will be recognized when-and-if
received. During fiscal 2004 and fiscal 2003, we have recognized $387,000 and
$783,000, respectively, in revenue related to the manufacture of additional
product from Comrex.
SUBSEQUENT
EVENTS
Sale
of Conferencing Services Business.
On July
1, 2004, we sold our conferencing services business segment to Premiere 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 Premiere. 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. We
classified the conferencing services operations as discontinued operations
in
the consolidated financial statements.
Settlement
Agreement and Release. In
connection with the sale of our conferencing services business, we entered
into
a severance agreement with Angelina Beitia, our former Vice-President, on July
15, 2004, which provided for a lump-sum payment of $100,000. In addition, Ms.
Beitia surrendered and delivered to us all outstanding vested and unvested
options.
Pre-payment
of Note Payable. We
pre-paid the balance of our note payable related to our Oracle Enterprise
Resource Planning implementation in the amount of $769,000 in October
2004.
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
in fiscal 2005 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
5.3
percent per year; and contingent consideration ranging from 3.0 percent to
4.0
percent of related gross revenues over a five-year period. We expect to present
all OM Video activities in discontinued operations in the fiscal year 2005
consolidated financial statements. As of June 30, 2004, 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. To date, OM Purchaser has made all payments required under the note and
we
are continuing to evaluate what impact, if any, this settlement may have on
the
OM Purchaser’s ability to make the payment required under the
note.
The
Shareholders’ Class Action. On
January 14, 2005, we paid the second cash payment of $2.5 million as agreed
to
in the settlement agreement dated December 4, 2003. On May 23, 2005, the court
order was amended to require us 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. On September 29, 2005, we completed our obligations under
the
settlement agreement by issuing a total of 1,148,494 shares of our common stock
to the plaintiff class, including 228,000 shares previously issued in November
2004, and we paid an aggregate of $127,000 in cash in lieu of shares to those
members of the class who would otherwise have been entitled to receive an
odd-lot number of shares or who resided in states in which there was no
exemption available for the issuance of shares. The cash payments were
calculated on the basis of $2.46 per share which was equal to the higher of
(i)
the closing price for our common stock as reported by the Pink Sheets on the
business day prior to the date the shares were mailed, or (ii) the average
closing price over the five trading days prior to such mailing
date.
39
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, 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 90 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 $425,000 including severance payments,
facilities we no longer use, and fixed assets that will be disposed
of.
Payoff
of Burk Note Receivable.
On
August 22, 2005 we entered into a Mutual Release and Waiver with Burk pursuant
to which Burk paid us $1.3 million in full satisfaction of the promissory note,
which included a discount of approximately $120,000. As part of the Mutual
Release and Waiver Agreement, we waived any right to future commission payments
from Burk and we granted mutual releases to one another with respect to claims
and liabilities. Subsequent to June 30, 2004, we anticipate recognizing a
pre-tax gain on the sale of approximately $1.5 million.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
June 30, 2004, our cash and cash equivalents were approximately $4.2 million
and
our marketable securities were approximately $1.8 million, which represented
an
overall decrease of $2.3 million in our balances from June 30, 2003 which were
cash and cash equivalents of approximately $6.1 million, restricted cash of
approximately $200,000 and our marketable securities of approximately $1.9
million. We had 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.
Net
cash
flows provided by operating activities were $1.1 million in fiscal 2004,
a
decrease of $1.4 million, from the net cash flows provided by operating
activities of $2.5 million in fiscal 2003. The decrease was attributable
to a
decrease of $11.8 million in non-cash expenses from fiscal 2003, a decrease
of
$2.4 million in cash provided by changes in working capital, and a $815,000
decrease in cash provided by discontinued operations, partially offset
by a
decrease in net loss from continuing operations of $13.6 million.
Net
cash
flows provided by operating activities were $2.5 million in fiscal 2003,
an
increase of $2.0 million, from the net cash flows provided by operating
activities of $515,000 in fiscal 2002. The increase was attributable to
an
increase of $6.3 million in cash provided from changes in working capital,
an
increase of $10.4 million in non-cash expenses, and a $836,000 increase in
cash provided by discontinued operations, partially offset by an increase
in net
loss from continuing operations of $15.4 million.
Net
cash
flows used in investing activities were ($1.5 million) in fiscal 2004, a
decrease of $2.8 million, from the net cash flows provided by investing
activities of $1.3 million in fiscal 2003. The decrease was primarily
attributable to a reduction in the net sales of marketable securities of
$10.3
million off set by a reduction in cash paid for acquisitions of $7.4
million.
Net
cash
flows provided by investing activities were $1.3 million in fiscal 2003,
an
increase of $30.6 million, from the net cash flows used in investing activities
of ($29.3 million) in fiscal 2002. The increase was mostly attributable to
net
purchases of marketable securities decreased by $22.9 million and a reduction
of
cash used in discontinued investing activities of $4.4 million partially
offset
by cash paid for acquisitions of $2.5 million.
Net
cash
flows used in financing activities were ($1.5 million) in fiscal 2004, a
decrease of $2.0 million, from the net cash flows provided by financing
activities of $465,000 in fiscal 2003. This decreased was primarily attributable
to a decrease in new borrowings related to our Oracle Enterprise Resource
Planning implementation of $2.0 million partially offset by an increase of
payments on long-term debt and capital leases of $209,000.
40
Net
cash
flows provided by financing activities were $465,000 in fiscal 2003, a decrease
of $23.2 million, from the net cash flows provided by financing activities
of
$23.7 million in fiscal 2002. This decrease was primarily attributable to
a
decrease in proceeds from the sale of common shares, including the exercise
of
stock options and the issuance of common stock under the employee stock purchase
plan partially offset by new borrowings in fiscal 2003 received under a note
payable of $2.0 million used for our Oracle Enterprise Resource Planning
implementation.
At
June
30, 2004, we had open purchase orders related to our contract manufacturers
and
other contractual obligations of approximately $98,000 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, 2004 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
|
$
|
970
|
$
|
728
|
$
|
242
|
$
|
-
|
$
|
-
|
||||||
|
Capital
Leases
|
9
|
7
|
2
|
-
|
-
|
|||||||||||
|
Operating
Leases
|
1,341
|
676
|
642
|
23
|
-
|
|||||||||||
|
Total
Contractual Cash Obligations
|
$
|
2,320
|
$
|
1,411
|
$
|
886
|
$
|
23
|
$
|
-
|
||||||
As
detailed elsewhere in this filing, on July 1, 2004, we sold our conferencing
services business segment to Clarinet, Inc. an affiliate of American
Teleconferencing Services, Ltd. doing business as Premiere Conferencing
(“Premiere”) 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.
As
previously discussed, 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. 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
5.3 percent per year; and contingent consideration ranging from 3.0 percent
to
4.0 percent of related gross revenues over a five-year period. 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. To date, OM Purchaser has made all payments required under the note and
we
are continuing to evaluate what impact, if any, this settlement may have on
the
OM Purchaser’s ability to make the payment required under the
note.
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”) for
$750,000 in cash at closing, $1.8 million in the form of a seven-year promissory
note, with interest at the rate of 9.0 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. We realized a gain on the sale, net of tax,
of
$58,000 for fiscal 2004, $200,000 for fiscal 2003, and $176,000 for fiscal
2002.
Subsequent to June 30, 2004, we anticipate recognizing a pre-tax gain of
approximately $1.5 million.
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 audits of our consolidated financial statements. Restatement
of fiscal 2002 and fiscal 2001 consolidated financial statements 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 $2.5 million in fiscal 2004, $2.5 million in fiscal 2005,
and $127,000 in fiscal 2006 in cash to settle the shareholders’ class action
lawsuit. We have incurred legal fees in the amount of approximately $1.8 million
from January 2003 through the date hereof and we have incurred audit and tax
fees in the amount of approximately $3.0 million from January 2004 through
the
date hereof.
41
Notwithstanding
the foregoing, as of the date of this filing, we believe that our working
capital and cash flows from operating activities will be sufficient to satisfy
our operating and capital expenditure requirements through calendar
2006.
ISSUED
BUT NOT YET ADOPTED ACCOUNTING PRONOUNCEMENTS
Variable
Interest Entities
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
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.
Financial
Instruments
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 and do not expect that it will have
a
material effect on our business, results of operations, financial position,
or
liquidity.
Other-Than-Temporary
Impairment
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 SFAS 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.
Inventory
Costs
In
November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs - an
amendment of ARB No. 43” (“SFAS 151”), which is the result of its efforts to
converge U.S. accounting standards for inventories with International Accounting
Standards. SFAS 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. SFAS 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.
42
Share-Based
Payment
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 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.
Accounting
Changes and Error Corrections
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
a Replacement of APB Opinion No. 20 and FASB Statement No. 3” in order to
converge U.S. Accounting Standards with International Accounting Standards.
SFAS
No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles required recognition of a cumulative effect adjustment within net
income of the period of the change. SFAS No. 154 requires retrospective
application to prior periods’ financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of
the
change. SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, it does not change the transition
provisions of any existing accounting pronouncements. We do not believe the
adoption of SFAS No. 154 will have a material effect on our business, results
of
operations, financial position, or liquidity.
Accounting
for Asset Retirement Obligations in the European Union
In
June
2005, the FASB issued a FASB Staff Position (“FSP”) interpreting SFAS No. 143,
“Accounting for Asset Retirement Obligations,” specifically FSP
143-1,
“Accounting for Electronic Equipment Waste Obligations” (“FSP 143-1”). FSP
143-1
addresses the accounting for obligations associated with Directive 2002/96/EC,
Waste Electrical and Electronic Equipment, which was adopted by the European
Union (“EU”). The FSP provides guidance on how to account for the effects of the
Directive but only with respect to historical waste associated with products
placed on the market on or before August 13, 2005. FSP
143-1
is
effective the later of the first reporting period ending after June 8, 2005,
or
the date of the adoption of the law by the applicable EU-member country.
Management
is currently evaluating the impact of FSP
143-1.
43
|
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
$940,000 at June 30, 2004. We do not have significant exposure to changing
interest rates on the note payable and capital leases because interest rates
on
the note payable and 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. We do not purchase or hold any derivative financial instruments.
A
hypothetical 10 percent change in market interest rates over the next year
would
not have a material effect on our business, results of operations, financial
condition, or cash flows as the interest rates on the note payable and the
majority of the capital leases are fixed.
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
percent adverse change in foreign currency exchange rates from the June 30,
2004
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. A
hypothetical one percent change in market interest rates over the next year
on
our marketable securities of $1.8 million at June 30, 2004 would not have a
material effect on our business, results of operations, financial condition,
or
cash flows.
44
|
ITEM
8.
|
FINANCIAL
STATEMENTS.
|
The
response to this item is submitted as a separate section of this Form 10-K
beginning on page F-1.
|
ITEM
9.
|
CHANGE
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
KPMG
On
October 28, 2005, KPMG LLP (“KPMG”) was dismissed as principal accountants for
the Company effective upon the completion of the audit of the Company’s
consolidated financial statements as of and for the fiscal year ended June
30,
2004 and the issuance of its report thereon. These financial statements are
included in this Form 10-K beginning on page F-1.
KPMG’s
report on the Company’s consolidated financial statements as of and for the
fiscal year ended June 30, 2004 did not contain an adverse opinion or disclaimer
of opinion and was not qualified or modified as to uncertainty, audit scope,
or
accounting principles. KPMG’s report on the Company’s consolidated financial
statements as of and for the fiscal years ended June 30, 2003 and 2002 did
not
contain an adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope, or accounting principles, except as
follows:
KPMG’s
report on the consolidated financial statements of the Company as of and for
the
years ended June 30, 2003 and 2002 contained a separate paragraph stating “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.” KPMG’s report on the
consolidated financial statements of the Company as of and for the years ended
June 30, 2004, 2003, and 2002 contained a separate paragraph stating “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.”
In
connection with its audit for the fiscal years ended June 30, 2004 and 2003,
and
during the course of KPMG’s audit of fiscal year ended June 30, 2004 and the
subsequent interim period through November 28, 2005, there were (1) no
disagreements with KPMG on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused
KPMG to make reference to the subject matter of the disagreements in connection
with its report, and (2) no events of the type listed in paragraphs (A) through
(D) of Item 304(a)(1)(v) of Regulation S-K, except that 1) KPMG reported
in a
letter to the Company's Audit Committee dated December 15, 2005 that during
its
audit of the Company's consolidated financial statements as of and for the
fiscal year ended June 30, 2004, it noted material weaknesses in internal
controls related to: accounting for revenue recognition and related sales
returns, credit memos, and allowances; accounting for cutoff and period-end
close adjustments related to accrued liabilities and prepaid assets; the
tracking and valuation of inventory; accounting for non-routine transactions;
the timeliness and adequacy of the monthly close process; and the lack of
personnel with adequate experience in preparing financial statements and
related
footnotes in accordance with U.S. generally accepted accounting principles,
and
2) KPMG reported in a letter to the Company's Audit Committee dated August
16,
2005 that during its audit of the Company's consolidated financial statements
as
of and for the fiscal years ended June 30, 2003 and 2002, it noted material
weaknesses in internal controls related to: accounting for revenue recognition
and related sales returns, credit memos, and allowances; accounting for cutoff
and period-end close adjustments related to accrued liabilities and prepaid
assets; the tracking and valuation of inventory; accounting for leases;
accounting for non-routine transactions; and the lack of personnel with adequate
experience in preparing financial statements and related footnotes in accordance
with U.S. generally accepted accounting principles. The Audit Committee and
the
Company's management discussed such material weaknesses in internal controls
with KPMG, and the Company has authorized KPMG to respond fully to the inquiries
of the Company’s new principal accountant with respect
thereto.
45
Hansen, Barnett & Maxwell
On
October 28, 2005, the Company engaged Hansen, Barnett & Maxwell, A
Professional Corporation (“HBM”), as its new principal accountants to audit the
Company’s financial statements for the fiscal year ended June 30, 2005. The
Audit Committee of the Company’s Board of Directors recommended and approved the
engagement of HBM.
During
the Company’s two most recent fiscal years and through October 28, 2005, the
Company did not consult HBM with respect to (i) the application of accounting
principles to a specified transaction, either completed or proposed; or the
type
of audit opinion that might be rendered on the Company's consolidated financial
statements; or (ii) any matter that was either the subject of a disagreement
(as
defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions
to
that Item) or a reportable event (as described in Item 304(a)(1)(v) of
Regulation S-K).
The
dismissal of KPMG and engagement of HBM as the Company’s principal accountants
were discussed on a November 2, 2005 Form 8-K.
|
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 Interim Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure.
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 Interim 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, 2004. In conducting this evaluation, we considered matters relating
to
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. See Form 10-K for the year ended
June 30, 2003, Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations. Restatements
and Reclassifications of Previously Issued Consolidated Financial
Statements.
We
concluded that as of June 30, 2004, 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.
Accounting policies and practices over revenue recognition and sales
returns were inconsistent with United States GAAP. As a result, we
improperly accelerated revenue recognition. Policies and practices
did not
properly consider the ability to estimate
returns.
|
|
·
|
We
have a material weakness related to accounting for cutoff and period-end
close adjustments related to accrued liabilities and prepaid assets.
Accounting policies and practices over cutoff and period-end close
adjustments related to accrued liabilities and prepaid assets were
inconsistent with U.S. GAAP. This material weakness resulted in recording
accruals and amortizing certain prepaid assets to operating
expenses in 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. Accounting policies and practices over tracking
and
valuation of inventory, including controls to identify and properly
account for slow-moving or obsolete inventory were inconsistent with
U.S.
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 non-routine transactions,
which
include discontinued operations, and evaluation and recognition of
impairment charges. Accounting policies and practices over accounting
for
such non-routine transactions were inconsistent with U.S. GAAP. This
material weakness resulted in 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, and improper evaluation of triggering
events associated with impairment of long-lived assets.
|
|
·
|
We
have a material weakness in the timeliness and adequacy of the monthly
close process. We lack personnel with adequate experience in accounting
matters to analyze and interpret accounting data in a timely
manner.
|
46
|
·
|
We
have a material weakness in financial reporting. We lack personnel
with
adequate experience in preparing financial statements and related
footnotes in accordance with U.S.
GAAP.
|
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.
|
|
·
|
Hiring
of accounting personnel with experience in accounting matters and
financial reporting.
|
|
·
|
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 non-routine and complex transactions,
account reconciliation procedures, and contract management
procedures.
|
|
·
|
On-going
training and monitoring by management to ensure operation of controls
as
designed.
|
|
·
|
Adoption
of a Code of Ethics.
|
|
·
|
Establishment
of a Disclosure Committee of members of Company management with the
purpose of reviewing disclosures to be made to the investment community
or
to shareholders to gauge that the disclosures are accurate and complete
and that the disclosures fairly present the Company’s financial condition
and results of operations in all material
respects.
|
We
have
committed considerable resources to date, to the reviews and remedies described
above, although certain of such items are on-going as of this filing date,
and
it will take time to realize all the benefits. Additional efforts will be
required to remediate all of these material weaknesses 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.
47
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, Utah. 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, Utah. 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 Certified Public
Accountants.
|
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
|
48
|
Harry
Spielberg
|
Harry
Spielberg joined our Board of Directors 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
|
David
Weiner was a member of our Board of Directors until January 2005 when he
resigned his position.
Director
Committees
Our
Board
of Directors currently has two standing committees; namely, 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 (Chair). 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 (Chair).
Meetings
of the Board of Directors and Committees
The
Board
of Directors held twelve meetings during fiscal 2004. The audit committee held
21 meetings during fiscal 2004. The compensation committee held 2 meetings
during fiscal 2004. In 2004, each director attended at least 75 percent of
the
meetings of the Board of Directors and the committees on which they served.
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
Executive
Officers
Our
executive officers as of the date of this filing are as follows:
|
Name
|
Age
|
Position
|
||
|
Zeynep
“Zee” Hakimoglu
|
52
|
President
and Chief Executive Officer
|
||
|
Craig
E. Peeples
|
38
|
Interim
Chief Financial Officer and Corporate Controller
|
||
|
Tracy
A. Bathurst
|
41
|
Vice-President
of Product Line Management
|
||
|
DeLonie
N. Call
|
52
|
Vice-President
of Human Resources and Corporate Secretary
|
||
|
Werner
H. Pekarek
|
56
|
Vice-President
of Operations
|
||
|
Joseph
P. Sorrentino
|
50
|
Vice-President
of Worldwide Sales and Marketing
|
49
|
Zee
Hakimoglu
|
Zee
Hakimoglu joined us in December 2003 with more than 15 years of executive
and senior-level, high-tech management experience and was appointed
as
President and Chief Executive Officer in July 2004. 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 of Science Degree
in
Physics from California State College, Sonoma, and a Master’s Degree in
Physics from Drexel University.
|
|
|
Craig
Peeples
|
Craig
Peeples joined us in August 2005 as our Corporate Controller with
more
than 15 years of diverse financial experience and was appointed as
Interim
Chief Financial Officer in September 2005. From May 2001 to August
2005,
Mr. Peeples held various positions at Mrs. Fields Famous Brands,
a public
reporting franchisor/retailer of premium snack foods, including Director
of Compliance & Audits and TCBY Controller. Mr. Peeples was the
Vice-President and Corporate Controller for TenFold Corporation,
a public,
software company, from March 2000 to March 2001. From September 1993
to
March 2000, Mr. Peeples worked in the assurance and business advisory
practice of Arthur Andersen LLP, at the time a "Big-6" public accounting
firm, most recently with the title Experienced Manager. Mr. Peeples
is a
graduate of the Marriott School of Management at Brigham Young University
where he earned his Master of Accountancy and cum Laude Bachelor
of
Science degrees concurrently. Mr. Peeples is a Utah-state licensed
certified public accountant and a member of the American Institute
of
Certified Public Accountants.
|
|
|
Tracy
Bathurst
|
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
|
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 of Science Degree in Business Management
and Economics.
|
|
|
Werner
Pekarek
|
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 was 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 also 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. Mr. Pekarek earned a Bachelor
of
Science Degree in Electrical Engineering from the University of Paderborn
in Germany.
|
50
|
Joseph
Sorrentino
|
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. 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 of Science Degree from San Jose
State
University.
|
Compliance
with Section 16(a) of the Exchange Act (Beneficial Ownership Reporting
Compliance)
Section
16(a) of the Exchange Act, as amended, requires our directors and executive
officers, and persons who own more than 10 percent 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 percent 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 3 dated November
14, 2003 for Charles A. Callis, former Vice-President of International
Operations; (ii) the Form 3 dated July 27, 2004 for David Hubbard, former
Vice-President of Operations; and (iii) the Form 3 dated July 27, 2004 for
Donald E. Frederick, former Chief Financial Officer.
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 2004, our next four most highly compensated executive officers
who
were serving as executive officers on June 30, 2004 and two additional persons
who had served as executive officers during a portion of 2004 but were no longer
serving in such positions on June 30, 2004 (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, 2004.
