UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
fiscal year ended June 30, 2003
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from ________ to ________
Commission
file number 0-17219
CLEARONE
COMMUNICATIONS, INC.
(Exact
name of registrant as specified in its charter)
|
Utah
|
87-0398877
|
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
1825
Research Way, Salt Lake City, Utah
|
84119
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number (801)
975-7200
Securities
registered under Section 12(b) of the Act:
None
Securities
registered under Section 12(g) of the Act:
Common
Stock, $0.001 par value
(Title
of
class)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
¨
No
x
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this
Form 10-K. ¨
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Securities Exchange Act of 1934, as amended). ¨
The
aggregate market value of the 9,495,093 shares of voting common stock held
by
non-affiliates is approximately $37,505,617 at August 10, 2005, based on
the
$3.95 closing price for the Company’s common stock on the Pink Sheets on August
10, 2005.
1
APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13, or 15(d) of the Securities Exchange
Act
of 1934 subsequent to the distribution of securities under a plan confirmed
by a
court. Yes
¨
No
¨
The
number of shares of ClearOne common stock outstanding as of June 30, 2003
and
June 30, 2005, respectively were 11,086,733 and 11,264,233.
DOCUMENTS
INCORPORATED BY REFERENCE
List
hereunder the following documents if incorporated by reference and the part
of
the Form 10-K (e.g.,
Part I,
Part II, etc.) into which the document is incorporated: (1) any annual report
to
security holders; (2) any proxy or information statement; and (3) any prospectus
filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The
listed documents should be clearly described for identification purposes
(e.g.,
annual
report to security holders for fiscal year ended December 24,
1980).
None.
2
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. These statements reflect our views with respect
to future events based upon information available to us at this time. These
forward-looking statements are subject to uncertainties and other factors
that
could cause actual results to differ materially from these statements.
Forward-looking statements are typically identified by the use of the words
“believe,” “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“project,” “propose,” “plan,” “intend,” and similar words and expressions.
Examples of forward-looking statements are statements that describe the proposed
development, manufacturing and sale of our products, statement that describe
our
results of operations, pricing trends, the markets for our products, our
anticipated capital expenditures, our cost reduction and operational
restructuring initiatives, and regulatory developments, statements with regard
to the nature and extent of competition we may face in the future, statements
with respect to the sources of and need for future financing, and statements
with respect to future strategic plans, goals and objectives. Forward-looking
statements are contained in this report under “Item 1. Description of Business,”
and “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” The forward-looking statements are based on present
circumstances and on our predictions respecting events that have not occurred,
that may not occur, or that may occur with different consequences and timing
than those now assumed or anticipated. Actual events or results may differ
materially from those discussed in the forward-looking statements as a result
of
various factors, including the risk factors discussed in this report under
the
caption “Description of Business: Risk Factors.” These cautionary statements are
intended to be applicable to all related forward-looking statements wherever
they appear in this report. The cautionary statements contained or referred
to
in this report should also be considered in connection with any subsequent
written or oral forward-looking statements that may be issued by us or persons
acting on our behalf. Any forward-looking statements are made only as of
the
date of this report and ClearOne assumes no obligation to update forward-looking
statements to reflect subsequent events or circumstances.
CAUTIONARY
STATEMENT REGARDING THE FILING DATE OF THIS REPORT AND THE ANTICIPATED FUTURE
FILINGS OF ADDITIONAL PAST-DUE REPORTS
Due
to
the re-audit of the Company’s financial statements for its 2002 and 2001 fiscal
years, this Annual Report on Form 10-K for the fiscal year ended June 30,
2003
is first being filed in August 2005. The Company is in the process of preparing
its Annual Report on Form 10-K for the fiscal years ended June 30, 2004 and
2005, respectively, and plans to file such reports at the earliest practicable
date. Shareholders and others are cautioned that the financial statements
included in this report are two years old and are not indicative of the
operating results that may be expected for the years ending June 30, 2004
and
2005. Shareholders are also cautioned that since the Company is not current
in
the filing of required reports with the Securities and Exchange Commission
(SEC), the SEC could initiate proceedings against the Company at any time,
including proceedings to suspend trading of the Company’s
securities.
PART I
References
in this Annual Report on Form 10-K to “ClearOne”, “we”, “us” or “the Company”
refer to ClearOne Communications, Inc., a Utah corporation, and, unless the
context otherwise requires or is otherwise expressly stated, its
subsidiaries.
ITEM
1. DESCRIPTION
OF BUSINESS
Overview
We
are an
audio conferencing products company. We develop, manufacture, market and
service
a comprehensive line of audio conferencing products, which range from tabletop
conferencing phones to professionally installed audio systems. We also
manufacture and sell document and education cameras and conferencing furniture.
We have a strong history of product innovation and plan to continue to apply
our
expertise in audio engineering to developing innovative new products. We
believe
the performance and reliability of our high-quality audio products create
a
natural communication environment, which saves organizations of all sizes
time
and money by enabling more effective and efficient communication between
geographically separated businesses, employees and customers.
3
Our
products are used by organizations of all sizes to accomplish effective group
communication. Our end users range from some of the world’s largest and most
prestigious companies and institutions to small and medium sized businesses,
educational institutions, and government organizations. We sell our products
to
these end users primarily through a distribution network of independent
distributors who in turn sell products to dealers, systems integrators and
value-added resellers. The Company also sells products on a limited basis
directly to dealers, systems integrators, value-added resellers and end users.
We
were
incorporated in Utah on July 8, 1983 under the name “Insular, Inc.” On March 26,
1985, we acquired all of the stock of Gentner Electronics Corporation
(“Gentner”) in a transaction treated as a reverse acquisition for accounting
purposes. In connection with the acquisition of Gentner, we changed our name
to
Gentner Electronics Corporation. On July 1, 1991, we changed our name to
Gentner
Communications Corporation. On January 1, 2002, we changed our name to ClearOne
Communications, Inc. Our principal executive offices are located at 1825
Research Way, Salt Lake City, Utah 84119, and our telephone number at this
location is (801) 975-7200. Our Internet website address is www.clearone.com.
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K, and amendments to such reports are available, free of charge, on
our
Internet website under “ClearOne Info—Investor Relations—SEC,” as soon as
reasonably practicable after we file electronically such material with, or
furnish it to, the SEC. Information on our website does not constitute a
part of
this Annual Report on Form 10-K or other periodic reports we file with the
SEC.
The public may also read and copy any materials we file with the SEC at the
SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549.
The public may also obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet
website (www.sec.gov)
that
contains reports, proxy and information statements and other information
regarding ClearOne that we file electronically with the SEC.
For
a
discussion of certain risks applicable to our business, financial condition
and
results of operations, see the risk factors described in “Risk Factors”
below.
Significant
Events
Restatement
of Previously Issued Financial Information
This
report contains our audited consolidated financial statements for the fiscal
year ended June 30, 2003 and our restated audited consolidated financial
statements for the fiscal years ended June 30, 2002 and 2001. In connection
with
the restatement, we performed a comprehensive review of our previously issued
consolidated financial statements for fiscal years 2002 and 2001 and identified
a significant number of errors and adjustments. The restated consolidated
financial statements include restatements of assets, liabilities, stockholders’
equity, results of operations and cash flows, and resulted in cumulative
net
reductions to stockholders’ equity as of June 30, 2002 and 2001 of approximately
$17.4 million and approximately $3.8 million, respectively, and reductions
in
previously reported net income for the years ended June 30, 2002 and 2001
of
approximately $14.1 million and $3.9 million, respectively. The restated
2002
and 2001 financial statements were audited by KPMG LLP (KPMG), who replaced
Ernst & Young LLP (Ernst & Young) as our independent registered public
accounting firm in December 2003. Certain restated quarterly financial
information is included in this report in the section captioned “Item 6.
Selected Financial Data.”
We
have
not amended our prior filings to reflect the restatement. As a result, the
information previously filed in our annual reports on Form 10-K for fiscal
years
2002 and 2001, our quarterly reports on Form 10-Q for the quarterly periods
included in those fiscal years and for the quarter ended September 30, 2002
and
any current filings on Form 8-K, or other disclosures containing fiscal 2003,
2002 or 2001 information filed or made prior to the filing of this 2003 Form
10-K should not be relied upon and have been superceded by this Form
10-K.
Changes
to Management and Board of Directors. Since
January 2003, we have changed all but one member of our executive management
team. Three of our former directors are no longer serving in such positions
and
we have appointed two new directors, both of whom are independent directors
who
serve on our audit committee. In January 2003, Frances Flood, our former
chairman and chief executive officer, and Susie Strohm, our former chief
financial officer, were placed on administrative leave and they subsequently
resigned from their positions. Michael Keough was then appointed as our chief
executive officer, Greg Rand was appointed as our president and chief operating
officer and George Claffey was appointed as our chief financial officer.
All
three subsequently resigned for personal reasons at various times during
2004
and on July 8, 2004, Zeynep “Zee” Hakimoglu was
appointed as our president and chief executive officer and Donald Frederick
was
appointed as our chief financial officer.
4
The
SEC Action. ClearOne’s
previously filed financial statements were the subject of a civil action
filed
by the U.S. Securities and Exchange Commission on January 15, 2003 against
ClearOne and the persons then acting as its chief executive and chief financial
officers. The complaint generally alleged that the defendants had engaged
in a
program of inflating ClearOne’s revenues, net income and accounts receivable by
engaging in improper revenue recognition. On December 4, 2003, we settled
the
SEC action by entering into a consent decree in which, without admitting
or
denying the allegations of the complaint, we consented to the entry of a
permanent injunction prohibiting future securities law violations. No fine
or
penalty was assessed against ClearOne as part of the settlement.
Securities
Delisted from Nasdaq Stock Market. Our
common stock was delisted from the Nasdaq National Market System on April
21,
2003 and since that time has been quoted on the National Quotation Bureau’s Pink
Sheets.
The
Shareholder Class Action. On
June 30, 2003, a consolidated complaint was filed against ClearOne, eight
of our present or former officers and directors, and our former auditor,
Ernst
& Young, by a class consisting of purchasers of the Company’s common stock
during the period from April 17, 2001 through January 15, 2003. The allegations
in the complaint were essentially the same as those contained in the SEC
action
described above. On December 4, 2003, we, on behalf of the Company and all
other
defendants with the exception of Ernst & Young, entered into a settlement
agreement with the class pursuant to which we agreed to pay the class $5.0
million and issue the class 1.2 million shares of our common stock. The cash
payment was made in two equal installments, the first on November 10, 2003
and
the second on January 14, 2005. On May 23, 2005, the court order was amended
to
provide that odd-lot numbers of shares (99 or fewer shares) will not be issued
from the settlement fund and claimants who would otherwise be entitled to
receive 99 or fewer shares will be paid cash in lieu of such odd-lot number
of
shares. As of the date hereof, 228,000 shares of our common stock have been
issued to the class and we plan to complete the issuance of the remaining
shares
in the near future in accordance with the terms of the court order, subject
to
the receipt of any required approvals from state regulatory
authorities.
Changes
in Type and Scope of Operations
Acquisitions
of ClearOne, Inc. and Ivron Systems, Ltd.
We have
been manufacturing and marketing audio conferencing products since 1989,
which
has been our core competency. During fiscal 2001 and fiscal 2002, we attempted
to expand our operations through the acquisitions of ClearOne, Inc. and Ivron
Systems, Ltd., both of which were involved in the development and sale of
video
conferencing technology and products. Such acquisitions proved unsuccessful
and,
as discussed in more detail in Item 1. Description of Business. Acquisitions
and Dispositions,
we
recorded impairment charges related to such acquisitions in the aggregate
amount
of approximately $7.1 million in fiscal 2002.
Acquisitions
of E.mergent, Inc. and OM Video.
During
fiscal 2002 and fiscal 2003, we entered the audio visual integration services
business through the acquisitions of E.mergent, Inc. and Stechyson Electronics,
Ltd., doing business as OM Video. Our management at that time believed such
acquisitions would complement our existing operations and our core competencies
and allow us to acquire market share in this industry. However, our entry
into
the services business was perceived as a threat by our systems integrators
and
value-added resellers, many of whom we began competing against for sales.
The
acquisitions were not successful and the remaining operations were sold in
fiscal 2004 and fiscal 2005. As discussed in more detail in Item 1. Description
of Business. Acquisitions
and Dispositions,
we
recorded impairment charges related to such acquisitions in the aggregate
amount
of approximately $26.0 million in fiscal 2003.
Sale
of our U.S. Audiovisual Integration Services. On
May 6,
2004, we sold certain assets of our U.S. audiovisual integration services
operations to M:Space, Inc. (M:Space) for no cash compensation. M:Space is
a
privately held audiovisual integration services company. In exchange for
M:Space
assuming obligations for completion of certain customer contracts and satisfying
maintenance contract obligations to existing customers, we transferred to
M:Space certain assets including inventory valued at $569,000. We expect
that
the operations of the U.S. audiovisual integration services will be classified
as discontinued operations in the fiscal year 2004. As of June 30, 2003 the
assets of audiovisual integrations services were classified as held and
used.
5
Sale
of Conferencing Services Business.
On July
1, 2004, we sold our conferencing services business segment to Clarinet,
Inc.,
an affiliate of American Teleconferencing Services, Ltd. d/b/a Premier
Conferencing for $21.3 million. Of the purchase price $1.0 million was placed
into an 18-month Indemnity Escrow account and an additional $300,000 was
placed
into a working capital escrow account. We received the $300,000 working capital
escrow funds approximately 90 days after the execution date of the contract.
Additionally, $1.4 million of the proceeds was utilized to pay off equipment
leases pertaining to assets being conveyed to Clarinet. We expect that the
conferencing services operations will be classified as discontinued operations
in the fiscal year 2005. As of June 30, 2003, the assets of conferencing
services were classified as held and used.
Sale
of OM Video.
On
March
4, 2005, we sold all of the issued and outstanding stock of our Canadian
subsidiary, ClearOne Communications of Canada, Inc. (ClearOne Canada) to
6351352
Canada Inc., a Canada corporation (the “OM Purchaser”). ClearOne Canada owned
all the issued and outstanding stock of Stechyson Electronics Ltd., which
conducts business under the name OM Video. We agreed to sell the stock of
ClearOne Canada for $200,000 in cash; a $1.3 million note payable over a
15-month period, with interest accruing on the unpaid balance at the rate
of
5.25% per year; and contingent consideration ranging from 3% to 4% of related
gross revenues over a five-year period. We expect that the operations of
the
Canada audiovisual integration services will be classified as discontinued
operations in fiscal year 2005. As of June 30, 2003, the assets of the Canada
audiovisual integration business were classified as held and used. In June
2005,
we were advised that the OM Purchaser had settled an action brought by the
former employer of certain of OM Purchaser’s owners and employees alleging
violation of non-competition agreements. The settlement reportedly involved
a
cash payment and an agreement not to sell certain products for a period of
one
year. We are evaluating what impact, if any, this settlement may have on
the OM
Purchaser’s ability to make the payment required under the note.
Following
the disposition of operations in the video conferencing, business services
and
conferencing services businesses, we returned to our core competency of
developing, manufacturing and marketing audio conferencing products, which
is
where we intend to keep our focus for the foreseeable future.
Business
Strategy
Our
goal
is to achieve market leadership in group conferencing environments through
the
development of new, competitive products that offer superior quality and
ease of
use. The principal components of our strategy to achieve this goal
are:
Provide
a superior conferencing experience
We
have
been developing audio technologies since 1981 and we believe we have established
a reputation for providing some of the highest quality group audio conferencing
solutions in the industry. Our proprietary Gentner® Distributed Echo
Cancellation® and digital signal processing technologies have been the core of
our installed conferencing products, and are the foundation for our new product
development. We plan to build upon our reputation of being a market leader
and
continue to provide the highest quality products and technologies to the
customers and markets we serve.
Provide
greater value to our customers
To
provide our customers with conferencing products that deliver high value,
we are
leveraging advances in emerging technology trends and applying these advances
specifically to group conferencing environments. By offering high quality
products that are designed to solve ease-of-use issues and are easy to install,
configure and maintain, we believe we can provide greater value to our customers
and reduce their total cost of ownership.
Be
a
leader in audio conferencing innovation
We
have
sharpened our focus on developing cutting edge audio conferencing products
and
are committed to incorporating the latest technologies into our new and existing
product lines. Key to this effort is adopting emerging technologies such
as
Voice over Internet Protocol (VoIP), international standards-based conferencing
protocols, wireless connectivity and the convergence of voice, video and
data
networks.
6
Develop
strong sales channels
We
have
made significant efforts to develop strong domestic and international sales
channels through the addition of key distributors and dealers. We plan to
continue to add new distribution partners, with specific emphasis on bolstering
distribution to the information technology and telecommunications channels,
where we see opportunity for our MAX®
tabletop
audio conferencing products; our new RAV™ audio conferencing systems; our
conferencing peripherals, including the AccuMic®
product
line; and other products currently in development.
Broaden
our product offerings
We
offer
a full range of audio conferencing products, from high-end, professionally
installed audio conferencing systems to conferencing-specific telephones.
We
plan to continue to broaden our product offerings to meet the evolving needs
of
our customers, address changes in the markets we currently serve, and
effectively target new markets for our products.
Develop
strategic partnerships
To
stay
on the leading edge of product development, we plan to continue to identify
partners with technology and expertise in areas strategic to our growth
objectives. We will also work to develop partnerships with leaders in markets
complimentary to conferencing who can benefit from our audio products and
technologies, and through whom we can access new market growth opportunities.
Strengthen
existing customer relationships through dedicated support
We
have
developed outstanding technical and sales support teams that are dedicated
to
providing customers with the best available service and support. We believe
our
technical support is recognized as among the best in the industry, and we
will
continue to invest in the necessary resources to ensure that our customers
have
access to the information and support they need to be successful using our
products.
Markets
and Products
We
currently conduct all our operations in the conferencing products industry.
We
also previously operated in the conferencing services segment until July
1, 2004
when we sold our conferencing services business to American Teleconferencing
Services, Ltd., and in the business services segment until March 4, 2005,
when
we sold the remaining operations in that area to 6351352 Canada Inc. For
additional financial information about our segments see “Note 23. Segment,
Geographic and Revenue Information” to our consolidated financial statements,
which are included in this report.
Products
Segment
The
performance and reliability of our high-quality conferencing products enable
effective and efficient communication between geographically separated
businesses, employees and customers. We offer a full range of audio conferencing
products, from high-end, professionally installed audio conferencing systems
used in executive boardrooms, courtrooms, classrooms and auditoriums, to
conferencing-specific telephones used in small conference rooms and offices.
Our
products feature our proprietary Gentner® Distributed Echo Cancellation® and
noise cancellation technologies to enhance communication during a conference
call by eliminating echo and background noise. They also feature proprietary
audio processing technologies such as adaptive modeling, full duplex,
first-microphone priority and microphone gating, which combine to enable
natural
communication between distant conferencing participants similar to that of
being
in the same room.
7
Principal
drivers of demand for audio conferencing products are: the increasing
availability of easy to use audio conferencing equipment; the improving voice
quality of audio conferencing systems compared to desktop speakerphones;
and the
trend of global, regional and local corporate expansion. Other factors that
we
expect to have a significant impact on the demand for audio conferencing
systems
are the availability of a wider range of affordable audio conferencing products
for small businesses and home offices; the growth of distance learning and
corporate training programs, and the number of teleworkers; the decrease
in the
amount of travel within most enterprises for routine meetings; and the
transition to the Internet Protocol (IP) network from the traditional public
switched telephone network (PSTN). We expect these growth factors to be offset
slightly by direct competition from high-end desktop speakerphones, the
technological volatility of IP-based products and continued pressures on
enterprises to reduce spending.
Professional
Audio Conferencing Products
We
have
been developing high-end, professionally installed audio conferencing products
since 1991 and believe we have established strong brand recognition for these
Professional Audio Conferencing products.
Our
Professional Audio Conferencing products include the XAP®, Audio Perfect® (AP)
and PSR1212 product lines. The XAP® line includes our most powerful,
feature-rich products, with the latest advances in technology and functionality.
It has more processing power than our Audio Perfect® products and contains noise
cancellation technology in addition to our Gentner® Distributed Echo
Cancellation® technology found in the Audio Perfect® product line. The Audio
Perfect® product line offers lower-cost products that still allow users to
experience quality sound in a wide variety of conferencing venues. The PSR1212
is a digital matrix mixer that provides advanced audio processing, microphone
mixing and routing for local sound reinforcement.
The
XAP®,
Audio Perfect® and PSR1212 products are comprehensive audio control systems
designed to excel in the most demanding acoustical environments and routing
configurations. These products are also used for integrating high-quality
audio
with videoconferencing systems.
Out-of-the-Box
Premium Conferencing Systems
In
fiscal
2004, we introduced our RAV™ audio conferencing system. RAV™ is a complete,
out-of-the-box system that includes an audio mixer, loudspeakers, microphones
and a wireless control device. It uniquely combines the sound quality of
a
professionally installed audio system with the simplicity of a conference
phone,
and can be easily connected to industry common rich-media devices, such as
video
or webconferencing systems, to deliver enhanced audio performance.
RAV™
offers many powerful audio processing technologies from our Professional
Audio
Conferencing products without the need for professional installation and
programming. It features Gentner® Distributed Echo Cancellation®, noise
cancellation, microphone gating and a drag-and-drop graphical user interface
for
easy system setup, control and management.
Table
Top Conferencing Phone Systems
In
fiscal
2003, we developed our MAX® line of tabletop conferencing phones. These phones
incorporate the high-end echo cancellation, noise cancellation and audio
processing technologies found in our industry leading professional audio
conferencing products.