51
SUMMARY
COMPENSATION TABLE
|
Annual
Compensation
|
Long-Term
Compensation
|
|||||||||||
|
Awards
|
Payouts
|
|||||||||||
|
Name
and Position
|
Fiscal
Year
|
Salary
|
Paid
Bonus
|
Other
Annual
Compen-
sation1
|
Securities
Under-
lying
Options
/SARS
|
All
Other
Compen-
sation2
|
||||||
|
Chief
Executive Officers During Fiscal 2004
|
||||||||||||
|
Michael
Keough
|
2004
|
$203,457
|
$41,000
|
-
|
150,000
|
$46,154
|
||||||
|
Chief
Executive Officer and President 3
|
||||||||||||
|
2003
|
$119,230
|
-
|
-
|
50,000
|
-
|
|||||||
|
Frances
M. Flood
|
2004
|
$115,385
|
-
|
-
|
-
|
$306,000
|
||||||
|
President
and Chief Executive Officer 4
|
||||||||||||
|
2003
|
$231,199
|
-
|
-
|
300,000
|
$1,095
|
|||||||
|
2002
|
$179,615
|
$76,006
|
-
|
100,000
|
$2,148
|
|||||||
|
Executive
Officers as of June 30, 2004
|
||||||||||||
|
Charles
A. Callis
|
2004
|
$140,000
|
$41,200
|
-
|
105,000
|
-
|
||||||
|
Vice
President 5
|
||||||||||||
|
2003
|
$75,385
|
-
|
-
|
-
|
-
|
|||||||
|
Angelina
Beitia
|
2004
|
$135,000
|
$27,675
|
-
|
105,000
|
$810
|
||||||
|
Vice
President 6
|
||||||||||||
|
2003
|
$116,226
|
-
|
$400
|
15,000
|
-
|
|||||||
|
2002
|
$118,462
|
$5,000
|
$2,005
|
-
|
$3,900
|
|||||||
|
DeLonie
N. Call
|
2004
|
$100,000
|
$20,500
|
-
|
105,000
|
$600
|
||||||
|
Vice
President
|
||||||||||||
|
2003
|
$97,660
|
-
|
-
|
15,000
|
$946
|
|||||||
|
2002
|
$62,308
|
$2,000
|
-
|
25,000
|
$900
|
|||||||
|
Zee
Hakimoglu
|
2004
|
$75,293
|
$2,359
|
-
|
50,000
|
$388
|
||||||
|
Vice-President
7
|
||||||||||||
|
Former
Executive Officers
|
||||||||||||
|
Gregory
L. Rand
|
2004
|
$106,672
|
$30,750
|
-
|
72,000
|
$75,000
|
||||||
|
President
and Chief Operating Officer 8
|
||||||||||||
|
2003
|
$130,256
|
-
|
-
|
50,000
|
-
|
|||||||
|
George
E. Claffey
|
2004
|
$127,949
|
$30,750
|
-
|
120,000
|
$61,192
|
||||||
|
Chief
Financial Officer 9
|
||||||||||||
|
2003
|
$60,000
|
-
|
-
|
-
|
-
|
|||||||
____________
|
1
|
The
Company did not pay or provide perquisites or other benefits during
the
periods indicated by 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, or severance compensation on behalf of the named executive
officers.
|
|
3
|
Mr.
Keough was employed as an executive officer from November 18, 2002
to June
16, 2004. Mr. Keough served as our Chief Executive Officer from January
21, 2003 to June 16, 2004. Mr. Keough received a total severance
payment
of $46,154.
|
52
|
4
|
Ms.
Flood was on paid administrative leave from January 21, 2003 to December
5, 2003. Ms. Flood’s employment and position as an executive officer
terminated on December 5, 2003. As discussed herein, Ms. Flood entered
into an employment separation agreement with the Company pursuant
to which
she received a total payment of $350,000 and she returned to the
Company
for cancellation 35,000 shares of the Company’s common stock valued by the
Company at $44,000 and 706,434 stock options (461,433 of which were
vested). The Company booked $306,000 of the $350,000 as severance
compensation.
|
|
5
|
Mr.
Callis was employed as an executive officer from December 9, 2002
to
September 17, 2004. He served as our Vice-President of International
Operations from December 9, 2002 to January 22, 2004 and as our
Vice-President of Worldwide Sales from January 22, 2004 to September
17,
2004.
|
|
6
|
Ms.
Beitia’s employment and position as an executive officer terminated on
July 1, 2004 in connection with the sale of our conferencing services
business segment to Premiere.
|
|
7
|
Ms.
Hakimoglu served as our Vice-President of Product Line Management
from
December 2003 to July 8, 2004. On July 8, 2004, Ms. Hakimoglu was
named as
our President and Chief Executive
Officer.
|
|
8
|
Mr.
Rand was employed as an executive officer on from August 12, 2002
to
February 27, 2004. Mr. Rand received a total severance payment of
$75,000.
|
|
9
|
Mr.
Claffey was employed as an executive officer on from January 28,
2003 to
April 6, 2004. Mr. Claffey received a total severance payment of
$61,192.
|
Options/SAR
Grants in Last Fiscal Year
The
following table sets forth the stock option grants made to the named executive
officers for fiscal 2004. We did not grant any stock appreciation rights, or
SARs, to the named executive officers during fiscal 2004.
The
exercise price per share of each option granted was equal to the closing price
of our common stock on the date of grant.
OPTION
GRANTS IN FISCAL YEAR ENDED JUNE 30, 2004
(INDIVIDUAL
GRANTS)
|
Number
of
Securities
Underlying
Options
|
Percent
of
Total
Options
Granted
to
Employees
|
Exercise
or
Base
|
Expiration
|
Potential
Realizable
Value
of Assumed
Annual
Rate of
Stock
Price
Appreciation
for
Option
Term4
|
||||||||
|
Name
and Position
|
Granted
(#)
|
in
Fiscal Year1
|
Price
($/Sh)
|
Date
|
5%($)
|
10%($)
|
||||||
|
Chief
Executive Officer During Fiscal 2004
|
||||||||||||
|
Michael
Keough
|
90,0002
|
8%
|
$2.80
|
11/12/2013
|
$179,006
|
$466,985
|
||||||
|
60,0002
|
6%
|
$6.40
|
3/24/2014
|
$272,770
|
$711,597
|
|||||||
|
Frances
M. Flood
|
-
|
-
|
$-
|
-
|
$-
|
$-
|
||||||
|
Executive
Officers as of June 30, 2004
|
||||||||||||
|
|
||||||||||||
|
Charles
A. Callis
|
63,0003
|
6%
|
$2.80
|
11/12/2013
|
$125,301
|
$326,890
|
||||||
|
42,0003
|
4%
|
$6.40
|
3/24/2014
|
$190,939
|
$498,118
|
|||||||
|
|
||||||||||||
|
Angelina
Beitia
|
63,0003
|
6%
|
$2.80
|
11/12/2013
|
$125,301
|
$326,890
|
||||||
|
42,0003
|
4%
|
$6.40
|
3/24/2014
|
$190,939
|
$498,118
|
|||||||
|
|
||||||||||||
|
DeLonie
N. Call
|
63,0003
|
6%
|
$2.80
|
11/12/2013
|
$125,301
|
$326,890
|
||||||
|
42,0003
|
4%
|
$6.40
|
3/24/2014
|
$190,939
|
$498,118
|
|||||||
|
|
||||||||||||
|
Zee
Hakimoglu
|
50,0002
|
5%
|
$6.40
|
3/24/2014
|
$227,309
|
$592,997
|
||||||
|
|
||||||||||||
|
Former
Executive Officers
|
|
|||||||||||
|
|
||||||||||||
|
Gregory
L. Rand
|
72,0003
|
7%
|
$2.80
|
11/12/2013
|
$143,204
|
$373,588
|
||||||
|
|
||||||||||||
|
George
E. Claffey
|
72,0003
|
7%
|
$2.80
|
11/12/2013
|
$143,204
|
$373,588
|
||||||
|
48,0003
|
4%
|
$6.40
|
3/24/2014
|
$218,216
|
$569,227
|
|||||||
53
____________
|
1.
|
Based
on aggregate of 1,087,500 shares subject to options granted to our
employees in 2004, including the named executive
officers.
|
|
2.
|
The
options have a ten-year term and vest over a three-year period with
one-third vesting on the first anniversary of the grant date and
the
remaining two-thirds vesting in equal monthly installments over the
remaining 24-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.
|
|
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.
|
|
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 percent or 10 percent 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
percent and 10 percent 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.
|
Aggregated
Option/SAR Exercises and Fiscal Year-End Option/SAR Value
Table
The
following table sets forth information concerning stock options exercised by
the
named executive officers during fiscal 2004 and the year-end value of
in-the-money, unexercised options:
AGGREGATED
OPTION EXERCISES IN FISCAL YEAR ENDED JUNE 30, 2004
AND
FISCAL YEAR-END OPTION VALUES
|
Name
and Position
|
Shares
Acquired
on
Exercise (#)
|
Value
Realized
($)1
|
Number
of
Securities
Underlying
Unexercised
Options
at
FY-End (#)
Exercisable/
Unexercisable
|
Value
of
Unexercised
In-the-Money
Options
at
FY-End ($)
Exercisable/
Unexercisable2
|
||||
|
Chief
Executive Officers During Fiscal 2004
|
||||||||
|
Michael
Keough3
|
-
|
$-
|
18,749/-
|
$32,811/$-
|
||||
|
Frances
M. Flood4
|
-
|
$-
|
-/-
|
$-/$-
|
||||
|
Executive
Officers as of June 30, 2004
|
||||||||
|
Charles
A. Callis
|
-
|
$-
|
-/105,000
|
$-/$170,100
|
||||
|
Angelina
Beitia5
|
-
|
$-
|
10,624/134,376
|
$12,186/$187,164
|
||||
|
DeLonie
N. Call
|
-
|
$-
|
9,749/135,251
|
$12,186/$187,614
|
||||
|
Zee
Hakimoglu
|
-
|
$-
|
-/50,000
|
$-/$-
|
||||
|
Former
Executive Officers
|
||||||||
|
Gregory
L. Rand3
|
-
|
$-
|
25,000/-
|
$48,750/$-
|
||||
|
George
E. Claffey
|
-
|
$-
|
-/-
|
$-/$-
|
54
____________
|
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 $5.50 per share, which was the closing selling
price of our common stock on the Pink Sheets on the last business
day of
our 2004 fiscal year, less the option exercise price payable per
share.
|
|
3
|
In
February 2003, we determined not to permit the exercise of stock
options
granted under the 1990 Plan or the 1998 Plan until such time as we
have
become current in the filing of periodic reports with the SEC. We
provided
for an extension of the exercise period of certain options to prevent
them
from expiring without the holder having had the opportunity to exercise
them. Currently, Mr. Keough holds 18,749 vested stock options and
Mr. Rand
holds 25,000 vested stock options.
|
|
4
|
As
discussed herein, on December 5, 2003, we entered into an employment
separation agreement with Frances Flood, our former Chief Executive
Officer, which generally provided that she would resign from her
positions
and employment with the Company. Under the agreement, Ms. Flood delivered
to us for cancellation 706,434 stock options (461,433 of which were
vested). No options remain outstanding for Ms.
Flood.
|
|
5
|
As
discussed herein, on July 15, 2004, we entered into an employment
settlement agreement and release with Angelina Beitia. In connection
with
such agreement, she surrendered and delivered to us all outstanding
vested
and unvested options.
|
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.
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 pursuant to the employment
separation agreement discussed below.
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).
55
As
of the
end of fiscal 2004, 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.
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.
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.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee during fiscal 2004 was composed of Brad R. Baldwin,
Scott
M. Huntsman, and Edward Dallin Bagley. This same composition exists today.
Mr.
Bagley also served as a consultant to the Company from November 2002 through
January 2004 and was paid $5,000 monthly for his services. No interlocking
relationships exist between any member of the Company’s Board of Directors or
Compensation Committee and any member of the board of directors or compensation
committee of any other company nor has any such interlocking relationship
existed in the past. No member of the Compensation Committee is or was formerly
an executive officer or an employee of the Company or its
subsidiaries.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER
MATTERS
|
The
following table sets forth certain information regarding ownership of our common
stock as of November 30, 2005 by (i) each person known to us to be the
beneficial owner of more than 5 percent 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.
56
|
Names
of
Beneficial Owners
|
Amount
of
Beneficial
Ownership
|
Percentage
of
Class1
|
||
|
Directors
and Executive
Officers
|
||||
|
Edward
Dallin Bagley2
|
1,809,601
|
14.1%
|
||
|
Brad
R. Baldwin3
|
186,666
|
1.5%
|
||
|
DeLonie
N. Call4
|
87,228
|
0.7%
|
||
|
Zee
Hakimoglu5
|
80,555
|
0.6%
|
||
|
Harry
Spielberg6
|
64,000
|
0.5%
|
||
|
Tracy
A. Bathurst7
|
63,100
|
0.5%
|
||
|
Larry
R. Hendricks8
|
30,500
|
0.2%
|
||
|
Scott
M. Huntsman9
|
30,500
|
0.2%
|
||
|
Joseph
P. Sorrentino10
|
21,388
|
0.2%
|
||
|
Werner
Pekarek11
|
15,000
|
0.1%
|
||
|
Directors
and Executive Officers as a Group
|
||||
|
(11
people)12
|
2,388,538
|
18.7%
|
|
1
|
For
each individual included in the table, the calculation of percentage
of
beneficial ownership is based on 12,184,727 shares of common stock
outstanding as of November 30, 2005 and shares of common stock that
could
be acquired by the individual within 60 days of November 30, 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 139,000 shares
that
are exercisable within 60 days after November 30,
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 89,000 shares that are exercisable within 60
days
after November 30, 2005.
|
|
4
|
Includes
options to purchase 86,853 shares that are exercisable within 60
days
after November 30, 2005.
|
|
5
|
Includes
options to purchase 80,555 shares that are exercisable within 60
days
after November 30, 2005.
|
|
6
|
Includes
options to purchase 64,000 shares that are exercisable within 60
days
after November 30, 2005.
|
|
7
|
Includes
options to purchase 62,602 shares that are exercisable within 60
days
after November 30, 2005.
|
|
8
|
Includes
options to purchase 30,500 shares that are exercisable within 60
days
after November 30, 2005.
|
|
9
|
Includes
options to purchase 30,500 shares that are exercisable within 60
days
after November 30, 2005.
|
|
10
|
Includes
options to purchase 21,388 shares that are exercisable within 60
days
after November 30, 2005.
|
|
11
|
Includes
options to purchase 15,000 shares that are exercisable within 60
days
after November 30, 2005.
|
|
12
|
Includes
options to purchase a total of 619,398 shares that are exercisable
within
60 days after November 30, 2005 by executive officers and directors.
|
57
|
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 $1.7 million
during the period from January 2003 through September 30, 2005.
Joint
Prosecution and Defense Agreement.
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, Chairman of the Board of Directors, 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 Mr. 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
Mr.
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 Mr. Bagley. The Joint Prosecution and Defense
Agreement does not explain any allocation method and no allocation discussions
have occurred.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND
SERVICES
|
ClearOne
engaged KPMG in December 2003 to replace Ernst & Young as its independent
registered public accountants. ClearOne engaged KPMG to audit its financial
statements for its 2004 and 2003 fiscal years and to reaudit its consolidated
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. Since
KPMG
was engaged for a multi-year audit engagement, it is not practicable to separate
fees incurred into the specific audit period covered by the multi-period
fees.
The
fees
for the audits and quarterly reviews related to the June 30, 2003, 2002,
and
2001 financial statements, audit-related fees, taxes, and other fees provided
by
KPMG were as follows:
|
Audit
Fees
|
$
|
2,204,109
|
||
|
Audit-Related
Fees
|
13,029
|
|||
|
Tax
Fees
|
126,106
|
|||
|
Total
|
$
|
2,343,244
|
ClearOne
also engaged KPMG to audit its financial statements for fiscal 2004 as well
as
to perform quarterly reviews on the quarters within this fiscal year. The
fees
for the audit and quarterly reviews related to June 30, 2004 financial
statements, audit-related fees, taxes and other fees provided by KPMG were
as
follows:
|
Audit
Fees
|
$
|
906,918
|
||
|
Other
|
27,110
|
|||
|
Total
|
$
|
934,028
|
58
“Audit
Fees” consisted of fees billed for services rendered for the audit or reaudit of
ClearOne’s annual financial statements, Statement on Audit Standards (“SAS”) 100
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. “Other” consisted of fees billed for
document production related to legal proceedings.
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.
59
PART
IV
|
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, 2004 and 2003
Consolidated
Statements of Operations and Comprehensive Loss for fiscal years ended June
30,
2004, 2003, and 2002
Consolidated
Statements of Shareholders’ Equity for fiscal years ended June 30, 2004, 2003,
and 2002
Consolidated
Statements of Cash Flows for fiscal years ended June 30, 2004, 2003, and
2002
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
|
|||
|
10.1
|
10
|
Employment
Separation Agreement between ClearOne Communications, Inc. and Frances
Flood, dated December 5, 2003.*
|
Incorp.
by reference8
|
|||
|
10.2
|
10
|
Employment
Separation Agreement between ClearOne Communications, Inc. and Susie
Strohm, dated December 5, 2003.*
|
Incorp.
by reference8
|
|||
|
10.3
|
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
|
Incorp.
by reference8
|
|||
|
10.4
|
10
|
Asset
Purchase Agreement between ClearOne Communications, Inc. and Comrex
Corp.,
dated as of August 23, 2002.
|
Incorp.
by reference8
|
|||
|
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
|
|||
|
10.7
|
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
|
Incorp.
by reference8
|
60
|
10.8
|
10
|
Asset
Purchase Agreement dated May 6, 2004 between ClearOne Communications,
Inc.
and M:SPACE, Inc.
|
Incorp.
by reference8
|
|||
|
10.9
|
10
|
Asset
Purchase Agreement among Clarinet, Inc., American Teleconferencing
Services, Ltd. doing business as Premiere Conferencing, and ClearOne
Communications, Inc., dated July 1, 2004
|
Incorp.
by reference5
|
|||
|
10.10
|
10
|
Stock
Purchase Agreement dated March 4, 2005 between 6351352 Canada Inc.
and
Gentner Ventures, Inc., a wholly owned subsidiary of ClearOne
Communications, Inc.
|
Incorp.
by reference8
|
|||
|
10.11
|
10
|
1998
Stock Option Plan
|
Incorp.
by reference6
|
|||
|
10.12
|
10
|
1990
Incentive Plan
|
Incorp.
by reference7
|
|||
|
10.13
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
Gregory Rand dated February 27, 2004.*
|
Incorp.
by reference8
|
|||
|
10.14
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
George Claffey dated April 6, 2004.*
|
Incorp.
by reference8
|
|||
|
10.15
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
Michael Keough dated June 16, 2004.*
|
Incorp.
by reference8
|
|||
|
10.16
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
Angelina Beitia dated July 15, 2004.*
|
Incorp.
by reference8
|
|||
|
10
|
Manufacturing
Agreement between ClearOne Communications, Inc. and Inovar, Inc.
dated
August 1, 2005
|
This
filing9
|
||||
|
10
|
Mutual
Release and Waiver between ClearOne Communications, Inc. and Burk
Technology, Inc. dated August 22, 2005
|
This
filing
|
||||
|
14.1
|
14
|
Code
of Ethics, approved by the Board of Directors on November 18,
2004
|
Incorp.
by reference8
|
|||
|
21
|
Subsidiaries
of the registrant
|
This
filing
|
||||
|
31
|
Section
302 Certification of Chief Executive Officer
|
This
filing
|
||||
|
31
|
Section
302 Certification of Interim Chief Financial Officer
|
This
filing
|
||||
|
32
|
Section
1350 Certification of Chief Executive Officer
|
This
filing
|
||||
|
32
|
Section
1350 Certification of Interim Chief Financial Officer
|
This
filing
|
||||
|
99.1
|
99
|
Audit
Committee Charter, adopted November 18, 2004
|
Incorp.
by reference8
|
______________
*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, 2003
|
|
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.
|
|
8
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended June 30, 2003.
|
|
9
|
The
exhibits to the Manufacturing Agreement are not included in the foregoing
exhibits. The Registrant undertakes to furnish supplementally to
the
Commission copies of any omitted items on
request.
|
61
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.
|
|||||
|
December
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
|
December
16, 2005
|
|||
|
Zeynep
Hakimoglu
|
(Principal
Executive Officer)
|
||||
|
/s/
Craig E. Peeples
|
Interim
Chief Financial Officer
|
December
16, 2005
|
|||
|
Craig
E. Peeples
|
(Principal
Financial and Accounting Officer)
|
||||
|
/s/
Edward Dallin Bagley
|
Chairman
of the
|
December
16, 2005
|
|||
|
Edward
Dallin Bagley
|
Board
of Directors
|
||||
|
/s/
Brad R. Baldwin
|
Director
|
December
16, 2005
|
|||
|
Brad
R. Baldwin
|
|||||
|
/s/
Larry R. Hendricks
|
Director
|
December
16, 2005
|
|||
|
Larry
R. Hendricks
|
|||||
|
/s/
Scott M. Huntsman
|
Director
|
December
16, 2005
|
|||
|
Scott
M. Huntsman
|
|||||
|
/s/
Harry Spielberg
|
Director
|
December
16, 2005
|
|||
|
Harry
Spielberg
|
|||||
62
| ITEM 8. |
FINANCIAL
STATEMENTS
|
Index
to Consolidated Financial Statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets as of June 30, 2004 and 2003
|
F-3
|
|
Consolidated
Statements of Operations and Comprehensive Loss for fiscal years
ended
June 30, 2004, 2003, and 2002
|
F-4
|
|
Consolidated
Statements of Shareholders' Equity for fiscal years ended June
30, 2004,
2003, and 2002
|
F-6
|
|
Consolidated
Statements of Cash Flows for fiscal years ended June 30, 2004,
2003, and
2002
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-9
|
Report
of
Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders
ClearOne
Communications, Inc.:
We
have
audited the accompanying consolidated balance sheets of ClearOne Communications,
Inc. and subsidiaries as of June 30, 2004 and 2003, and the related consolidated
statements of operations and comprehensive loss, shareholders’ equity, and cash
flows for each of the years in the three-year period ended June 30, 2004.
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, 2004 and 2003 and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2004 in conformity with U.S. generally accepted accounting
principles.