The
MAX®
product line is comprised of the MAX® EX, MAX® Wireless, MAXAttach and MAXAttach
wireless tabletop conferencing phones. MAX® Wireless was the first wireless
conferencing phone. Designed for use in executive offices or small conference
rooms with up to eight participants, MAX® Wireless can be moved from room to
room within 150 feet of its base station. MAXAttach is a wired conferencing
phone with unique expansion capabilities. Instead of just adding extension
microphones for use in larger rooms, MAXAttach links up to four complete
phones
together. This provides even distribution of microphones, loudspeakers and
controls for better sound quality and improved user access in medium to large
conference rooms. The MAXAttach wireless is the industry’s first dual unit
wireless conference phone.
8
Other
Products
We
complement our audio conferencing products with microphones, document and
education cameras and conferencing-specific furniture. Our microphones are
designed to improve the audio quality in audio, video and webconferencing
applications. They feature echo cancellation and audio processing technologies
and can be used with personal computers, videoconferencing systems or installed
audio conferencing systems. Our cameras can be used in professional conferencing
or educational settings to enable presentation of materials and images such
as
full-color documents, 3-D objects and images from a variety of sources,
including computers, microscopes, and multimedia devices such as VCR and
DVD
players. Our wide selection of wood, metal and laminate conferencing furniture
features audiovisual carts, plasma screen carts and pedestals, videoconferencing
carts, tables, cabinets and podiums. We also provide custom furniture
design.
Marketing
and Sales
We
sell
our products primarily through a worldwide network of audiovisual, information
technology and telecommunications distributors, who in turn sell our products
to
dealers, systems integrators and value-added resellers. We also sell our
products on a limited basis directly to dealers, systems integrators,
value-added resellers and end users. We use a two-tier distribution model,
in
which we primarily sell our products directly to distributors, who then sell
our
products to independent systems integrators, dealers and value-added resellers,
who in turn work directly with the end users of our products on product
fulfillment and installation. In addition, we regularly participate in
conferencing forums, trade shows and industry promotions.
In
fiscal
2003, approximately $18.6 million, or 68%, of our total product sales were
generated in the United States and product sales of approximately $8.9 million,
or 32%, were generated outside the United States. Revenue from product and
business services customers outside of the United States accounted for
approximately 26% of our total sales from continuing operations for fiscal
2003,
10% for fiscal 2002 and 12% for fiscal 2001. We sell our products in more
than
70 countries worldwide. We anticipate that the portion of our total revenue
from
international sales will continue to increase as we further enhance our focus
on
developing new products, establishing new channel partners, strengthening
our
presence in key growth areas, and improving product localization with
country-specific product documentation and marketing materials.
Distributors
We
sell
our products directly to approximately 90 distributors throughout the world.
Distributors buy our products at a discount to list price and resell them
on a
non-exclusive basis to independent systems integrators, dealers and value-added
resellers. Our distributors maintain their own inventory and accounts
receivable, and are required to provide technical and non-technical support
for
our products to the next level of distribution participants. We work with
our
distributors to establish appropriate inventory stocking levels. We also
work
with our distributors to maintain relationships with our existing systems
integrators, dealers and value-added resellers and to establish new distribution
participant relationships. We also sell our products on a limited basis to
certain systems integrators, dealers and value-added resellers who buy our
products at a discount to list and resell them on a non-exclusive basis to
end
users.
Independent
Integrators and Resellers
Our
distributors sell our products worldwide to approximately 750 independent
systems integrators, dealers and value-added resellers on a non-exclusive
basis.
While dealers, resellers and systems integrators all sell our products directly
to the end users, systems integrators typically add significant value to
each
sale by combining our products with products from other manufacturers as
part of
a complex audiovisual system installation. Dealers and value-added resellers
usually buy our products in large volumes and may bundle our products with
products from other manufacturers for resale to the end user. We maintain
close
working
ties with our distribution participants and offer them education and training
on
our all of our products.
Trade
Shows and Industry Forums
We
regularly attend industry forums and exhibit our products at trade shows
to
ensure our products remain highly visible to distributors and dealers, and
to
keep abreast of market trends.
9
Customers
No
customer accounted for more than 10% of our total revenue during fiscal 2003,
2002 or 2001. In fiscal 2003, revenues in our product segment included sales
to
three distributors that represented approximately 42% of the segment’s revenues.
We currently only report revenues in our product segment and revenues in
that
segment during fiscal 2005 include sales to three distributors that represent
approximately 63% of our revenue. As discussed below, these distributors
facilitate product sales to a large number of end users, none of which is
known
to account for more than 10% of our revenues from product sales. Nevertheless,
the loss of one or more distributors could reduce revenues and have a material
adverse effect on our business and results of operations.
Competition
The
conferencing products market is characterized by intense competition and
rapidly
evolving technology. We have no single competitor for all of our product
and
service offerings, but we compete with various companies with respect to
specific products and services. We believe we compete successfully as a result
of the high quality of our products and technical support services as well
as
the strength of our brand.
With
respect to our products, we believe the principal factors driving sales are
product design, quality and functionality of products, establishment of brand
name recognition, pricing, access to and penetration of distribution channels,
quality of customer support, and a significant customer base.
In
the
audio conferencing systems market, our competitors include Polycom, Biamp
Systems, Sony, Sound Control, Aethra, Cisco and other companies that offer
conferencing systems. According to industry sources, during the 2003 calendar
year, we had the largest share of the installed segment of the conferencing
systems market, which we target with our Professional Audio Conferencing
products. In the markets for our document cameras, competitors include Sony,
Elmo, Ken-a-Vision, Samsung, Wolfvision and other manufacturers. Our microphones
compete with the products of Shure, Audio Technica, Global Media and others.
Our
conferencing furniture products compete primarily with the products of Video
Furniture International, Accuwood and Comlink.
In
each
of the markets in which we compete, most of our competitors may have access
to
greater financial, technical, manufacturing and marketing resources, and
as a
result they could respond more quickly or effectively to new technologies
and
changes in customer preferences. No assurances can be given that we can continue
to compete effectively in the markets we serve.
Product
Development
We
are
committed to research and development, and view our continued investment
in
research and development as a key ingredient to our long-term business success.
Our research and development expenditures were approximately $3.0 million
in
fiscal 2003, $3.8 million in fiscal 2002 and $2.7 million in fiscal
2001.
Our
core
competencies in research and development include many audio technologies,
including telephone echo cancellation, acoustic echo cancellation and noise
cancellation. Our ability to use digital signal processing technology to
perform
audio processing operations is also a core competency. Our research and
development efforts are supported by an internal computer aided design team
that
creates electrical schematics, printed circuit board designs, mechanical
designs
and manufacturing documentation. We believe the technology developed through
this interactive process is critical to the performance of our products.
We also
believe that ongoing development of our core technological competencies is
vital
to maintaining and increasing future sales of our products and to enhancing
new
and existing products.
10
Manufacturing
Prior
to
June 2005, we manufactured and assembled most of our products in our
manufacturing facility located at our corporate headquarters in Salt Lake
City,
Utah. We also subcontracted the manufacture of some products to a third-party
contract manufacturer located in Southeast Asia. We also manufactured and
continue to manufacture our furniture product line in our manufacturing facility
located in Champlin, Minnesota.
We
generally purchase our assembly components from distributors. We also buy
a
limited amount of components directly from fabricators located
near our manufacturing facilities. Many of our suppliers are located in the
United States.
While
it
is our policy to have a minimum of two vendor sources for components, certain
electronic components used in the manufacture of our products can only be
obtained from a single manufacturer and we are solely dependent upon these
manufacturers to deliver such components to our suppliers so that they can
meet
our production needs. We do not have a written commitment from such suppliers
to
fulfill our future requirements. While our suppliers maintain an inventory
of
such components, no assurances can be given that such components will always
be
readily available, available at reasonable prices, available in sufficient
quantities, or delivered in a timely fashion. If such components become
unavailable, it is likely that we will experience delays, which could be
significant, in the production and delivery of our products, unless and until
we
can otherwise procure the required component or components at competitive
prices, if at all, or make product design changes. From time to time, we
experience increased prices and increased lead times on certain of these
key
components that have limited availability. Any lack of availability of these
components could have a material adverse effect on our ability to sell products
and the related increase in prices would likely reduce our profit margins.
Many
of the components utilized by us in our manufacturing process are bonded
by
certain distributors and manufacturers, meaning that the component inventory
will be kept “on-site” at vendor stock locations and managed by the vendors. The
component inventory will then be sold to us on an as-required basis.
On
August
1, 2005, we entered into a Manufacturing Agreement with Inovar, Inc., a
Utah-based electronics manufacturing services provider (“Inovar”), pursuant to
which we agreed to outsource our Salt Lake City manufacturing operations
to
Inovar. The agreement is for an initial term of three years, which shall
automatically be extended for successive and additional terms of one year
each
unless terminated by either party upon 120 days’ advance notice at any time
after the second anniversary of the agreement. The agreement generally provides,
among other things, that Inovar shall: (i) furnish the necessary personnel,
material, equipment, services and facilities to be the exclusive manufacturer
of
substantially all the products that were previously manufactured at our Salt
Lake City, Utah manufacturing facility, and the non-exclusive manufacturer
of a
limited number of products, provided that the total cost to ClearOne (including
price, quality, logistic cost and terms and conditions of purchase) is
competitive; (ii) provide repair service and warranty support and proto-type
services for new product introduction on terms to be agreed upon by the parties;
(iii) purchase certain items of our manufacturing equipment; (iv) lease certain
other items of our manufacturing equipment and have a one-year option to
purchase such leased items; (v) have the right to lease our former manufacturing
employees from a third party employee leasing company; and (vi) purchase
the
parts and materials on hand and in transit at our cost for such items with
the
purchase price payable on a monthly basis when and if such parts and materials
are used by Inovar. The parties also entered into a one-year sublease for
approximately 12,000 square feet of manufacturing space located in our
headquarters in Salt Lake City, Utah, which sublease may be terminated by
either
party upon ninety days’ notice. The agreement provides that products shall be
manufactured by Inovar pursuant to purchase orders submitted by us at purchase
prices to be agreed upon by the parties, subject to adjustment based upon
such
factors as volume, long range forecasts, change orders etc. We also granted
Inovar a right of first refusal to manufacture new products developed by
us at a
cost to ClearOne (including price, quality, logistic cost and terms and
conditions of purchase) that is competitive.
For
risks
associated with our manufacturing strategy please see “Risk Factors” in Item
1.
11
Intellectual
Property and Other Proprietary Rights
We
believe that our success depends in part on our ability to protect our
proprietary rights. We rely on a combination of patent, copyright, trademark
and
trade secret laws and confidentiality procedures to protect our proprietary
rights. The laws of foreign countries may not protect our intellectual property
to the same degree as the laws of the United States.
We
generally require our employees, customers and potential distribution
participants to enter into confidentiality and non-disclosure agreements
before
we disclose any confidential aspect of our technology, services or business.
In
addition, our employees are routinely required to assign to us any proprietary
information, inventions or other technology created during the term of their
employment with us. These precautions may not be sufficient to protect us
from
misappropriation or infringement of our intellectual property.
We
currently have several patents issued or pending covering our conferencing
products and technologies. The expiration dates of issued patents range from
2009 to 2010. We hold registered trademarks for ClearOne, XAP, MAX, AccuMic,
Audio Perfect, Distributed Echo Cancellation, Gentner and others. We have
also
filed for trademarks for RAV and others.
Employees
As
of
July 31, 2005, we had 121 employees, 119 of whom were employed on a full-time
basis, with 47 in sales, marketing and customer support, 40 in product
development, 17 in manufacturing support and 17 in administration, including
finance. None of our employees are subject to a collective bargaining agreement
and we believe our relationship with our employees is good.
Acquisitions
and Dispositions
During
the fiscal year ended June 30, 2001, we completed the acquisition of ClearOne,
Inc., a developer of video conferencing technology and audio conferencing
products. We also completed the sale of the
assets of the remote control portion of our RFM/Broadcast division to Burk
Technology, Inc. During the fiscal year ended June 30, 2002, we completed
the
acquisitions of Ivron Systems, Ltd., a developer of videoconferencing technology
and product, E.mergent, Inc., an integration services provider and manufacturer
of cameras and conferencing furniture, and the sale of our court conferencing
customer list and all contracts relating to our court conferencing services
to
CourtCall LLC. During the fiscal year ended June 30, 2003, we sold our
broadcast telephone interface products, including the digital hybrid and
TS-612
product lines, to Comrex Corporation
and completed the acquisition of Stechyson Electronics Ltd., doing business
as
OM Video, an integration business services company. The total consideration
for
each acquisition was based on negotiations between ClearOne and the acquired
company or its shareholders that took into account a number of factors of
the
business, including historical revenues, operating history, products,
intellectual property and other factors. Each acquisition was accounted for
under the purchase method of accounting. Each acquisition is summarized below
and is discussed in more detail in the footnotes to the audited consolidated
financial statements included in this report.
ClearOne,
Inc. Acquisition. In
May
2000, we entered into an agreement to purchase substantially all of the assets
of ClearOne, Inc. for approximately $3.6 million consisting of $1.8 million
of
cash and 129,871 shares of our restricted common stock valued at $13.97 per
share. The acquisition was consummated on July 5, 2000.
As
of the
acquisition date, we acquired tangible assets consisting of property and
equipment of $473,000, deposits of $59,000, and inventory of $299,000. We
recorded $924,000 of identifiable intangibles, $728,000 of in-process research
and development, and $1.2 million in goodwill, resulting from the difference
between the purchase price plus acquisition costs and the net assets acquired.
We amortized goodwill of $1.2 million on a straight-line basis over four
years
until the adoption of SFAS No. 142 on July 1, 2002. Amortization of goodwill
was
$297,000 for each of the fiscal years ended June 30, 2002 and 2001.
12
We
charged $728,000 to expense representing acquired in-process research and
development that had not yet reached technological feasibility. We anticipated
the technology would require an additional 18 to 20 months of development
at a
minimum cost of $1.2 million. The technology had no alternative future use.
After the acquisition, we initially continued to develop the technology,
however, we experienced significant difficulties in completing the development
of the video conferencing technologies and subsequently determined that the
technology was not viable and never brought the in-process video conferencing
technology to market.
We
continued to sell the acquired teleconferencing product until the fourth
quarter
of the fiscal year ended June 30, 2002. Due to declining sales, negative
margins
beginning in the fourth quarter of the year ended June 30, 2002, and
management’s decision to stop investing in the acquired teleconferencing
product, we determined that a triggering event had occurred in the fourth
quarter of the fiscal year ended June 30, 2002. We performed an impairment
test
and determined that an impairment loss on the ClearOne assets should be
recognized.
Sale
of Assets to Burk Technology.
On April
12, 2001, we sold the assets of the remote control portion of our RFM/Broadcast
division to Burk Technology, Inc. (Burk), a privately held developer and
manufacturer of broadcast facility control systems products. We retained
the
accounts payable of the remote control portion of the RFM/Broadcast division
and
Burk assumed obligations for unfilled customer orders and satisfying warranty
obligations to existing customers and for inventory sold to Burk. However,
we
retained certain warranty obligations to Burk to ensure that all of the assets
sold to Burk were in good operating condition and repair.
Consideration
for the sale consisted of $750,000 in cash at closing, $1.8 million in the
form
of a seven-year promissory note, with interest at the rate of nine percent
per
year, and up to $700,000 as a commission over a period of up to seven years.
The
payments on the promissory note may be deferred based upon Burk not meeting
net
quarterly sales levels established within the agreement. The promissory note
is
secured by a subordinate security interest in the personal property of Burk.
The
gain on the sale is being recognized as cash is collected (as collection
was not
reasonably assured from Burk). The commission is based upon future net sales
of
Burk over base sales established within the agreement. We realized a gain
on the
sale of $200,000 for the 2003 fiscal year, $176,000 for the 2002 fiscal year,
and $123,000 for the 2001 fiscal year. As of June 30, 2003, $1.5 million of
the promissory note remained outstanding and we had received $20,000 in
commissions.
Ivron
Systems, Ltd. Acquisition. On
October 3, 2001, we purchased all of the issued and outstanding shares of
Ivron
Systems, Ltd., of Dublin, Ireland. Under the terms of the original agreement,
the shareholders of Ivron received $6.0 million of cash at closing of the
purchase. As part of the purchase, all outstanding options to purchase Ivron
shares were cancelled in consideration for a cash payment of $650,000. Further,
under that agreement, after June 30, 2002, each former Ivron shareholder
would be entitled to receive approximately .08 shares of our common stock
for
each Ivron share previously held by such shareholder, provided that certain
video product development contingencies were achieved. This represented
approximately 429,000 shares of common stock. Thereafter, for the fiscal
years
ending June 30, 2003 and 2004, the former Ivron shareholders would be entitled
to share in up to approximately $17.0 million of additional cash and stock
consideration provided that certain agreed upon earnings per share targets
were
achieved by us. In addition, former optionees of Ivron who remained with
us were
eligible to participate in a cash bonus program paid by us, based on our
combined performance with Ivron in the fiscal years ending June 30, 2003
and
2004. The maximum amount payable under this cash bonus program was approximately
$1.0 million.
As
of the
acquisition date, we acquired tangible assets consisting primarily of cash
of
$297,000, accounts receivable of $92,000, inventory of $337,000, and property
and equipment of $22,000. We assumed liabilities consisting primarily of
trade
accounts payable of $174,000, and accrued compensation and other accrued
liabilities of $264,000.
On
March
26, 2002, we entered into negotiations with the former shareholders of Ivron
to
modify the terms of the original purchase agreement because, upon further
analysis, certain aspects of the acquired technology did not meet the intended
product objectives established in our original purchase negotiations.
13
The
amendment, which was finalized on April 8, 2002, revised the contingent
consideration that the Ivron shareholders would have been entitled to receive
in
subsequent years so that upon meeting certain gross profit targets for the
“V-There” and “Vu-Link” set-top videoconferencing products, technologies, and
sub-elements thereof (including licensed products), the former Ivron
shareholders had the opportunity to receive up to 109,000 shares of our common
stock, issuable in four installments, on a quarterly basis, through July
15,
2003. No performance targets were met and accordingly no contingent
consideration was or will be paid.
Based
on
the modified purchase price determined under the terms of the amendment,
we
recorded intangible assets of $5.3 million related to developed technology,
$1.1
million related to intellectual property, and goodwill of $218,000. Amortization
expense of $446,000 was recorded for the developed technology for the period
from October 3, 2001 to June 30, 2002. No amortization expense was recorded
for
goodwill. After
the
acquisition, we experienced significant difficulties in selling the acquired
video conferencing products. Due to the phasing out of a product line occasioned
by technological difficulties and negative projected cash flows, we determined
that a triggering event had occurred during the fourth quarter of the fiscal
year ended June 30, 2002. We performed an impairment test and determined
that an
impairment loss on the Ivron assets should be recognized. Subsequent to June
30,
2003, we discontinued selling the “V-There” and “Vu-Link” set-top
videoconferencing products.
Sale
of Court Conferencing Assets. As
part
of our conferencing services segment, our court conferencing customers engaged
in the audio and/or video conferencing of legal proceedings including remote
appearances in state and federal courts and/or administrative tribunals within
the United States. On October 26, 2001, we sold our court conferencing customer
list, including all contracts relating to its court conferencing services
to
CourtCall LLC and recognized a gain of $250,000.
E.mergent
Acquisition. On
May
31, 2002, we completed our acquisition of E.mergent, Inc. pursuant to the
terms
of an Agreement and Plan of Merger dated January 21, 2002 pursuant to which
we
paid $7.3 million of cash and issued 868,691 shares of our common stock valued
at $16.55 per share to the former E.mergent stockholders.
In
addition to the shares of our common stock issued, we assumed all options
to
purchase E.mergent common stock that were vested and outstanding on the
acquisition date. These options were converted into the right to acquire
a total
of 4,158 shares of our common stock at a weighted average exercise price
of
$8.48 per share. A
value
of approximately $49,000 was assigned to these options using the Black-Scholes
option pricing model.
As
of the
acquisition date, we acquired tangible assets consisting primarily of cash
of
$68,000, accounts receivable of $2.2 million, inventory of $3.3 million,
property and equipment of $475,000 and other assets of $1.3 million. We assumed
liabilities consisting primarily of accounts payable of $1.3 million, line
of
credit borrowings of $484,000, unearned maintenance revenue of $873,000,
accrued
compensation (other than severance) and other accrued liabilities of $656,000.
We incurred severance costs of approximately $468,000 related to the termination
of four E.mergent executives and seven other E.mergent employees as a result
of
duplication of positions upon consummation of the acquisition. In June 2002,
$52,000 was paid to such individuals. The severance accrual as of June 30,
2002
of $416,000 was paid during the fiscal year ended June 30, 2003.
We
recorded intangible assets of $1.1 million related to patents, $392,000 related
to customer relationships, $215,000 related to a non-compete agreement, and
goodwill of $17.1 million. Amortization expense of $437,000 was recorded
for the
intangible assets for the period from June 1, 2002 to June 30, 2003. In
accordance with SFAS No. 142, no amortization expense was recorded for goodwill.
Our
management at the time believed the E.mergent acquisition would complement
our
existing operations and our core competencies would allow us to acquire market
share in the audio visual integration industry. However, our entry into the
services business was perceived as a threat by our systems integrators and
value-added resellers, many of whom we began competing against for sales.
In
order to avoid this conflict and maintain good relationships with our systems
integrators and value-added resellers, we decided to stop pursuing new services
contracts in the fourth quarter of the fiscal year ended June 30, 2003 which
was
considered a triggering event for evaluation of impairment. We ultimately
exited
the U.S. audiovisual integration market and subsequently sold our U.S.
audiovisual integration business to M:Space in May of 2004. Although we continue
to sell camera and furniture products acquired from E.mergent, our decision
to
exit the U.S. integration services market adversely affected the future cash
flows of the E.mergent business unit. We determined that a triggering event
occurred in the fourth quarter of the fiscal year ended June 30, 2003. We
performed an impairment test and determined that an impairment loss on certain
E.mergent assets should be recognized.
14
Sale
of Broadcast Telephone Interface Business to Comrex.
On
August 23, 2002, we entered into an agreement with Comrex Corporation (Comrex).
In exchange for $1.3 million, Comrex received certain inventory associated
with
our broadcast telephone interface product line, a perpetual software license
to
use our technology related to broadcast telephone interface products along
with
one free year of maintenance and support, and transition services for 90
days
following the effective date of the agreement. The transition services included
training, engineering assistance, consultation, and development services.
We
recognized $1.1 million in revenue related to this transaction in the fiscal
year ended June 30, 2003.
We
also
entered into a manufacturing agreement to continue to manufacture additional
product for Comrex for one year following the agreement described above on
a
when-and-if needed basis. Comrex agreed to pay the Company for any additional
product on a per item basis of cost plus 30%.
OM
Video Acquisition. On
August
27, 2002, we purchased all of the outstanding shares of Stechyson Electronics
Ltd., doing business as OM Video, an audiovisual integration firm headquartered
in Ottawa, Canada. Under the terms of the agreement, the shareholders of
OM
Video received $6.3 million in cash at closing. During the fiscal years ended
June 30, 2003 and 2004, we paid an additional $500,000 of a potential $600,000
that was held pending verification of certain representations and warranties
made in connection with the acquisition. During the second quarter of fiscal
2003, we also paid $750,000 of a potential $800,000 earn-out provision. No
further payment related to the holdback or contingent consideration will
be
paid.
As
of the
acquisition date, we acquired tangible assets consisting primarily of cash
of
$193,000, accounts receivable of $470,000, inventory of $122,000, property
and
equipment of $145,000 and prepaid expenses of $6,000. We assumed liabilities
consisting primarily of accrued liabilities of $378,000 and accrued tax
liabilities of $221,000. We also obtained a non-competition agreement with
a
term of two years from the former owner of OM Video.
Our
management at the time believed the OM Video acquisition would complement
our
existing operations and our core competencies would allow us to acquire market
share in the audio visual integration industry. However, our entry into the
services business was perceived as a threat by our systems integrators and
value-added resellers, many of whom we began competing against for sales.
In
order to avoid this conflict and maintain good relationships with our systems
integrators and value-added resellers, we deemphasized the audiovisual
integration market serving the Ottawa Canada region beginning in the fourth
quarter of the fiscal year ended June 30, 2003. This decision was considered
a
triggering event for evaluation of impairment. On March 4, 2005, we sold
all of
our Canadian audio visual integration business. On June 30, 2003, we performed
an impairment test and determined that an impairment loss on the OM Video
assets
should be recognized.
Risk
Factors
Investors
should carefully consider the risks described below. The risks described
below
are not the only ones we face, and there are risks that we are not presently
aware of or that we currently believe are immaterial that may also impair
our
business operations. Any of these risks could harm our business. The trading
price of our common stock could decline significantly due to any of these
risks,
and investors may lose all or part of their investment. In assessing these
risks, investors should also refer to the other information contained or
incorporated by reference in this Annual Report on Form 10-K, including our
consolidated financial statements and related notes.
Risks
Relating to Our Business
We
face intense competition in all of the markets for our products and services,
and our operating results will be adversely affected if we cannot compete
effectively against other companies.
As
described in more detail in the section entitled “Competition,” the markets for
our products and services are characterized by intense competition and pricing
pressures and rapid technological change. We compete with businesses having
substantially greater financial, research and development, manufacturing,
marketing, and other resources. If we are not able to continually design,
manufacture, and successfully introduce new or enhanced products or services
that are comparable or superior to those provided by our competitors and
at
comparable or better prices, we could experience pricing pressures and reduced
sales, profit margins, profits, and market share, each of which could have
a
materially adverse effect on our business.
15
Difficulties
in estimating customer demand in our products segment could harm our profit
margins.
Orders
from our distributors and other distribution participants are based on demand
from end-users. Prospective end user demand is difficult to measure. This
means
that our revenues in any fiscal quarter could be adversely impacted by low
end
user demand, which could in turn negatively affect orders we receive from
distributors and dealers. Our expectations for both short- and long-term
future
net revenues are based on our own estimates of future demand.
Revenues
for any particular time period are difficult to predict with any degree of
certainty. We usually ship products within a short time after we receive
an
order; so consequently, backlog has not been a good indicator of future
revenues. We believe that the current level of backlog will fluctuate dependent
in part on our ability to forecast revenue mix and plan our manufacturing
accordingly. A significant portion of our customers’ orders are received in the
last month of the quarter. We budget the amount of our expenses based on
our
revenue estimates. If our estimates of sales are not accurate and we experience
unforeseen variability in our revenues and operating results, we may be unable
to adjust our expense levels accordingly and our profit margins will be
adversely affected.
Our
profitability may be adversely affected by our continuing dependence on our
distribution channels.
We
market
our products primarily through a network of distributors
who in turn sell our products to systems integrators, dealers and value-added
resellers.
All of
our agreements with such distributors
and other distribution participants are
non-exclusive, terminable at will by either party and generally short-term,
with
the exception of one exclusive installed audio distribution agreement for
the
United Kingdom and Southern Ireland. No assurances can be given that any
or all
such distributors or other distribution participants will continue their
relationship with us. Distributors and to a lesser extent systems integrators,
dealers and value-added resellers cannot easily be replaced and the loss
of
revenues and our inability to reduce expenses to compensate for the loss
of
revenues could adversely affect our net revenues and profit
margins.
Although
we rely on our distribution channels to sell our products, our distributors
and other distribution participants are
not
obligated to devote any specified amount of time, resources or efforts to
the
marketing of our products or to sell a specified number of our products.
There
are no prohibitions on distributors or other resellers offering products
that
are competitive with our products and most do offer competitive products.
The
support of our products by distributors
and other distribution participants may
depend on the competitive strength of our products and the price incentives
we
offer for their support. If our distributors
and other distribution participants are
not
committed to our products, our revenues and profit margins may be adversely
affected.
General
economic conditions may have an adverse impact on our
revenues.
General
economic conditions have, in the past, and may continue to lead to reductions
in
capital expenditures on technology by end user customers of our products.
While
there have been indications of improvement in the global economy and its
impact
on technology spending, constraints still exist and may have an adverse impact
on our future revenues.
We
depend on a limited number of suppliers for components and the inability
to
obtain sufficient supplies of components could adversely affect our product
sales.
While
it
is our policy to have a minimum of two vendor sources for components, certain
components used in the manufacture of our products can only be obtained from
a
single manufacturer and we are solely dependent upon these manufacturers
to
deliver such components to our suppliers so that they can meet our delivery
schedules. We do not have a written commitment from such suppliers to fulfill
our future requirements. While our suppliers maintain an inventory of such
components, no assurances can be given that such components will always be
readily available, available at reasonable prices, available in sufficient
quantities, or delivered in a timely fashion. If such components become
unavailable, it is likely that we will experience delays, which could be
significant, in the production and delivery of our products, unless and until
we
can otherwise procure the required component or components at competitive
prices, if at all. We have experienced increased prices and increased lead
times
on certain of these key components that have limited availability. Any lack
of
availability of these components could have a material adverse effect on
our
ability to sell products and the related increase in prices would likely
reduce
our profit margins.
16
Furthermore,
suppliers of some of these components may become our competitors, which might
also affect the availability of key components to us. It is possible that
other
components required in the future may necessitate custom fabrication in
accordance with specifications developed or to be developed by us. Also,
in the
event we, or any of the manufacturers whose products we expect to utilize
in the
manufacture of our products, are unable to develop or acquire components
in a
timely fashion, our ability to achieve production yields, revenues and net
income may be adversely affected.
Product
obsolescence could harm demand for our products and could adversely affect
our
revenues and our results of operations.
Our
industry is subject to rapid and frequent technological innovations that
could
render existing technologies in our products obsolete and thereby decrease
market demand for such products. If any of our products become slow-moving
or
obsolete and the recorded value of our inventory is greater than its market
value, we will be required to write-down the value of our inventory to its
fair
market value, which would adversely affect our results of
operations.
Product
development delays or defects could harm our competitive position and reduce
our
revenues.
We
have,
in the past, and may again experience technical difficulties and delays with
the
development and introduction of new products. The products we develop contain
sophisticated and complicated components and utilize manufacturing techniques
involving new technologies. Potential difficulties in the development process
that could be experienced by us include difficulty in:
|
·
|
meeting
required specifications;
|
|
·
|
hiring
a sufficient number of developers;
|
|
·
|
developing
and testing products; and
|
|
·
|
achieving
necessary manufacturing efficiencies.
|
Once
new
products reach the market, they may have defects, which could adversely affect
market acceptance of these products and our reputation. If we are not able
to
manage and minimize such potential difficulties, our business could be
negatively affected.
If
we
are unable to protect our intellectual property rights or have insufficient
proprietary rights, our business would be materially impaired.
We
currently rely primarily on a combination of trade secrets, copyrights,
trademarks, patents and nondisclosure agreements to establish and protect
our
proprietary rights in our products. No assurances can be given that others
will
not independently develop similar technologies, or duplicate or design around
aspects of our technology. In addition, we cannot assure you that any patent
or
registered trademark owned by us will not be invalidated, circumvented or
challenged or that the rights granted thereunder will provide competitive
advantages to us. Litigation may be necessary to enforce our intellectual
property rights. We believe our products and other proprietary rights do
not
infringe upon any proprietary rights of third parties. We cannot assure you,
however, that third parties will not assert infringement claims in the future.
Our industry is characterized by vigorous protection of intellectual property
rights. Such claims and litigation are expensive and could divert management’s
attention, regardless of their merit. In the event of a claim, we might be
required to license third party technology or redesign our products, which
may
not be possible or economically feasible.
We
currently hold only a limited number of patents. To the extent that we have
patentable technology for which we have not filed patent applications, others
may be able to use such technology or even gain priority over us by patenting
such technology themselves.
17
International
sales account for a significant portion of our net revenue and risks inherent
in
international sales could harm our business.
International
sales represent a significant portion of our total sales from continuing
operations. For example, international sales represented 26% of our total
sales
from continuing operations for fiscal 2003, 10% for fiscal 2002 and 12% for
fiscal 2001. We anticipate that the portion of our total revenue from
international sales will continue to increase as we further enhance our focus
on
developing new products, establishing new distribution partners, strengthening
our presence in key growth areas, and improving product localization with
country-specific product documentation and marketing materials. Our
international business is subject to the financial and operating risks of
conducting business internationally, including:
|
·
|
unexpected
changes in, or the imposition of, additional legislative or regulatory
requirements;
|
|
·
|
fluctuating
exchange rates;
|
|
·
|
tariffs
and other barriers;
|
|
·
|
difficulties
in staffing and managing foreign subsidiary operations;
|
|
·
|
export
restrictions;
|
|
·
|
greater
difficulties in accounts receivable collection and longer payment
cycles;
|
|
·
|
potentially
adverse tax consequences; and
|
|
·
|
potential
hostilities and changes in diplomatic and trade
relationships.
|
Our
sales
in the international market are denominated in U.S. Dollars, with the exception
of sales through our wholly owned subsidiary, ClearOne Communications of
Canada,
Inc. (ClearOne Canada d.b.a. OM Video), whose sales were denominated in Canadian
Dollars until March 4, 2005, when the subsidiary was sold to a third party.
Consolidation of ClearOne Canada’s financial statements with ours, under U.S.
generally accepted accounting principles, required remeasurement of the amounts
stated in ClearOne Canada’s financial statements to U.S. Dollars, which was
subject to exchange rate fluctuations. We did not undertake hedging activities
that might protect us against such risks.
We
may not be able to hire and retain highly skilled employees, which could
affect
our ability to compete effectively and may cause our revenue and profitability
to decline.
We
depend
on highly skilled technical personnel to research and develop, market and
service new and existing products. To succeed, we must hire and retain employees
who are highly skilled in the rapidly changing communications and Internet
technologies. Individuals who have the skills and can perform the services
we
need to provide our products and services are in great demand. Because the
competition for qualified employees in our industry is intense, hiring and
retaining employees with the skills we need is both time-consuming and
expensive. We might not be able to hire enough skilled employees or retain
the
employees we do hire. Our inability to hire and retain employees with the
skills
we seek could hinder our ability to sell our existing products, systems,
or
services or to develop new products, systems, or services with a consequent
adverse effect on our business.
Our
reliance on third-party technology or license agreements.
We
have
licensing agreements with various suppliers for software and hardware
incorporated into our products. These third-party licenses may not continue
to
be available to us on commercially reasonable terms, if at all. The termination
or impairment of these licenses could result in delays of current product
shipments or delays or reductions in new product introductions until equivalent
designs could be developed, licensed and integrated, if at all possible,
which
would have a material adverse effect on our business.
18
Our
reliance on international outsource manufacturing strategy.
We
have
an agreement with an international manufacturer for the manufacture of our
MAX®
product line. We use a facility in China. Should there be any disruption
in
services due to natural disaster, economic or political difficulties in China,
quarantines or other restrictions associated with infectious diseases, or
other
similar events, or any other reason, such disruption would have a material
adverse effect on our business. A delay in shipping these products due to
an
interruption in the manufacturer’s operations would have a negative impact on
our revenues. Operating in the international environment exposes us to certain
inherent risks, including unexpected changes in regulatory requirements and
tariffs, and potentially adverse tax consequences, which could materially
affect
our results of operations.
Our
sales depend to a certain extent on government funding and
regulation.
In
the
conferencing market, the revenues generated from sales of our audio conferencing
products for distance learning and courtroom facilities are dependent on
government funding. In the event government funding for such initiatives
was
reduced or became unavailable, our sales could be negatively impacted.
Additionally, many of our products are subject to governmental regulations.
New
regulations could significantly impact sales in an adverse manner.
We
may have difficulty in collecting outstanding receivables.
We
grant
credit without requiring collateral to substantially all of our customers.
If
there were a recurrence of economic uncertainty or an economic slowdown,
the
risks relating to the granting of such credit would increase. Although we
monitor and mitigate the risks associated with our credit policies, we cannot
assure you that such mitigation will be effective. We have experienced losses
due to customers failing to meet their obligations. Future losses could be
significant and, if incurred, could harm our business and have a material
adverse effect on our operating results and financial condition.
Interruptions
to our business could adversely affect our operations.
As
with
any company, our operations are at risk of being interrupted by earthquake,
fire, flood, and other natural and human-caused disasters, including terrorist
attacks and disease. Our operations are also at risk of power loss,
telecommunications failure, and other infrastructure and technology based
problems. To help guard against such risks, we carry business interruption
loss
insurance with coverage of up to $5.4 million to help compensate us for losses
that may occur.
Risks
Relating to Our Company
Many
of our officers and key personnel have recently joined the company or have
only
worked together for a short period of time.
We
have
recently made several significant changes to our senior management. In July
2004
we named a new President and Chief Executive Officer, who had been serving
as
our Vice President of Product Development since December 2003. In addition
we
hired a new Chief Financial Officer in July 2004, a Vice President of Worldwide
Sales and Marketing in November 2004, a Vice President of Operations in December
2004. In January 2005, we named a new Vice President of Product Line Management,
who had been serving as our Director of Research and Development. As a result
of
these recent changes in senior management, many of our officers and other
key
personnel have only worked together for a short period of time. The failure
to
successfully integrate senior management could have an adverse impact on
our
business operations, including reduced sales, confusion with our channel
partners and delays in new product introductions.
We
are not current in the filing of reports with the SEC and the SEC could initiate
enforcement proceedings against us at any time.
We
are
not current in the filing of reports with the SEC and the SEC could initiate
enforcement proceedings against us at any time, including proceedings to
suspend
trading of our securities.
19
Our
directors
and officers own 19.6% of the Company and may exert control over
us.
Our
officers and directors together have beneficial ownership of approximately
19.6%
of our common stock (including options that are currently exercisable or
exercisable within 60 days of July 31, 2005). With this significant holding
in
the aggregate, the officers and directors, acting together, could exert control
over us and may be able to delay or prevent a change in control.
Our
stock price fluctuates as a result of the conduct of our business and stock
market fluctuations.
The
market price of our common stock has experienced significant fluctuations
and
may continue to fluctuate significantly. The market price of our common stock
may be significantly affected by a variety of factors, including:
|
·
|
statements
or changes in opinions, ratings or earnings estimates made by brokerage
firms or industry analysts relating to the market in which we do
business
or relating to us specifically;
|
|
·
|
disparity
between our reported results and the projections of
analysts;
|
|
·
|
the
announcement of new products or product enhancements by us or our
competitors;
|
|
·
|
technological
innovations by us or our
competitors;
|
|
·
|
quarterly
variations in our results of
operations;
|
|
·
|
general
market conditions or market conditions specific to technology industries;
|
|
·
|
domestic
and international economic
conditions;
|
|
·
|
our
ability to report financial information in a timely manner;
and
|
|
·
|
the
markets in which our stock is
traded.
|
|
ITEM
2.
|
PROPERTIES
|
Our
principal administrative, sales, marketing, customer support and research
and
development facility is located in our headquarters in Salt Lake City, Utah.
Most of our product manufacturing and warehousing operations are also located
in
our Salt Lake City headquarters. We currently occupy a 51,760 square-foot
facility under the terms of an operating lease expiring in October 2006.
We
believe the facility will be reasonably adequate to meet our needs for the
next
12 months.
From
July
1, 2004 through February 28, 2005, we sublet 5,416 square feet of space in
our
headquarters building to Premiere Conferencing, the purchaser of our
conferencing services business. On August 1, 2005, we entered into a one-year
sublease with Inovar, Inc. with respect to the 12,000 square foot manufacturing
facility in our headquarters building in connection with the outsourcing
of our
manufacturing operations. Such space had been provided to Inovar on a rent-free
basis from June 20 to July 31, 2005, pending execution of definitive agreements.
Our
conference furniture manufacturing and warehousing operations are conducted
from
a facility totaling 17,520 square feet located in Champlin, Minnesota. We
lease
this facility under a lease agreement that expires in September 2007. We
believe
the facility will be reasonably adequate to meet our needs for the next 12
months.
Our
wholly owned United Kingdom subsidiary, ClearOne Communications Limited,
rents
an office in Oxfordshire, England, consisting of 250 square feet. The office
space is rented under a managed office arrangement which requires 90 days
notice
to terminate the agreement.
Our
wholly owned subsidiary, ClearOne Communications of Canada, Inc. d/b/a OM
Video,
leased a facility in Ottawa, Canada consisting of 16,190 square feet. We
leased
this facility under a lease agreement that expires in July 2005. As discussed
herein, we sold this subsidiary in March 2005.
20
Our
wholly owned subsidiary, ClearOne Communications EuMEA, GmbH, leased an office
in Nuremberg, Germany, consisting of 200 square meters. This office was closed
in December 2004 and the lease was terminated.
We
previously rented sales offices located in Des Moines, Iowa on a month-to-month
basis but such leases were terminated in December 2002. We also leased a
sales
office in Westmont, Illinois pursuant to a lease that expired in July 2004.
Our
U.S.
business services operations were conducted from a facility totaling 25,523
square feet located in Golden Valley, Minnesota. We leased these facilities
under a lease agreement that expired in December 2004. We negotiated an early
buyout of the lease effective June 2004.
We
leased
an office in Woburn, Mass. that we initially acquired through the purchase
of
ClearOne, Inc. in July 2000. The facility consisted of 2,206 square feet.
We
negotiated an early buyout of the lease effective September 2003.
Our
wholly owned subsidiary, Gentner Communications Limited, leased an office
in
Dublin, Ireland for research and development related to video conferencing.
The
facility consisted of 431 square meters, of which we sublet 129 square meters
to
a third party effective July 2002. We negotiated an early buyout of the lease
effective November 2002.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
In
addition to the legal proceedings described below, we are also involved from
time to time in various claims and other legal proceedings which arise in
the
normal course of our business. Such matters are subject to many uncertainties
and outcomes that are not predictable. However, based on the information
available to us today, we do not believe any such other proceedings will
have a
material, adverse effect on our financial condition or results of
operations.
The
SEC Action.
On
January 15, 2003, the U.S. Securities and Exchange Commission filed a civil
complaint against ClearOne, Frances Flood, then ClearOne’s Chairman, Chief
Executive Officer and President, and Susie Strohm, then ClearOne’s Chief
Financial Officer, in the U.S. District Court for the District of Utah, Central
Division. The complaint alleged that from the quarter ended March 31, 2001,
the
defendants engaged in a program of inflating ClearOne’s revenues, net income and
accounts receivable by engaging in improper revenue recognition in violation
of
generally accepted accounting principles (GAAP), and Section 17(a) of the
Securities Act of 1933 and Sections 10(b), 13(a) and 13(b) of the Securities
Exchange Act of 1934, and various regulations promulgated thereunder. Following
the filing of the complaint, we placed Ms. Flood and Ms. Strohm on
administrative leave and they subsequently resigned from their positions
with
the Company. On December 4, 2003, we settled the SEC action by entering into
a
consent decree in which, without admitting or denying the allegations of
the
complaint, we consented to the entry of a permanent injunction prohibiting
future securities law violations. No fine or penalty was assessed against
the
Company as part of the settlement.
On
February 20, 2004, Ms. Flood and Ms. Strohm settled the SEC action by entering
into consent decrees wherein, without admitting or denying the allegations
of
the complaint, they each consented to the entry of a permanent injunction
prohibiting future violations of the antifraud, reporting, and issuer books
and
records requirements of the federal securities laws. The order against Ms.