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
December
15, 2005
F-2
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share amounts)
|
June
30,
|
|||||||
|
2004
|
2003
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
4,207
|
$
|
6,124
|
|||
|
Restricted
cash
|
-
|
200
|
|||||
|
Marketable
securities
|
1,750
|
1,900
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts of $24 and $0,
respectively
|
7,225
|
858
|
|||||
|
Inventories,
net
|
6,297
|
8,877
|
|||||
|
Income
tax receivable
|
3,446
|
2,433
|
|||||
|
Deferred
income tax assets
|
401
|
2,531
|
|||||
|
Prepaid
expenses
|
532
|
420
|
|||||
|
Assets
held for sale
|
3,294
|
6,022
|
|||||
|
Total
current assets
|
27,152
|
29,365
|
|||||
|
Property
and equipment, net
|
4,077
|
4,320
|
|||||
|
Intangibles,
net
|
901
|
1,018
|
|||||
|
Deferred
income tax assets, net
|
-
|
548
|
|||||
|
Other
assets
|
26
|
25
|
|||||
|
Total
assets
|
$
|
32,156
|
$
|
35,276
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Capital
lease obligations
|
$
|
6
|
$
|
32
|
|||
|
Note
payable
|
692
|
652
|
|||||
|
Accounts
payable
|
2,234
|
1,714
|
|||||
|
Accrued
liabilities
|
10,764
|
8,510
|
|||||
|
Deferred
product revenue
|
6,107
|
-
|
|||||
|
Billings
in excess of costs on uncompleted contracts
|
375
|
296
|
|||||
|
Liabilities
held for sale
|
2,329
|
4,389
|
|||||
|
Total
current liabilities
|
22,507
|
15,593
|
|||||
|
Capital
lease obligations, net of current portion
|
2
|
9
|
|||||
|
Note
payable, net of current portion
|
240
|
931
|
|||||
|
Deferred
income taxes, net
|
401
|
-
|
|||||
|
Total
liabilities
|
23,150
|
16,533
|
|||||
|
Commitments
and contingencies (see Notes 12 and 16)
|
|||||||
|
Shareholders'
equity:
|
|||||||
|
Common
stock, 50,000,000 shares authorized, par value $0.001, 11,036,233
and
11,086,733 shares issued and outstanding, respectively
|
11
|
11
|
|||||
|
Additional
paid-in capital
|
48,395
|
48,258
|
|||||
|
Deferred
compensation
|
(54
|
)
|
(75
|
)
|
|||
|
Accumulated
other comprehensive income
|
1,189
|
1,197
|
|||||
|
Accumulated
deficit
|
(40,535
|
)
|
(30,648
|
)
|
|||
|
Total
shareholders' equity
|
9,006
|
18,743
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
32,156
|
$
|
35,276
|
|||
See
accompanying notes to consolidated financial statements.
F-3
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in
thousands, except share amounts)
|
Years
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
Revenue:
|
||||||||||
|
Product
|
$
|
27,836
|
$
|
27,512
|
$
|
26,253
|
||||
|
Business
services
|
6,058
|
7,165
|
-
|
|||||||
|
Total
revenue
|
33,894
|
34,677
|
26,253
|
|||||||
|
Cost
of goods sold:
|
||||||||||
|
Product
|
13,683
|
15,940
|
10,939
|
|||||||
|
Product
inventory write-offs
|
2,696
|
2,175
|
2,945
|
|||||||
|
Business
services
|
4,052
|
4,055
|
-
|
|||||||
|
Total
cost of goods sold
|
20,431
|
22,170
|
13,884
|
|||||||
|
Gross
profit
|
13,463
|
12,507
|
12,369
|
|||||||
|
Operating
expenses:
|
||||||||||
|
Marketing
and selling
|
8,269
|
6,880
|
7,010
|
|||||||
|
General
and administrative
|
12,907
|
15,398
|
4,376
|
|||||||
|
Research
and product development
|
3,908
|
2,995
|
3,810
|
|||||||
|
Impairment
losses
|
-
|
13,528
|
7,115
|
|||||||
|
Total
operating expenses
|
25,084
|
38,801
|
22,311
|
|||||||
|
Operating
loss
|
(11,621
|
)
|
(26,294
|
)
|
(9,942
|
)
|
||||
|
Other
income (expense), net:
|
||||||||||
|
Interest
income
|
52
|
85
|
293
|
|||||||
|
Interest
expense
|
(183
|
)
|
(91
|
)
|
(23
|
)
|
||||
|
Other,
net
|
(130
|
)
|
55
|
18
|
||||||
|
Total
other income (expense), net
|
(261
|
)
|
49
|
288
|
||||||
|
Loss
from continuing operations before income taxes
|
(11,882
|
)
|
(26,245
|
)
|
(9,654
|
)
|
||||
|
Benefit
for income taxes
|
580
|
1,321
|
173
|
|||||||
|
Loss
from continuing operations
|
(11,302
|
)
|
(24,924
|
)
|
(9,481
|
)
|
||||
|
Discontinued
operations:
|
||||||||||
|
(Loss)
income from discontinued operations
|
2,440
|
(10,761
|
)
|
4,217
|
||||||
|
(Loss)
gain on disposal of discontinued operations
|
(183
|
)
|
318
|
280
|
||||||
|
Income
tax (provision) benefit
|
(842
|
)
|
(605
|
)
|
(1,677
|
)
|
||||
|
(Loss)
income from discontinued operations
|
1,415
|
(11,048
|
)
|
2,820
|
||||||
|
Net
loss
|
$
|
(9,887
|
)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
|
|
Comprehensive
Loss:
|
||||||||||
|
Net
loss
|
$
|
(9,887
|
)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
|
|
Foreign
currency translation adjustments
|
(8
|
)
|
1,197
|
-
|
||||||
|
Comprehensive
loss
|
$
|
(9,895
|
)
|
$
|
(34,775
|
)
|
$
|
(6,661
|
)
|
|
See
accompanying notes to consolidated financial statements.
F-4
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(CONTINUED)
(in
thousands, except share amounts)
|
Years
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
Basic
loss per common share from continuing operations
|
$
|
(1.02
|
)
|
$
|
(2.22
|
)
|
$
|
(0.99
|
)
|
|
|
Diluted
loss per common share from continuing operations
|
$
|
(1.02
|
)
|
$
|
(2.22
|
)
|
$
|
(0.99
|
)
|
|
|
Basic
(loss) earnings per common share from discontinued
operations
|
$
|
0.13
|
$
|
(0.99
|
)
|
$
|
0.30
|
|||
|
Diluted
(loss) earnings per common share from discontinued
operations
|
$
|
0.13
|
$
|
(0.99
|
)
|
$
|
0.30
|
|||
|
Basic
loss per common share
|
$
|
(0.89
|
)
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
|
|
Diluted
loss per common share
|
$
|
(0.89
|
)
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
|
See
accompanying notes to consolidated financial statements.
F-5
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(in
thousands, except share amounts)
|
Common
Stock
|
Additional
Paid-In
|
Deferred
|
Accumulated
Other Comprehensive
|
Retained
Earnings (Accumulated
|
Total
Shareholders'
|
|||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Income
|
Deficit)
|
Equity
|
||||||||||||||||
|
Balances
at June 30, 2001
|
8,612,978
|
$
|
9
|
$
|
8,856
|
$
|
(122
|
)
|
$
|
-
|
$
|
11,985
|
$
|
20,728
|
||||||||
|
Sales
of Common Shares pursuant to exercises of stock options
|
195,999
|
-
|
1,020
|
-
|
-
|
-
|
1,020
|
|||||||||||||||
|
Income
tax benefits from stock option exercises and dispositions
|
-
|
-
|
452
|
-
|
-
|
-
|
452
|
|||||||||||||||
|
Issuances
of Common Shares under Employee Stock Purchase Plan
|
724
|
-
|
13
|
-
|
-
|
-
|
13
|
|||||||||||||||
|
Issuance
of Common Shares and warrants for cash
|
1,500,000
|
1
|
23,834
|
-
|
-
|
-
|
23,835
|
|||||||||||||||
|
Issuance
of Common Shares 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
|
11,178,392
|
11
|
48,704
|
(147
|
)
|
-
|
5,324
|
53,892
|
||||||||||||||
|
Sales
of Common Shares pursuant to exercises of stock options
|
31,500
|
-
|
86
|
-
|
-
|
-
|
86
|
|||||||||||||||
|
Issuances
of Common Shares under Employee Stock Purchase Plan
|
1,841
|
-
|
8
|
-
|
-
|
-
|
8
|
|||||||||||||||
|
Repurchase
and retirement of Common Shares
|
(125,000
|
)
|
-
|
(430
|
)
|
-
|
-
|
-
|
(430
|
)
|
||||||||||||
|
Deferred
compensation resulting from the modification 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
|
|||||||||||||
|
Repurchase
and retirement of Common Shares per settlement agreements with
former
executive officers
|
(50,500
|
)
|
-
|
(63
|
)
|
-
|
-
|
-
|
(63
|
)
|
||||||||||||
|
Compensation
expense resulting from the modification of stock options
|
-
|
-
|
200
|
-
|
-
|
-
|
200
|
|||||||||||||||
|
Amortization
of deferred compensation
|
-
|
-
|
-
|
21
|
-
|
-
|
21
|
|||||||||||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
(8
|
)
|
-
|
(8
|
)
|
|||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(9,887
|
)
|
(9,887
|
)
|
|||||||||||||
|
Balances
at June 30, 2004
|
11,036,233
|
$
|
11
|
$
|
48,395
|
$
|
(54
|
)
|
$
|
1,189
|
$
|
(40,535
|
)
|
$
|
9,006
|
|||||||
See
accompanying notes to consolidated financial statements.
F-6
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Years
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
loss from continuing operations
|
$
|
(11,302
|
)
|
$
|
(24,924
|
)
|
$
|
(9,481
|
)
|
|
|
Adjustments
to reconcile net loss to net cash provided by operations:
|
||||||||||
|
Loss
on impairment of long-lived assets, goodwill and
intangibles
|
-
|
13,528
|
7,115
|
|||||||
|
Depreciation
and amortization expense
|
1,952
|
2,083
|
2,176
|
|||||||
|
Deferred
taxes
|
3,079
|
2,224
|
(2,920
|
)
|
||||||
|
Stock-based
compensation
|
221
|
(38
|
)
|
78
|
||||||
|
Income
tax benefits from stock option exercises
|
-
|
-
|
452
|
|||||||
|
Write-off
of inventory
|
2,696
|
2,175
|
2,945
|
|||||||
|
Gain
on sale of assets
|
-
|
-
|
(250
|
)
|
||||||
|
Loss
(gain) on disposal of assets and fixed assets write-offs
|
154
|
(2
|
)
|
(4
|
)
|
|||||
|
Provision
for doubtful accounts
|
24
|
-
|
-
|
|||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(6,391
|
)
|
(372
|
)
|
1,098
|
|||||
|
Inventories
|
(491
|
)
|
1,597
|
(5,395
|
)
|
|||||
|
Prepaid
expenses and other assets
|
(111
|
)
|
(123
|
)
|
248
|
|||||
|
Accounts
payable
|
520
|
(415
|
)
|
819
|
||||||
|
Accrued
liabilities
|
2,248
|
5,749
|
(308
|
)
|
||||||
|
Income
taxes
|
(911
|
)
|
(2,893
|
)
|
1,137
|
|||||
|
Deferred
revenue
|
6,569
|
265
|
-
|
|||||||
|
Net
change in other assets/liabilities
|
1
|
48
|
-
|
|||||||
|
Net
cash (used in) continuing operating activities
|
(1,742
|
)
|
(1,098
|
)
|
(2,290
|
)
|
||||
|
Net
cash provided by discontinued operating activities
|
2,826
|
3,641
|
2,805
|
|||||||
|
Net
cash provided by operating activities
|
1,084
|
2,543
|
515
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Restricted
cash
|
200
|
(200
|
)
|
-
|
||||||
|
Purchase
of property and equipment
|
(1,753
|
)
|
(1,519
|
)
|
(2,633
|
)
|
||||
|
Proceeds
from the sale of property and equipment
|
5
|
4
|
10
|
|||||||
|
Proceeds
from the sale of assets
|
-
|
80
|
160
|
|||||||
|
Purchase
of marketable securities
|
(3,350
|
)
|
(18,500
|
)
|
(30,600
|
)
|
||||
|
Sale
of marketable securities
|
3,500
|
29,000
|
18,200
|
|||||||
|
Cash
paid for acquisitions, net of cash received
|
-
|
(7,444
|
)
|
(9,947
|
)
|
|||||
|
Net
cash (used in) provided by continuing investing activities
|
(1,398
|
)
|
1,421
|
(24,810
|
)
|
|||||
|
Net
cash used in discontinued investing activities
|
(79
|
)
|
(104
|
)
|
(4,484
|
)
|
||||
|
Net
cash (used in) provided by investing activities
|
(1,477
|
)
|
1,317
|
(29,294
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Borrowings
under note payable
|
-
|
1,998
|
-
|
|||||||
|
Principal
payments on capital lease obligations
|
(32
|
)
|
(61
|
)
|
(210
|
)
|
||||
|
Principal
payments on note payable
|
(652
|
)
|
(414
|
)
|
(484
|
)
|
||||
|
Proceeds
from sales of Common Shares
|
-
|
95
|
24,869
|
|||||||
|
Purchase
and retirement of Common Shares
|
(63
|
)
|
(430
|
)
|
-
|
|||||
|
Net
cash (used in) provided by continuing financing activities
|
(747
|
)
|
1,188
|
24,175
|
||||||
|
Net
cash used in discontinued financing activities
|
(770
|
)
|
(723
|
)
|
(503
|
)
|
||||
|
Net
cash (used in) provided by financing activities
|
(1,517
|
)
|
465
|
23,672
|
||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(1,910
|
)
|
4,325
|
(5,107
|
)
|
|||||
|
Effect
of foreign exchange rates on cash and cash equivalents
|
(7
|
)
|
55
|
-
|
||||||
|
Cash
and cash equivalents at the beginning of the year
|
6,124
|
1,744
|
6,851
|
|||||||
|
Cash
and cash equivalents at the end of the year
|
$
|
4,207
|
$
|
6,124
|
$
|
1,744
|
||||
See
accompanying notes to consolidated financial statements.
F-7
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(in
thousands)
|
Supplemental
disclosure of cash flow information:
|
||||||||||
|
Cash
paid for interest
|
$
|
282
|
$
|
211
|
$
|
170
|
||||
|
Cash
paid (received) for income taxes
|
(2,189
|
)
|
(79
|
)
|
3,529
|
|||||
|
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||||
|
Equipment
acquired under capital lease
|
$
|
-
|
$
|
-
|
$
|
1,155
|
||||
|
Supplemental
disclosure of acquisition activity:
|
||||||||||
|
Fair
value of assets acquired
|
$
|
-
|
$
|
8,235
|
$
|
33,712
|
||||
|
Liabilities
assumed
|
-
|
(599
|
)
|
(4,484
|
)
|
|||||
|
Value
of common shares issued
|
-
|
-
|
(14,427
|
)
|
||||||
|
Cash
paid for acquisition
|
$
|
-
|
$
|
7,636
|
$
|
14,801
|
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
- Nature of Operations
|
ClearOne
Communications, Inc., a Utah corporation, 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 end-user customers include some of the world’s largest companies and
institutions, government organizations, educational institutions, and small
and
medium-sized businesses. The Company mostly sells its products to these end-user
customers through a two-tier distribution network of independent distributors
who then sell the products to dealers, including independent systems integrators
and value-added resellers. The Company also sells its products on a limited
basis directly to certain dealers, system integrators, value-added resellers,
and end-users.
During
the fiscal year ended June 30, 2004, the Company decided to discontinue
operations of a portion of its business services segment and its conferencing
services segment. As discussed in Note 4, in May 2004, the Company sold certain
assets of its U.S. audiovisual integration services operations to M:Space,
Inc.
(“M:Space”). In July 2004 and subsequent to the fiscal year ended June 30, 2004,
the Company sold its conferencing services segment to Clarinet, Inc., an
affiliate of American Teleconferencing Services, Ltd. doing business as Premiere
Conferencing (“Premiere”). Both of these operations and related net assets are
presented in discontinued operations and assets and liabilities held for
sale in
the accompanying consolidated financial statements.
Subsequent
to the fiscal year ended June 30, 2004, the Company sold all of the issued
and
outstanding shares of its Canadian subsidiary, ClearOne Communications of
Canada, Inc. to 6351352 Canada Inc., which is a portion of its business services
segment. The related net assets are shown as held and used at the end of
fiscal
2004. Following these dispositions of operations, the Company has returned
to
its core competency of developing, manufacturing, and, marketing audio
conferencing products.
|
2.
|
Summary
of Significant Accounting
Policies
|
Consolidation
- These
consolidated financial statements include the financial statements of ClearOne
Communications, Inc. and its wholly-owned subsidiaries, ClearOne Communications
EuMEA GmbH, ClearOne Communications Limited UK, ClearOne Communications of
Canada, Inc., E.mergent, Inc., Gentner Communications Ltd. - Ireland, and
OM
Video. All intercompany accounts and transactions have been eliminated in
consolidation.
Pervasiveness
of Estimates
- The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America 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 sales and expenses during
the reporting periods. Key estimates in the accompanying consolidated financial
statements include, among others, revenue recognition, 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. Actual results could differ materially from these estimates.
Fair
Value of Financial Instruments
- The
carrying values of cash equivalents, marketable securities, accounts receivable,
accounts payable, and accrued liabilities all approximate fair value due
to the
relatively short-term maturities of these assets and liabilities. The carrying
values of long-term debt also approximate fair value because applicable interest
rates either fluctuate based on market conditions or approximate the Company’s
borrowing rate.
F-9
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
Foreign
Currency Translation -
The
functional currency for OM Video is the Canadian Dollar. Adjustments resulting
from the translation of OM Video amounts are recorded as accumulated other
comprehensive income in the accompanying consolidated balance sheets. 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. The
impact
from remeasurement of all other foreign subsidiaries is recorded in the
accompanying consolidated statements of operations.
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, 2004 and
2003
cash equivalents totaled $3,898 and $5,049, respectively, and consisted
primarily of money market funds. The Company places its temporary cash
investments with high quality financial institutions. At times, including
at
June 30, 2004 and 2003, such investments may be in excess of the Federal
Deposit
Insurance Corporation insurance limit of $100.
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 the
former shareholders of 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, 2004 and 2003, all marketable securities were
classified as current assets and consisted of municipal government auction
rate
notes.
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, 2004, 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.
Sources
of Supplies
- The
Company depends on an outsource manufacturing strategy for its products.
In
August 2005, the Company entered into a manufacturing agreement with Inovar,
a
domestic manufacturing services provider, to be the exclusive manufacturer
of
substantially all the products that were previously manufactured at the
Company’s Salt Lake City, Utah manufacturing facility (see Note 26). As of
August 2005, Inovar became the primary manufacturer of substantially all
of the
Company’s products, except its MAX®
product
line, and if Inovar experiences difficulties in obtaining sufficient supplies
of
components, component prices become unreasonable, an interruption in its
operations, or otherwise suffers capacity constraints, the Company would
experience a delay in shipping these products which would have a negative
impact
on its revenues. Currently, the Company has no second source of manufacturing
for substantially all of its products.
F-10
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
The
Company has an agreement with an international manufacturer in China for
the
manufacture of its MAX® product line. 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 the Company’s business. A delay in shipping these products due
to an interruption in the manufacturer’s operations would have a negative impact
on the Company’s revenues. Operating in the international environment exposes
the Company to certain inherent risks, including unexpected changes in
regulatory requirements and tariffs, and potentially adverse tax consequences,
which could materially affect the Company’s results of operations.
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 write-off experience, customer concentrations,
customer creditworthiness, and current economic trends when evaluating the
adequacy of the allowance for doubtful accounts. If the assumptions that
are
used to determine the allowance for doubtful accounts change, the Company
may
have to provide for a greater level of expense in the future periods or reverse
amounts provided in prior periods.
The
Company’s allowance for doubtful accounts activity for the fiscal years ended
June 30, 2004 and 2003 were as follows:
|
Description
|
Balance
at Beginning of Period
|
Charged
to Costs and Expenses
|
Deductions
|
Balance
at End of Period
|
|||||||||
|
Year
ended June 30, 2003
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
|
Year
ended June 30, 2004
|
$
|
-
|
$
|
24
|
$
|
-
|
$
|
24
|
|||||
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. Consideration is given to obsolescence, excessive levels,
deterioration, direct selling expenses, and other factors in evaluating net
realizable value. Consigned inventory includes product that has been delivered
to customers for which revenue recognition criteria have not been met. During
the fiscal years ended June 30, 2004, 2003, and 2002, the Company recorded
inventory write-offs of $2.7 million, $2.2 million, and $2.9 million,
respectively.
Property
and Equipment
-
Property and equipment are stated at cost less accumulated depreciation.
Costs
associated with internally developed software are capitalized in accordance
with
Statement of Position 98-1 (“SOP 98-1”), “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.” Expenditures that materially
increase values or capacities or extend useful lives of property and equipment
are capitalized. Routine maintenance, repairs, and renewal costs are expensed
as
incurred. Gains or losses from the sale or retirement of property and equipment
are recorded in current operations and the related book value of the property
is
removed from the fixed assets and the related accumulated depreciation and
amortization accounts.
Estimated
useful lives are generally two to ten years. Depreciation and amortization
are
calculated over the estimated useful lives of the respective assets using
the
straight-line method. 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.
F-11
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
Goodwill
-
Goodwill represents the excess of costs over fair value of the net assets
of
businesses acquired. The Company amortized goodwill related to the ClearOne,
Inc. (“ClearOne”) acquisition from the acquisition date through June 30, 2002.
Accordingly, during the fiscal year ended June 30, 2002, goodwill amortization
was $297 and was reported in general and administrative expenses. 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 non-amortization and amortization provisions
of
SFAS No. 142 were 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 year ended
June
30, 2002 is presented as if the provisions of SFAS No. 142 had been in effect
for all periods presented:
|
Year
Ended June 30, 2002
|
||||
|
Reported
net loss
|
$
|
(6,661
|
)
|
|
|
Goodwill
amortization, net of income tax
|
186
|
|||
|
Adjusted
net loss
|
$
|
(6,475
|
)
|
|
|
Basic
loss per common share:
|
||||
|
As
reported
|
$
|
(0.69
|
)
|
|
|
Goodwill
amortization
|
0.02
|
|||
|
As
adjusted
|
$
|
(0.67
|
)
|
|
|
Diluted
loss per common share:
|
||||
|
As
reported
|
$
|
(0.69
|
)
|
|
|
Goodwill
amortization
|
0.02
|
|||
|
As
adjusted
|
$
|
(0.67
|
)
|
|
On
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. Upon adoption of SFAS No. 142, there was no
impairment of the Company’s gross goodwill balance of $17.1 million from the
E.mergent, Inc. acquisition. Although goodwill is 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.
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.”
Intangibles
-
Definite-lived intangibles are subject to amortization. The Company uses
the
straight-line method over the estimated useful life of the asset. All of
the
Company’s intangible assets, consisting of patents and a non-compete agreement,
as of June 30, 2004 and 2003 were determined to be definite-lived intangible
assets.
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.