Flood
also provided for disgorgement in the amount of $71,000 along with prejudgment
interest of $2,882, a civil penalty in the amount of $71,000, and prohibited
Flood from acting as an officer or director of any issuer that has a class
of
securities registered pursuant to Section 12 of the Exchange Act or that
is
required to file reports pursuant to Section 15(d) of the Exchange Act. The
order against Ms. Strohm also provided for disgorgement in the amount of
$25,000
together with prejudgment interest in the amount of $1,015 and a civil penalty
in the amount of $25,000. The final settlement of the SEC action as to Ms.
Flood
and Ms. Strohm satisfied the condition precedent contained in the employment
separation agreements entered into by the Company with each of such persons
on
December 5, 2003 (See Item 11. Executive Compensation: Employment Contracts
and
Termination of Employment and Change-in-Control Agreements).
21
The
Whistleblower Action.
On
February 11, 2003, our former vice president of sales filed a whistleblower
claim with the Occupational Safety and Health Administration (OSHA) under
the
employee protection provisions of the Sarbanes-Oxley Act alleging that the
Company had wrongfully terminated his employment for reporting the Company’s
alleged improper revenue recognition practices to the SEC in December 2002,
which precipitated the SEC action against the Company. In February 2004,
OSHA
issued a preliminary order in favor of the former officer, ordering that
he be
reinstated with back pay, lost benefits, and attorney’s fees. The former officer
had also filed a separate lawsuit against the Company in the United States
District Court for the District of Utah, Central Division, alleging various
employment discrimination claims. In May 2004, the Administrative Law Judge
approved a settlement agreement with the former officer pursuant to which
he
released the Company from all claims asserted by him in the OSHA proceeding
and
the federal court action in exchange for a cash payment by the Company. The
settlement did not have a material impact on the Company's results of operations
or financial condition.
The
Shareholders’ Class Action.
On
June 30, 2003, a Consolidated Complaint was filed in the U.S. District
Court for the District of Utah, Central Division, against the Company, eight
present or former officers and directors of the Company, and Ernst & Young
LLP (Ernst & Young), the Company’s former independent registered public
accountants, by a class consisting of purchasers of the Company’s common stock
during the period from April 17, 2001 through January 15, 2003. The action
followed the consolidation of several previously filed class action complaints
and the appointment of lead counsel for the class. The allegations in the
complaint were essentially the same as those contained in the SEC complaint
described above. On December 4, 2003, the Company, on behalf of itself and
all
other defendants with the exception of Ernst & Young, entered into a
settlement agreement with the class pursuant to which we agreed to pay the
class
$5.0 million and issue the class 1.2 million shares of our common stock.
The
cash payment was made in two equal installments, the first on November 10,
2003
and the second on January 14, 2005. On May 23, 2005, the court order was
amended
to provide that odd-lot numbers of shares (99 or fewer shares) will not be
issued from the settlement fund and claimants who would otherwise be entitled
to
receive 99 or fewer shares will be paid cash in lieu of such odd-lot number
of
shares. As of the date hereof, 228,000 shares of our common stock have been
issued to the class and we plan to complete the issuance of the remaining
shares
in the near future in accordance with the terms of the court order, subject
to
the receipt of any required approvals from state regulatory
authorities.
The
Shareholder Derivative Actions.
Between
March and August, 2003, four shareholder derivative actions were filed in
the Third Judicial District Court of Salt Lake County, State of Utah, by
certain
shareholders of the Company against various present and past officers and
directors of the Company and against Ernst & Young. The complaints asserted
allegations similar to those asserted in the SEC action and shareholders’ class
action described above and also alleged that the defendant directors and
officers violated their fiduciary duties to the Company by causing or allowing
the Company to recognize revenue in violation of GAAP and issue materially
misstated financial statements, and that Ernst & Young breached its
professional responsibilities to the Company and acted in violation of GAAP
and
generally accepted accounting standards by failing to identify or prevent
the
alleged revenue recognition violations and by issuing unqualified audit opinions
with respect to the Company’s 2002 and 2001 financial statements. One of these
actions was dismissed without prejudice on June 13, 2003. As to the other
three actions, our board of directors appointed a special litigation committee
of independent directors to evaluate the claims. That committee determined
that
the maintenance of the derivative proceedings against the individual defendants
was not in the best interest of the Company. Accordingly, on December 12,
2003,
we moved to dismiss those claims. In March 2004, our motions were granted,
and the derivative claims were dismissed with prejudice as to all defendants
except Ernst & Young. The Company was substituted as the plaintiff in the
action and is now pursuing in its own name the claims against Ernst & Young.
22
The
Insurance Coverage Action. On
February 9, 2004, ClearOne and Edward Dallin Bagley (Bagley), a director
and significant shareholder of ClearOne, jointly filed an action in the United
States District Court for the District of Utah, Central Division, against
National Union Fire Insurance Company of Pittsburgh, Pennsylvania and Lumbermens
Mutual Insurance Company, the carriers of certain prior period directors
and
officers liability insurance policies, to recover the costs of defending
and
resolving claims against certain of our present and former directors and
officers in connection with the SEC action, the shareholders’ class action and
the shareholder derivative actions described above, and seeking other damages
resulting from the refusal of such carriers to timely pay the amounts owing
under such liability insurance policies. This action has been consolidated
into
a declaratory relief action filed by one of the insurance carriers on
February 6, 2004 against ClearOne and certain of its current and former
directors. In this action, the insurers assert that they are entitled to
rescind
insurance coverage under our directors and officers’ liability insurance
policies, $3.0 million of which was provided by National Union and $2.0 million
which was provided by Lumbermens Mutual, based on alleged misstatements in
our
insurance applications. In February 2005, we entered into a confidential
settlement agreement with Lumbermens Mutual pursuant to which ClearOne and
Bagley received a lump sum cash amount and the plaintiffs agreed to dismiss
their claims against Lumbermens Mutual with prejudice. The cash settlement
will
be held in a segregated account until the claims involving National Union
have
been resolved, at which time the amounts received in the action will be
allocated among the Company and Bagley. The amount distributed to the Company
and Bagley will be determined based on future negotiations between the Company
and Bagley. We are vigorously pursuing our claims against National Union
although no assurances can be given that we will be successful. ClearOne
and
Bagley have entered into a Joint Prosecution and Defense Agreement in connection
with the action.
The
Pacific Technology & Telecommunications Collection Action.
On
August 12, 2003, we initiated a commercial arbitration proceeding against
Pacific Technology & Telecommunications (PT&T), a former distributor,
seeking to collect approximately $1.8 million that PT&T owed ClearOne for
inventory purchased but not paid for. PT&T denied our claim and asserted
counterclaims. Subsequently, on April 20, 2004, PT&T filed for
protection under Chapter 7 of the United States Bankruptcy Code, which had
the
effect of staying the proceeding. Following PT&T’s bankruptcy filing, the
Company successfully negotiated a settlement with the bankruptcy trustee.
Under
the settlement, which has been approved by the bankruptcy court, the Company
paid $25,000 and obtained the right to recover all unsold ClearOne inventory
held by PT&T and the right to pursue on the basis of an assignment any
claims that PT&T may have against any of its own officers or directors,
subject, however, to a maximum recovery of $800,000. The Company is currently
in
the process of investigating whether any such claims exist and, if so, whether
it would be in the Company’s best interest to pursue them given the anticipated
legal expenses and the uncertainties of being able to collect any resulting
favorable judgment. The settlement also resulted in the release and dismissal
with prejudice of all of PT&T’s claims against the Company. To date, the
Company has not recovered any inventory held by PT&T.
U.S.
Attorney’s Investigation. As
previously announced on January 28, 2003, the Company has been advised that
the
U.S. Attorney’s Office for the District of Utah has begun an investigation
stemming from the complaint in the SEC action described above. No pleadings
have
been filed to date and the Company is cooperating fully with the U.S. Attorney’s
Office.
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No
matter
was submitted to a vote of our security holders during the fourth quarter
ended
June 30, 2003.
23
PART
II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Market
Information
Our
common stock traded under the symbol CLRO on the Nasdaq National Market System
(“NASDAQ”) until April 21, 2003. Our shares were delisted from NASDAQ effective
as of the opening of trading on April 21, 2003, due to our failure to timely
file SEC reports and public interest concerns relating to the SEC complaint
filed on January 15, 2003. Since April 21, 2003, our common stock has been
traded on the National Quotation Bureau’s Pink Sheets under the symbol “CLRO.”
The following table sets forth the high and low sales prices for the common
stock for each quarter during the last three fiscal years. On August 10,
2005,
the closing price for our common stock on the Pink Sheets was
$3.95.
|
2001
|
Market
|
High
|
Low
|
|||||||
|
First
Quarter
|
NASDAQ
|
$
|
17.13
|
$
|
12.00
|
|||||
|
Second
Quarter
|
NASDAQ
|
16.44
|
8.50
|
|||||||
|
Third
Quarter
|
NASDAQ
|
15.69
|
9.75
|
|||||||
|
Fourth
Quarter
|
NASDAQ
|
14.30
|
9.50
|
|||||||
|
2002
|
High
|
Low
|
||||||||
|
First
Quarter
|
NASDAQ
|
$
|
18.72
|
$
|
9.80
|
|||||
|
Second
Quarter
|
NASDAQ
|
22.94
|
15.03
|
|||||||
|
Third
Quarter
|
NASDAQ
|
18.99
|
12.30
|
|||||||
|
Fourth
Quarter
|
NASDAQ
|
18.80
|
13.25
|
|||||||
|
2003
|
High
|
Low
|
||||||||
|
First
Quarter
|
NASDAQ
|
$
|
14.69
|
$
|
3.31
|
|||||
|
Second
Quarter
|
NASDAQ
|
5.45
|
2.82
|
|||||||
|
Third
Quarter
|
NASDAQ/Pink
Sheets
|
4.68
|
1.38
|
|||||||
|
Fourth
Quarter
|
Pink
Sheets
|
3.05
|
0.09
|
|||||||
Shareholders
As
of
July 29, 2005, there were 451 shareholders of record of our common stock,
including broker dealers and clearing corporations who hold shares for their
customers, each of which is counted as a single shareholder.
Dividends
We
have
not paid a cash dividend on our common stock and do not anticipate doing
so in
the foreseeable future. We intend to retain earnings to fund future capital
requirements, growth and product development.
Equity
Compensation Plan Information
The
following table sets forth information as of June 30, 2003 with respect to
compensation plans under which equity securities of ClearOne are authorized
for
issuance.
24
|
Number
of securities to be issued upon exercise of outstanding options,
warrants,
and rights
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
||||
|
(a)
|
(b)
|
(
c )
|
||||
|
Equity
compensation plans approved by security holders
|
2,122,756
|
$6.89
|
496,668
|
|||
|
Equity
compensation plans not approved by security holders
|
0
|
0.00
|
0
|
|||
|
Total
|
2,122,756
|
$6.89
|
496,668
|
Stock
Repurchase program.
During
fiscal 2001, we repurchased 20,300 shares of our common stock on the open
market
at prices ranging from $10.58 to $14.16, for an aggregate purchase price
of
$244,000. All repurchased shares were retired. This stock repurchase program
expired in October 2001.
During
fiscal 2003, we repurchased 125,000 shares on the open market at prices ranging
from $3.06 to $3.60, for an aggregate purchase price of $430,000. All
repurchased shares were retired. This stock repurchase program expired in
October 2003 and we have not repurchased any additional securities since
that
time.
Private
Placement of Common Stock.
On
December 11, 2001, we completed a private placement of 1,500,000 shares of
our
common stock, from which we received net proceeds of approximately $23.8
million, after deducting costs and expenses associated with the private
placement. In connection with the offering, we issued warrants to the placement
agent entitling it to purchase up to 150,000 shares of our common stock at
an
exercise price of $17.00 per share through November 27, 2006.
ITEM
6. SELECTED
FINANCIAL DATA
The
following selected financial data has been derived from our audited Consolidated
Financial Statements. For the fiscal years ended June 30, 2002 and 2001,
the
data in the table below is restated to reflect the restatement of results
for
those years (see below and Note 3. Restatement and reclassifications of
previously issued financial statements in Item 8 of this report). For the
fiscal years ended June 30, 2000 and 1999, the selected financial data in
the
table below is presented on an unaudited basis, to reflect prior period
adjustments resulting from the re-audit of subsequent fiscal years. The results
presented below for the fiscal years ended June 30, 2000 and 1999 have not
been
re-audited and are unaudited. The information set forth below is not necessarily
indicative of results of future operations, and should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements and related notes thereto
included elsewhere in this Form 10-K.
25
SELECTED
CONSOLIDATED FINANCIAL DATA
(in
thousands, except share data)
|
Years
Ended June 30,
|
||||||||||||||||
|
2003
|
2002
|
2001
|
2000
|
1999
|
||||||||||||
|
(restated)
|
(restated)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
|
Operating
results:
|
||||||||||||||||
|
Net
revenue
|
$
|
57,585
|
$
|
43,362
|
$
|
34,137
|
$
|
27,918
|
$
|
20,268
|
||||||
|
Costs
and expenses:
|
||||||||||||||||
|
Cost
of goods sold
|
35,301
|
22,172
|
15,133
|
11,175
|
8,908
|
|||||||||||
|
Marketing
and selling
|
12,187
|
10,739
|
7,711
|
6,200
|
4,313
|
|||||||||||
|
General
and administrative
|
18,011
|
5,345
|
4,198
|
3,214
|
2,545
|
|||||||||||
|
Product
development
|
2,995
|
3,810
|
2,747
|
1,271
|
1,195
|
|||||||||||
|
Impairment
losses
|
26,001
|
7,115
|
-
|
-
|
-
|
|||||||||||
|
Gain
on sale of assets
|
-
|
(250
|
)
|
-
|
-
|
-
|
||||||||||
|
Purchased
in-process research and development
|
-
|
-
|
728
|
-
|
-
|
|||||||||||
|
Operating
income (loss)
|
(36,910
|
)
|
(5,569
|
)
|
3,620
|
6,058
|
3,307
|
|||||||||
|
Other
income (expense)
|
(96
|
)
|
132
|
188
|
153
|
(78
|
)
|
|||||||||
|
Income
(loss) from continuing operations before income taxes
|
(37,006
|
)
|
(5,437
|
)
|
3,808
|
6,211
|
3,229
|
|||||||||
|
Provision
(benefit) for income taxes
|
(834
|
)
|
1,400
|
1,050
|
2,229
|
1,209
|
||||||||||
|
Income
(loss) from continuing operations
|
(36,172
|
)
|
(6,837
|
)
|
2,758
|
3,982
|
2,020
|
|||||||||
|
Income
from discontinued operations, net of applicable income
taxes
|
-
|
-
|
737
|
427
|
524
|
|||||||||||
|
Gain
on disposal of business segment, net of applicable income
taxes
|
200
|
176
|
123
|
-
|
-
|
|||||||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
$
|
4,409
|
$
|
2,544
|
||||
|
Earnings
(loss) per common share:
|
||||||||||||||||
|
Basic
earnings (loss) from continuing operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.32
|
$
|
0.48
|
$
|
0.25
|
||||
|
Diluted
earnings (loss) from continuing operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.30
|
$
|
0.46
|
$
|
0.24
|
||||
|
Basic
earnings from discontinued operations
|
$
|
0.02
|
$
|
0.02
|
$
|
0.10
|
$
|
0.05
|
$
|
0.06
|
||||||
|
Diluted
earnings from discontinued operations
|
$
|
0.02
|
$
|
0.02
|
$
|
0.09
|
$
|
0.04
|
$
|
0.06
|
||||||
|
Basic
earnings (loss)
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
$
|
0.53
|
$
|
0.31
|
||||
|
Diluted
earnings (loss)
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
$
|
0.50
|
$
|
0.30
|
||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
11,183,339
|
9,588,118
|
8,593,725
|
8,269,941
|
8,080,536
|
|||||||||||
|
Diluted
|
11,183,339
|
9,588,118
|
9,194,009
|
8,740,209
|
8,468,884
|
|||||||||||
|
As
of June 30,
|
||||||||||||||||
|
2003
|
2002
|
2001
|
2000
|
1999
|
||||||||||||
|
(restated)
|
(restated)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
|
Financial
data:
|
||||||||||||||||
|
Current
assets
|
$
|
26,917
|
$
|
36,312
|
$
|
17,604
|
$
|
15,116
|
$
|
9,282
|
||||||
|
Property,
plant and equipment, net
|
6,768
|
8,123
|
5,681
|
3,050
|
2,126
|
|||||||||||
|
Total
assets
|
35,276
|
63,876
|
25,311
|
18,220
|
11,519
|
|||||||||||
|
Long-term
debt, net of current maturities
|
931
|
-
|
-
|
-
|
-
|
|||||||||||
|
Capital
leases, net of current maturities
|
1,215
|
2,016
|
1,680
|
230
|
455
|
|||||||||||
|
Total
stockholders' equity
|
18,743
|
53,892
|
20,728
|
15,073
|
8,352
|
|||||||||||
Quarterly
Financial Data (Unaudited)
The
financial data in this Annual Report on Form 10-K for the quarter ended
September 30, 2002, and for each of the quarters in the fiscal years ending
June
30, 2002 and 2001 has been restated from amounts previously reported on Forms
10-Q and Forms 10-K. A discussion of the restatement in relation to the affected
quarters is provided in Note 3 to our audited consolidated financial statements
- Restatement and Reclassification of Previously Issued Consolidated Financial
Statements. An overview of the restatement is provided in the introduction
to
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
26
|
Fiscal
2003 Quarters Ended
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
As
of Sept. 30
|
As
of Dec. 31
|
As
of Mar. 31
|
As
of June 30
|
|||||||||||||
|
(as
previously reported)
|
(restated)
|
|||||||||||||||
|
Net
revenue
|
$
|
12,998
|
$
|
13,818
|
$
|
14,184
|
$
|
15,258
|
$
|
14,325
|
||||||
|
Cost
of goods sold
|
(7,440
|
)
|
(11,922
|
)
|
(6,357
|
)
|
(10,169
|
)
|
(6,853
|
)
|
||||||
|
Operating
expenses
|
(6,398
|
)
|
(6,569
|
)
|
(13,129
|
)
|
(7,120
|
)
|
(6,375
|
)
|
||||||
|
One-time
charges
|
(1,947
|
)
|
-
|
-
|
-
|
-
|
||||||||||
|
Impairment
charges
|
-
|
-
|
-
|
-
|
(26,001
|
)
|
||||||||||
|
Other
(income) expense
|
77
|
(11
|
)
|
(40
|
)
|
(12
|
)
|
(34
|
)
|
|||||||
|
Gain
on sale of product line
|
1,112
|
-
|
-
|
-
|
-
|
|||||||||||
|
Loss
from continuing operations before income taxes
|
(1,598
|
)
|
(4,684
|
)
|
(5,342
|
)
|
(2,043
|
)
|
(24,938
|
)
|
||||||
|
Benefit
for income taxes
|
(439
|
)
|
(314
|
)
|
(358
|
)
|
(137
|
)
|
(25
|
)
|
||||||
|
Loss
from continuing operations
|
(1,159
|
)
|
(4,370
|
)
|
(4,984
|
)
|
(1,906
|
)
|
(24,913
|
)
|
||||||
|
Income
from discontinued operations
|
-
|
59
|
59
|
24
|
58
|
|||||||||||
|
Net
loss
|
$
|
(1,159
|
)
|
$
|
(4,311
|
)
|
$
|
(4,925
|
)
|
$
|
(1,882
|
)
|
$
|
(24,855
|
)
|
|
|
Basic
(loss) per common share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.10
|
)
|
$
|
(0.39
|
)
|
$
|
(0.44
|
)
|
$
|
(0.17
|
)
|
$
|
(2.23
|
)
|
|
|
Discontinued
operations
|
-
|
0.01
|
0.01
|
-
|
0.01
|
|||||||||||
|
Basic
(loss) per common share
|
$
|
(0.10
|
)
|
$
|
(0.38
|
)
|
$
|
(0.43
|
)
|
$
|
(0.17
|
)
|
$
|
(2.22
|
)
|
|
|
Diluted
(loss) per common share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.10
|
)
|
$
|
(0.39
|
)
|
$
|
(0.44
|
)
|
$
|
(0.17
|
)
|
$
|
(2.23
|
)
|
|
|
Discontinued
operations
|
-
|
0.01
|
0.01
|
-
|
0.01
|
|||||||||||
|
Diluted
(loss) per common share
|
$
|
(0.10
|
)
|
$
|
(0.38
|
)
|
$
|
(0.43
|
)
|
$
|
(0.17
|
)
|
$
|
(2.22
|
)
|
|
|
Fiscal
2002 Quarters Ended
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||
|
As
of Sept. 30
|
As
of Dec. 31
|
||||||||||||
|
(as
previously reported)
|
(restated)
|
(as
previously reported)
|
(restated)
|
||||||||||
|
Net
revenue
|
$
|
11,220
|
$
|
9,963
|
$
|
12,582
|
$
|
12,590
|
|||||
|
Cost
of goods sold
|
(4,582
|
)
|
(4,423
|
)
|
(5,057
|
)
|
(5,484
|
)
|
|||||
|
Operating
expenses
|
(4,501
|
)
|
(4,304
|
)
|
(5,211
|
)
|
(4,487
|
)
|
|||||
|
Impairment
charges
|
-
|
-
|
-
|
-
|
|||||||||
|
Other
(income) expense
|
145
|
71
|
66
|
(67
|
)
|
||||||||
|
Income
from continuing operations before income taxes
|
2,282
|
1,307
|
2,380
|
2,552
|
|||||||||
|
Provision
for income taxes
|
870
|
393
|
888
|
766
|
|||||||||
|
Income
from continuing operations
|
1,412
|
914
|
1,492
|
1,786
|
|||||||||
|
Income
from discontinued operations
|
-
|
-
|
-
|
-
|
|||||||||
|
Net
income
|
$
|
1,412
|
$
|
914
|
$
|
1,492
|
$
|
1,786
|
|||||
|
Basic
earnings per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.16
|
$
|
0.11
|
$
|
0.17
|
$
|
0.20
|
|||||
|
Discontinued
operations
|
-
|
-
|
-
|
-
|
|||||||||
|
Basic
earnings per common share
|
$
|
0.16
|
$
|
0.11
|
$
|
0.17
|
$
|
0.20
|
|||||
|
Diluted
earnings per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.16
|
$
|
0.10
|
$
|
0.16
|
$
|
0.18