F-12
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
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. The impairment of long-lived assets
requires judgments and estimates. If circumstances change, such estimates
could
also change. Assets held for sale are reported at the lower of the carrying
amount or fair value, less the estimated costs to sell.
Revenue
Recognition
-
Included in continuing operations are two sources of revenue: (i) product
revenue, primarily from product sales to distributors, dealers, and end-users;
and (ii) business services revenue which includes 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 fiscal year ended June 30, 2003.
Accordingly,
amounts charged to both distributors and non-distributors were not considered
fixed and determinable or reasonably collectible until cash was collected
and
thus, there was a delay in the Company’s recognition of revenue and related cost
of goods sold from the time of product shipment until invoices were paid.
As a
result, the June 30, 2003 balance sheet reflects no accounts receivable or
deferred revenue related to product sales. During the fiscal year ended June
30,
2004, the Company recognized $5.2 million in revenues and $1.7 million in
cost
of goods sold that were deferred in prior periods since cash had not been
collected as of the end of the fiscal year ended June 30, 2003.
During
the fiscal year ended June 30, 2004, the Company had in place improved credit
policies and procedures, an approval process for sales returns and credit
memos,
processes for managing and monitoring channel inventory levels, better trained
staff, and discontinued the practice of frequently granting significant
concessions from the originally invoiced amount. As a result of these improved
policies and procedures, the Company extends credit to customers who it believes
have the wherewithal to pay.
The
Company provides a right of return on product sales to distributors. Currently,
the Company does not have sufficient historical return experience with its
distributors that is predictive of future events given historical excess
levels
of inventory in the distribution channel. Accordingly, revenue from product
sales to distributors is not recognized until the return privilege has expired,
which approximates when product is sold-through to customers of the Company’s
distributors (dealers, system integrators, value-added resellers, and
end-users). As of June 30, 2004, the Company deferred $6.2 million in revenue
and $2.4 million in cost of goods sold related to invoices sold where return
rights had not lapsed.
The
Company offers rebates and market development funds 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.
F-13
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
The
Company provides advance replacement units to end-users on defective units
of
certain products within 90 days of purchase date from the dealer. The Company
records a receivable from the end-user until the defective unit has been
returned. The Company maintains an allowance for these estimated returns
which
has been reflected as a reduction to accounts receivable. The allowance for
estimated advance replacement returns was $91 and $5, as of June 30, 2004
and
2003, respectively.
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 the 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 FASB Technical
Bulletin No. 90-1, “Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts.”
Conferencing
services revenue, which has been classified in discontinued operations,
primarily from full service conference calling and on-demand, reservationless
conference calling is recognized at the time of customer usage, and is based
upon minutes used. On July 1, 2004, the Company sold its conferencing services
business segment to Premiere as discussed in Note 4.
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.
Warranty
Costs
- The
Company accrues for warranty costs based on estimated warranty return rates
and
estimated costs to repair. Factors that affect the Company’s warranty liability
include the number of units sold, historical and anticipated rates of warranty
returns, and repair cost. The Company reviews the adequacy of its recorded
warranty accrual on a quarterly basis.
Changes
in the Company’s warranty accrual during the fiscal years ended June 30, 2004
and 2003 were as follows:
|
Years
Ended June 30,
|
|||||||
|
2004
|
2003
|
||||||
|
Balance
at the beginning of year
|
$
|
80
|
$
|
55
|
|||
|
Accruals/additions
|
206
|
203
|
|||||
|
Usage
|
(178
|
)
|
(178
|
)
|
|||
|
Balance
at end of year
|
$
|
108
|
$
|
80
|
|||
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, 2004, 2003, and 2002 totaled $716, $361, and $693,
respectively, and are included in the caption Marketing and Selling.
Research
and Product Development Costs
- The
Company expenses research and product development costs as incurred.
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 temporary 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. These temporary differences will result in taxable or deductible
amounts in future years when the reported amounts of the assets or liabilities
are recovered or settled. 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. The Company evaluates the realizability of its
net
deferred tax assets on a quarterly basis and valuation allowances are provided,
as necessary. Adjustments to the valuation allowance will increase or decrease
the Company’s income tax provision or benefit.
F-14
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
Earnings
Per Share
- The
following table sets forth the computation of basic and diluted earnings
(loss)
per common share:
|
Year
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
Numerator:
|
||||||||||
|
Loss
from continuing operations
|
$
|
(11,302
|
)
|
$
|
(24,924
|
)
|
$
|
(9,481
|
)
|
|
|
(Loss)
income from discontinued operations, net of tax
|
1,530
|
(11,248
|
)
|
2,644
|
||||||
|
(Loss)
gain on disposal of discontinued operations, net of tax
|
(115
|
)
|
200
|
176
|
||||||
|
Net
loss
|
$
|
(9,887
|
)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
|
|
Denominator:
|
||||||||||
|
Basic
weighted average shares
|
11,057,896
|
11,183,339
|
9,588,118
|
|||||||
|
Dilutive
common stock equivalents using treasury stock method
|
-
|
-
|
-
|
|||||||
|
Diluted
weighted average shares
|
11,057,896
|
11,183,339
|
9,588,118
|
|||||||
|
Basic
and diluted earnings (loss) per common share:
|
||||||||||
|
Continuing
operations
|
$
|
(1.02
|
)
|
$
|
(2.22
|
)
|
$
|
(0.99
|
)
|
|
|
Discontinued
operations
|
0.14
|
(1.01
|
)
|
0.28
|
||||||
|
Disposal
of discontinued operations
|
(0.01
|
)
|
0.02
|
0.02
|
||||||
|
Net
loss
|
(0.89
|
)
|
(3.21
|
)
|
(0.69
|
)
|
||||
Options
to purchase 1,433,187, 1,972,756, and 1,518,956 shares of common stock were
outstanding as of June 30, 2004, 2003, and 2002, 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, 2004, 2003, and 2002, but were not included in
the
computation of diluted earnings per share as the effect would be anti-dilutive.
During fiscal 2004, the Company entered into a settlement agreement related
to
the shareholders’ class action and agreed to issue 1.2 million shares of its
common stock; however, certain of these shares were settled in cash in lieu
of
common stock (see Note 16). The Company issued 228,000 shares in November
2004
and 920,494 shares in September 2005. These shares are not included in the
weighted average share calculations as their inclusion would have been
anti-dilutive.
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 expense, if any, is amortized to
expense over the vesting period.
SFAS
No.
123, “Accounting for Stock-Based Compensation,” requires pro forma information
regarding net income (loss) as if the Company had accounted for its stock
options granted under the 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.
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 SFAS No. 123, 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.
The
following is the pro forma disclosure and the related impact on the net loss
attributable to common shareholders and net loss per common share for the
years
ended June 30, 2004, 2003, and 2002.
F-15
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
Years
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
Net
loss:
|
||||||||||
|
As
reported
|
$
|
(9,887
|
)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
|
|
Stock-based
employee compensation expense included in reported net loss, net
of income
taxes
|
13
|
(24
|
)
|
49
|
||||||
|
Stock-based
employee compensation expense determined under the fair-value method
for
all awards, net of income taxes
|
(439
|
)
|
(966
|
)
|
(1,003
|
)
|
||||
|
Pro
forma
|
$
|
(10,313
|
)
|
$
|
(36,962
|
)
|
$
|
(7,615
|
)
|
|
|
Basic
earnings (loss) per common share:
|
||||||||||
|
As
reported
|
(0.89
|
)
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
||
|
Pro
forma
|
(0.93
|
)
|
(3.31
|
)
|
(0.79
|
)
|
||||
|
Diluted
earnings (loss) per common share:
|
||||||||||
|
As
reported
|
$
|
(0.89
|
)
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
|
|
Pro
forma
|
(0.93
|
)
|
(3.31
|
)
|
(0.79
|
)
|
||||
Recent
Accounting Pronouncements
Variable
Interest Entities
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, “Consolidated Financial Statements,” 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.
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, 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.
Financial
Instruments
In
May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 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. The Company’s adoption of this statement
on July 1, 2003 did not have a material effect on its business, results of
operations, financial position, or liquidity.
F-16
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
Other-Than-Temporary
Impairment
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 SFAS 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 does not expect the adoption of this EITF to
have
a material impact on its operations.
Inventory
Costs
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an Amendment of
ARB No. 43”, which is the result of its efforts to converge U.S. accounting
standards for inventories with International Accounting Standards. SFAS 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. SFAS 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 business, results of operations,
financial position, or liquidity.
Share-Based
Payment
In
December 2004, the FASB issued SFAS No. 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 a significant adverse impact on its future results
of
operations.
Accounting
Changes and Error Corrections
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections -
a Replacement of APB Opinion No. 20 and FASB Statement No. 3” in order to
converge U.S. Accounting Standards with International Accounting Standards.
SFAS
No. 154 changes the requirements for the accounting for and reporting of
a
change in accounting principle. Previously, most voluntary changes in accounting
principles required recognition of a cumulative effect adjustment within
net
income of the period of the change. SFAS No. 154 requires retrospective
application to prior periods’ financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect
of the
change. SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, it does not change the transition
provisions of any existing accounting pronouncements. The Company does not
believe the adoption of SFAS No. 154 will have a material effect on its
business, results of operations, financial position, or
liquidity.
F-17
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
Accounting
for Asset Retirement Obligations in the European Union
In
June
2005, the FASB issued a FASB Staff Position (“FSP”) interpreting SFAS No. 143,
“Accounting for Asset Retirement Obligations,” specifically FSP
143-1,
“Accounting for Electronic Equipment Waste Obligations” (“FSP 143-1”).
FSP
143-1
addresses the accounting for obligations associated with Directive 2002/96/EC,
Waste Electrical and Electronic Equipment, which was adopted by the European
Union (“EU”). The FSP provides guidance on how to account for the effects of the
Directive but only with respect to historical waste associated with products
placed on the market on or before August 13, 2005. FSP
143-1
is
effective the later of the first reporting period ending after June 8, 2005,
or
the date of the adoption of the law by the applicable EU-member country.
Management
of the Company is currently evaluating the impact of FSP
143-1.
Reclassifications
Certain
reclassifications have been made to the prior years’ consolidated financial
statements and notes to consolidated financial statements to conform to the
current year’s presentation.
|
3.
|
Acquisitions
|
During
the fiscal year ended June 30, 2001, the Company completed the acquisition
of
ClearOne, Inc. (“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 Systems, Ltd. (“Ivron”), a developer
of video conferencing technology and product, and E.mergent, Inc.,
(“E.mergent”), a manufacturer of cameras and conferencing furniture and an
audiovisual integration services provider. During the fiscal year ended June
30,
2003, the Company completed the acquisition of Stechyson Electronics Ltd.,
doing
business as OM Video (“OM Video”), an audiovisual integration 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 used 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:
F-18
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
ClearOne
|
Ivron
|
E.mergent
|
OM
Video
|
||||||||||
|
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
|
|||||
ClearOne
The
Company entered into an agreement to purchase substantially all of the assets
of
ClearOne for $3.6 million consisting of $1.8 million 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 $1.2 million. 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 video conferencing technologies and subsequently
determined that the technology was not viable and never brought the in-process
video conferencing 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
of
approximately $901 should be recognized (see Note 10).
Ivron
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 $6.0 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 an aggregate cash payment of $650.
F-19
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
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.
Under
the
original agreement, former Ivron shareholders would be entitled to receive
up to
429,000 shares of common stock and up to approximately $17.0 million of
additional cash and stock consideration provided that certain agreed upon
earnings per share targets were achieved by the Company during fiscal years
2003
and 2004. In addition, former optionees of Ivron who remained with the Company
were eligible to participate in a cash bonus program of up to approximately
$1.0
million paid by the Company, based on the Company’s combined performance with
Ivron in the fiscal years ending June 30, 2003 and 2004. On April 8, 2002,
an
amendment to the original purchase agreement was finalized which revised
the
contingent consideration that the Ivron shareholders would be entitled to
receive up to 109,000 shares of common stock. 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 and
with
the assistance of a third-party valuation firm and after considering the
facts
and circumstances surrounding the Company’s intentions, the Company recorded
intangible assets of $5.3 million related to developed technology, $1.1 million
related to intellectual property, and goodwill of $218. The developed
technologies had estimated useful lives of three to fifteen years and the
patents had an estimated useful life of fifteen years. Amortization expense
of
$446 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, the Company 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,
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
of
approximately $6.2 million should be recognized (see Note 10). During early
fiscal 2004, the Company discontinued selling the “V-There” and “Vu-Link”
set-top video conferencing products.
E.mergent
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 $7.3 million 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 percent, risk-free interest rate of 2.9 percent, expected volatility of
81.8
percent, 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 $2.2 million, inventory of $3.3 million, property
and equipment of $475 and other assets of $1.3 million. The Company assumed
liabilities consisting of accounts payable of $1.3 million, 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, patents, a non-compete agreement,
and
goodwill. Amortization expense of $437 was recorded for customer relationships,
patents, and a non-compete agreement. 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.
F-20
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
The
Company’s management, at the time, believed the E.mergent acquisition would
complement the Company’s existing operations and that core competencies would
allow the Company to acquire market share in the audiovisual integration
industry. However, the Company’s entry into the services business was perceived
as a threat by its systems integrators and value-added resellers, since the
Company began competing against many of them for sales. In order to avoid
this
conflict and to 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 4).
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
the integration services-related E.mergent assets of approximately $12.5
million
should be recognized. The Company also determined that an impairment loss
on
other acquired E.mergent assets of approximately $5.1 million should be
recognized (see Note 10). The U.S. audiovisual integration business operations
and related net assets are included in discontinued operations in the
accompanying consolidated financial statements.
OM
Video
On
August
27, 2002, the Company purchased all of the outstanding shares of OM Video,
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, 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 not considered as part of the original purchase price allocation
was
recorded as additional consideration and booked to goodwill. No further payment
related to the holdback or contingent consideration will be paid. Accordingly,
the total cash payments associated with the acquisition were approximately
$7.5
million.
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
primarily 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
a
former owner of OM Video.
The
Company’s management, at the time, believed the OM Video acquisition would
complement the Company’s existing operations and that core competencies would
allow the Company to acquire market share in the audiovisual integration
industry. However, the Company’s entry into the services business was perceived
as a threat by its systems integrators and value-added resellers, since the
Company began competing against many of them for sales. In order to avoid
this
conflict and to 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 June 30, 2003, the Company performed an
impairment test and determined that an impairment loss on the OM Video assets
of
approximately $8.4 million should be recognized (see Note 10). On March 4,
2005,
the Company sold all of its Canadian audiovisual integration business (see
Note
26).
Pro
Forma Financial Information
The
following unaudited pro forma combined financial information reflects operations
as if the acquisitions of Ivron, E.mergent, and OM Video, that are not included
in discontinued operations, 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, 2001, respectively.
F-21
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
2003
|
2002
|
||||||
|
Revenue
from continuing operations
|
$
|
35,819
|
$
|
43,012
|
|||
|
Loss
from continuing operations
|
(24,931
|
)
|
(9,636
|
)
|
|||
|
Net
loss
|
(35,979
|
)
|
(6,816
|
)
|
|||
|
Basic
and diluted loss per common share from continuing
operations
|
$
|
(2.23
|
)
|
$
|
(1.01
|
)
|
|
|
Basic
and diluted loss per common share from net loss
|
(3.22
|
)
|
(0.71
|
)
|
|||
|
4.
|
Discontinued
Operations
|
During
fiscal 2004, the Company completed the sale of its U.S. audiovisual integration
services to M:Space. During fiscal 2005, the Company completed the sale of
its
conferencing services business component to Premiere. Accordingly, the results
of operations and the financial position of each of these components have
been
reclassified in the accompanying consolidated financial statements as
discontinued operations. Additionally, during fiscal 2001 the Company sold
certain assets whose sales proceeds are included with discontinued operations
(see Note 5). The following reconciles the financial position of the components
to the reported amounts as of June 30, 2004 and 2003.
|
As
of June 30,
|
|||||||
|
2004
|
2003
|
||||||
|
Assets
held for sale:
|
|||||||
|
U.S.
audiovisual integration services
|
$
|
-
|
$
|
1,869
|
|||
|
Conferencing
services business
|
3,294
|
4,153
|
|||||
|
Total
assets held for sale
|
$
|
3,294
|
$
|
6,022
|
|||
|
Liabilities
held for sale:
|
|||||||
|
U.S.
audiovisual integration services
|
$
|
-
|
$
|
1,516
|
|||
|
Conferencing
services business
|
2,329
|
2,873
|
|||||
|
Total
liabilities held for sale
|
$
|
2,329
|
$
|
4,389
|
|||
F-22
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
Summary
operating results of the discontinued operations are as follows:
|
Year
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
(Loss)
income from discontinued operations
|
||||||||||
|
U.S.
audiovisual integration services
|
$
|
(360
|
)
|
$
|
(14,127
|
)
|
$
|
258
|
||
|
Conferencing
services business
|
2,800
|
3,366
|
3,959
|
|||||||
|
Total
(loss) income from discontinued operations
|
2,440
|
(10,761
|
)
|
4,217
|
||||||
|
(Loss)
gain on disposal of discontinued operations
|
||||||||||
|
U.S.
audiovisual integration services
|
$
|
(276
|
)
|
$
|
-
|
$
|
-
|
|||
|
Burk
(see Note 5)
|
93
|
318
|
280
|
|||||||
|
Total
(loss) gain on disposal of discontinued operations
|
(183
|
)
|
318
|
280
|
||||||
|
Income
tax benefit (provision)
|
||||||||||
|
U.S.
audiovisual integration services
|
$
|
237
|
$
|
769
|
$
|
(96
|
)
|
|||
|
Conferencing
services business
|
(1,044
|
)
|
(1,256
|
)
|
(1,477
|
)
|
||||
|
Burk
(see Note 5)
|
(35
|
)
|
(118
|
)
|
(104
|
)
|
||||
|
Total
income tax benefit (provision)
|
(842
|
)
|
(605
|
)
|
(1,677
|
)
|
||||
|
Total
(loss) income from discontinued operations, net of income
taxes
|
||||||||||
|
U.S.
audiovisual integration services
|
$
|
(399
|
)
|
$
|
(13,358
|
)
|
$
|
162
|
||
|
Conferencing
services business
|
1,756
|
2,110
|
2,482
|
|||||||
|
Burk
(see Note 5)
|
58
|
200
|
176
|
|||||||
|
Total
(loss) income from discontinued operations, net of income
taxes
|
$
|
1,415
|
$
|
(11,048
|
)
|
$
|
2,820
|
|||
M:Space
During
the fourth quarter of the fiscal year ended June 30, 2003, the Company decided
to stop pursuing new U.S. business services contracts and impaired the U.S.
acquired business services assets. The Company did not prepare any formal
disposition plan at that time and existing customers continued to be serviced.
During the fourth quarter of fiscal 2004, the Company decided to sell this
component as many of the existing Company systems integrators and value-added
resellers perceived the Company’s entry into the business services arena as a
threat since the Company began competing against these same customers for
sales,
as well as the Company’s desire to return to its core competency in the audio
conferencing products segment. U.S. audiovisual integration services revenues,
reported in discontinued operations, for the years ended June 30, 2004, 2003,
and 2002 were $3.6 million, $7.6 million, and $1.5 million, respectively.
The
U.S. audiovisual integration services pre-tax income (loss), reported in
discontinued operations, for the years ended June 30, 2004, 2003, and 2002,
were
($360), ($14.1 million), and $258, respectively.
On
May 6,
2004, the Company sold certain assets of its U.S. audiovisual integration
services operations to 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 $573. The Company
realized a pre-tax loss on the sale of $276 for the fiscal year ended June
30,
2004.
The
assets and liabilities of the discontinued operations are presented separately
under the captions “Assets Held for Sale” and “Liabilities Held for Sale,”
respectively, in the accompanying balance sheets as of June 30, 2003, and
consist of the following:
F-23
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
As
of June 30, 2003
|
||||
|
Assets
held for sale:
|
||||
|
Accounts
receivable
|
$
|
1,775
|
||
|
Inventories
|
90
|
|||
|
Prepaid
expenses
|
4
|
|||
|
Total
assets held for sale
|
$
|
1,869
|
||
|
Liabilities
held for sale:
|
||||
|
Accounts
payable
|
$
|
76
|
||
|
Deferred
maintenance
|
794
|
|||
|
Billings
in excess of costs
|
320
|
|||
|
Accrued
liabilities
|
326
|
|||
|
Total
liabilities held for sale
|
$
|
1,516
|
||
Summary
operating results of the discontinued operations are as follows:
|
Years
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
Revenue
- business services
|
$
|
3,597
|
$
|
7,640
|
$
|
1,526
|
||||
|
Cost
of goods sold - business services
|
2,648
|
5,227
|
978
|
|||||||
|
Gross
profit
|
949
|
2,413
|
548
|
|||||||
|
Marketing
and selling expenses
|
522
|
2,426
|
131
|
|||||||
|
General
and administrative expenses
|
787
|
1,641
|
159
|
|||||||
|
Impairment
losses
|
-
|
12,473
|
-
|
|||||||
|
(Loss)
income before income taxes
|
(360
|
)
|
(14,127
|
)
|
258
|
|||||
|
Loss
on disposal of discontinued operations
|
(276
|
)
|
-
|
-
|
||||||
|
Benefit
(provision) for income taxes
|
237
|
769
|
(96
|
)
|
||||||
|
(Loss)
income from discontinued operations, net of income taxes
|
$
|
(399
|
)
|
$
|
(13,358
|
)
|
$
|
162
|
||
Conferencing
Services
In
April
2004, the Company’s Board of Directors appointed a committee to explore sales
opportunities to sell the conferencing services business component. The Company
decided to sell this component primarily because of decreasing margins and
investments in equipment that would have been required in the near future.
Conferencing services revenues, reported in discontinued operations, for
the
years ended June 30, 2004, 2003, and 2002 were $15.6 million, $15.3 million,
and
$15.6 million, respectively. Conferencing services pre-tax income, reported
in
discontinued operations, for the years ended June 30, 2004, 2003, and 2002,
were
$2.8 million, $3.4 million, and $4.0 million, respectively.
On
July
1, 2004, the Company sold its conferencing services business component to
Premiere. Consideration for the sale consisted of $21.3 million in cash.
Of the
purchase price $1.0 million was placed into an 18-month Indemnity Escrow
account
and an additional $300 was placed into a working capital escrow account.
The
Company received the $300 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 Premiere. The Company expects to realize a pre-tax gain on the
sale
of approximately $17.5 million during the fiscal year ended June 30, 2005.
As of
October 31, 2005, the $1.0 million remained in the Indemnity Escrow account.
F-24
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
The
assets and liabilities of the discontinued operations are presented separately
under the captions “Assets Held for Sale” and “Liabilities Held for Sale,”
respectively, in the accompanying balance sheets as of June 30, 2004 and
2003,
and consist of the following:
|
As
of June 30,
|
|||||||
|
2004
|
2003
|
||||||
|
Assets
held for sale
|
|||||||
|
Accounts
receivable
|
$
|
1,712
|
$
|
1,575
|
|||
|
Prepaid
expenses
|
158
|
130
|
|||||
|
Property
and equipment, net
|
1,424
|
2,448
|
|||||
|
Total
assets held for sale
|
$
|
3,294
|
$
|
4,153
|
|||
|
Liabilities
held for sale
|
|||||||
|
Capitalized
leases
|
$
|
1,206
|
$
|
1,975
|
|||
|
Accounts
payable
|
287
|
158
|
|||||
|
Accrued
liabilities
|
836
|
740
|
|||||
|
Total
liabilities held for sale
|
$
|
2,329
|
$
|
2,873
|
|||
Summary
operating results of the discontinued operations are as follows:
|
Years
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
Revenue
- conferencing services
|
$
|
15,578
|
$
|
15,268
|
$
|
15,583
|
||||
|
Cost
of goods sold - conferencing services
|
7,844
|
7,904
|
7,310
|
|||||||
|
Gross
profit
|
7,734
|
7,364
|
8,273
|
|||||||
|
Marketing
and selling expenses
|
3,799
|
2,881
|
3,599
|
|||||||
|
General
and administrative expenses
|
1,036
|
972
|
809
|
|||||||
|
Other
expense, net
|
99
|
145
|
156
|
|||||||
|
Gain
on sale of assets
|
-
|
-
|
(250
|
)
|
||||||
|
Income
from discontinued operations
|
2,800
|
3,366
|
3,959
|
|||||||
|
Provision
for income taxes
|
(1,044
|
)
|
(1,256
|
)
|
(1,477
|
)
|
||||
|
Income
from discontinued operations, net of income taxes
|
$
|
1,756
|
$
|
2,110
|
$
|
2,482
|
||||
|
5.
|
Sale
of Assets
|
Burk
Technology, Inc.
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, $1.8 million in the form
of a
seven-year promissory note, with interest at the rate of nine percent per
year,
and up to $700 as a commission over a period of up to seven years. The payments
on the promissory note could be deferred based upon Burk not meeting net
quarterly sales levels established within the agreement. The promissory note
was
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 was based upon future net sales of Burk
over base sales established within the agreement. The Company realized a
gain on
the sale of $58 (net of applicable income taxes of $35), $200 (net of applicable
income taxes of $119), and $176 (net of applicable income taxes of $104)
for the
fiscal years ended June 30, 2004, 2003, and 2002, respectively. As of
June 30, 2004, $1.5 million of the promissory note remained outstanding and
the Company had received $20 in commissions.
F-25
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
On
August
22, 2005, the Company entered into a Mutual Release and Waiver Agreement
with
Burk pursuant to which Burk paid the Company $1.3 million in full satisfaction
of the promissory note, which included a discount of approximately $120.
As part
of the Mutual Release and Waiver Agreement, the Company waived any right
to
future commission payments from Burk and Burk and the Company granted mutual
releases to one another with respect to future claims and liabilities.
Subsequent to June 30, 2004, the Company anticipates recognizing a pre-tax
gain
on the sale of approximately $1.5 million. Accordingly, the total pre-tax
gain
on the disposal of discontinued operations, related to Burk, will be
approximately $3.0 million.
Court
Conferencing
As
part
of the Company’s conferencing services operating 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. This
gain
is included in the conferencing services portion of income from discontinued
operations in the accompanying consolidated financial statements (see Note
4).
|
6.
|
Sale
of Broadcast Telephone
Interface
|
On
August
23, 2002, the Company entered into an agreement with Comrex Corporation
(“Comrex”). In exchange for $1.3 million, 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 97-2, “Software Revenue Recognition,”
(“SOP 97-2”). 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.
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 $130 and $1.1 million in revenue related to this transaction in
the
fiscal years ended June 30, 2004 and 2003, respectively. The revenue is included
in business services revenue in the accompanying consolidated financial
statements.
The
Company entered into a manufacturing agreement to continue to manufacture
additional product for Comrex until August 2003 on a when-and-if needed basis.
Comrex paid the Company for any additional product on a per item basis of
cost
plus 30 percent. Given the future revenue stream associated with each unit
produced, revenue will be recognized when-and-if received. During fiscal
2004
and fiscal 2003, the Company has recognized $387 and $783, respectively,
in
revenue related to the manufacture of additional product from Comrex.
F-26
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
7.
|
Inventories
|
Inventories,
net of reserves, consist of the following as of June 30, 2004 and 2003:
|
As
of June 30,
|
|||||||
|
2004
|
2003
|
||||||
|
Raw
materials
|
$
|
1,674
|
$
|
3,881
|
|||
|
Finished
goods
|
2,242
|
3,258
|
|||||
|
Consigned
inventory
|
2,381
|
1,738
|
|||||
|
Total
inventory
|
$
|
6,297
|
$
|
8,877
|
|||
Consigned
inventory represents inventory at distributors and other customers where
revenue
recognition criteria have not been achieved.
|
8.
|
Property
and Equipment
|
Major
classifications of property and equipment and estimated useful lives are
as
follows as of June 30, 2004 and 2003:
|
Estimated
|
As
of June 30,
|
|||||||||
|
useful
lives
|
2004
|
2003
|
||||||||
|
Office
furniture and equipment
|
3
to 10 years
|
$
|
8,078
|
$
|
7,265
|
|||||
|
Manufacturing
and test equipment
|
2
to 10 years
|
2,532
|
3,277
|
|||||||
|
Vehicles
|
3
to 5 years
|
9
|
9
|
|||||||
|
10,619
|
10,551
|
|||||||||
|
Accumulated
depreciation and amortization
|
(6,542
|
)
|
(6,231
|
)
|
||||||
|
Property
and equipment, net
|
$
|
4,077
|
$
|
4,320
|
||||||
|
9.
|
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.
Goodwill
The
following presents details of the Company’s goodwill by operating segments for
the years ended June 30, 2004, 2003, and 2002:
F-27
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
Products
|
Business
Services
|
Total
|
||||||||
|
Balances
as of June 30, 2001
|
$
|
890
|
$
|
-
|
$
|
890
|
||||
|
Amortization
of ClearOne goodwill
|
(297
|
)
|
-
|
(297
|
)
|
|||||
|
Acquisition
of Ivron
|
218
|
-
|
218
|
|||||||
|
Impairment
of ClearOne and Ivron goodwill (see Note 10)
|
(811
|
)
|
-
|
(811
|
)
|
|||||
|
Acquisition
of E.mergent
|
5,026
|
12,046
|
17,072
|
|||||||
|
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
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Balances
as of June 30, 2004
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
Acquired
Intangibles
Amortization
of intangible assets was $115, $680, and $787 for the years ended June 30,
2004,
2003, and 2002, respectively. Amortization of costs related to patents was
reported in product cost of goods sold. Amortization of costs related to
customer and partner relationships, and non-compete agreements was reported
in
marketing and selling expense and general and administrative expense,
respectively.
The
following table presents the Company’s intangible assets as of June 30, 2004 and
2003:
|
2004
|
2003
|
|||||||||||||||
|
Useful
Lives
|
Gross
Value
|
Accumulated
Amortization
|
Gross
Value
|
Accumulated
Amortization
|
||||||||||||
|
Patents
|
15/7
years
|
$
|
1,060
|
$
|
(175
|
)
|
$
|
1,060
|
$
|
(75
|
)
|
|||||
|
Non-compete
agreements
|
2
to 3 years
|
52
|
(36
|
)
|
52
|
(19
|
)
|
|||||||||
|
Total
|
$
|
1,112
|
$
|
(211
|
)
|
$
|
1,112
|
$
|
(94
|
)
|
||||||
During
fiscal 2003, the Company recorded impairment losses related to an E.mergent
customer relationship and a portion of the non-compete agreement with a former
officer of E.mergent. During June 2004, the Company decided to no longer
invest
additional research and development related to the camera products, and a
change
was made to the estimated useful life of the camera-related patent from fifteen
years to seven years. Estimated future amortization expense is as
follows:
F-28
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
Years
Ending June 30,
|
||||
|
2005
|
$
|
196
|
||
|
2006
|
180
|
|||
|
2007
|
180
|
|||
|
2008
|
180
|
|||
|
2009
|
165
|
|||
|
Thereafter
|
-
|
|||
|
Total
estimated amortization expense
|
$
|
901
|
||
|
10.
|
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 video conferencing 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.
Management estimated the fair market value of the long-lived assets using
the
present value of expected future discounted cash flows. The analysis resulted
in
an impairment loss of $7.1 million for the fiscal year ended June 30, 2002.
The
Company entered into the conferencing furniture manufacturing business through
the E.mergent acquisition. The estimated fair value of the reporting unit,
for
purposes of evaluating goodwill for impairment, was less than its carrying
values. Additionally, the estimated undiscounted future cash flows generated
by
certain other long-lived assets, excluding goodwill, was less than its carrying
value. The impairment analysis performed in accordance with SFAS No. 142
and
SFAS No. 144, resulted in an impairment loss of $5.1 million for the fiscal
year
ended June 30, 2003. Management estimated the fair value of reporting unit
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.
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
business was perceived as a threat by its systems integrators and value-added
resellers, since the Company began competing against many of them for sales.
During the fourth quarter of the fiscal year ended June 30, 2003, the Company
decided to stop pursuing new U.S. business service contracts and to de-emphasize
the audiovisual integration market serving the Ottawa, Canada region.
These
changes in facts and circumstances as well as the change in the Company’s
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 $20.9 million 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-29
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
The
impairment losses relate to the following:
|
2003
|
2002
|
||||||
|
Goodwill:
|
|||||||
|
ClearOne
|
$
|
-
|
$
|
593
|
|||
|
Ivron
|
-
|
218
|
|||||
|
E.mergent
- Products
|
5,026
|
-
|
|||||
|
E.mergent
- Business Services (see Note 4)
|
12,066
|
-
|
|||||
|
OM
Video
|
7,774
|
-
|
|||||
|
24,866
|
811
|
||||||
|
Intangible
assets:
|
|||||||
|
ClearOne
|
-
|
308
|
|||||
|
Ivron
|
-
|
5,924
|
|||||
|
E.mergent
- Products
|
18
|
-
|
|||||
|
E.mergent
- Business Services (see Note 4)
|
195
|
-
|
|||||
|
OM
Video
|
387
|
-
|
|||||
|
600
|
6,232
|
||||||
|
Property
and equipment:
|
|||||||
|
Ivron
|
-
|
72
|
|||||
|
E.mergent
- Products
|
58
|
-
|
|||||
|
E.mergent
- Business Services (see Note 4)
|
212
|
-
|
|||||
|
OM
Video
|
265
|
-
|
|||||
|
535
|
72
|
||||||
|
Total
|
$
|
26,001
|
$
|
7,115
|
|||
During
fiscal 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 fiscal 2002, the Company recorded impairment
losses of $72 related to property and equipment associated with the Ivron
asset
grouping.
The
impairment charges related to ClearOne and Ivron are included in impairment
losses in fiscal 2002. Approximately $12.5 million of the E.mergent impairment
charges are included in discontinued operations and are related to the U.S.
audiovisual integration services business in fiscal 2003 (see Note 4). An
additional $5.1 million of the E.mergent impairment charges are included
in
impairment losses in fiscal 2003. The impairment charges related to OM Video
are
included in impairment losses in fiscal 2003. The Company completed the sale
of
OM Video during fiscal 2005, and expects to present all OM Video activity
in
discontinued operations in the fiscal 2005 consolidated financial
statements.
|
11.
|
Lines
of Credit
|
Through
December 22, 2003, the Company maintained a revolving line of credit in the
amount of $10.0 million with a commercial bank. Prior to November 22, 2002,
the
line of credit was in the amount of $5.0 million. 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 0.3 percent, at the Company’s
option). The borrowing rate was 3.6 percent as of December 22, 2003, when
the
line of credit expired. The weighted average interest rate for fiscal 2004
through December 22, 2003 and for the fiscal years ended June 30, 2003 and
2002,
was 3.6 percent, 4.0 percent, and 5.2 percent, 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.
No amounts were outstanding under the line of credit as of June 30,
2003.
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.
F-30
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
12.
|
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.
Property
and equipment under capital leases are as follows:
|
As
of June 30,
|
|||||||
|
2004
|
2003
|
||||||
|
Office
furniture and equipment
|
$
|
28
|
$
|
28
|
|||
|
Accumulated
amortization
|
(15
|
)
|
(10
|
)
|
|||
|
Net
property and equipment under capital leases
|
$
|
13
|
$
|
18
|
|||
Depreciation
expense for assets recorded under capital leases was $5, $5, and $5 for the
years ended June 30, 2004, 2003, and 2002, respectively.
On
August
1, 2005, the Company entered into a one-year sublease with Inovar with respect
to the 12 square foot manufacturing facility in its headquarters building
in
connection with the outsourcing of its manufacturing operations. Either party
may terminate the lease for any reason upon 90 days written notice or 60
days
written notice to the other party of material breach of the agreement. The
subtenant pays $11 per month and the sublease expires on July 31, 2006.
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
$1.8 million, $1.3 million, and $755 for the years ended June 30, 2004, 2003,
and 2002, respectively.
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,
2004:
|
Capital
|
Gross
Operating Leases
|
Less
Sublease
|
Net
Operating Leases
|
||||||||||
|
For
years ending June 30:
|
|||||||||||||
|
2005
|
$
|
7
|
$
|
676
|
$
|
-
|
$
|
676
|
|||||
|
2006
|
2
|
553
|
(121
|
)
|
432
|
||||||||
|
2007
|
-
|
221
|
(11
|
)
|
210
|
||||||||
|
2008
|
-
|
21
|
-
|
21
|
|||||||||
|
2009
and thereafter
|
-
|
2
|
-
|
2
|
|||||||||
|
Total
minimum lease payments
|
9
|
$
|
1,473
|
$
|
(132
|
)
|
$
|
1,341
|
|||||
|
Less
amount representing interest
|
(1
|
)
|
|||||||||||
|
Present
value of net minimum lease payments
|
8
|
||||||||||||
|
Less
current portion
|
(6
|
)
|
|||||||||||
|
Long-term
capital lease obligations
|
$
|
2
|
|||||||||||
|
13.
|
Note
Payable
|
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
Enterprise Resource Planning implementation. The term of the note was 36
months
with monthly payments of $60 and an interest rate of 5.8 percent. The Company
had $932 outstanding under the note payable as of June 30, 2004.
F-31
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
14.
|
Accrued
Liabilities
|
Accrued
liabilities consist of the following as of June 30, 2004 and 2003:
|
As
of June 30,
|
|||||||
|
2004
|
2003
|
||||||
|
Accrued
salaries and bonuses
|
$
|
948
|
$
|
710
|
|||
|
Other
accrued liabilities
|
760
|
327
|
|||||
|
Legal
contingencies
|
43
|
147
|
|||||
|
Class
action settlement
|
9,013
|
7,326
|
|||||
|
Total
|
$
|
10,764
|
$
|
8,510
|
|||
|
15.
|
Costs
and Estimated Earnings on Uncompleted
Contracts
|
Information
with respect to uncompleted contracts is as follows as of June 30, 2004 and
2003:
|
As
of June 30,
|
|||||||
|
2004
|
2003
|
||||||
|
Billings
on uncompleted contracts
|
$
|
757
|
$
|
634
|
|||
|
Less
costs incurred on uncompleted contracts
|
(382
|
)
|
(338
|
)
|
|||
|
$
|
375
|
$
|
296
|
||||
The
above
amounts are reported in the consolidated balance sheet in billings in excess
of
costs on uncompleted contracts.
|
16.
|
Commitments
and Contingencies
|
The
Company establishes contingent liabilities when a particular contingency
is both
probable and estimable. For the contingencies noted below the Company has
accrued amounts considered probable and estimable. The Company is not aware
of
pending claims or assessments, other than as described below, which may have
a
material adverse impact on the Company’s financial position or results of
operations.
Ascalade
Communications, Ltd.
On
August 11, 2003, the Company entered into a manufacturing agreement with
Ascalade Communications, Ltd. related to the outsourced manufacturing of
certain
of its products. The manufacturing agreement established annual volume
commitments. In the event annual volume commitments are not met, the Company
will be subject to a tooling amortization charge for the difference between
the
Company’s volume commitment and its actual product purchases. For the calendar
year ended December 31, 2004, the Company did not meet its annual volume
commitment and was required to pay $30 in amortization charges. The Company
was
also responsible for prepayment of $274 in certain raw material inventory
related to the annual volume commitment.
Legal
Proceedings.
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 as of November 28, 2005 and after discussions with
legal counsel, the Company does not believe any such other proceedings will
have
a material, adverse effect on its business, results of operations, financial
position, or liquidity, except as described below.
F-32
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
The
SEC Action.
On
January 15, 2003, the 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
auditing standards (“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.
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 had 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
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 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 the Company agreed
to pay
the class $5.0 million and issue the class 1.2 million 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. On September 29, 2005, the Company completed its
obligations under the settlement agreement by issuing a total of 1,148,494
shares of the Company’s common stock to the plaintiff class, including 228,000
shares previously issued in November 2004, and the Company paid an aggregate
of
$127 in cash in lieu of shares to those members of the class who would otherwise
have been entitled to receive an odd-lot number of shares or who resided
in
states in which there was no exemption available for the issuance of shares.
The
cash payments were calculated on the basis of $2.46 per share which was equal
to
the higher of (i) the closing price for the Company’s common stock as reported
by the Pink Sheets on the business day prior to the date the shares were
mailed,
or (ii) the average closing price over the five trading days prior to such
mailing date.
Expenses
related to the SEC investigation and the shareholders’ class action lawsuit was
$5.1 million and $9.2 million for the years ended June 30, 2004 and 2003,
respectively, and are reported in general and administrative expenses. During
fiscal 2004, the Company incurred an expense of approximately $4.1 million
related to the 1.2 million shares of the Company’s common stock that were issued
in November 2004 and September 2005. On a quarterly basis, the Company revalues
the un-issued shares to the closing price of the stock on the last day of
the
quarter.
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 complaint 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 to
issue
materially misstated financial statements and that Ernst & Young breached
its professional responsibilities to the Company and acted in violation of
GAAP
by failing to identify or prevent the alleged revenue recognition violations
and
by issuing unqualified audit opinions with respect to the Company’s fiscal 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 against the individual defendents was not in
the
best interest of the Company. Accordingly, on December 12, 2003, the Company
moved to dismiss those claims. 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-33
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(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) (see Note 21).
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.
The
Insurance Coverage Action. On
February 9, 2004, the Company and Edward Dallin Bagley, the Chairman of the
Board of Directors and significant shareholder of the Company, jointly filed
an
action against National Union Fire Insurance Company of Pittsburgh, Pennsylvania
(“National Union”) and Lumbermens Mutual Insurance Company of Berkeley Heights,
New Jersey (“Lumbermens Mutual”), 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 complaint, 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, $3.0 million of which was provided by National Union and $2.0 million
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 Mr. Bagley received a lump-sum cash amount and the plaintiffs
agreed
to dismiss their claims against Lumbermens Mutual with prejudice. The cash
settlement is 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 between the Company and Mr. Bagley. The amount distributed to
the
Company and Mr. Bagley will be determined based on future negotiations between
the Company and Mr. 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. On October 21, 2005, the court granted
summary
judgment in favor of National Union on its rescission defense and accordingly
entered a judgment dismissing all of the claims asserted by ClearOne and
Mr.
Bagley. The Company and Mr. Bagley have filed a notice of appeal concerning
this
adverse judgment and intend to vigorously pursue the appeal and any follow-up
proceedings regarding their claims against National Union. Although the Company
and Mr. Bagley are optimistic about their appeal, no assurances can be given
that they will be successful. The Company and Mr. Bagley have entered into
a
Joint Prosecution and Defense Agreement in connection with the action and
the
Company is paying all litigation expenses except litigation expenses which
are
solely related to Mr. Bagley’s claims in the litigation.
F-34
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
Wells
Submission.
The
Company has been advised by the staff of the Salt Lake District Office of
the
SEC that the staff intends to recommend to the Commission that administrative
proceedings be instituted to revoke the registration of the Company’s common
stock based on the Company’s failure to timely file annual and quarterly reports
with the Commission. The Company has provided the staff with a so-called
“Wells
Submission” setting forth its position with respect to the staff’s intended
recommendation, which submission would be considered by the Commission in
determining whether or not to authorize an administrative proceeding. There
can
be no assurance that the Company will be successful in convincing the Commission
not to initiate an administrative proceeding or that the Company would prevail
if an administrative proceeding were initiated.
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 $1.8 million that PT&T owed
the Company for inventory it purchased and received but did not pay 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.
|
17.
|
Shareholders’
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 $25.5 million,
before costs and expenses associated with this transaction, which totaled
$1.7
million.
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 $1.6 million using the Black-Scholes option pricing model
with
the following assumptions: expected dividend yield of 0 percent, risk-free
interest rate of 4.4 percent, expected price volatility of 68.0 percent,
and
contractual life of five years. The warrants expire on November 27, 2006.
All
warrants were outstanding as of June 30, 2004.
Stock
Repurchase Program
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 immediately retired.
The
stock repurchase program expired in October 2003 and no additional shares
were
repurchased.
F-35
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
18.
|
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 percent, 15 percent, 20 percent, 25 percent, and 30
percent per year. Certain other stock options vest in full after eight years.
As
of June 30, 2004, there were 30,750 options outstanding under the 1990 Plan
and
no additional options were available for grant under such plan.