|
|||||
|
Discontinued
operations
|
-
|
-
|
-
|
-
|
|||||||||
|
Diluted
earnings per common share
|
$
|
0.16
|
$
|
0.10
|
$
|
0.16
|
$
|
0.18
|
|||||
27
|
Fiscal
2002 Quarters Ended
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||
|
As
of Mar. 31
|
As
of June 30
|
||||||||||||
|
(as
previously reported)
|
(restated)
|
(as
previously reported)
|
(restated)
|
||||||||||
|
Net
revenue
|
$
|
14,171
|
$
|
9,316
|
$
|
16,569
|
$
|
11,493
|
|||||
|
Cost
of goods sold
|
(5,587
|
)
|
(4,388
|
)
|
(7,774
|
)
|
(7,876
|
)
|
|||||
|
Operating
expenses
|
(5,430
|
)
|
(4,971
|
)
|
(5,667
|
)
|
(5,884
|
)
|
|||||
|
Impairment
charges
|
-
|
-
|
-
|
(7,115
|
)
|
||||||||
|
Other
(income) expense
|
(71
|
)
|
32
|
369
|
97
|
||||||||
|
Income
(loss) from continuing operations before income taxes
|
3,083
|
(11
|
)
|
3,497
|
(9,285
|
)
|
|||||||
|
Provision
(benefit) for income taxes
|
1,012
|
(3
|
)
|
1,061
|
244
|
||||||||
|
Income
(loss) from continuing operations
|
2,071
|
(8
|
)
|
2,436
|
(9,529
|
)
|
|||||||
|
Income
from discontinued operations
|
-
|
117
|
-
|
59
|
|||||||||
|
Net
income (loss)
|
$
|
2,071
|
$
|
109
|
$
|
2,436
|
$
|
(9,470
|
)
|
||||
|
Basic
earnings (loss) per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.20
|
$
|
-
|
$
|
0.24
|
$
|
(0.90
|
)
|
||||
|
Discontinued
operations
|
-
|
0.01
|
-
|
0.01
|
|||||||||
|
Basic
earnings (loss) per common share
|
$
|
0.20
|
$
|
0.01
|
$
|
0.24
|
$
|
(0.89
|
)
|
||||
|
Diluted
earnings (loss) per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.20
|
$
|
-
|
$
|
0.22
|
$
|
(0.90
|
)
|
||||
|
Discontinued
operations
|
-
|
0.01
|
-
|
0.01
|
|||||||||
|
Diluted
earnings (loss) per common share
|
$
|
0.20
|
$
|
0.01
|
$
|
0.22
|
$
|
(0.89
|
)
|
||||
|
Fiscal
2001 Quarters Ended
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||
|
As
of Sept. 30
|
As
of Dec. 31
|
||||||||||||
|
(as
previously reported)
|
(restated)
|
(as
previously reported)
|
(restated)
|
||||||||||
|
Net
revenue
|
$
|
9,333
|
$
|
5,567
|
$
|
9,680
|
$
|
9,585
|
|||||
|
Cost
of goods sold
|
(3,766
|
)
|
(2,804
|
)
|
(3,971
|
)
|
(3,944
|
)
|
|||||
|
Operating
expenses
|
(3,488
|
)
|
(4,042
|
)
|
(3,873
|
)
|
(3,538
|
)
|
|||||
|
Other
expense
|
64
|
8
|
119
|
88
|
|||||||||
|
Income
(loss) from continuing operations before income taxes
|
2,143
|
(1,271
|
)
|
1,955
|
2,191
|
||||||||
|
Provision
(benefit) for income taxes
|
799
|
(350
|
)
|
752
|
604
|
||||||||
|
Income
(loss) from continuing operations
|
1,344
|
(921
|
)
|
1,203
|
1,587
|
||||||||
|
Income
from discontinued operations
|
186
|
95
|
337
|
245
|
|||||||||
|
Gain
on disposal of business segment
|
-
|
-
|
-
|
-
|
|||||||||
|
Net
income (loss)
|
$
|
1,530
|
$
|
(826
|
)
|
$
|
1,540
|
$
|
1,832
|
||||
|
Basic
earnings (loss) per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.16
|
$
|
(0.11
|
)
|
$
|
0.14
|
$
|
0.18
|
||||
|
Discontinued
operations
|
0.02
|
0.01
|
0.04
|
0.03
|
|||||||||
|
Basic
earnings (loss) per common share
|
$
|
0.18
|
$
|
(0.10
|
)
|
$
|
0.18
|
$
|
0.21
|
||||
|
Diluted
earnings (loss) per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.15
|
$
|
(0.11
|
)
|
$
|
0.13
|
$
|
0.17
|
||||
|
Discontinued
operations
|
0.02
|
0.01
|
0.04
|
0.03
|
|||||||||
|
Diluted
earnings (loss) per common share
|
$
|
0.17
|
$
|
(0.10
|
)
|
$
|
0.17
|
$
|
0.20
|
||||
28
|
Fiscal
2001 Quarters Ended
|
|||||||||||||
|
(in
thousands)
|
|||||||||||||
|
As
of Mar. 31
|
As
of June 30
|
||||||||||||
|
(as
previously reported)
|
(restated)
|
(as
previously reported)
|
(restated)
|
||||||||||
|
Net
revenue
|
$
|
10,212
|
$
|
9,589
|
$
|
10,653
|
$
|
9,396
|
|||||
|
Cost
of goods sold
|
(4,328
|
)
|
(4,168
|
)
|
(4,438
|
)
|
(4,217
|
)
|
|||||
|
Operating
expenses
|
(3,786
|
)
|
(3,805
|
)
|
(3,757
|
)
|
(3,999
|
)
|
|||||
|
Other
expense
|
69
|
39
|
121
|
53
|
|||||||||
|
Income
from continuing operations before income taxes
|
2,167
|
1,655
|
2,579
|
1,233
|
|||||||||
|
Provision
for income taxes
|
808
|
456
|
959
|
340
|
|||||||||
|
Income
from continuing operations
|
1,359
|
1,199
|
1,620
|
893
|
|||||||||
|
Income
(loss) from discontinued operations
|
242
|
250
|
(28
|
)
|
147
|
||||||||
|
Gain
on disposal of business segment
|
-
|
-
|
1,220
|
123
|
|||||||||
|
Net
income
|
$
|
1,601
|
$
|
1,449
|
$
|
2,812
|
$
|
1,163
|
|||||
|
Basic
earnings per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.16
|
$
|
0.14
|
$
|
0.19
|
$
|
0.10
|
|||||
|
Discontinued
operations
|
0.03
|
0.03
|
0.14
|
0.03
|
|||||||||
|
Basic
earnings per common share
|
$
|
0.19
|
$
|
0.17
|
$
|
0.33
|
$
|
0.13
|
|||||
|
Diluted
earnings per common share:
|
|||||||||||||
|
Continuing
operations
|
$
|
0.15
|
$
|
0.13
|
$
|
0.18
|
$
|
0.10
|
|||||
|
Discontinued
operations
|
0.03
|
0.03
|
0.13
|
0.03
|
|||||||||
|
Diluted
earnings per common share
|
$
|
0.18
|
$
|
0.16
|
$
|
0.31
|
$
|
0.13
|
|||||
Discussion of Quarterly Financial Data (Unaudited)
We
have
restated our previously reported consolidated financial statements for the
fiscal years ended June 30, 2002 and 2001. The discussion below relates to
the
changes in the consolidated statements of operations on a quarterly basis
and
are unaudited. Since we have not previously filed our quarterly reports on
Form
10-Q for the quarters ended December 31, 2002 and March 31 and June 30, 2003,
figures for those periods have not been restated.
Summary
of restatement items
Errors
in
previously issued financial statements were identified in the following
areas:
Revenue
Recognition and Related Sales Returns, Credit Memos, and Allowances.
We
recognized revenue before the amounts charged to both distributors and
non-distributors were considered fixed and determinable or reasonably
collectible. Accordingly, revenue was inappropriately accelerated.
Beginning
in 2001 and through 2002, we modified our sales channels to include
distributors. These distributors were generally thinly capitalized with little
or no financial resources and did not have the wherewithal to pay for these
products when delivered by us. Furthermore, in a substantial number of cases,
significant amounts of inventories were returned or never paid for and the
payment for product sold (to both distributors and non-distributors) was
regularly subject to final negotiation with our customers. As a result of
such
negotiations, we routinely agreed to significant concessions from the originally
invoiced amounts to facilitate collection. Accordingly, amounts charged to
both
distributors and non-distributors were not considered fixed and determinable
or
reasonably collectible until cash was collected. Accordingly, product revenues
to distributors and non-distributors were restated for the quarter ended
September 30, 2002, and for each of the quarters in the fiscal years ending
June
30, 2002 and 2001.
Related
sales returns and allowances, rebates, and accounts receivables were revised
appropriately given the revenue adjustments.
29
Cutoff
and Period-End Close Adjustments Related to Accrued Liabilities and Prepaid
Assets. We
recorded accruals and amortized certain prepaid assets to operating expenses
during the quarter ended September 30, 2002, and during each of the quarters
in
the fiscal years ending June 30, 2002 and 2001in the improper periods.
Accordingly, adjustments to accrued liabilities, prepaid assets, and operating
expenses were recorded to properly account for these errors.
Tracking
and Valuation of Inventory, Including Controls to Identify and Properly Account
for Obsolete Inventory. As
part
of the restatement process, we discovered that we made errors in the recording
and presentation of inventories, including consigned inventory, obsolete
and
slow-moving inventories, errors in the capitalization of overhead expenses,
errors in recording inventories at the lower of cost or market, and errors
for
inventory shrinkage. As a result, we made adjustments to reflect consigned
inventory, to properly capitalize overhead expenses, physical inventory
adjustments, adjustments to lower of cost or market, and adjustments to reserves
for excess, obsolete and slow-moving inventory. Accordingly, inventories
and
cost of goods sold were restated to properly account for these
errors.
Accounting
for Leases, Including Classification as Operating or Capital. In
evaluating the classification of leases, we did not consider all periods
for
which failure to renew the lease imposes a penalty on the lessee in such
amount
that a renewal appears, at the inception of the leases, to be reasonably
assured. Accordingly, certain leases were classified as operating leases
that
should have been classified as capital leases. The effect of properly recording
the capital leases on our previously reported financial statements is to
record
additional capital lease obligations, property and equipment, and depreciation
expense and reduce rental expense for the quarter ended September 30, 2002,
and
for each of the quarters in the fiscal years ending June 30, 2002 and
2001.
We
did
not consider escalating rent payments and rent holidays for certain operating
leases. Accordingly, rent expense was inappropriately understated. The effect
of
straight-lining rent payments on our previously reported financial statements
is
to record an accrued liability for future rent payments and record additional
rent expense.
Accounting
for Acquisitions. During
the restatement process, we determined that the valuations and purchase price
allocations in connection with its acquisitions of ClearOne, Ivron, and
E.mergent were not performed properly. We engaged independent third-party
valuation specialists to provide valuations and purchase price allocations
on
these acquisitions. We re-examined the purchase price allocations and adjusted
for items that should have been recorded previously.
|
·
|
In
our previously issued consolidated financial statements, we valued
the
129,871 shares of common stock issued in conjunction with the acquisition
of ClearOne at $15.40 per share. We determined that the shares
should have
been valued at $13.97 per share based on the market prices a few
days
before and after the measurement date.
|
|
·
|
We
recorded adjustments to the amounts allocated to certain acquired
intangible assets, including developed technologies, patents and
trademarks, and distribution agreements. We also recorded adjustments
to
the amounts allocated to in-process research and development related
to
the ClearOne acquisition.
|
|
·
|
We
recorded adjustments to the amounts allocated to certain acquired
tangible
assets and assumed liabilities, including cash, accounts receivable,
inventory, property, plant and equipment, deferred tax assets,
and
deferred tax liabilities.
|
|
·
|
The
adjustments to purchase price, as well as the adjustments to the
amounts
allocated to acquired intangible assets, acquired tangible assets,
and
assumed liabilities, resulted in corresponding adjustments to the
amount
allocated to goodwill.
|
30
Accounting
for Equity and Other Significant Non-Routine Transactions.
|
·
|
During
the quarter ended June 30, 2001, we sold our remote control product
line
to Burk Technology. In previously issued consolidated financial
statements, we recognized a gain on the sale of our remote control
product
line that included a significant note receivable from the buyer
at the
time of the sale, and recognized interest income associated with
the note
receivable in periods subsequent to the sale. Based on an analysis
of the
facts and circumstances that existed at the date of the sale, the
recognition of this gain was inappropriate as the buyer did not
have the
wherewithal to pay this note receivable, the operations of the
remote
control product line had not historically generated cash flows
sufficient
to fund the required payments, and there were contingent liabilities
we
had to the buyer. Accordingly, we concluded that the gain should
be
recognized as cash is received from the buyer. As a result, we
have
reduced the gain on sale and eliminated the note receivable at
the time of
the sale, and recognized additional gain on the sale of the product
line
when-and-as cash payments on the note receivable are
obtained.
|
|
·
|
During
the quarter ended June 30, 2002, we experienced certain triggering
events
that indicated that certain long-lived assets related to ClearOne
and
Ivron were impaired. Accordingly, we performed an impairment analysis
in
accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121. As a result of this analysis, we determined
that
goodwill, intangible assets, and certain property, plant, and equipment
related to the ClearOne and Ivron acquisitions were fully impaired
as of
June 30, 2002. As a result, we recognized an impairment loss equal
to the
carrying value of these assets. In previously issued consolidated
financial statements, we failed to recognize that a triggering
event had
occurred and did not record an impairment loss for these assets.
|
|
·
|
During
the quarter ended March 31, 2001, the terms of certain outstanding
stock
options were modified to allow for their acceleration in the event
we met
certain EPS targets. During the quarter ended June 30, 2001 we
cancelled
certain outstanding stock options and issued a replacement award
with a
lower exercise price, resulting in variable accounting. In previously
issued consolidated financial statements, we did not record compensation
expense in connection with these modifications in accordance with
Accounting Principles Board (APB) No. 25 and Financial Accounting
Standards Board (FASB) Interpretation Number 44, “Accounting for Certain
Transactions involving Stock Compensation” (an interpretation of APB No.
25).
|
|
·
|
On
June 29, 2001, we repurchased 5,000 shares of our previously issued
and
outstanding common shares. In previously issued consolidated financial
statements, we did not record the effects of this transaction until
fiscal
year 2002.
|
Accounting
for Income Taxes.
During
each of the quarters in the fiscal years ending June 30, 2002 and 2001, and
in
the quarter ended September 30, 2002, our income before income taxes was
restated to correct for certain accounting errors, resulting in less pre
tax
book income and correspondingly less income tax expense. In conjunction with
the
restatement, we evaluated the realizability of deferred tax assets. In the
quarter ended June 30, 2002, we recorded an increased domestic valuation
allowance to reflect our determination that not all of our deferred tax assets
were more likely than not realizable pursuant to the provisions of SFAS 109,
“Accounting for Income Taxes”.
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion should be read in conjunction with our Consolidated
Financial Statements and related Notes included in Item 8 of this Annual
Report
on Form 10-K. This discussion contains forward-looking statements based on
current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions, as set forth under “Special Note
Regarding Forward-Looking Statement.” Our actual results and the timing of
events could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth in the
following discussion and under the caption “Factors That Could Affect Our Future
Results” of this Management’s Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this Annual Report on Form 10-K. Unless
otherwise indicated, all references to a year reflect our fiscal year that
ends
on June 30.
31
Business
Overview
We
are an
audio conferencing products company. We develop, manufacture, market and
service
a comprehensive line of audio conferencing products, which range from tabletop
conferencing phones to professionally installed audio systems. We have a
strong
history of product innovation and plan to continue to apply our expertise
in
audio engineering to developing innovative new products. The performance
and
reliability of our high-quality solutions create a natural communication
environment, which saves organizations of all sizes time and money by enabling
more effective and efficient communication between geographically separated
businesses, employees and customers.
Restatements
and Reclassifications of Previously Issued Consolidated Financial
Statements
We
have
restated our previously reported consolidated financial statements for the
quarter ended September 30, 2002, and for fiscal years ended June 30, 2002
and
2001, and each of the quarters therein. The restatement adjustments (including
impairment charges) resulted in a cumulative net reduction to shareholders’
equity of approximately $17.4 million and $3.8 million as of June 30, 2002
and
2001, respectively, and a reduction in previously reported net income of
approximately $14.1 million and $3.9 million for the years ended June 30,
2002
and 2001, respectively. We have also restated the July 1, 2000 opening retained
earnings balance to reflect corrected items that relate to prior periods.
We
have not amended our prior filings to reflect the restatement. As a result,
information previously filed in our annual reports on Form 10-K for fiscal
years
ended June 30, 2002 and 2001, our quarterly reports on Form 10-Q for the
quarterly periods included in those fiscal years and for the quarter ended
September 30, 2002 and any current reports on Form 8-K, or other disclosures,
containing fiscal 2003, 2002 and 2001 information filed or made prior to
the
filing of this 2003 Form 10-K should not be relied upon.
As
discussed below, our previously issued consolidated balance sheets, consolidated
statements of operations and comprehensive income (loss), consolidated
statements of stockholders’ equity and cash flows for the years ended June 30,
2002 and 2001 have been restated to correct for certain accounting
errors.
Summary
of restatement items
Errors
in
previously issued financial statements were identified in the following
areas:
Revenue
Recognition and Related Sales Returns, Credit Memos, and Allowances.
We
recognized revenue before the amounts charged to both distributors and
non-distributors were considered fixed and determinable or reasonably
collectible. Accordingly, revenue was inappropriately accelerated.
Beginning
in 2001 and through 2002, we modified our sales channels to include
distributors. These distributors were generally thinly capitalized with little
or no financial resources and did not have the wherewithal to pay for these
products when delivered by us. Furthermore, in a substantial number of cases,
significant amounts of inventories were returned or never paid for and the
payment for product sold (to both distributors and non-distributors) was
regularly subject to final negotiation with our customers. As a result of
such
negotiations, we routinely agreed to significant concessions from the originally
invoiced amounts to facilitate collection. Accordingly, amounts charged to
both
distributors and non-distributors were not considered fixed and determinable
or
reasonably collectible until cash was collected. Accordingly, product revenues
to distributors and non-distributors were restated for the years ending June
30,
2002 and 2001.
Related
sales returns and allowances, rebates, and accounts receivables were revised
appropriately given revenue adjustments.
Cutoff
and Period-End Close Adjustments Related to Accrued Liabilities and Prepaid
Assets. We
recorded accruals and amortized certain prepaid assets to operating expenses
during the fiscal years ended June 30, 2002 and 2001 in the improper periods.
Accordingly, adjustments to accrued liabilities, prepaid assets, and operating
expenses were recorded for the years ending June 30, 2002 and 2001.
32
Tracking
and Valuation of Inventory, Including Controls to Identify and Properly Account
for Obsolete Inventory. As
part
of the restatement process, we discovered that we made errors in the recording
and presentation of inventories, including consigned inventory, obsolete
and
slow-moving inventories, errors in the capitalization of overhead expenses,
errors in recording inventories at the lower of cost or market, and errors
for
inventory shrinkage. As a result, we made adjustments to reflect consigned
inventory, to properly capitalize overhead expenses, physical inventory
adjustments, adjustments to lower of cost or market, and adjustments to reserves
for excess, obsolete and slow-moving inventory. Accordingly, inventories
and
cost of goods sold were restated to properly account for these
errors.
Accounting
for Leases, Including Classification as Operating or Capital. In
evaluating the classification of leases, we did not consider all periods
for
which failure to renew the lease imposes a penalty on the lessee in such
amount
that a renewal appears, at the inception of the leases, to be reasonably
assured. Accordingly, certain leases were classified as operating leases
that
should have been classified as capital leases. The effect of properly recording
the capital leases on our previously reported financial statements is to
record
additional capital lease obligations, property and equipment, and depreciation
expense and reduce rental expense for fiscal periods ending June 30, 2002
and
2001.
We
did
not consider escalating rent payments and rent holidays for certain operating
leases. Accordingly, rent expense was inappropriately understated. The effect
of
straight-lining rent payments on our previously reported financial statements
is
to record an accrued liability for future rent payments and record additional
rent expense.
Classification
of Cash and Marketable Securities.
In
previously issued consolidated financial statements, we classified municipal
government auction rate notes and auction rate preferred stocks as cash instead
of marketable securities. Accordingly, reclassifications were made to the
2002
cash balances to properly classify those as marketable securities instead
of
cash.