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
was accelerated for 637,089 of these options upon meeting certain earnings
per
share goals through the fiscal year ended June 30, 2003. 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, 2004, there were 1,402,437 options outstanding under
the
1998 Plan and 795,439 options available for grant in the future.
Stock
option information for the fiscal years ending June 30, 2004, 2003, and 2002
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, 2001
|
1,750,798
|
$
|
8.37
|
||||
|
Granted
|
366,908
|
13.24
|
|||||
|
Expired
and canceled
|
(402,751
|
)
|
13.04
|
||||
|
Exercised
|
(195,999
|
)
|
5.21
|
||||
|
Outstanding
at June 30, 2002
|
1,518,956
|
8.71
|
|||||
|
Granted
|
835,500
|
3.57
|
|||||
|
Expired
and canceled
|
(350,200
|
)
|
11.57
|
||||
|
Exercised
|
(31,500
|
)
|
2.72
|
||||
|
Outstanding
at June 30, 2003
|
1,972,756
|
6.12
|
|||||
|
Granted
|
1,118,250
|
4.37
|
|||||
|
Expired
and canceled
|
(1,657,819
|
)
|
4.72
|
||||
|
Exercised
|
-
|
-
|
|||||
|
Outstanding
at June 30, 2004
|
1,433,187
|
$
|
6.37
|
||||
F-36
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
The
following table summarizes information about stock options outstanding as
of
June 30, 2004:
|
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
|
30,750
|
1.5
years
|
$
|
0.75
|
30,750
|
$
|
0.75
|
|||||||||
|
$2.05
to $4.09
|
703,789
|
6.9
years
|
3.14
|
278,229
|
3.37
|
|||||||||||
|
$4.10
to $8.18
|
355,581
|
8.0
years
|
6.43
|
12,081
|
6.67
|
|||||||||||
|
$8.19
to $10.22
|
15,256
|
5.3
years
|
9.67
|
11,144
|
9.67
|
|||||||||||
|
$10.23
to $12.26
|
78,340
|
6.4
years
|
11.37
|
26,860
|
11.39
|
|||||||||||
|
$12.27
to $14.31
|
143,321
|
6.0
years
|
13.30
|
78,714
|
13.58
|
|||||||||||
|
$14.32
to $16.35
|
78,500
|
5.9
years
|
15.25
|
26,689
|
15.25
|
|||||||||||
|
$16.36
to $18.40
|
27,150
|
6.0
years
|
17.15
|
5,005
|
17.15
|
|||||||||||
|
$18.41
to $20.45
|
500
|
5.7
years
|
19.63
|
338
|
19.63
|
|||||||||||
|
Total
|
1,433,187
|
6.9
years
|
$
|
6.37
|
469,810
|
$
|
6.43
|
|||||||||
The
following are the options exercisable at the corresponding weighted average
exercise price as of June 30, 2004, 2003, and 2002, respectively: 469,810
at
$6.43; 839,871 at $4.80; and 793,965 at $6.10.
The
grant
date weighted average fair value of options granted during the years ended
June
30, 2004, 2003, and 2002 was $3.29, $2.50, and $9.33, 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, 2004, 2003, and 2002: expected dividend yield, 0 percent for each year;
risk-free interest rate was 3.2 percent, 2.5 percent, and 4.1 percent,
respectively; expected price volatility, 91.2 percent, 90.0 percent, and
81.2
percent; and expected life of options, 5.2, 4.9, and 5.5 years.
During
the fiscal year ended June 30, 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. Since December
2003, 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. These
modifications include (i) the extension of the post-service exercise period
of
vested options held by persons who have ceased to serve the Company; (ii)
the
extension of the option exercise period for maturing options that were fully
vested and unexercised; (iii) the acceleration of vesting schedule for certain
key employees whose employment terminated due to the sale of the conferencing
services business to Premiere; and (iv) the acceleration of vesting schedule
of
one former officer at termination. The Company booked compensation expense
of
$200 during fiscal 2004 due to these modifications.
|
19.
|
Employee
Stock Purchase Plan
|
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 to determine
eligibility. The ESPP is intended to qualify under Section 423 of the Internal
Revenue Code. All employees are eligible after thirty days
employment.
F-37
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
Employees
can purchase common stock through payroll deductions of up to 10 percent
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, 2004, 2003, and 2002,
0,
1,841, and 724 shares of common stock were issued under the ESPP. The ESPP
is
compensatory under APB Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”). Compensation expense from the ESPP was $0, $8, and $13
for the fiscal years ended June 30, 2004, 2003, and 2002, respectively. The
program was suspended during fiscal 2003 due to the Company’s failure to remain
current in its filing of periodic reports with the SEC.
|
20.
|
Significant
Customers
|
During
the fiscal years ended June 30, 2004, 2003, and 2002, revenues in the Company’s
product segment included sales to different distributors that represented
more
than 10 percent each. During the fiscal year ended June 30, 2004, the Company
had three distributors whose individual sales represented more than 10 percent
of total revenue and whose combined sales represented 53.0 percent of total
revenue. These same distributors each had balances of greater than 10 percent
of
the Company’s total accounts receivable aging as of June 30, 2004. Combined
these distributors represented 54.9 percent of gross accounts receivable.
During
the fiscal year ended June 30, 2003, the Company had two distributors whose
individual sales represented more than 10 percent of total revenue and whose
combined sales represented 24.8 percent of total revenue. During the fiscal
year
ended June 30, 2002, the Company had one distributor whose individual sales
represented 15.7 percent of its total revenues.
These
distributors facilitate product sales to a large number of end-users, none
of
which is known to account for more than 10 percent of the Company’s revenue from
product sales. Nevertheless, the loss of one or more distributors could reduce
revenues and have a material adverse effect on the Company’s business and
results of operations.
|
21.
|
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.
During
the fiscal year ended June 30, 2004, the Company recorded a total of $182
in
severance associated with settlement agreements and releases with three former
executive officers in connection with the cessation of their employment.
Such
costs were included in operating expenses during the year ended June 30,
2004.
The Company paid these amounts during the years ended June 30, 2004 and 2005.
In
connection with the employment separation agreements between the Company
and Ms.
Flood and the Company and Ms. Strohm, the Company recorded compensation expense
of $306 and $56, respectively (See Note 16).
|
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 percent up to 6 percent of the
employee’s earnings, paid bi-weekly; however, 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, 2004, 2003, and 2002 totaled $30, $0, and $72,
respectively.
F-38
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
23.
|
Income
Taxes
|
Income
(loss) from continuing operations and before income taxes consisted of the
following:
|
Years
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
U.S.
|
$
|
(12,438
|
)
|
$
|
(17,822
|
)
|
$
|
(3,261
|
)
|
|
|
Non-U.S.
|
556
|
(8,423
|
)
|
(6,393
|
)
|
|||||
|
$
|
(11,882
|
)
|
$
|
(26,245
|
)
|
$
|
(9,654
|
)
|
||
The
benefit (provision) for income taxes on income from continuing operations
consisted of the following:
|
Years
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
Current:
|
||||||||||
|
U.S.
Federal
|
$
|
3,698
|
$
|
3,460
|
$
|
(2,028
|
)
|
|||
|
U.S.
State
|
163
|
132
|
(245
|
)
|
||||||
|
Non-U.S.
|
(202
|
)
|
(47
|
)
|
(22
|
)
|
||||
|
Stock
option benefit credited to paid in capital
|
-
|
-
|
(452
|
)
|
||||||
|
Total
current
|
$
|
3,659
|
$
|
3,545
|
$
|
(2,747
|
)
|
|||
|
Deferred:
|
||||||||||
|
U.S.
Federal
|
666
|
771
|
3,714
|
|||||||
|
U.S.
State
|
440
|
613
|
505
|
|||||||
|
Non-U.S.
|
-
|
-
|
(1
|
)
|
||||||
|
Total
deferred
|
1,106
|
1,384
|
4,218
|
|||||||
|
Total
current and deferred income taxes
|
4,765
|
4,929
|
1,471
|
|||||||
|
Increase
in valuation allowance
|
(4,185
|
)
|
(3,608
|
)
|
(1,298
|
)
|
||||
|
Benefit
(provision) for income taxes
|
$
|
580
|
$
|
1,321
|
$
|
173
|
||||
F-39
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(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 34.0 percent on income from continuing operations:
|
Years
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
U.S.
federal statutory income tax rate at 34.0%
|
$
|
4,040
|
$
|
8,924
|
$
|
3,282
|
||||
|
State
income tax (provision) benefit, net of federal income
tax effect
|
75
|
54
|
(373
|
)
|
||||||
|
Extraterritorial
income exclusion
|
-
|
-
|
79
|
|||||||
|
Research
and development credit
|
108
|
-
|
46
|
|||||||
|
Foreign
earnings or losses taxes at different rates
|
(10
|
)
|
(255
|
)
|
(132
|
)
|
||||
|
Impairment
of investment in foreign subsidiary
|
-
|
(2,596
|
)
|
(2,112
|
)
|
|||||
|
Impairment
of E.mergent goodwill
|
-
|
(1,709
|
)
|
-
|
||||||
|
Change
in valuation allowance
|
(4,185
|
)
|
(3,608
|
)
|
(1,298
|
)
|
||||
|
Valuation
allowance change attributable to state tax impact
and other
|
436
|
661
|
764
|
|||||||
|
Non-deductible
items and other
|
116
|
(150
|
)
|
(83
|
)
|
|||||
|
Total
|
$
|
580
|
$
|
1,321
|
$
|
173
|
||||
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, 2004 and 2003, significant components of the net
U.S.
deferred income tax assets and liabilities were as follows:
|
As
of June 30,
|
|||||||
|
2004
|
2003
|
||||||
|
Deferred
income tax assets:
|
|||||||
|
Net
operating loss carryforwards
|
$
|
1,838
|
$
|
724
|
|||
|
Accrued
liabilities
|
3,865
|
2,980
|
|||||
|
Allowance
for sales returns and doubtful accounts
|
9
|
155
|
|||||
|
Inventory
reserve
|
1,019
|
1,939
|
|||||
|
Deferred
revenue
|
1,455
|
1,796
|
|||||
|
Installment
sale
|
178
|
128
|
|||||
|
Accumulated
research and development credits
|
382
|
142
|
|||||
|
Alternative
minimum tax credits
|
355
|
-
|
|||||
|
Basis
difference in intangible assets
|
797
|
852
|
|||||
|
Other
|
227
|
162
|
|||||
|
Subtotal
|
10,125
|
8,878
|
|||||
|
Valuation
allowance
|
(9,507
|
)
|
(5,252
|
)
|
|||
|
Deferred
income tax assets
|
618
|
3,626
|
|||||
|
Deferred
income tax liabilities:
|
|||||||
|
Basis
difference in fixed assets
|
(618
|
)
|
(458
|
)
|
|||
|
Other
|
-
|
(89
|
)
|
||||
|
Deferred
income tax liabilities
|
(618
|
)
|
(547
|
)
|
|||
|
Net
deferred income tax assets
|
$
|
-
|
$
|
3,079
|
|||
F-40
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(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, 2004 and
2003,
as follows:
|
As
of June 30,
|
|||||||
|
2004
|
2003
|
||||||
|
Current
deferred income tax assets
|
$
|
401
|
$
|
2,531
|
|||
|
Long-term
deferred income tax assets
|
-
|
548
|
|||||
|
Current
deferred income tax liabilities
|
-
|
-
|
|||||
|
Long-term
deferred income tax liabilities
|
(401
|
)
|
-
|
||||
|
Net
deferred income tax assets
|
$
|
-
|
$
|
3,079
|
|||
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 $559, $205, and $152 for the fiscal
years ended June 30, 2004, 2003, and 2002, respectively.
As
of
June 30, 2004 and 2003, the Company has a net operating loss (“NOL”), research
credit, and alternative minimum tax credit carryforwards for U.S. federal
income
tax reporting purposes of $2.4 million, $313, and $355, respectively, which
will
begin to expire in 2021. Of these carryforwards, $697 of the NOL and $159
of the
research credit 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 goodwill related to E.mergent was fully impaired at June 30, 2004.
The
Company also has state NOL and research and development tax credit carryforwards
of approximately $20.4 million and $69, respectively, which expire depending
on
the rules of the various states to which the carryovers relate. The Company
also
has a NOL carryforward 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 Note 26, 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. The Company has not determined if it has undergone an
ownership change under these provisions. If the Company has undergone an
ownership change under these rules, the Company’s ability to utilize its NOLs
and credit carryovers may be limited. However, 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 $1.1 million 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.
Valuation allowances were recorded in 2004 and 2003 due to the uncertainty
of
realization of the assets based upon a number of factors, including lack
of
profitability in 2004, 2003, and 2002 and the limited taxable income in
carryback years as permitted by the tax law. For the year ended June 30,
2003,
the Company has recorded a valuation allowance against a portion of its net
deferred tax assets. For the year ended June 30, 2004, the Company has recorded
a valuation allowance against all of its net deferred tax assets. A full
valuation allowance was recorded because none of the net deferred tax assets
would generate a NOL that could be carried back to prior tax years. Based
on the
Company’s lack of profitability in recent years it is more likely than not that
all of the net deferred tax assets will not be realized that cannot be carried
back to prior tax years.
F-41
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
The
net
change in the Company’s domestic valuation allowance was an increase of $4.3
million, $3.5 million, and $1.7 million for the years ended June 30, 2004,
2003,
and 2002, respectively.
|
24.
|
Related-Party
Transactions
|
Edward
Dallin Bagley, Chairman of the Board of Directors and significant shareholder
of
the Company, served as a consultant to the Company from November 2002 through
January 2004 and was paid $5 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.
The
Company and Mr. Bagley jointly filed an action against National Union and
Lumbermens Mutual. For additional discussion see Note 16 under The
Insurance Coverage Action.
|
25.
|
Segment
and Geographic Information
|
During
the fiscal years ended June 30, 2004, 2003, and 2002, the Company included
in
continuing operations two operating segments - products 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 fiscal
2002
as a result of the acquisition of E.mergent in late fiscal 2002 and includes
certain operations of E.mergent and the operations of OM Video. During fiscal
2004, the Company sold its business services-related E.mergent operations
and
accordingly these operations have been omitted from these disclosures (see
Note
4). Because of the changes in the Company’s operations and the information being
provided to the Company’s Chief Executive Officer, the segment disclosures for
fiscal 2003 and 2002 have been restated to incorporate these
changes.
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
products segment includes products for audio conferencing products, video
conferencing products, and sound reinforcement products. The business services
segment provided services in Canada, including technical services such as
designing, constructing, and servicing of conference systems and maintenance
contracts, 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.
The
United States was the only country to contribute more than 10 percent of
total
revenues in each fiscal year. Canada contributed more than 10 percent of
total
revenues in the fiscal years ended June 30, 2004 and 2003. The Company’s
revenues are substantially denominated in U.S. dollars and are summarized
geographically as follows (in thousands):
|
Years
Ended June 30,
|
||||||||||
|
2004
|
2003
|
2002
|
||||||||
|
United
States
|
$
|
21,654
|
$
|
19,683
|
$
|
22,035
|
||||
|
Canada
|
6,274
|
6,316
|
474
|
|||||||
|
All
other countries
|
5,966
|
8,678
|
3,744
|
|||||||
|
Total
|
$
|
33,894
|
$
|
34,677
|
$
|
26,253
|
||||
The
Company’s long-lived assets, net of accumulated depreciation, located outside of
the United States are $83, $39, and $41, for the fiscal years ended June
30,
2004, 2003, and 2002, respectively.
F-42
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
The
following tables summarize the Company’s segment information:
|
Product
|
Business
Services
|
Product
Segment Transactions with the Business Services
Segment
|
Total
|
||||||||||
|
2004:
|
|||||||||||||
|
Revenue
|
$
|
27,879
|
$
|
6,058
|
$
|
(43
|
)
|
$
|
33,894
|
||||
|
Gross
profit
|
11,465
|
2,006
|
(8
|
)
|
13,463
|
||||||||
|
2003:
|
|||||||||||||
|
Revenue
|
$
|
27,516
|
$
|
7,165
|
$
|
(4
|
)
|
$
|
34,677
|
||||
|
Gross
profit
|
9,405
|
3,110
|
(8
|
)
|
12,507
|
||||||||
|
2002:
|
|||||||||||||
|
Revenue
|
$
|
26,253
|
$
|
-
|
$
|
-
|
$
|
26,253
|
|||||
|
Gross
profit
|
12,369
|
-
|
-
|
12,369
|
|||||||||
The
reconciliation of segment information to the Company’s consolidated totals is as
follows (in thousands):
|
Fiscal
Year Ended June 30, 2004
|
|||||||||||||
|
Product
|
Business
Services
|
Corporate
|
Total
|
||||||||||
|
Gross
profit
|
$
|
11,457
|
$
|
2,006
|
$
|
-
|
$
|
13,463
|
|||||
|
Marketing
and selling expense
|
(7,879
|
)
|
(390
|
)
|
-
|
(8,269
|
)
|
||||||
|
General
and administrative expense
|
(406
|
)
|
(1,113
|
)
|
(11,388
|
)
|
(12,907
|
)
|
|||||
|
Research
and product development expense
|
(3,908
|
)
|
-
|
-
|
(3,908
|
)
|
|||||||
|
Interest
income
|
-
|
-
|
52
|
52
|
|||||||||
|
Interest
expense
|
-
|
-
|
(183
|
)
|
(183
|
)
|
|||||||
|
Other
income (expense), net
|
-
|
-
|
(130
|
)
|
(130
|
)
|
|||||||
|
(Provision)
benefit for income taxes
|
-
|
-
|
580
|
580
|
|||||||||
|
Total
income from continuing operations
|
$
|
(736
|
)
|
$
|
503
|
$
|
(11,069
|
)
|
$
|
(11,302
|
)
|
||
|
Depreciation
and amortization expense
|
$
|
1,934
|
$
|
18
|
$
|
-
|
$
|
1,952
|
|||||
|
Identifiable
assets
|
$
|
17,732
|
$
|
1,302
|
$
|
9,828
|
$
|
28,862
|
|||||
F-43
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
|
Fiscal
Year Ended June 30, 2003
|
|||||||||||||
|
Product
|
Business
Services
|
Corporate
|
Total
|
||||||||||
|
Gross
profit
|
$
|
9,397
|
$
|
3,110
|
$
|
-
|
$
|
12,507
|
|||||
|
Marketing
and selling expense
|
(6,468
|
)
|
(412
|
)
|
-
|
(6,880
|
)
|
||||||
|
General
and administrative expense
|
(365
|
)
|
(1,270
|
)
|
(13,763
|
)
|
(15,398
|
)
|
|||||
|
Research
and product development expense
|
(2,995
|
)
|
-
|
-
|
(2,995
|
)
|
|||||||
|
Impairment
losses
|
(5,102
|
)
|
(8,426
|
)
|
-
|
(13,528
|
)
|
||||||
|
Interest
income
|
-
|
-
|
85
|
85
|
|||||||||
|
Interest
expense
|
-
|
-
|
(91
|
)
|
(91
|
)
|
|||||||
|
Other
income (expense), net
|
-
|
-
|
55
|
55
|
|||||||||
|
(Provision)
benefit for income taxes
|
-
|
-
|
1,321
|
1,321
|
|||||||||
|
Total
income from continuing operations
|
$
|
(5,533
|
)
|
$
|
(6,998
|
)
|
$
|
(12,393
|
)
|
$
|
(24,924
|
)
|
|
|
Depreciation
and amortization expense
|
$
|
1,805
|
$
|
278
|
$
|
-
|
$
|
2,083
|
|||||
|
Identifiable
assets
|
$
|
14,255
|
$
|
910
|
$
|
14,089
|
$
|
29,254
|
|||||
|
Fiscal
Year Ended June 30, 2002
|
|||||||||||||
|
Product
|
Business
Services
|
Corporate
|
Total
|
||||||||||
|
Gross
profit
|
$
|
12,369
|
$
|
-
|
$
|
-
|
$
|
12,369
|
|||||
|
Marketing
and selling expense
|
(7,010
|
)
|
-
|
-
|
(7,010
|
)
|
|||||||
|
General
and administrative expense
|
(880
|
)
|
-
|
(3,496
|
)
|
(4,376
|
)
|
||||||
|
Research
and product development expense
|
(3,810
|
)
|
-
|
-
|
(3,810
|
)
|
|||||||
|
Impairment
losses
|
(7,115
|
)
|
-
|
-
|
(7,115
|
)
|
|||||||
|
Interest
income
|
-
|
-
|
293
|
293
|
|||||||||
|
Interest
expense
|
-
|
-
|
(23
|
)
|
(23
|
)
|
|||||||
|
Other
income (expense), net
|
-
|
-
|
18
|
18
|
|||||||||
|
(Provision)
benefit for income taxes
|
-
|
-
|
173
|
173
|
|||||||||
|
Total
income from continuing operations
|
$
|
(6,446
|
)
|
$
|
-
|
$
|
(3,035
|
)
|
$
|
(9,481
|
)
|
||
|
Depreciation
and amortization expense
|
$
|
2,176
|
$
|
-
|
$
|
-
|
$
|
2,176
|
|||||
|
Identifiable
assets
|
$
|
23,497
|
$
|
-
|
$
|
19,760
|
$
|
43,257
|
|||||
|
26.
|
Subsequent
Events
|
Sale
of Conferencing Services Business.
On July
1, 2004, the Company sold its conferencing services business segment to Premiere
for $21.3 million. Of the purchase price $1.0 million was placed into an
18-month Indemnity Escrow account and an additional $300 was placed into
a
working capital escrow account. The Company received the $300 working capital
escrow funds approximately 90 days after the execution date of the contract.
Additionally, $1.4 million of the proceeds were utilized to pay off equipment
leases pertaining to assets being conveyed to Premiere. 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. The
Company classified the conferencing services operations as discontinued
operations in the accompanying consolidated financial statements (see Note
4).
F-44
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
Settlement
Agreement and Release.
In
connection with the Company’s sale of its conferencing services business, the
Company entered into a severance agreement with Angelina Beitia, the Company’s
former Vice-President, on July 15, 2004, which provided for a lump-sum payment
of $100. In addition, Ms. Beitia surrendered and delivered to the Company
all
outstanding vested and unvested options.
Pre-payment
of Note Payable.
The
Company pre-paid the balance of the note payable, $769, in October 2004.
(see
Note 13).
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 in fiscal 2005 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 $1.3 million note payable over a 15-month
period, with interest accruing on the unpaid balance at the rate of 5.3 percent
per year; and contingent consideration ranging from 3.0 percent to 4.0 percent
of related gross revenues over a five-year period. The Company expects to
present all OM Video activities in discontinued operations in the fiscal
year
2005 consolidated financial statements. As of June 30, 2004, the assets of
the
Canada audiovisual integration business were classified as held and used.
(see
Note 3.)
The
Shareholders’ Class Action.
On
January 14, 2005, the second cash payment of $2.5 million was paid by the
Company as agreed to in the settlement agreement dated December 4, 2003.
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. On September 29, 2005, the Company
completed its obligations under the settlement agreement by issuing a total
of
1,148,494 shares of the Company’s common stock to the plaintiff class, including
228,000 shares previously issued in November 2004, and the Company paid an
aggregate of $127 in cash in lieu of shares to those members of the class
who
would otherwise have been entitled to receive an odd-lot number of shares
or who
resided in states in which there was no exemption available for the issuance
of
shares. The cash payments were calculated on the basis of $2.46 per share
which
was equal to the higher of (i) the closing price for the Company’s common stock
as reported by the Pink Sheets on the business day prior to the date the
shares
were mailed, or (ii) the average closing price over the five trading days
prior
to such mailing date. (see Note 16.)
Third-Party
Manufacturing Agreement.
On
August 1, 2005, 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,
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 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 90 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 a 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 approximately
$425 including severance payments, facilities no longer used by the Company,
and
fixed assets that will be disposed of. The Company anticipates that these
costs
will be included in the fiscal 2005 and 2006 consolidated financial
statements.
F-45
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T)
(in
thousands except share and per share amounts)
Payoff
of Burk Note Receivable.
On
August 22, 2005, the Company entered into a Mutual Release and Waiver Agreement
with Burk pursuant to which Burk paid us $1.3 million in full satisfaction
of
the promissory note, which included a discount of approximately $120. As
part of
the Mutual Release and Waiver Agreement, we waived any right to future
commission payments from Burk and we granted mutual releases to one another
with
respect to claims and liabilities. Subsequent to June 30, 2004, we anticipate
recognizing a pre-tax gain on the sale of approximately $1.5 million. (see
Note
5).
F-46
EXHIBIT
10.17
MANUFACTURING
AGREEMENT
THIS
MANUFACTURING AGREEMENT (this "Agreement")
is
dated as of the 1st day of August, 2005, (the "Effective
Date")
by and
between ClearOne Communications, Inc., a Utah corporation, having a principal
place of business at 1825 Research Way, Salt Lake City, Utah 84119
("Buyer"),
and
Inovar, Inc., a Utah corporation, having a principal place of business at 1073
West 1700 North, Logan, Utah 84321 ("Manufacturer").
Recitals
WHEREAS,
Manufacturer is an electronics manufacturing services provider that furnishes
the necessary personnel, material, equipment, services and facilities to
manufacture products for original equipment manufacturers and other third
parties in accordance with detailed specifications provided by such OEMs and
third parties;
WHEREAS,
Buyer desires to engage Manufacturer to manufacture certain of Buyer's products
in accordance with orders to be issued from time to time by Buyer;
WHEREAS,
Manufacturer is willing to enter into a business agreement and to accept orders
to manufacture Buyer's products upon terms and conditions, which, among other
things, reimburse Manufacturer for certain costs that Manufacturer reasonably
incurs in reliance on Buyer's orders and forecasts but cannot recover because
Buyer's requirements change; and
WHEREAS,
the parties hereto desire to enter into a business agreement upon the terms
and
conditions set forth herein.
NOW,
THEREFORE, in consideration of the mutual agreements hereinafter set forth,
it
is hereby agreed between the parties hereto as follows:
|
1.
|
DEFINITIONS.
|
(a) Defect.
"Defect" means any defect in a Product that results from Manufacturer's failure
to comply with the applicable IPC Workmanship Standard.
(b) Exclusive
Products.
"Exclusive Products" means all of Buyer's products as of the Effective Date
as
set forth on Exhibit
D
hereto,
together with any product that is added as an Exclusive Product in accordance
with Section 2(b).
(c) Inventory.
"Inventory" means the materials and components required to manufacture the
Products.
(d) IPC
Workmanship Standard.
"IPC
Workmanship Standard" means the Workmanship Standard promulgated by IPC
specified in the applicable Product Schedule.
(e) Long
Lead Inventory.
"Long
Lead Inventory" means Inventory that has a long lead time from a supplier and
must be purchased in advance of receipt of a Purchase Order in order for
Manufacturer to be able to meet the delivery schedule for Products as set forth
in the applicable Product Schedule.
(f) Master
Product Schedule.
"Master
Product Schedule" means a product schedule for each Product inclusive of
information on the sample product schedule attached as Exhibit
A.
(g) Minimum
Buy Inventory.
"Minimum Buy Inventory" means Inventory that may only be purchased in minimum
lot sizes.
1
(h) Minimum
Order Size.
"Minimum Order Size" means the minimum dollar or quantity amount that Buyer
must
order per Product on each individual Purchase Order as specified in the
applicable Product Schedule.
(i) NCNR
Inventory.
"NCNR
Inventory" means all Inventory that is (i) on order and not cancelable, or
(ii)
in Manufacturer's possession and not returnable to the vendor/supplier or
usable, within a reasonable time not to exceed three (3) months
from purchase, for other accepted Purchase Orders or other buyers.
(j) Non-Exclusive
Products.
"Non-Exclusive Products" as set forth on Exhibit
E
hereto.
(k) Product
Schedule.
"Product Schedule" means a schedule in the form of Exhibit A hereto, as amended
from time to time by mutual agreement of the parties, that (i) references this
Agreement and is executed by the parties hereto, (ii) sets forth information
relating to a Product to be manufactured for Buyer pursuant to this Agreement
and applicable Purchase Orders, and (iii) is attached to this Agreement and
incorporated herein by reference.
(l)
Products.
"Products" means the Exclusive Products and the Non-Exclusive
Products.
(m) Purchase
Order.
"Purchase Order" means an order meeting the requirements of this Agreement
submitted by Buyer for acceptance by Manufacturer.
(n) Purchase
Price.
"Purchase Price" means the unit price for a Product as established by
Manufacturer in accordance with Section 8.
(o) Safety
Stock Inventory.
"Safety
Stock Inventory" means Inventory that, unless purchased in advance of Purchase
Orders, may not be available in sufficient quantities to manufacture Products
as
set forth in the applicable Product Schedule.
(p) Specifications.
"Specifications" means the bill of materials, Product documentation, schematics,
assembly drawings, designs, test specifications, current revision number,
approved vendor list and other manufacturing information for each Product as
set
forth in the applicable Product Schedules.
(q) Total
Cost of Ownership.
"Total
Cost of Ownership" means total Product cost to Buyer including price, quality,
logistic cost and terms and conditions of purchase.
(r)
Minimum
Revenue Requirements.
“Minimum Revenue Requirements” means by Buyer projected revenue to Manufacturer
for a period of 12 (twelve) months.
|
2.
|
STATEMENT
OF WORK.
|
(a) Engagement.
Buyer
hereby engages Manufacturer, and Manufacturer hereby accepts Buyer's engagement,
to furnish the necessary personnel, material, equipment, services and facilities
to be the exclusive manufacturer of the Exclusive Products (Exhibit D, these
products are Exclusive as long as Manufacturer provides competitive Total Cost
of Ownership), and a non-exclusive manufacturer of the Non-Exclusive Products,
in accordance with the applicable Specifications as required by Purchase Orders
issued by Buyer and accepted by Manufacturer in accordance with Section
4(a)
herein.
Manufacturer shall also provide repair service and warranty support and
proto-type services for new product introduction as mutually agreed by
Manufacturer and Buyer. Manufacturer's electronic manufacturing services shall
be performed in accordance with the applicable IPC Workmanship Standard for
each
Product being manufactured. A Master Product Schedule will be developed for
each
Product.
(b) Additional
Products.
Manufacturer shall have a right of first refusal to manufacture any new product
that is developed and proposed for production by Buyer after the Effective
Date.
Buyer shall provide Manufacturer at least thirty (30) days notice of any
proposal to have a product manufactured by a bona fide third party manufacturer,
which notice shall set forth the Total Cost of Ownership of the proposed
manufacturing agreement provided that such disclosure is not limited or
prohibited by the third party manufacturer or prohibited by law Manufacturer
shall then have the right to designate such product as an Exclusive Product
hereunder at a Total Cost of Ownership equal to or better than that proposed
by
any bona fide third party manufacturer (to be verified in writing by Buyer),
and
Buyer and Manufacturer shall execute a Product Schedule for such Product, which
shall be attached hereto and incorporated herein by reference. If Manufacturer
does not exercise such right within thirty (30) days after receipt of Buyer's
notice, Buyer may have such product manufactured by the third party at. Upon
written request by Buyer, Manufacturer shall provide prototype manufacturing
and
engineering support services for Buyer's new product introductions at such
prices and upon such terms as are mutually agreed upon by the
parties.
2
(c) Certifications.
Manufacturer shall maintain its ISO 9001:2000 certification and shall target
RoHS manufacturing capability by October 2005 with full compliance to occur
by
June 30, 2006.
(d) Transition;
Technical Support; Employees.
The
parties acknowledge and agree that in connection with the performance of
Manufacturer's obligations hereunder, Manufacturer will be assuming Buyer's
manufacturing operations, which will involve Manufacturer subleasing a portion
of Buyer's manufacturing facility, acquiring an option to purchase Buyer's
manufacturing equipment, leasing Buyer's manufacturing equipment and leasing
the
employees used by Buyer in its Manufacturing operations from a third party
employee leasing company. During any period in which the Sublease (as defined
in
Exhibit B below) is in effect, Buyer shall provide to Manufacturer, at the
premises covered by the Sublease, such technical assistance and manufacturing
support as may be reasonably necessary to ensure a smooth transition of
manufacturing operations from Buyer to Manufacturer. In connection with the
assumption of Buyer's manufacturing operations by Manufacturer, Buyer shall
make
all identified manufacturing employees available to a third party employee
leasing company, and Manufacturer shall have the right to lease such employees
from the third party employee leasing company.
(e) Buyer's
Inventory.
On the
Effective Date, Manufacturer shall purchase Buyer's parts and materials on
hand
and in transit that can be used in the manufacturing of any ordered Products
("Buyer's Inventory"), other than materials deemed obsolete or otherwise
unusable by Manufacturer, at Buyer's cost for such parts and materials. The
purchase price for Buyer's Inventory shall be Buyer's standard cost for such
Inventory as of July 31, 2005, which shall be payable as follows: Within five
(5) business days after each calendar month, Manufacturer shall send to Buyer
a
statement setting forth the portion of Buyer's Inventory used (including the
part number, description, quantity, unit cost and extended cost) in the
manufacturing of the Products during such calendar month and within thirty
(30)
days after such calendar month, Manufacturer shall pay Buyer for the portion
of
the Buyer's Inventory used. Buyer shall have the right to audit the monthly
inventory statement provided by Manufacturer. In the event any Buyer's Inventory
remains unused nine (9) months after the Effective Date, or in the event this
Agreement is terminated for any reason prior to the end of such 9-month period,
Manufacturer shall return such unused Buyer's Inventory to Buyer and any balance
remaining on the Purchase Price shall be canceled. Manufacturer agrees that
in
cases where Manufacturer may have common components, Manufacturer will consume
Buyer’s components before consuming any of Manufacturer’s
components.
(f) Other
Agreements.
This
Agreement shall be contingent upon the execution by Buyer and Manufacturer
of a
sublease for Buyer's manufacturing facilities in the form of Exhibit B hereto
(the "Sublease"),
and
the Equipment Purchase Option Agreement in the form of Exhibit C
hereto.
(g) Disaster
recovery plan.
Manufacture shall develop and provide a disaster recovery plan in writing to
secure product supply in the event of a catastrophic occurrence to the Buyer
within 60 days of the effective date of the Manufacturing Agreement.
3
|
3.
|
TERM
AND TERMINATION.
|
(a) Term.
Unless
sooner terminated as set forth in this Section
3,
the
term of this Agreement shall commence on the Effective Date and continue for
an
initial term of three (3) years (the "Initial
Term")
unless
either party provides a written termination notice to the other party pursuant
to Section
3(c).
(b) Renewal.
Unless
terminated in accordance with Section
3(c)
below,
this Agreement shall be automatically renewed for successive one-year terms
(each a "Renewal
Term"
and,
together with the Initial Term, the "Term").
(c) Termination.
(i)
After the second anniversary of the Effective Date, either party may terminate
this Agreement for any reason, upon one hundred twenty (120) days
written notice to the other party, and (ii) either party may terminate this
Agreement sixty (60) days after written notification to the other party of
material breach of this Agreement, or immediately in the case of failure to
make
any payment hereunder or breach of confidentiality obligations, if such breach
is not cured within such period or, if such breach cannot reasonably be cured
within sixty (60) days, the defaulting party fails to commence a cure within
the
sixty (60) day period and thereafter pursue such cure to
completion.
(d) Effect
of Termination.
The
expiration or termination of this Agreement shall not affect any obligations
that exist as of the date of termination, including without limitation accepted
Purchase Orders under Section
4.
|
4.
|
ORDERING.
|
(a) Purchase
Orders.
Performance under this Agreement shall be initiated by Purchase Orders issued
by
Buyer and accepted by Manufacturer in accordance with Section 4(b) below. Except
as set forth in Section 4(e) below, Buyer shall be under no obligation to
purchase, and Manufacturer shall be under no obligation to manufacture, Products
hereunder unless and until Buyer issues a Purchase Order and Manufacturer has
accepted Buyer's Purchase Order. Buyer's Purchase Orders shall set forth for
each ordered Product: (i) the quantity, which shall not be less than the
applicable Minimum Order Size, (ii) the applicable Purchase Price and total
price, (iii) the delivery and shipping instructions, and (iv) the requested
delivery schedule, which shall comply with the delivery schedule limitations
set
forth in the applicable Product Schedule. Notwithstanding the foregoing, if
Manufacturer's Long Lead Time Inventory is not compatible with Buyer's requested
delivery schedule, the parties may agree in writing or by Purchase Order that
Manufacturer may begin work in advance of having a definitive delivery schedule
and that the parties will, within ten (10) days, finalize the delivery schedule
based upon the information on the Long Lead Time Inventory. All Purchase Orders
shall be subject to and governed by the terms and conditions of this Agreement
and the applicable Product Schedules, which shall not be changed or supplemented
by an accepted Purchase Order unless such changed or supplemental terms and
conditions are set forth on the face of the Purchase Order and specifically
reference this Section
4(a).
Buyer
and Manufacturer acknowledges that pre-printed terms and conditions on its
Purchase Order form, if any, shall not apply to the Purchase Order.
Manufacture
shall make reasonable effort to accommodate Buyers PO’s not limited to
expediting product and material.
(b) Purchase
Order Timing.
Purchase Orders shall be submitted on a weekly basis. Upon execution of this
Agreement, Buyer shall submit five (5) Purchase Orders to Manufacturer, with
each Purchase Order representing one (1) week of Buyer's requirements. Each
week
thereafter Buyer will submit a new one (1) week Purchase Order to maintain
a
five (5) week rolling requirement.
(c) Cancellation
of Purchase Orders.
Purchase Orders may only be modified or cancelled, and scheduled shipments
may
only be deferred, with Manufacturer's prior written consent or according to
the
terms of this Agreement. Both parties agree that written consent can be in
the
form of an e-mail. Modification, change, or cancellation is not deemed approved
until e-mail acknowledgement is received from the authorized person subject
to
section 5b.
4
(d) Acceptance.
Manufacturer shall use reasonable commercial efforts to accept all Buyer
Purchase Orders. No Purchase Order shall be deemed accepted unless Manufacturer
provides Buyer written notice accepting the Purchase Order. Both parties agree
that written consent can be in the form of an e-mail. Acceptance is not approved
until e-mail acknowledgment is received from the authorized representative
of
Manufacturer.
(e) Minimum
Revenue Requirement (MRR).
Buyer
and Manufacturer agree to use MRR to set the transfer price for a 12 month
period. During the first year of the Term, the aggregate amount paid to
Manufacturer by Buyer shall not be less than 75% of the initial Long Range
Forecast (as defined below), which shall be approved by Manufacturer in writing.
Manufacturer and Buyer shall review and compare the Mid-Range forecast to the
MRR quarterly and mutually agree to price increases or decreases going forward.
The foregoing amounts are collectively referred to herein as the "Minimum
Revenue Requirement."
The
agreed upon MRR as of the date of execution based on the Long Range Forecast
is
$9.6 million dollars. In the event amounts paid to Manufacturer by Buyer fall
below 75% or exceed 125% of the Minimum Revenue Requirement, the parties agree
that the pricing of Products shall be adjusted in accordance with Section 8(b)
below.
|
5.
|
FORECASTS.
|
(a) Manufacturer's
Reliance on Forecasts.
On or
before the last day of each calendar month, Buyer shall provide to Manufacturer
the estimated quantity of each Product that will be ordered during the six
(6)
month period following such date (the "Mid-Range
Forecast"),
and
the estimated quantity of each Product that will be ordered during the one
(1)
year period following such date (the "Long
Range Forecast").
The
Long Range Forecast shall be for planning purposes only. Buyer understands
and
acknowledges that Manufacturer will use the Mid-Range Forecast, among other
things, to determine the amount of Inventory to purchase in advance of Purchase
Orders. Such Inventory may include Long Lead, Minimum Buy, NCNR, and Safety
Stock Inventory. The parties will review monthly Mid-Range Forecasts and
mutually agree on the Long Lead, Minimum Buy, NCNR and Safety Stock Inventory
to
be acquired by Manufacturer pursuant to such Mid-Range Forecast. Buyer agrees
that if any such Inventory purchased in advance of the Purchase Orders is not
used for Buyer's Purchase Orders and cannot be returned or used on other orders
within three (3) months (or as the parties may otherwise mutually and expressly
agree), then Buyer shall purchase any such Inventory at Manufacturer's cost
provided that Manufacturer can show that such Inventory was purchased to meet
mutually agreed Long Lead, Minimum Buy, NCNR and/or Safety Stock Inventory
requirements. In addition, Manufacturer shall be compensated for otherwise
unrecoverable costs reasonably
incurred by Manufacturer in reliance on the Mid-Range Forecast, including but
not limited to, the cost of all NCNR Inventory or other unused Inventory
specifically ordered for Buyer in Manufacturer's possession (plus Manufacturer's
standard material handling fee not to exceed 8%), any vendor cancellation
charges (including restocking fees), and any nonrecurring engineering or
production costs provided that Manufacturer can show that such Inventory was
purchased to meet mutually agreed Long Lead, Minimum Buy, NCNR and/or Safety
Stock Inventory requirements. Manufacturer
shall use reasonable commercial efforts to return unused Inventory specifically
purchased for Buyer and to cancel pending orders with suppliers. Upon
Manufacturer's receipt of payment from Buyer for any Inventory, Buyer shall
have
the option to: (i) direct Manufacturer to ship to Buyer, at Buyer's cost, the
Inventory, or (ii) request Manufacturer store the Inventory in an ESD compliant
and temperature controlled environment at customary storage charges for use
on
future Purchase Orders for a period of up to three (3) months or as the parties
may otherwise mutually agree. Buyer agrees to notify Manufacturer promptly
in
writing if and when Buyer determines that it will not order at least the
estimated quantity set forth in the applicable Mid-Range Forecast for a
Product.
5
(b) Manufacturing
Flexibility and Minimum Order Quantities.
Manufacturer agrees to allow up to (i) a 50% reduction/addition in the quantity
of a Product actually ordered from the quantity set forth in the Mid-Range
Forecast for the period 61 - 90 days following the date of the Mid-Range
Forecast; and (ii) a 25% reduction/addition in the quantity of a Product
actually ordered from the quantity set forth in the Mid-Range Forecast for
the
period 36 - 60 days following the date of the Mid-Range Forecast. If the
quantity actually ordered falls below the foregoing thresholds, then the
Purchase Price for that Product going forward may be equitably adjusted to
reflect the impact of Buyer's failure to purchase the estimated quantity as
mutually agreed by both parties. The parties agree to negotiate such request
in
good faith. The minimum order quantity (MOQ) for each Product shall be as set
forth on Exhibits D and E hereto.
(c) Product
End-of-Life.
Buyer
shall provide not less than ninety (90) days written notice to Manufacturer
of
any Product end-of-life.
|
6.
|
SHIPMENT
AND DELIVERY.
|
Manufacturer
shall ship Products in accordance with each accepted Purchase Order, subject
to
the terms and conditions of this Agreement. Delivery of Products shall be made
F.O.B. at the loading dock of Buyer's facility on the dates specified in the
applicable Purchase Order. Title to, and risk of loss for, Products shall pass
to Buyer at the time of delivery of possession of the Products at Buyer's
facility.
|
7.
|
ACCEPTANCE.
|
The
Product shall be deemed accepted when Buyer has tested and inspected the Product
in accordance with the contracted level of testing and inspections, and such
Products have passed the testing and inspections.
|
8.
|
PRICES;
OTHER COSTS; PRICE CHANGES;
INVOICING.
|
(a) Prices;
Taxes.
Buyer
shall pay Manufacturer the Purchase Price as mutually agreed upon by
Manufacturer and Buyer, which Purchase Price may be adjusted from time to time
pursuant to the terms of this Agreement. The Purchase Price is inclusive
of the
costs
of packaging, shipping and insurance and any applicable federal, state and
local
taxes.
(b) Price
Changes.