Accounting
for Acquisitions. During
the restatement process, we determined that the valuations and purchase price
allocations in connection with our acquisitions of ClearOne, Ivron, and
E.mergent were not performed properly. We engaged independent third-party
valuation specialists to provide valuations and purchase price allocations
on
these acquisitions. We re-examined the purchase price allocations and adjusted
for items that should have been recorded previously.
|
·
|
In
our previously issued consolidated financial statements, we valued
the
129,871 shares of common stock issued in conjunction with the acquisition
of ClearOne at $15.40 per share. We determined that the shares
should have
been valued at $13.97 per share based on the market prices a few
days
before and after the measurement date.
|
|
·
|
We
recorded adjustments to the amounts allocated to certain acquired
intangible assets, including developed technologies, patents and
trademarks, and distribution agreements. We also recorded adjustments
to
the amounts allocated to in-process research and development related
to
the ClearOne acquisition.
|
|
·
|
We
recorded adjustments to the amounts allocated to certain acquired
tangible
assets and assumed liabilities, including cash, accounts receivable,
inventory, property and equipment, deferred tax assets, and deferred
tax
liabilities.
|
|
·
|
The
adjustments to purchase price, as well as the adjustments to the
amounts
allocated to acquired intangible assets, acquired tangible assets,
and
assumed liabilities, resulted in corresponding adjustments to the
amount
allocated to goodwill.
|
33
Accounting
for Equity and Other Significant Non-Routine Transactions.
|
·
|
During
the year ended June 30, 2001 we sold our remote control product
line to
Burk Technology. In previously issued consolidated financial statements,
we recognized a gain on the sale of our remote control product
line that
included a significant note receivable from the buyer at the time
of the
sale, and recognized interest income associated with the note receivable
in periods subsequent to the sale. Based on an analysis of the
facts and
circumstances that existed at the date of the sale, the recognition
of
this gain was inappropriate as the buyer did not have the wherewithal
to
pay this note receivable, the operations of the remote control
product
line had not historically generated cash flows sufficient to fund
the
required payments, and there were contingent liabilities we had
to the
buyer. Accordingly, we concluded that the gain should be recognized
as
cash is received from the buyer. As a result, we have reduced the
gain on
sale and eliminated the note receivable at the time of the sale,
and
recognized additional gain on the sale of the business segment
when-and-as
cash payments on the note receivable are
obtained.
|
|
·
|
During
the year ended June 30, 2002 we experienced certain triggering
events that
indicated that certain long-lived assets related to ClearOne and
Ivron
were impaired. Accordingly, we performed an impairment analysis
in
accordance with the provisions of SFAS No. 121. As a result of
this
analysis, we determined that goodwill, intangible assets, and certain
property and equipment related to the ClearOne and Ivron acquisitions
were
fully impaired as of June 30, 2002. As a result, we recognized
an
impairment loss equal to the carrying value of these assets. In
previously
issued consolidated financial statements, we failed to recognize
that a
triggering event had occurred and did not record an impairment
loss for
these assets.
|
|
·
|
During
the year ended June 30, 2001 the terms of certain outstanding stock
options were modified to allow for their acceleration in the event
we met
certain EPS targets. During the year ended June 30, 2001 we cancelled
certain outstanding stock options and issued a replacement award
with a
lower exercise price, resulting in variable accounting. In previously
issued consolidated financial statements, we did not record compensation
expense in connection with these modifications in accordance with
APB No.
25 and FASB Interpretation Number 44, “Accounting for Certain Transactions
involving Stock Compensation” (an interpretation of APB No. 25).
|
|
·
|
On
June 29, 2001, we repurchased 5,000 shares of our previously issued
and
outstanding common shares. In previously issued consolidated financial
statements, we did not record the effects of this transaction until
fiscal
year 2002.
|
Accounting
for Income Taxes. During
the fiscal periods ending June 30, 2002 and 2001, our income before income
taxes
was restated to correct for certain accounting errors, resulting in less
pre tax
book income and correspondingly less income tax expense. In conjunction with
the
restatement, we evaluated the realizability of deferred tax assets. In 2002,
we
recorded an increased domestic valuation allowance to reflect our determination
that not all of our deferred tax assets were more likely than not realizable
pursuant to the provisions of SFAS 109, “Accounting for Income
Taxes”.
34
Restated
Financial Statements
Statements
of Operations Adjustments (in thousands)
|
As
of June 30, 2002
|
As
of June 30, 2001
|
||||||||||||
|
As
Previously Reported
|
Restated
|
As
Previously Reported
|
Restated
|
||||||||||
|
Revenue:
|
|||||||||||||
|
Product
|
$
|
37,215
|
$
|
26,253
|
$
|
28,190
|
$
|
22,448
|
|||||
|
Conferencing
services
|
17,328
|
15,583
|
11,689
|
11,689
|
|||||||||
|
Business
services
|
-
|
1,526
|
-
|
-
|
|||||||||
|
Total
revenue
|
54,543
|
43,362
|
39,879
|
34,137
|
|||||||||
|
Cost
of goods sold:
|
|||||||||||||
|
Product
|
15,057
|
10,939
|
10,634
|
8,789
|
|||||||||
|
Product
inventory write-offs
|
-
|
2,945
|
-
|
416
|
|||||||||
|
Conferencing
services
|
7,943
|
7,310
|
5,869
|
5,928
|
|||||||||
|
Business
services
|
-
|
978
|
-
|
-
|
|||||||||
|
Total
cost of goods sold
|
23,000
|
22,172
|
16,503
|
15,133
|
|||||||||
|
Gross
profit
|
31,543
|
21,190
|
23,376
|
19,004
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Marketing
and selling
|
10,705
|
10,739
|
7,753
|
7,711
|
|||||||||
|
General
and administrative
|
6,051
|
5,345
|
4,649
|
4,198
|
|||||||||
|
Research
and product development
|
4,053
|
3,810
|
2,502
|
2,747
|
|||||||||
|
Impairment
losses
|
-
|
7,115
|
-
|
-
|
|||||||||
|
Gain
on sale of court conferencing assets
|
-
|
(250
|
)
|
-
|
-
|
||||||||
|
Purchased
in-process research and development
|
-
|
-
|
-
|
728
|
|||||||||
|
Total
operating expenses
|
20,809
|
26,759
|
14,904
|
15,384
|
|||||||||
|
Operating
income (loss)
|
10,734
|
(5,569
|
)
|
8,472
|
3,620
|
||||||||
|
Other
income, net
|
509
|
132
|
373
|
188
|
|||||||||
|
Income
(loss) from continuing operations before income taxes
|
11,243
|
(5,437
|
)
|
8,845
|
3,808
|
||||||||
|
Provision
for income taxes
|
3,831
|
1,400
|
3,319
|
1,050
|
|||||||||
|
Income
(loss) from continuing operations
|
7,412
|
(6,837
|
)
|
5,526
|
2,758
|
||||||||
|
Discontinued
operations:
|
|||||||||||||
|
Income
from discontinued operations, net of income taxes
|
-
|
-
|
737
|
737
|
|||||||||
|
Gain
on disposal of a component of our business, net of income
taxes
|
-
|
176
|
1,220
|
123
|
|||||||||
|
Net
income (loss)
|
$
|
7,412
|
$
|
(6,661
|
)
|
$
|
7,483
|
$
|
3,618
|
||||
|
Basic
earnings (loss) per common share from continuing
operations
|
$
|
0.77
|
$
|
(0.71
|
)
|
$
|
0.64
|
$
|
0.32
|
||||
|
Diluted
earnings (loss) per common share from continuing
operations
|
$
|
0.74
|
$
|
(0.71
|
)
|
$
|
0.61
|
$
|
0.30
|
||||
|
Basic
earnings per common share from discontinued operations
|
$
|
-
|
$
|
0.02
|
$
|
0.23
|
$
|
0.10
|
|||||
|
Diluted
earnings per common share from discontinued operations
|
$
|
-
|
$
|
0.02
|
$
|
0.22
|
$
|
0.09
|
|||||
|
Basic
earnings (loss) per common share
|
$
|
0.77
|
$
|
(0.69
|
)
|
$
|
0.87
|
$
|
0.42
|
||||
|
Diluted
earnings (loss) per common share
|
$
|
0.74
|
$
|
(0.69
|
)
|
$
|
0.83
|
$
|
0.39
|
||||
35
Balance Sheet Adjustments (in thousands)
|
As
of June 30, 2002
|
As
of June 30, 2001
|
||||||||||||
|
As
Previously Reported
|
As
Restated
|
As
Previously Reported
|
As
Restated
|
||||||||||
|
ASSETS
|
|||||||||||||
|
Current
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
14,248
|
$
|
1,744
|
$
|
6,852
|
$
|
6,851
|
|||||
|
Marketable
securities
|
-
|
12,400
|
-
|
-
|
|||||||||
|
Accounts
receivable, net
|
20,317
|
4,322
|
7,213
|
2,027
|
|||||||||
|
Inventories
|
8,606
|
12,516
|
4,132
|
6,459
|
|||||||||
|
Note
Receivable, current portion
|
196
|
-
|
71
|
-
|
|||||||||
|
Deferred
income tax assets
|
1,293
|
4,709
|
248
|
1,587
|
|||||||||
|
Prepaid
expenses and other
|
610
|
621
|
780
|
680
|
|||||||||
|
Total
current assets
|
45,270
|
36,312
|
19,296
|
17,604
|
|||||||||
|
Property
and equipment, net
|
5,770
|
8,123
|
3,697
|
5,681
|
|||||||||
|
Goodwill,
net
|
20,553
|
17,072
|
2,634
|
890
|
|||||||||
|
Intangibles,
net
|
6,991
|
1,634
|
182
|
616
|
|||||||||
|
Deferred
income tax assets
|
-
|
661
|
-
|
446
|
|||||||||
|
Note
Receivable, net of current portion
|
1,490
|
-
|
1,716
|
||||||||||
|
Other
assets
|
73
|
74
|
73
|
74
|
|||||||||
|
Total
assets
|
$
|
80,147
|
$
|
63,876
|
$
|
27,598
|
$
|
25,311
|
|||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||||||||
|
Current
liabilities:
|
|||||||||||||
|
Line
of credit
|
$
|
196
|
$
|
196
|
$
|
-
|
|||||||
|
Capital
lease obligations
|
60
|
784
|
182
|
619
|
|||||||||
|
Accounts
payable
|
3,053
|
3,056
|
568
|
652
|
|||||||||
|
Accrued
liabilities
|
2,299
|
2,841
|
1,130
|
1,408
|
|||||||||
|
Deferred
revenue
|
607
|
572
|
-
|
-
|
|||||||||
|
Income
taxes payable
|
820
|
265
|
422
|
224
|
|||||||||
|
Total
current liabilities
|
7,035
|
7,714
|
2,302
|
2,903
|
|||||||||
|
Capital
lease obligations, net of current portion
|
41
|
2,016
|
48
|
1,680
|
|||||||||
|
Deferred
revenue, net of current portion
|
277
|
254
|
-
|
-
|
|||||||||
|
Deferred
income tax liabilities
|
1,458
|
-
|
746
|
-
|
|||||||||
|
Total
liabilities
|
8,811
|
9,984
|
3,096
|
4,583
|
|||||||||
|
Commitments
and contingencies
|
|||||||||||||
|
Stockholders'
equity:
|
|||||||||||||
|
Common
stock
|
11
|
11
|
9
|
9
|
|||||||||
|
Additional
paid-in capital
|
48,384
|
48,704
|
8,963
|
8,856
|
|||||||||
|
Deferred
compensation
|
-
|
(147
|
)
|
-
|
(122
|
)
|
|||||||
|
Retained
earnings
|
22,941
|
5,324
|
15,530
|
11,985
|
|||||||||
|
Total
stockholders' equity
|
71,336
|
53,892
|
24,502
|
20,728
|
|||||||||
|
Total
liabilities and stockholders' equity
|
$
|
80,147
|
$
|
63,876
|
$
|
27,598
|
$
|
25,311
|
|||||
Stockholders’
Equity Adjustments
The
restatement adjustments resulted in a cumulative net reduction to stockholders’
equity of approximately $17.4 million and $3.8 million as of June 30, 2002
and
2001, respectively. We have also restated the June 30, 2000 retained earnings
balance to reflect cumulative adjustments through that date.
36
Cash
Flows Adjustments (in thousands)
The
following table presents selected consolidated statements of cash flows
information showing previously reported and restated cash flows, for the
years
ended June 30, 2002 and 2001:
|
Years
ended
June
30,
|
Years
ended
June
30,
|
||||||||||||
|
2002
|
2001
|
||||||||||||
|
As
previously
reported
|
As
restated
|
|
As
previously reported
|
As
restated
|
|||||||||
|
Net
cash from operating activities
|
$
|
105
|
$
|
31
|
$
|
3,708
|
$
|
4,357
|
|||||
|
Net
cash (used in) investing activities
|
(17,044
|
)
|
(29,470
|
)
|
(3,114
|
)
|
(3,285
|
)
|
|||||
|
Net
cash from (used in) financing activities
|
24,335
|
24,156
|
(104
|
)
|
(456
|
)
|
|||||||
Discussion
of Operations
Results
of Operations
The
following table sets forth certain items from our consolidated statements
of
operations (in thousands) for the fiscal years ended June 30, 2003, 2002
and
2001, together with the percentage of total revenue which each such item
represents:
|
Year
Ended June 30,
|
|||||||||||||||||||
|
2003
|
2002
|
2001
|
|||||||||||||||||
|
(Restated)
|
(Restated)
|
||||||||||||||||||
|
%
of Revenue
|
%
of Revenue
|
%
of Revenue
|
|||||||||||||||||
|
Revenues
|
$
|
57,585
|
$
|
43,362
|
$
|
34,137
|
|||||||||||||
|
Cost
of goods sold
|
35,301
|
61.3
|
%
|
22,172
|
51.1
|
%
|
15,133
|
44.3
|
%
|
||||||||||
|
Gross
Profit
|
22,284
|
38.7
|
%
|
21,190
|
48.9
|
%
|
19,004
|
55.7
|
%
|
||||||||||
|
Operating
expenses:
|
|||||||||||||||||||
|
Marketing
and selling
|
12,187
|
21.2
|
%
|
10,739
|
24.8
|
%
|
7,711
|
22.6
|
%
|
||||||||||
|
General
and administrative
|
18,011
|
31.3
|
%
|
5,345
|
12.3
|
%
|
4,198
|
12.3
|
%
|
||||||||||
|
Research
and product development
|
2,995
|
5.2
|
%
|
3,810
|
8.8
|
%
|
2,747
|
8.0
|
%
|
||||||||||
|
Impairment
losses
|
26,001
|
45.2
|
%
|
7,115
|
16.4
|
%
|
-
|
0.0
|
%
|
||||||||||
|
Gain
on sale of court conferencing assets
|
-
|
0.0
|
%
|
(250
|
)
|
-0.6
|
%
|
-
|
0.0
|
%
|
|||||||||
|
Purchased
in-process research and development
|
-
|
0.0
|
%
|
-
|
0.0
|
%
|
728
|
2.1
|
%
|
||||||||||
|
Total
operating expenses
|
59,194
|
102.8
|
%
|
26,759
|
61.7
|
%
|
15,384
|
45.1
|
%
|
||||||||||
|
Operating
income (loss)
|
(36,910
|
)
|
-64.1
|
%
|
(5,569
|
)
|
-12.8
|
%
|
3,620
|
10.6
|
%
|
||||||||
|
Other
income (expense), net:
|
|||||||||||||||||||
|
Interest
income
|
85
|
0.1
|
%
|
293
|
0.7
|
%
|
334
|
1.0
|
%
|
||||||||||
|
Interest
expense
|
(236
|
)
|
-0.4
|
%
|
(179
|
)
|
-0.4
|
%
|
(164
|
)
|
-0.5
|
%
|
|||||||
|
Other,
net
|
55
|
0.1
|
%
|
18
|
0.0
|
%
|
18
|
0.1
|
%
|
||||||||||
|
Income
(loss) from continuing operations before income taxes
|
(37,006
|
)
|
-64.3
|
%
|
(5,437
|
)
|
-12.5
|
%
|
3,808
|
11.2
|
%
|
||||||||
|
Provision
(benefit) for income taxes
|
(834
|
)
|
-1.4
|
%
|
1,400
|
3.2
|
%
|
1,050
|
3.1
|
%
|
|||||||||
|
Income
(loss) from continuing operations
|
(36,172
|
)
|
-62.8
|
%
|
(6,837
|
)
|
-15.8
|
%
|
2,758
|
8.1
|
%
|
||||||||
|
Net
gain from discontinued operations
|
200
|
0.3
|
%
|
176
|
0.4
|
%
|
860
|
2.5
|
%
|
||||||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
-62.5
|
%
|
$
|
(6,661
|
)
|
-15.4
|
%
|
$
|
3,618
|
10.6
|
%
|
|||||
Our
revenues increased 68.7% over the period from $34.1 million in fiscal 2001
to
$57.6 million in fiscal 2003. During this period, we changed our business
mix
through four acquisitions and two dispositions.
The
following is a discussion of our results of operations for our fiscal years
ended June 30, 2003, June 30, 2002 and June 30, 2001. For each of our business
segments, we discuss revenues. All other items are discussed on a consolidated
basis.
37
Revenues
For
the
years ended June 30, 2003, 2002 and 2001, revenues by business segment were
as
follows (in thousands):
|
Year
Ended June 30,
|
|||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
2003
|
2002
|
2001
|
|||||||||||||||||
|
(Restated)
|
(Restated)
|
||||||||||||||||||
|
%
of Revenue
|
%
of Revenue
|
%
of Revenue
|
|||||||||||||||||
|
Product
|
$
|
27,512
|
47.8
|
%
|
$
|
26,253
|
60.5
|
%
|
$
|
22,448
|
65.8
|
%
|
|||||||
|
Conferencing
Services
|
15,268
|
26.5
|
%
|
15,583
|
36.0
|
%
|
11,689
|
34.2
|
%
|
||||||||||
|
Business
Services
|
14,805
|
25.7
|
%
|
1,526
|
3.5
|
%
|
-
|
0.0
|
%
|
||||||||||
|
Total
|
$
|
57,585
|
100.0
|
%
|
$
|
43,362
|
100.0
|
%
|
$
|
34,137
|
100.0
|
%
|
|||||||
Total
Revenue.
Total
revenue increased $14.2 million, or 32.8% in fiscal 2003 compared to fiscal
2002, and increased $9.2 million, or 27.0%, in fiscal 2002 compared to fiscal
2001. The overall increase in revenue during fiscal 2003 was primarily
attributable to revenue from business services which increased $13.3 million
year over year as a result of the acquisitions of E.mergent in late fiscal
2002
and OM Video in early fiscal 2003. The increase in revenue during fiscal
2002
over fiscal 2001 was attributable to increased revenue in all three segments
of
our business.
Product.
Product
revenue increased $1.3 million, or 4.8%, in fiscal 2003 compared to fiscal
2002,
and increased $3.8 million, or 17.0%, in fiscal 2002 compared to fiscal 2001.
The increase in revenue was primarily due to introducing new product lines,
which include the XAP® product, sound reinforcement product and tabletop
conferencing phones. We also introduced additional products lines through
acquisitions, which include our camera and furniture product lines. Beginning
in
2001, the Company moved from a dealer/sales representative customer model
to a
distributor model.
Conferencing
Services.
Conferencing services revenue decreased $0.3 million, or 2.0%, in fiscal
2003
compared to fiscal 2002, and increased $3.9 million, or 33.3%, in fiscal
2002
compared to fiscal 2001. The decrease in revenue in fiscal 2003 compared
to
fiscal 2002 reflects lower price per minute charges due to intense competition
caused primarily by overcapacity in the industry. The increase in revenue
in
fiscal 2002 compared to fiscal 2001 was due primarily to an increased customer
base, including an increase in the number of resellers who sold our
services.
Business
Services. Business
services revenue increased $13.3 million, or 870.2%, in fiscal 2003 compared
to
fiscal 2002. The increase in revenue in fiscal 2003 compared to fiscal 2002
was
primarily due to our acquisitions of E.mergent, Inc. on May 31, 2002 and
OM
Video on August 27, 2003. The increase in revenue in fiscal 2003 was also
due to
the sale of a software license to Comrex with a value of $1.1 million and
was
associated with our telephone interface product. Prior to fiscal 2002, we
did
not have operations in the business services segment.
Revenues
from sales outside of the United States accounted for 26%, 10% and 12% of
total
revenues for fiscal 2003, fiscal 2002 and fiscal 2001, respectively.
No
one
customer accounted for more than 10% of our total net revenues during fiscal
2003, 2002 or 2001. In fiscal 2003, revenues in our product segment included
sales to three distributors that represented approximately 42% of this segment’s
revenues. No one customer accounted for more than 10% of our conferencing
services or business services segment revenues for any fiscal year.
In
fiscal
2003 and fiscal 2002, we introduced several new products in our products
segment
and our conferencing services segment. We also acquired two companies and
entered into the business services segment of our business.
38
Costs
of goods sold - gross profit margin
Costs
of
goods sold (“COGS”) includes expenses associated with the manufacture of our
products, including material and direct labor, our manufacturing organization,
tooling depreciation, warranty expense, freight expense, royalty payments
and
the allocation of overhead expenses; operating and maintaining our conferencing
services networks, including material and direct labor, depreciation, and
an
allocation of overhead expenses; and operating our installations services,
including material and direct labor, depreciation, and an allocation of overhead
expenses. COGS increased by approximately $13.1 million, or 59.2%, to $35.3
million in fiscal 2003 compared with fiscal 2002, and increased by $7.0 million,
or 46.5%, to $22.2 million in fiscal 2002 compared with $15.1 million in
fiscal
2001. As a percentage of revenues, COGS was 61.3%, 51.1% and 44.3% in fiscal
2003, fiscal 2002 and fiscal 2001, respectively.