In
addition to other provisions in this Agreement allowing for changes in the
Purchase Price, if fluctuations occur at any time in the costs of manufacturing
any Product, Manufacturer may request an adjustment in the Purchase Price to
account for such fluctuations, and the parties agree to negotiate any such
adjustment in good faith. Buyer has the right to request a review of cost
changes impacting the proposed increase or decrease of prices. Except as
otherwise set forth in this Agreement, the Purchase Prices for the Products
shall not be adjusted unless, during any calendar month MOQ or contract year,
Buyer fails to meet the Minimum Revenue Requirement, in which event Manufacturer
shall be entitled to an equitable adjustment going forward in the Purchase
Price. . Notwithstanding the foregoing, the Purchase Price as of the effective
date shall be reduced as follows:
|
a.
|
Manufacturer
shall use its commercially reasonable efforts to reduce it costs
of
manufacturing by 10% prior to April 15, 2006. Effective as of April
15,
2006, the Purchase price for each product shall be reduced by an
amount
equal to (A) 10% of the Manufacturer’s non-materials cost of manufacturing
such Product on the effective Date (B) the amount of any reduction
in
Manufacturer’s costs of materials for such Product between the effective
Date and April 15, 2006.
|
(c) Tooling/Non-Recurring
Expenses.
Buyer
shall pay for, or obtain and consign to Manufacturer, any Product specific
tooling and shall prepay other non-recurring expenses as set forth in the
applicable Product Schedule. Manufacture shall insure adequate maintenance
for
all consigned tooling. Upon request by Buyer, Manufacturer shall return all
items paid for by Buyer pursuant to this Section
8(c).
6
(d) Invoicing
and Payment.
Manufacturer shall invoice Buyer with each shipment of Products. A proper
invoice shall include Manufacturer's name and invoice date, the Purchase Order
number, the total price and the name (if applicable), title, complete mailing
address where payment is to be sent and must be submitted to the appropriate
invoice address listed in the applicable Product Schedule or Purchase
Order.
Terms
will be 2% 10, net 30 days, Buyer to pay all invoices within thirty (30) days
of
the date of invoice. Payments shall be made in U.S. dollars. Any payment or
part
of a payment that is not paid after thirty (30) days past due shall bear
interest at the rate of one percent (1%) per month from its due date until
paid.
All payments are due at Manufacturer's place of business.
|
9.
|
ENGINEERING
CHANGES AND COST SAVINGS.
|
Buyer
may
request in writing that Manufacturer incorporate an engineering change into
a
Product. Such request shall include a description of the proposed change
sufficient to permit Manufacturer to evaluate it. Manufacturer's evaluation
shall be in writing and shall state the impact of the requested change on
delivery schedule and expected cost. Manufacturer shall not proceed with the
requested engineering change until the parties have agreed in writing on the
changes to the Product, Specifications, delivery schedule and pricing, including
without limitation the cost to be paid by Buyer for re-assembly, retooling
and
Inventory on hand and on order that becomes obsolete. Pricing for obsolete
Inventory as a result of such change shall be based upon the cost of such
Inventory plus Manufacturer's standard material handling fee. Any cost reduction
programs may also have an affect on the Purchase Price.
|
10.
|
FORCE
MAJEURE.
|
Neither
party shall be liable for its failure to perform hereunder due to any acts
of
God, including fires, floods, wars, terror, sabotage, accidents, labor disputes,
governmental laws, ordinances, rules and regulations, whether valid or invalid.
Additionally, neither party shall be liable for its failure to perform hereunder
to the extent operational occurrences are beyond its reasonably control,
including, without limitation, inability to obtain material, equipment or
transportation, shortages, accidents, priorities, requisitions, allocation
price
adjustment restrictions and any other similar occurrence; provided, however,
that obligations for payment for Products produced and shipped shall not be
relieved or suspended by any event of force majeure. The party whose performance
is prevented by any such occurrence shall notify the other party thereof in
writing as soon as is reasonably possible after the commencement of such
occurrence, and shall promptly give written notice to the other party of the
cessation of such occurrence. The party affected by such occurrence shall use
reasonable commercial efforts to remedy or remove such event of force majeure
as
expeditiously as possible.
|
11.
|
INTELLECTUAL
PROPERTY.
|
(a) Ownership
of Intellectual Property; License.
Title
to and ownership of all of the technology, trade secrets, trademarks, know-how,
and information regarding the Products, and the manufacture of the Products,
supplied by Buyer to Manufacturer hereunder shall remain in Buyer. Buyer hereby
grants Manufacturer a limited, non-transferable, non-exclusive, revocable
license to use Buyer's software, technology, trade secrets, know-how, and other
proprietary information ("Buyer's
Proprietary Information")
for
the purposes of this Agreement, free of any claim or allegation by Buyer of
misappropriation of Buyer's Proprietary Information or infringement by
Manufacturer of any Buyer intellectual property rights covering Buyer's
Proprietary Information; provided, however, that Manufacturer's rights and
freedom of use in connection with the manufacture of Products for Buyer
hereunder shall endure only for the term of this Agreement. After the
termination or expiration of this Agreement, (i) such license shall expire
and
Manufacturer shall have no further rights to use Buyer's Proprietary
Information, and (ii) Manufacturer shall return to Buyer all written documents
and other materials relating to Buyer's Proprietary Information. Notwithstanding
the foregoing, title to and ownership of any software, technology, trade
secrets, know-how, and information of Manufacturer ("Manufacturer's
Proprietary Information")
used
by Manufacturer hereunder shall remain the property of
Manufacturer.
7
(b) Confidentiality.
Both
parties agree that either party may acquire information that is confidential
and
proprietary to the other party including, but not limited to, business plans,
finances, financial results, strategies, customers, suppliers, product
specifications, and the Proprietary Information set forth in Section
11(a).
Both
parties agree that each party's information is the sole and exclusive property
of that respective party. Each party agrees that it will maintain and protect
the confidentiality of the other party's Proprietary Information using the
same
standard of care that such party uses to protect its own Proprietary
Information, which in no event shall be less than reasonable care. The
obligation to keep each party's Proprietary Information confidential shall
survive the termination or expiration of this Agreement. Terms and conditions
of
NDA apply. NDA is attached by reference as Exhibit F.
(c) Warranty.
Buyer
warrants that it has the right to manufacture and market the Products, and
that
the Products and all Specifications provided to Manufacturer do not infringe
upon any patent, trademark or copyright of any third party. Manufacturer
warrants that any manufacturing services provided will be of a professional
quality, conforming to IPC workmanship standards and practices.
|
12.
|
MANUFACTURER
RESTRICTIONS AS TO USE OF
PRODUCTS.
|
Buyer
acknowledges and agrees that the Products are not designed for and, absent
Manufacturer's express written authorization, are not to be used in IPC Class
3
product (equipment where continued performance or performance on demand is
critical such as life support systems or critical weapons systems).
|
13.
|
PRODUCT
WARRANTY AND DISCLAIMER.
|
(a) Product
Warranty.
Manufacturer warrants that Products manufactured hereunder will conform to
the
Specifications and will be free from Defects in material and workmanship for
a
period of one (1) year from the date of delivery of the Products to Buyer.
Buyer
shall promptly notify Manufacturer in writing of any malfunction in the
Products, which notification shall describe the malfunction in sufficient detail
to permit Manufacturer to isolate the malfunction. Upon notification from Buyer,
Manufacturer will provide Buyer with instructions on returning the Product
under
a warranty claim. Upon receipt of any Products returned by Buyer pursuant to
this Section
13,
Manufacturer shall test the Products in accordance with the contracted level
of
testing as set forth in the applicable Product Schedule in order to isolate
any
malfunctions in the Product. If Manufacturer determines that the malfunction
is
not due to nonconformity with the Specifications or Defect, then Manufacturer
will seek instructions from the Buyer regarding whether Manufacturer should
return the Product to Buyer or dispose of it. If Manufacturer is unable to
isolate any malfunctions in the Product using the contracted level of testing
as
set forth in the applicable Product Schedule, then Buyer is solely responsible
for isolation of the malfunction and Manufacturer will seek instructions from
the Buyer regarding whether Buyer will authorize additional testing on the
returned Product or whether Manufacturer should return the Product to Buyer
or
dispose of it. If
any
returned Product contains malfunctions due to nonconformity with the
Specifications or Defects in material or workmanship, then Buyer's
exclusive remedy and Manufacturer's sole liability under this warranty will
be
for Manufacturer, at its sole option and expense, to correct or replace the
nonconforming or defective Product. This
warranty does not apply to: (i) any first articles, prototypes, pre-production
units, or test units of a Product; (ii) any Products that have been repaired
by
Buyer or a third party; (iii) any Products that have been altered or modified
in
any way by Buyer or a third party; or (iv) any Products that have been subject
to misuse, abnormal use or neglect.
(b) Disclaimer. THE
WARRANTY STATED ABOVE IS IN LIEU OF ALL OTHER WARRANTIES, CONDITIONS OR OTHER
TERMS, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING WITHOUT LIMITATION
ANY IMPLIED WARRANTIES OF TERMS AS TO QUALITY, FITNESS FOR PARTICULAR PURPOSE,
MERCHANTABILITY OR OTHERWISE, WHETHER IMPLIED BY CUSTOM OR LAW. Component
manufacturer’s warranty will pass thru to Buyer where applicable.
8
|
14.
|
LIMITATIONS
OF LIABILITY.
|
EXCEPT
AS
EXPRESSLY PROVIDED IN SECTION
15
(INDEMNIFICATION) OF THIS AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE
TO
THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, LOST PROFITS,
SPECIAL OR PUNITIVE DAMAGES OF ANY KIND OR NATURE ARISING OUT OF OR RELATING
TO
THIS AGREEMENT OR CONNECTED WITH OR RESULTING FROM THE MANUFACTURE, SALE,
DELIVERY, RESALE, REPAIR, REPLACEMENT, OR USE OF ANY PRODUCTS OR THE FURNISHING
OF ANY SERVICE OR PART THEREOF, WHETHER SUCH LIABILITY IS BASED IN CONTRACT,
TORT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE, EVEN IF SUCH PARTY HAD BEEN
WARNED OF THE POSSIBILITY OF ANY SUCH DAMAGES.
|
15.
|
INDEMNIFICATION.
|
(a) Buyer's
Indemnification.
Buyer
shall defend, indemnify and hold Manufacturer and its parent companies,
subsidiaries, affiliates, officers, directors, employees, agents and
representatives harmless from any and all claims, demands, liabilities, actions,
suits, proceedings, losses, injuries and death, including damages, judgments,
expenses and/or costs (including without limitation reasonable attorneys' fees
and related costs) based on or arising out of: (i) any claims or demands that
use of Buyer's Proprietary Information in manufacturing the Products constitutes
infringement; (ii) any claims or demands relating to the design of the Products;
(iii) any claims or demands by any third party that there was a failure to
warn
of any foreseeable use, improper use, misuse or defects of any Products; (iv)
any claims or demands relating to Buyer's negligence, use, ownership,
maintenance, transfer, transportation or disposal of the Products; (v) any
claims or demands of Buyer's violation or alleged violation of any federal,
state, or local laws or regulation, including without limitation, the laws
and
regulations governing product safety, labeling, packaging and labor practices;
(vi) any claims of patent, trademark, or copyright infringement; or (vii) any
claims or demands arising out of a breach by Buyer of any of the terms and
conditions of this Agreement. Manufacturer shall give written notice of any
claim or potential claim to Buyer within a reasonable time following the time
at
which Manufacturer first became aware of the circumstances which gave rise
to
such claim for indemnification hereunder. Buyer may, at its option, have control
of any litigation and appointment of counsel in defense of any third party
claims for which Manufacturer seeks indemnification hereunder. The obligation
to
indemnify under this Section
15
shall
survive the termination or expiration of this Agreement but not extend any
longer than two (2) years beyond the termination date.
(b) Manufacturer's
Indemnification.
Manufacturer shall defend, indemnify and hold Buyer and its parent companies,
subsidiaries, affiliates, officers, directors, employees, agents and
representatives harmless from any and all claims, demands, liabilities, actions,
suits, proceedings, losses, injuries and death, including damages, judgments,
expenses and/or costs (including without limitation reasonable attorneys' fees
and related costs) based on or arising out of: (i) any claims or demands that
use of Manufacturer's Proprietary Information in manufacturing the Products
constitutes infringement; (ii) defects in any Products caused by Manufacturer
in
manufacturing the Products; (iii) any claims or demands relating to
Manufacturer's negligence, use, ownership, maintenance, transfer, transportation
or disposal of the Products; (iv) any claims or demands of Manufacturer's
violation or alleged violation of any federal, state, or local laws or
regulation, including labor practices; (v) any claims of patent, trademark,
or
copyright infringement where Manufacturer is using Buyer's information not
in
conformance with this Agreement; or (vi) any claims or demands arising out
of a
breach by Manufacturer of any of the terms and conditions of this Agreement.
Buyer shall give written notice of any claim or potential claim to Manufacturer
within a reasonable time following the time at which Buyer first became aware
of
the circumstances which gave rise to such claim for indemnification hereunder.
Manufacturer may, at its option, have control of any litigation and appointment
of counsel in defense of any third party claims for which Buyer seeks
indemnification hereunder. The obligation to indemnify under this Section
15
shall
survive the termination or expiration of this Agreement but not extend any
longer than two (2) years beyond the termination date.
9
|
16.
|
MISCELLANEOUS.
|
(a) Notices.
All
notices and other communications required or permitted to be given under this
Agreement shall be in writing and hand-delivered, mailed by first-class mail
postpaid, sent by facsimile (so long as the party sending the facsimile has
the
ability to receive a confirmation of receipt from its facsimile machine) or
sent
by an overnight courier with a reliable tracing system, to each of the parties
to their respective addresses as noted in the first paragraph of this Agreement.
Notices that are mailed shall be deemed to have been given as of the fourth
business day following the date of mailing and notices that are hand-delivered
or sent by overnight courier are deemed to be given the next business day.
Either party may change its address for the giving of notice by so notifying
the
other party by ten (10) days prior written notice given in the manner set forth
in this section.
(b) Written
Modifications.
No
amendment, modification or release from any provision of this Agreement, the
Product Schedules attached hereto or Purchase Orders issued hereunder shall
be
of any force or effect unless it is in writing and signed by both authorized
parties hereto and specifically refers to this Section
16(b).
(c) No
Assignment.
This
Agreement shall not be assigned by either party without the prior written
consent of the other party and any attempt to do so shall be void, except in
the
event of a merger or acquisition resulting the sale of substantially all of
the
party's assets.
(d) No
Waiver.
A
failure to exercise any right hereunder with respect to any breach shall not
constitute a waiver of such right with respect to any subsequent
breach.
(e) Independent
Contractors.
Each
party is acting as an independent contractor and not as agent, partner, or
joint
venturer with the other party for any purpose. Except as provided in this
Agreement neither party shall have any right, power, or authority to act or
to
create any obligation, express or implied, on behalf of the other.
(f) Fair
Labor Standards Act.
All
Products furnished hereunder will be manufactured in accordance with the Fair
Standards Labor Act of 1938, as amended, and the regulations and orders of
the
U.S. Department of Labor issued thereunder.
(g) Governing
Law.
The
validity, interpretation and performance of this Agreement shall be governed
by
the laws of the state of Manufacturer's place of business, being Utah, as set
forth in the first paragraph of this Agreement, without regard to such state's
conflicts of laws principles.
(h) Counterparts.
This
Agreement may not be executed in counterpart copies, except that Exhibits A
and
D may be supplemented or amended from time to time to reflect the addition
of
new products or to modify the terms and specifications for existing Products.
Any supplement or amendment to Exhibits A to E must be executed by both parties
hereto in writing and be assigned an appropriate contract tracking number so
that both parties are able to readily identify the current product schedule
terms in effect from time to time.
(i) Entire
Agreement.
The
terms and conditions of this Agreement, including all Product Schedules and
accepted Purchase Orders, constitute the entire agreement between the parties
hereto with respect to the subject matter hereof and supersede all previous
communication, either oral or written, between the parties hereto. There are
no
understandings, representations or warranties of any kind whatsoever, except
as
expressly set forth herein.
{
10
IN
WITNESS WHEREOF, the parties hereunto have caused this Agreement to be executed
as of the day and year first above written.
|
ClearOne
Communications, Inc.
|
Inovar,
Inc.
|
||||
|
By:
|
s/
Zee Hakimoglu
|
By:
|
/s/
Blake Kirby
|
||
|
Name:
Zee Hakimoglu
|
Name:
Blake
Kirby
|
||||
|
Title:
CEO/President
|
Title:
President/CEO
|
||||
|
ClearOne
Communications, Inc.
|
||
|
By:
|
/s/
Donald E. Frederick
|
|
|
Name:
Donald E. Frederick
|
||
|
Title:
Chief Financial Officer
|
||
11
EXHIBIT
10.18
MUTUAL RELEASE
AND WAIVER
KNOW
ALL MEN THAT
the
consideration for this Mutual Release and Waiver consists of the following
events:
1.)
payment of One Million Three Hundred Forty-Five Thousand Nine Hundred and
Five
Dollars ($1,345,905) by Burk Technology, Inc. ("Burk") of 7 Beaver Brook
Road,
Littleton, MA 01460 to ClearOne Communications, Inc. ("Clear") of 1825
Research
Way, Salt Lake City, UT 84119; and
2.)
forgiveness by Burk of certain claims alleged by Burk against Clear with
respect
to the so-called “Remote Facilities Management Product Line purchased by Burk
from Clear’s assignor Gentner Communication Corporation (“Gentner”) pursuant to
that certain Asset Purchase Agreement dated April 12, 2001 between Burk
and
Gentner (the “Agreement”); and
3.)
delivery by Clear to Burk of that certain Non-Negotiable Installment Note
dated
April 12, 2001 payable to Gentner in the principal amount of $1,750,000,
stamped
by Clear as “Paid-in-full”; and
4.)
delivery by Clear to Burk of UCC -3 Financing Statements Amendment assigning
Gentner’s security interest to Clear and then terminating Clear’s security
interest in the collateral identified in UCC -1 Statement # 200101909530
filed
on April 30, 2001 with the Secretary of State of the Commonwealth of
Massachusetts; and
5.)
delivery of other good and valuable consideration by each Party to the
other
Party, the receipt and sufficiency of which is hereby acknowledged by each
Party.
In
recognition of the exchange of such mutual consideration,
Burk and Clear do hereby forever release and discharge each
other, and the officers, employees, directors, legal representatives,
affiliates, successors and assigns of each,
of and
from any and all debts, demands, actions, causes of action, suits, proceedings,
agreements, covenants, contracts, judgments, damages, accounts, reckoning,
execution, claims and liabilities whatsoever of every kind and nature,
whether
known or unknown, whether or not well founded in fact or in law, and whether
in
law or equity or otherwise, whether direct or consequential, compensatory,
exemplary, liquidated or unliquidated, which either Party ever had, now
have, or
can, shall or may have for or by reason of the Agreement, and the Exhibits
attached thereto, from the beginning of the world to date of this Mutual
Release
and Waiver.
This
Mutual Release and Waiver is executed in two counterparts, each of which
shall
be considered an original instrument, but all of which shall be considered
one
and the same Mutual Release and Waiver, and shall be binding on each signatory
who executes and delivers the same to the other Party.
For
the
consideration aforesaid, the Parties covenant on behalf of themselves,
and their
successors and assigns, to execute and deliver such other and further documents
of release, indemnification, assignment, and consent, and take such other
action
as each Party may reasonably request for the more effective exchange of
releases.
IN
WITNESS WHEREOF, we have hereunto set our hands and seals this 22nd
day of
August, 2005.
|
Burk
Technology, Inc.
|
ClearOne
Communications, Inc.
|
|
|
/s/
Peter C. Burk
|
/s/
Donald E. Frederick
|
|
|
By:
Peter C. Burk, President
|
By:
Donald E. Frederick, CFO
|
|
|
Duly
Authorized
|
Duly
Authorized
|
EXHIBIT
21.1
SUBSIDIARIES
OF THE REGISTRANT
E.mergent,
Inc.
ClearOne
Communications EuMEA GmbH
ClearOne
Communications Limited UK
Gentner
Communications, Ltd. - Ireland
Gentner
Ventures, Inc.
EXHIBIT
31.1
CERTIFICATION
I,
Zeynep
Hakimoglu, certify that:
|
1.
|
I
have reviewed this annual report of ClearOne Communications, Inc.
on Form
10-K;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by
this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial
information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant
and have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including
its
consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting.
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
a)
|
All
significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
Date:
December 16, 2005
|
/s/
Zeynep Hakimoglu
|
|
Zeynep
Hakimoglu
|
|
|
President
and Chief Executive Officer
|
EXHIBIT
31.2
CERTIFICATION
I,
Craig
E. Peeples, certify that:
|
1.
|
I
have reviewed this annual report of ClearOne Communications, Inc.
on Form
10-K;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by
this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial
information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant
and have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including
its
consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
b)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
c)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting.
|
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting,
to
the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
a)
|
All
significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
Date:
December 16, 2005
|
/s/
Craig E. Peeples
|
|
Craig
E. Peeples
|
|
|
Interim
Chief Financial Officer
|
EXHIBIT
32.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
Pursuant
to
18
U.S.C. Section 1350,
As
Adopted pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002
I,
Zeynep
Hakimoglu, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of
ClearOne Communications, Inc. on Form 10-K for the year ended June 30, 2004,
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Annual Report
on
Form 10-K fairly presents, in all material respects, the financial condition
and
results of operations of ClearOne Communications, Inc.
|
Date:
December 16, 2005
|
/s/
Zeynep Hakimoglu
|
|
Zeynep
Hakimoglu
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
A
signed original of the written statement above required by Section 906 of
the
Sarbanes-Oxley Act of 2002 has been provided to ClearOne Communications,
Inc.
and will be retained by ClearOne Communications, Inc. and furnished to the
Securities and Exchange Commission or its staff upon
request.
EXHIBIT
32.2
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
Pursuant
to
18
U.S.C. Section 1350,
As
Adopted pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002
I,
Craig
E. Peeples, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of
ClearOne Communications, Inc. on Form 10-K for the year ended June 30, 2004,
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Annual Report
on
Form 10-K fairly presents, in all material respects, the financial condition
and
results of operations of ClearOne Communications, Inc.
|
Date:
December 16, 2005
|
/s/
Craig E. Peeples
|
|
Craig
E. Peeples
|
|
|
Interim
Chief Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
A
signed original of the written statement above required by Section 906 of
the
Sarbanes-Oxley Act of 2002 has been provided to ClearOne Communications,
Inc.
and will be retained by ClearOne Communications, Inc. and furnished to the
Securities and Exchange Commission or its staff upon
request.