Our
gross
profit margin from continuing operations was 38.7% in fiscal 2003 compared
to
48.9% in fiscal 2002 and 55.7% in fiscal 2001. The decrease in gross margins
from 48.9% in fiscal 2002 to 38.7% in fiscal 2003 is primarily due to the
write
down of excess, obsolete and slow moving inventory, proportionately higher
integration business service revenues resulting from the E.mergent and OM
Video
acquisitions that carry a lower gross margin percentage, proportionally higher
camera and furniture product revenues resulting from the E.mergent acquisition
that carry a lower gross margin percentage, lower conferencing services gross
margins as a result of increased price competition, and general pricing
pressures resulting from difficult economic conditions. The decrease in gross
margins from 55.7% in fiscal 2001 to 48.9% in fiscal 2002 is primarily due
to
the write down of excess, obsolete and slow moving inventory, and the addition
of integration services revenues resulting from E.mergent acquisition that
carry
a lower gross margin percentage than our core products.
Operating
Expenses
Our
operating expenses increased $32.4 million, or 121.2%, to $59.2 million in
fiscal 2003 compared with fiscal 2002 expenses of $26.8 million while fiscal
2002 expenses increased $11.4 million, or 73.9% from $15.4 million in fiscal
2001. As a percentage of revenues, operating expenses were 102.8%, 61.7%
and
45.1% in fiscal 2003, 2002 and 2001, respectively.
Marketing
and selling expenses.
Marketing and selling expenses includes sales, customer service and marketing
expenses. Total marketing and selling expenses increased $1.4 million, or
13.5%,
to $12.2 million in fiscal 2003 compared with fiscal 2002 expenses of $10.7
million while fiscal 2002 expenses increased $3.0 million, or 39.3%, from
$7.7
million in fiscal 2001. As a percentage of revenues, marketing and selling
expenses were 21.2%, 24.8% and 22.6% in fiscal 2003, 2002 and 2001,
respectively. Marketing and selling expenses as a percentage of revenues
remained relatively flat from 2001 to 2003 except for a slight increase in
2002.
The increase in absolute dollars in fiscal 2003 over fiscal 2002 was primarily
due to the addition of our business services segment and the increased headcount
and costs associated with the increased headcount. The increase in absolute
dollars in fiscal 2002 over fiscal 2001 was primarily due to an increased
headcount and associated headcount costs, along with an increase in commissions
to our resellers in our conferencing services segment. Also contributing
was an
increase in our marketing budget to increase momentum in the markets for
our new
products in our products segment and conferencing services segment and to
introduce our new business services segment.
39
General
and administrative expenses.
General
and administrative (G&A) expenses include compensation costs, professional
service fees, allocations of overhead expenses, litigation costs, including
costs associated with the SEC investigation and subsequent litigation, bad
debt
expenses, and corporate administrative costs, including finance and human
resources. Total general and administrative expenses increased $12.7 million,
or
237.0%, to $18.0 million in fiscal 2003 compared with fiscal 2002 expenses
of
$5.3 million while fiscal 2002 expenses increased $1.1 million, or 27.3%,
from
$4.2 million in fiscal 2001. As a percentage of revenues, general and
administrative expenses were 31.3%, 12.3% and 12.3% in fiscal 2003, 2002
and
2001, respectively. We attribute the increase in G&A as a percentage of
revenues from 12.3% in 2002 to 31.3% in 2003 to the following: costs associated
with the Securities and Exchange Commission investigation and subsequent
lawsuits, including a settlement payment associated with the shareholders’ class
action lawsuit in the amount of $5.0 million in cash and $2.52 million in
stock,
legal and accounting fees associated with these lawsuits in the amount of
$1.84
million, as well as writing off all costs associated with our shelf registration
in the amount of $328,000, payments for the early buyout of our leases in
Woburn, MA and Ireland in the total amount of $305,000, an increase in
accounting fees over the previous year of $210,000, an increase in legal
fees in
the amount of $130,000, salary expense increased $459,000 over the previous
fiscal year due primarily to the increase in the number of employees as a
result
of the E.mergent acquisition and an increase in overall general and
administrative expense of $1.27 million due to the OM Video
acquisition.
Research
and product development expenses.
Research
and product development expenses include research and development, product
line
management, engineering services and test and application expenses, including
compensation costs, outside services, expensed materials, depreciation and
an
allocation of overhead expenses. Total research and product development expenses
decreased $0.8 million, or 21.4%, to $3.0 million in fiscal 2003 compared
with
fiscal 2002 expenses of $3.8 million while fiscal 2002 expenses increased
$1.1
million, or 38.7%, from $2.7 million in fiscal 2001. As a percentage of
revenues, research and product development expenses were 5.2%, 8.8% and 8.0%
in
fiscal 2003, 2002 and 2001, respectively. The decrease in research and product
development expenses during fiscal 2003 was due to decreased salaries and
expenses associated with a reduction in personnel related to the closing
of the
Dublin office. Also, as a percentage of revenue, research and product
development dropped from 8.8% to 5.2% due to substantially higher business
services revenues that require little or no additional product development.
The
increase in product development expenses from fiscal 2001 to fiscal 2002
was due
to increased salaries and expenses associated with additional personnel and
development costs associated with new product development.
Impairment
charges.
In
fiscal 2002, impairment charges totaled $72,000 for property and equipment
and
approximately $7.0 million for goodwill and intangible assets. In fiscal
2003,
impairment charges totaled $535,000 for property and equipment and $25.5
million
for goodwill and intangible assets. See Item 1. Description of Business.
Acquisitions
and Dispositions.
Gain
on sale of court conferencing assets.
In
fiscal 2002, we recognized a gain of $250,000 in connection with our sale
of our
court conferencing customer list to CourtCall LLC.
Purchased
in-process research and development.
In the
first quarter of fiscal 2001, we wrote off $728,000 representing purchased
in-process research and development that had not yet reached technological
feasibility related to the ClearOne acquisition.
Operating
income (loss).
For
fiscal 2003, our operating loss increased $31.3 million, or 562.8%, to $36.9
million on revenues of $57.6 million, from an operating loss of $5.6 million
on
revenues of $43.4 million in fiscal 2002. The factors affecting this increase
in
operating loss were an increase in impairment charges for goodwill and other
intangible assets of $18.9 million, an increase in general and administrative
expenses of $12.7 million, an increase in marketing and selling expenses
of $1.4
million, and a decrease in the gain on sale of assets of $0.3 million, offset
by
a decrease in gross profit margin of $1.1 million and a reduction in product
development expenses of $0.8 million.
For
fiscal 2002, our operating loss increased $9.2 million, or 253.8%, to $5.6
million on revenues of $43.4 million, from an operating income of $3.6 million
on revenues of $34.1 million in fiscal 2001. The principal factors affecting
this increase in operating loss include an increase in impairment charges
for
goodwill and other intangible assets of $7.1 million, an increase in marketing
and selling expenses of $3.0 million, an increase in general and administrative
expenses of $1.1 million, and an increase in product development expenses
of
$1.1 million offset by a decrease in gross profit margins of $2.2 million,
a
decrease in purchased in-process research and development of $0.7 million
and an
increase in gain on sale of assets of $0.3 million.
40
Interest
income. Interest
income decreased $208,000, or 71.0%, to $85,000 in fiscal 2003 compared with
fiscal 2002 income of $293,000 while fiscal 2002 income decreased $41,000,
or
12.3%, from $334,000 in fiscal 2001. As a percentage of revenues, interest
income was 0.1%, 0.7% and 1.0% in fiscal 2003, 2002 and 2001, respectively.
The
reduction in interest income was due to the use of cash and cash equivalents
to
complete acquisitions during fiscal 2003 and 2002. The decrease in interest
income was also due to the general decrease in interest rates paid by financial
institutions.
Interest
expense. Interest
expense increased $57,000, or 31.8%, to $236,000 in fiscal 2003 compared
with
fiscal 2002 expense of $179,000 while fiscal 2002 income increased $15,000,
or
9.1%, from $164,000 in fiscal 2001. As a percentage of revenues, interest
expense was (0.4)%, (0.4)% and (0.5)% in fiscal 2003, 2002 and 2001,
respectively. The increase in interest expense is due to higher debt levels
that
resulted from new capital leases on bridging equipment for our conferencing
services business and the loan associated with the implementation of our
Oracle
ERP system.
Net
income (loss) from continuing operations.
Net loss
from continuing operations increased $31.6 million, or 580.6% to $37.0 million
in fiscal 2003 compared with fiscal 2002 net loss from continuing operations
of
$5.4 million while fiscal 2002 income decreased $9.2 million, or 242.8%,
from
net income from continuing operations of $3.8 million in fiscal 2001. As
a
percentage of revenues, net income (loss) from continuing operations was
(64.3)%, (12.5)% and 11.2% in fiscal 2003, 2002 and 2001, respectively. We
attribute the increased loss to the results of operations as described
above.
Provision
(benefit) for income taxes.
Provision (benefit) for income taxes was ($0.8) million, $1.4 million and
$1.1
million for 2003, 2002 and 2001, respectively. Certain expenses in our
consolidated statements of operations are not deductible for income tax
purposes. These expenses include impairment charges, meals and entertainment
expenses and goodwill amortization. In addition, we increased our deferred
tax
asset valuation allowance attributable to losses for which no tax benefit
is
recorded. The combined effects of the nondeductible expenses and the increased
valuation allowance were the primary reasons for our tax expense (benefit)
being
different from the expected tax expense (benefit). The Company has recorded
a
valuation allowance against certain deferred tax assets where it is not
considered more likely than not that the deferred tax assets will be
realized.
Net
gain from discontinued operations.
Net gain
from discontinued operations includes the sale of our remote control product
line to Burk Technology. The gain from discontinued operation, net of income
taxes, increased $24,000 in fiscal 2003 to $200,000 from $176,000 in fiscal
2002, and in fiscal 2002 decreased $684,000 from $860,000 in fiscal 2001.
The
income from discontinued operations during fiscal 2003 and fiscal 2002 consisted
of payments from Burk on their note receivable. The income from discontinued
operations during fiscal 2001 consisted of operating income from discontinued
operations and the gain on the sale to Burk.
Net
income (loss).
For
fiscal 2003, our net loss increased $29.3 million, or 440.0%, to $36.0 million
from $6.7 million in fiscal 2002. The $29.3 million increase in net loss
primarily resulted from an increase in operating loss of $31.3 million, a
decrease in interest income of $208,000 and an increase in interest expense
of
$57,000 partially offset by an increase in benefit for income taxes of $2.2
million, an increase in gain from discontinued operations of $24,000, an
increase in other income of $4,600 and gain on foreign currency transactions
of
$40,000.
For
fiscal 2002, our net loss increased $10.3 million, or 284.1%, to $6.7 million
from a net income of $3.6 million in fiscal 2001. The $10.3 million increase
in
net loss primarily resulted from an increase in operating loss of $9.2 million,
a decrease in gain from discontinued operations of $684,000, a decrease in
interest income of $41,000, an increase in interest expense of $15,000, a
decrease in other income of $46,000, and an increase in the provision for
income
taxes of $350,000 partially offset by an increase in gain on foreign currency
transactions of $46,000.
Effect
on the Company from Acquisitions and Subsequent Related
Dispositions
During
the fiscal years ended June 30, 2003, 2002 and 2001, we acquired four different
companies with the intention of expanding our operations to include the
development, manufacture and distribution of video conferencing products
as well
as adding a business services segment to our business. See Item 1. Description
of Business. Acquisitions
and Dispositions
for more
details. Total consideration paid to acquire these companies was approximately
$39.9 million in cash and the issuance of common stock.
41
As
a
result of the impairment tests performed effective as of the end of fiscal
2003
and fiscal 2002 according to SFAS No. 142 and 144, and 121, respectively,
we
recorded impairment charges for all goodwill, a portion of purchased
intangibles, and substantially all property and equipment for each entity.
Impairment charges totaled approximately $33.1 million on our statements
of
operations. Between the end of fiscal 2002 and the third quarter of fiscal
2005
we had disposed of substantially all the assets and operations of the four
acquired companies due to technology issues and lack of market success. We
experienced a significant decrease in revenue associated with the dispositions
and related cost and expenses. See Item 1. Description of Business. Subsequent
Events
for more
details.
We
have
refocused our organization on our original core competency, which is where
we
intend to keep our focus for the foreseeable future. Our current plans are
to
invest in research and development to release new products that are in line
with
our core competencies and that complement our existing product lines.
Private
Placement
On
December 11, 2001, we received net proceeds of $23.8 million from the private
sale of 1.5 million shares of our common stock, after deducting costs and
expenses associated with the private placement. The proceeds were used to
pay
the cash purchase price of the E.mergent acquisition and the OM Video
acquisition described below, as well as for other corporate purposes. In
connection with the offering, we also issued warrants to our placement agent
entitling it to purchase up to 150,000 shares of our common stock at $17.00
per
share through November 27, 2006. These warrants were valued at approximately
$1.6 million using the Black Scholes method.
Discontinued
Operations
On
April
12, 2001, we sold the assets of the remote control portion of our RFM/Broadcast
division to Burk Technology, Inc. (Burk), a privately held developer and
manufacturer of broadcast facility control systems products. We retained
the
accounts payable of the remote control portion of the RFM/Broadcast division
and
Burk assumed obligations for unfilled customer orders and satisfying warranty
obligations to existing customers and for inventory sold to Burk. However,
we
retained certain warranty obligations to Burk to ensure that all of the assets
sold to Burk were in good operating condition and repair.
Consideration
for the sale consisted of $750,000 in cash at closing, $1.8 million in the
form
of a seven-year promissory note, with interest at the rate of nine percent
per
year, and up to $700,000 as a commission over a period of up to seven years.
The
payments on the promissory note may be deferred based upon Burk not meeting
net
quarterly sales levels established within the agreement. The promissory note
is
secured by a subordinate security interest in the personal property of Burk.
The
gain on the sale is being recognized as cash is collected (as collection
was not
reasonably assured from Burk). The commission is based upon future net sales
of
Burk over base sales established within the agreement. We realized a gain
on the
sale of $200,000 for the 2003 fiscal year, $176,000 for the 2002 fiscal year,
and $123,000 for the 2001 fiscal year. As of June 30, 2003, $1.5 million of
the promissory note remained outstanding and we had received $20,000 in
commissions.
Sale
of Other Assets
Sale
of Court Conferencing Assets
As
part
of our conferencing services segment, our court conferencing customers engaged
in the audio and/or video conferencing of legal proceedings including remote
appearances in state and federal courts and/or administrative tribunals within
the United States. On October 26, 2001, we sold our court conferencing customer
list, including all contracts relating to our court conferencing services
to
CourtCall LLC and recognized a gain of $250,000.
42
Sale
of Broadcast Telephone Interface Product Line
On
August
23, 2002, we entered into an agreement with Comrex Corporation (Comrex).
In
exchange for $1.3 million, Comrex received certain inventory associated with
our
broadcast telephone interface product line, a perpetual software license
to use
our technology related to broadcast telephone interface products along with
one
free year of maintenance and support, and transition services for 90 days
following the effective date of the agreement. The transition services included
training, engineering assistance, consultation, and development services.
We
recognized $1.1 million in revenue related to this transaction in the fiscal
year ended June 30, 2003.
We
also
entered into a manufacturing agreement to continue to manufacture additional
product for Comrex for one year following the agreement described above on
a
when-and-if needed basis. Comrex agreed to pay us for any additional product
on
a per item basis of cost plus 30%.
Subsequent
Events
Sale
of our U.S. Audiovisual Integration Services.
On
May 6,
2004, we sold certain assets of our U.S. audiovisual integration services
operations to M:Space, Inc. (M:Space) for no cash compensation. M:Space is
a
privately held audiovisual integration services company. In exchange for
M:Space
assuming obligations for completion of certain customer contracts, and
satisfying maintenance contract obligations to existing customers, we
transferred to M:Space certain assets including inventory valued at $569,000.
We
expect that the operations of our U.S. audiovisual integration services will
be
classified as discontinued operations in the fiscal year 2004. As of June
30,
2003, the assets of audiovisual integration services were classified as held
and
used. We continue to manufacture and sell the camera and furniture lines
acquired with the E.mergent acquisition.
Sale
of Conferencing Services Business.
On July
1, 2004, we sold our conferencing services business segment to Clarinet,
Inc.,
an affiliate of American Teleconferencing Services, Ltd. d/b/a Premier
Conferencing for $21.3 million. Of the purchase price $1.0 million was placed
into an 18-month Indemnity Escrow account and an additional $300,000 was
placed
into a working capital account. We received the $300,000 working capital
escrow
funds approximately 90 days after the execution date of the contract.
Additionally, $1.4 million of the proceeds was utilized to pay off equipment
leases pertaining to assets being conveyed to Clarinet. We expect that the
conferencing services operations will be classified as discontinued operations
in the fiscal year 2005. As of June 30, 2003, the assets of conferencing
services were classified as held and used.
Closing
of Germany Office. During
December 2004, we closed our Germany office and consolidated those activities
with our United Kingdom office. Costs associated with closing the Germany
office
totaled $305,000 and included operating leases and severance
payments.
Sale
of OM Video.
On
March
4, 2005, we sold all of the issued and outstanding stock of our Canadian
subsidiary, ClearOne Communications of Canada, Inc. (ClearOne Canada) to
6351352
Canada Inc., a Canada corporation (the “OM Purchaser”). ClearOne Canada owned
all the issued and outstanding stock of Stechyson Electronics Ltd., which
conducts business under the name OM Video. We agreed to sell the stock of
ClearOne Canada for $200,000 in cash; a $1.3 million note payable over a
15-month period, with interest accruing on the unpaid balance at the rate
of
5.25% per year; and contingent consideration ranging from 3% to 4% of related
gross revenues over a five-year period. We expect that the operations of
the
Canada audiovisual integration services will be classified as discontinued
operations in fiscal year 2005. As of June 30, 2003, the assets of the Canada
audiovisual integration business were classified as held and used. In June
2005,
we were advised that the OM Purchaser had settled an action brought by the
former employer of certain of OM Purchaser’s owners and employees alleging
violation of non-competition agreements. The settlement reportedly involved
a
cash payment and an agreement not to sell certain products for a period of
one
year. We are evaluating what impact, if any, this settlement may have on
the OM
Purchaser’s ability to make the payment required under the note.
43
Third-Party
Manufacturing Agreement.
On
August 1, 2005, we entered into a Manufacturing Agreement with Inovar, Inc.,
a
Utah-based electronics manufacturing services provider (“Inovar”), pursuant to
which we agreed to outsource our Salt Lake City manufacturing operations
to
Inovar. The agreement is for an initial term of three years, which shall
automatically be extended for successive and additional terms of one year
each
unless terminated by either party upon 120 days’ advance notice at any time
after the second anniversary of the agreement. The agreement generally provides,
among other things, that Inovar shall: (i) furnish the necessary personnel,
material, equipment, services and facilities to be the exclusive manufacturer
of
substantially all the products that were previously manufactured at our Salt
Lake City, Utah manufacturing facility, and the non-exclusive manufacturer
of a
limited number of products, provided that the total cost to ClearOne (including
price, quality, logistic cost and terms and conditions of purchase) is
competitive; (ii) provide repair service and warranty support and proto-type
services for new product introduction on terms to be agreed upon by the parties;
(iii) purchase certain items of our manufacturing equipment; (iv) lease certain
other items of our manufacturing equipment and have a one-year option to
purchase such leased items; (v) have the right to lease our former manufacturing
employees from a third party employee leasing company; and (vi) purchase
the
parts and materials on hand and in transit at our cost for such items with
the
purchase price payable on a monthly basis when and if such parts and materials
are used by Inovar. The parties also entered into a one-year sublease for
approximately 12,000 square feet of manufacturing space located in our
headquarters in Salt Lake City, Utah, which sublease may be terminated by
either
party upon ninety days’ notice. The agreement provides that products shall be
manufactured by Inovar pursuant to purchase orders submitted by us at purchase
prices to be agreed upon by the parties, subject to adjustment based upon
such
factors as volume, long range forecasts, change orders etc. We also granted
Inovar a right of first refusal to manufacture new products developed by
us at a
cost to ClearOne (including price, quality, logistic cost and terms and
conditions of purchase) that is competitive. Costs associated with outsourcing
our manufacturing totaled approximately $429,000 including severance payments,
facilities we no longer use and fixed assets that will be disposed
of..
Liquidity
and Capital Resources
As
of
June 30, 2003, our cash and cash equivalents were approximately $6.1 million,
restricted cash of approximately $200,000 and our marketable securities of
approximately $1.9 million, which represents an overall decrease of $5.9
million
in our balances at June 30, 2002 which were cash and cash equivalents of
approximately $1.7 million and marketable securities totaling approximately
$12.4 million. We had an overall increase of $7.3 million in our cash and
cash
equivalents and marketable securities from fiscal 2001 to fiscal 2002, with
cash
and cash equivalents of approximately $6.9 million and marketable securities
of
$0 at June 30, 2001. In addition, we previously had a $10.0 million line
of
credit with a bank which was unused at June 30, 2003, and had been frozen
by our
bank on May 16, 2003. The line of credit expired on December 22, 2003 and
was
not renewed.
We
generated cash from operating activities totaling $2.5 million in fiscal
2003,
$31,000 in fiscal 2002 and $4.4 million in fiscal 2001. The increase in cash
provided from operating activities in fiscal 2003 over fiscal 2002 was due
primarily to a decrease in inventory and accounts receivable coupled with
an
increase in deferred revenue and income taxes payable. These items were offset
by an increase in accounts payable and a decrease in our income taxes. The
decrease in cash provided from operating activities in fiscal 2002 over fiscal
2001 was due primarily to an increase in our net loss and an increase in
our
inventory.
The
total
net change in cash and cash equivalents for fiscal 2003 was an increase of
$4.3
million. The primary uses of cash during this period were $7.4 million, net
of
cash received for the purchase of OM Video, $1.8 million for the purchases
of
property and equipment and the payment of the earn-out provision and $430,000
for the repurchase of common stock. The primary sources of cash were $2.5
million from operating activities, $10.5 million of net sales of investments,
$1.3 million from proceeds of the sale to Comrex, $318,000 from proceeds
of
discontinued operations, and $95,000 associated with the exercise of stock
options and the issuance of common stock under the employee stock purchase
plan.
The
total
net change in cash and cash equivalents for fiscal 2002 was a decrease of
$5.1
million. The primary uses of cash during this period were $14.4 million for
the
purchases of E.mergent and Ivron, $12.4 million of net purchases of investments,
and $2.8 million for the purchases of property and equipment. The primary
sources of cash were $1.0 million associated with the exercise of stock options
and the issuance of common stock under the employee stock purchase plan,
$23.8
million from the proceeds of a private placement, $250,000 from proceeds
of the
sale to CourtCall LLC, and $280,000 from proceeds of discontinued
operations.
44
The
total
net change in cash and cash equivalents for fiscal 2001 was an increase of
$1.5
million. The primary uses of cash during this period were $1.9 million for
the
purchase of ClearOne, $1.4 million for purchases of property and equipment
and
$244,000 for the repurchase of common stock. The primary sources of cash
were
$4.4 from operating activities, $340,000 associated with the exercise of
stock
options and the issuance of common stock under the employee stock purchase
plan
and $750,000 from the proceeds of discontinued operations.
The
positive cash from operating activities was primarily the result of adjusted
non-cash expenses (such as impairment, depreciation, amortization, the provision
for doubtful accounts, inventory write-downs for excess for obsolescence,
write
off of in-process research and development), increases in income tax receivable
and accrued liabilities. Offsetting the positive effect of these items were
an
increase in net loss, an increase in trade receivables, and a decrease in
accounts payable.
As
discussed herein, on April 12, 2001, we sold the assets of the remote control
portion of our RFM/Broadcast division to Burk Technology, Inc. (Burk).
Consideration for the sale consisted of $750,000 in cash at closing, $1.8
million in the form of a seven-year promissory note, with interest at the
rate
of nine percent per year, and up to $700,000 as a commission over a period
of up
to seven years. The payments on the promissory note may be deferred based
upon
Burk not meeting net quarterly sales levels established within the agreement.
The promissory note is secured by a subordinate security interest in the
personal property of Burk. The gain on the sale is being recognized as cash
is
collected (as collection was not reasonably assured from Burk). The commission
is based upon future net sales of Burk over base sales established within
the
agreement. We realized a gain on the sale of $200,000 for the 2003 fiscal
year,
$176,000 for the 2002 fiscal year, and $123,000 for the 2001 fiscal year.
We
received payments totaling $187,000 for the 2005 fiscal year and $93,000
for the
2004 fiscal year. As of June 30, 2005, $1.5 million of the promissory note
remained outstanding and we had received $20,000 in commissions.
At
June
30, 2003, we had open purchase orders related to our contract manufacturers
and
other contractual obligations of approximately $1.4 million primarily related
to
inventory purchases.
We
have
no off-balance-sheet financing arrangements with related parties and no
unconsolidated subsidiaries. Contractual obligations related to our capital
leases and operating leases at June 30, 2003 are summarized below (in
thousands):
|
Payments
Due by Period
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
One
year
or
less
|
Two
to
Three
Years
|
Four
to
Five
Years
|
After
Five
Years
|
|||||||||||
|
Note
Payable
|
$
|
1,698
|
$
|
728
|
$
|
970
|
$
|
-
|
$
|
-
|
||||||
|
Capital
Leases
|
2,318
|
961
|
1,357
|
-
|
-
|
|||||||||||
|
Operating
Leases
|
1,866
|
828
|
938
|
100
|
-
|
|||||||||||
|
Total
Contractual Cash Obligations
|
$
|
5,882
|
$
|
2,517
|
$
|
3,265
|
$
|
100
|
$
|
-
|
||||||
Beginning
in January 2003 and continuing through the date of this report, we have incurred
significant costs with respect to the defense and settlement of legal
proceedings, and the audit of our consolidated financial statements. Restatement
of fiscal 2002 and fiscal 2001 and the fiscal 2003 audit have been significantly
more complex, time consuming and expensive than we originally anticipated.
The
extended time commitment required to complete the restatement of financial
information continues to be costly and divert our resources, as well as have
a
material effect on our results of operations. We paid $5.0 million in cash
and
agreed to issue 1.2 million shares of our common stock to settle the class
action lawsuit, we have incurred legal fees in the amount of approximately
$1.5
million from January 2003 through the date hereof, and we have incurred audit
and tax fees in the amount of approximately $2.1 million from January 2004
through the date hereof.
Notwithstanding
the foregoing, as of June 30, 2005, we believe that our working capital and
cash
flows from operating activities will be sufficient to satisfy our operating
and
capital expenditure requirements for continuing operations for the next 12
months.
45
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
conformity with U.S. GAAP. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of
revenues and expenses during the reporting period. We evaluate our assumptions
and estimates on an ongoing basis and may employ outside experts to assist
in
our evaluations. We believe that the estimates we use are reasonable; however,
actual results could differ from those estimates. Our significant accounting
policies are described in Note 2 to the consolidated financial statements
included elsewhere in this Annual Report on Form 10-K. The following describes
our most critical accounting policies:
Revenue
and Associated Allowances for Revenue Adjustments and Doubtful
Accounts
We
currently have one source of revenue which is product revenue, primarily
from
product sales to independent distributors, dealers, systems integrators,
value-added resellers and end users. Product revenue is recognized when (i)
the
products are shipped, (ii) persuasive evidence of an arrangement exists,
(iii)
the price is fixed and determinable, and (iv) collection is reasonably assured.
Beginning in 2001, we modified our sales channels to include distributors.
These
distributors were generally thinly capitalized with little or no financial
resources and did not have the wherewithal to pay for these products when
delivered. Furthermore, in a substantial number of cases, significant amounts
of
inventories were returned or never paid for and the payment for product sold
(to
both distributors and non-distributors) was regularly subject to a final
negotiation between us and our customers. As a result of such negotiations,
we
routinely agreed to significant concessions from the originally invoiced
amounts
to facilitate collection. These practices continued to exist through the
end of
fiscal year 2003.
Accordingly,
amounts charged to both distributors and non-distributors were not considered
fixed and determinable or reasonably collectible until cash was collected.
As a
result, the June 30, 2003, 2002, and 2001 balance sheets reflect no accounts
receivable or deferred revenue related to product sales.
As
part
of the restatement process we identified certain deficiencies in our internal
controls over revenue recognition where amounts charged to both distributors
and
non-distributors were not considered fixed and determinable or reasonably
collectible until cash was collected. To address these internal control
deficiencies we have implemented improved credit policies and procedures,
improved the approval process for sales returns and credit memos, established
processes for managing and monitoring of channel inventory levels, and provided
training to our accounting staff. Based upon our implementation of these
internal controls and improved experience with our customers, we expect to
be
able to meet the criteria for revenue recognition prior to cash collection
in
the near future.
We
offer
rebates to certain distributors based upon volume of product by such
distributors. We record rebates as a reduction of revenue in accordance with
Emerging Issues Task Force (EITF) Issue No. 00-22, “Accounting for Points and
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers
for
Free Products or Services to Be Delivered in the Future.” Beginning January 1,
2002, we adopted EITF Issue No. 01-9, “Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor’s Products).” We
continue to record rebates as a reduction of revenue.
We
estimate future product returns based upon historical experience and maintain
an
allowance for estimated returns which has been reflected as a reduction to
accounts receivable. The allowance for estimated returns was $107,000, $0,
and
$0 as of June 30, 2003, 2002, and 2001, respectively.
We
offer
credit terms on the sale of our products to a majority of our customers and
perform ongoing credit evaluations of our customers’ financial condition. We
maintain an allowance for doubtful accounts based upon our historical collection
experience and expected collectibility of all accounts receivable. The allowance
for doubtful accounts was $139,000, $190,000, and $0 as of June 30, 2003,
2002,
and 2001, respectively; however, our actual bad debts in future periods may
differ from our current estimates and the differences may be material, which
may
have an adverse impact on our future accounts receivable and cash
position.
46
Goodwill
and Purchased Intangibles
We
assess
the impairment of goodwill and other identifiable intangibles annually or
whenever events or changes in circumstances indicate that the carrying value
may
not be recoverable. Some factors we consider important which could trigger
an
impairment review include the following:
|
·
|
Significant
underperformance relative to projected future operating
results;
|
|
·
|
Significant
changes in the manner of our use of the acquired assets or the
strategy
for our overall business; and
|
|
·
|
Significant
negative industry or economic
trends.
|
If
we
determine that the carrying value of goodwill and other identified intangibles
may not be recoverable based upon the existence of one or more of the above
indicators of impairment, we would typically measure any impairment based
on a
projected discounted cash flow method using a discount rate determined by
us to
be commensurate
with the risk inherent in our current business model. We evaluate goodwill
for
impairment at least annually.
On
July 1, 2002, we completed our transitional goodwill and purchased intangibles
impairment tests outlined under SFAS 142 which required the assessment of
goodwill and purchased intangibles for impairment, and in the fourth quarter
of
fiscal 2003, we completed our annual impairment tests. As of June 30, 2003,
we
determined that our goodwill assets and purchased intangible assets were
impaired and we recorded an impairment charge of $25.5 million related to
these
assets. We
plan
to conduct our annual impairment tests in the fourth quarter of every fiscal
year, unless impairment indicators exist sooner. Screening for and assessing
whether impairment indicators exist or if events or changes in circumstances
have occurred, including market conditions, operating fundamentals, competition
and general economic conditions, requires significant judgment. Additionally,
changes in the high-technology industry occur frequently and quickly. Therefore,
there can be no assurance that a charge to operations will not occur as a
result
of future purchased intangible impairment tests.
Accounting
for Income Taxes
We
estimate our actual current tax expense together with our temporary differences
resulting from differing treatment of items, such as deferred revenue, for
tax
and accounting purposes. These temporary differences result in deferred tax
assets and liabilities. We must then assess the likelihood that our deferred
tax
assets will be recovered from future taxable income and to the extent we
believe
that recovery is not likely, we must establish a valuation allowance against
these tax assets. Significant management judgment is required in determining
our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. To the
extent
we establish a valuation allowance in a period, we must include and expense
the
allowance within the tax provision in the consolidated statement of operations.
Lower
of Cost or Market Adjustments
We
account for our inventory on a first-in-first-out (FIFO) basis, and make
appropriate adjustments on a quarterly basis to write-down the value of
inventory to the lower of cost or net realizable value.
In
order
to determine what, if any, inventory needs to be written down, we perform
an
analysis of obsolete and slow-moving inventory quarterly. In general, we
write
down our excess and obsolete inventory by an amount that is equal to the
difference between the cost of the inventory and its estimated market value
if
market value is less than cost, based upon assumptions about future product
life-cycles, product demand and market conditions. Those items that are found
to
have a supply in excess of demand are considered to be slow-moving or obsolete
and the appropriate reserve is made to write-down the value of that inventory
to
its realizable value.
47
Issued
but not yet Adopted Accounting
Pronouncements
In
January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable
Interest Entities.” This interpretation establishes new guidelines for
consolidating entities in which a parent company may not have majority voting
control, but bears residual economic risks or is entitled to receive a majority
of the entity’s residual returns, or both. As a result, certain subsidiaries
that were previously not consolidated under the provisions of Accounting
Research Bulletin No. 51 may now require consolidation with the parent company.
This interpretation applies in the first year or interim period beginning
after
June 15, 2003, to variable interest entities in which an enterprise holds
a
variable interest that it acquired before February 1, 2003. We have evaluated
this interpretation but do not expect that it will have a material effect
on our
business, results of operations, financial position, or liquidity.
In
May
2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures
certain
financial instruments with characteristics of both liabilities and equity.
It
requires that an issuer classify a financial instrument that is within its
scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15,
2003. We have evaluated this statement but do not expect that it will have
a
material effect on our business, results of operations, financial position,
or
liquidity.
In
December 2003, the FASB issued a revision to Interpretation No. 46,
“Consolidation of Variable Interest Entities” (FIN46R). FIN46R clarifies the
application of ARB No. 51, “Consolidated Financial Statements” to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the
entity to finance its activities without additional subordinated financial
support. FIN46R requires the consolidation of these entities, known as variable
interest entities, by the primary beneficiary of the entity. The primary
beneficiary is the entity, if any, that will absorb a majority of the entity's
expected losses, receive a majority of the entity's expected residual returns,
or both.
Among
other changes, the revisions of FIN46R (a) clarified some requirements of
the original FIN46, which had been issued in January 2003, (b) eased
some implementation problems, and (c) added new scope exceptions. FIN46R
deferred the effective date of the Interpretation for public companies, to
the
end of the first reporting period ending after March 15, 2004. The adoption
of this interpretation did not have a material effect on our business, results
of operations, financial position, or liquidity.
In
March
2004, the FASB issued EITF No. 03-01, “The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments,” which provides new
guidance for assessing impairment losses on debt and equity investments.
The new
impairment model applies to investments accounted for under the cost or equity
method and investments accounted for under FAS 115, “Accounting for Certain
Investments in Debt and Equity Securities.” EITF No. 03-01 also includes new
disclosure requirements for cost method investments and for all investments
that
are in an unrealized loss position. In September 2004, the FASB delayed the
accounting provisions of EITF No. 03-01; however the disclosure requirements
remain effective. We will evaluate the effect, if any, of adopting EITF 03-01.
In
November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs—an
amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to
converge U.S. accounting standards for inventories with International Accounting
Standards. FAS No. 151 requires idle facility expenses, freight, handling
costs,
and wasted material (spoilage) costs to be recognized as current-period charges.
It also requires that allocation of fixed production overheads to the costs
of
conversion be based on the normal capacity of the production facilities.
FAS No.
151 will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. We do not anticipate that the implementation of this
standard will have a significant impact on our consolidated results of
operations, financial condition or cash flows.
In
December 2004, FASB issued Financial Accounting Standard No. 123R
(“SFAS 123R”), “Share-Based Payment.” SFAS 123R is a revision of SFAS 123. SFAS
123R establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. Primarily,
SFAS
123R focuses on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. It also addresses transactions
in
which an entity incurs liabilities in exchange for goods or services that
are
based on the fair value of the entity’s equity instruments or that may be
settled by the issuance of those equity instruments.
48
SFAS
123R
requires us to measure the cost of employee services received in exchange
for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award—the
requisite service period (usually the vesting period). No compensation cost
is
recognized for equity instruments for which employees do not render the
requisite service. Therefore, if an employee does not ultimately render the
requisite service, the costs recognized related to unvested options will
be
reversed.
In
accordance with Staff Accounting Bulletin 107, SFAS 123R is effective as
of the
beginning of the annual reporting period that begins after June 15, 2005.
Under these guidelines, we will adopt SFAS 123R as of the beginning of the
first
quarter of fiscal year 2006 starting July 1, 2005. We expect this statement
to
have an adverse impact on our future results of operations.
|
ITEM
7A.
|
QUALITATIVE
AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Market
risk represents the risk of changes in the value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. Changes in these factors could cause
fluctuations in the results of our operations and cash flows. In the ordinary
course of business, we are exposed to foreign currency and interest rate
risks.
These risks primarily relate to the sale of products and services to foreign
customers and changes in interest rates on our note payable and capital leases.
We
currently have limited market risk sensitive instruments related to interest
rates. Our note payable and capital lease obligations totaled approximately
$3.6
million at June 30, 2003. We do not have significant exposure to changing
interest rates on the note payable and capital leases because interest rates
for
the majority of the capital leases are fixed. We have not undertaken any
additional actions to cover market interest rate market risk and are not
a party
to any other interest rate market risk management activities. A hypothetical
10%
change in market interest rates over the next year would not impact our earnings
or cash flows as the interest rates on the note payable and the majority
of the
capital leases are fixed.
We
do not
purchase or hold any derivative financial instruments.
Although
our subsidiaries enter into transactions in currencies other than their
functional currency, foreign currency exposures arising from these transactions
are not material. The greatest foreign currency exposure arises from the
remeasurement of our net equity investment in our subsidiaries to U.S. dollars.
The primary currency to which we have exposure is the Canadian Dollar. We
sold
our Canadian subsidiary on March 4, 2005 to a private investment group. The
fair
value of our net foreign investments would not be materially affected by
a 10%
adverse change in foreign currency exchange rates from June 30, 2003
levels.
Market
Risk for Investment Securities
Investment
securities consist of shares in triple-A rated short-term money market funds
that typically invest in U.S. Treasury, U.S. government agency and highly
rated
corporate securities. Since these funds are managed in a manner designed
to
maintain a $1.00 per share market value, we do not expect any material changes
in market values as a result of increase or decrease in interest
rates.
49
| ITEM 8. |
FINANCIAL
STATEMENTS.
|
The
following financial statements are included with this report and are located
immediately following the signature page.
50
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
On
July
21, 2003, Ernst & Young, LLP ("Ernst & Young") was dismissed as the
Company’s independent registered public accountants. The decision to dismiss
Ernst & Young was recommended by the Audit Committee of the Board of
Directors and was approved by the Board of Directors. The Company filed a
current report on Form 8-K with respect to such event on July 25, 2003, which
was subsequently amended on August 11, September 30, October 16, and November
7,
2003.
Ernst
& Young's reports on the Company's financial statements for the two fiscal
years ended June 30, 2002 and 2001 did not contain an adverse opinion or
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles. However, as discussed below, such reports
were subsequently withdrawn and the Company engaged KPMG LLP (KPMG) to reaudit
its financial statements for its 2002 and 2001 fiscal years.
On
January 15, 2003, the Securities and Exchange Commission ("SEC") filed a
complaint in the United States District Court against the Company and two
of its
former officers, which included allegations of improper revenue recognition
from
sales to distributors. The Company provided a copy of the complaint to Ernst
& Young. The SEC complaint contained allegations that, if true, would
materially impact the fairness or reliability of the Company's financial
statements, and the validity of the allegations could not be determined without
further investigation. The Company's representatives discussed with Ernst
&
Young the SEC complaint and the need to issue a press release. On January
21,
2003, the Company issued a press release and filed a current report on Form
8-K
which included statements to the effect that the Company's financial statements
for the fiscal years ended June 30, 2001, and June 30, 2002, and for the
quarters ended March 31, 2001, through and including September 30, 2002,
were
under review and that investment decisions should not be made based on such
financial statements, or on the auditors' report thereon included in the
Company's Annual Report as filed on Form 10K. The Company's representatives
discussed the text of the press release with Ernst & Young prior to its
release.
In
its
letter to the Securities and Exchange Commission dated October 13, 2003,
a copy
of which is included as Exhibit 16.1 to the Company's 8-K/A report filed
on
November 7, 2003, Ernst & Young stated, among other things, that on or about
January 21, 2003, it advised the Company's Audit Committee (through its
designated representative) that the Securities and Exchange Commission’s
complaint dated January 15, 2003 and other information that had come to Ernst
& Young’s attention gave Ernst & Young concern regarding the fairness or
reliability of the Company’s financial statements for the two fiscal years ended
June 30, 2002 and 2001, and that such financial statements and Ernst &
Young’s reports thereon should not be relied upon and needed to be withdrawn and
that Ernst & Young was unwilling to be associated with the previously-issued
financial statements until a sufficient investigation into those allegations
had
been performed and any matters noted in the investigation appropriately
resolved. The Company has no written record of such advice and, except as
described in its 8-K filings, has been unable to corroborate such statements
by
Ernst & Young.
On
December 18, 2003, we engaged KPMG as our new independent registered public
accountants to audit our financial statements for the 2003 fiscal year and
to
reaudit our financial statements for the 2002 and 2001 fiscal years. Those
financial statements are included in this report.
|
CONTROLS
AND PROCEDURES
|
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange
Act
of 1934, as amended (the Exchange Act), is recorded, processed, summarized,
and
reported within the required time periods and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure.
We
have
restated our consolidated financial statements for the 2002 and 2001 fiscal
years, and the individual restatement adjustments are discussed in “Item 8.
Financial Statements - Note 3. Restatement and Reclassification of Previously
Issued Financial Statements.”
51
As
required by Rule 13a-15 under the Exchange Act, we have completed an evaluation,
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness and the design and operation of our disclosure controls and
procedures. This evaluation has allowed us to make conclusions in 2005, as
set
forth below, regarding the state of our disclosure controls and procedures
as of
June 30, 2003. In conducting this evaluation, we considered matters relating
to
the restatement of our financial statements including actions taken by us
within
the past two years to identify and enhance the effectiveness of our disclosure
controls and procedures and our internal controls over financial reporting.
In
connection with the restatement process, we also identified the internal
controls over financial reporting that could or should have prevented or
mitigated the errors.
We
concluded that as of June 30, 2003, the following material weaknesses in
our
internal controls existed:
We
have a
material weakness with respect to accounting for revenue recognition and
related
sales returns, credit memos, and allowances. Our accounting policies and
practices over revenue recognition and related sales returns, credit memos,
and
allowances were inconsistent with generally accepted accounting principles
in
the U.S. (GAAP). We also have ineffective controls to monitor compliance
with
existing policies and procedures, and have insufficient training of accounting
personnel. As a result, we recognized revenue before the amounts charged
to both
distributors and non-distributors were considered fixed and determinable
or
reasonably collectible. Related sales returns and allowances, rebates, and
accounts receivables were also misstated as a result of the errors in revenue
recognition.
We
have a
material weakness related to accounting for cutoff and period-end close
adjustments related to accrued liabilities and prepaid assets. Our accounting
policies and practices over cutoff and period-end close adjustments related
to
accrued liabilities and prepaid assets were inconsistent with GAAP. This
material weakness resulted in recording accruals and amortizing certain prepaid
assets to operating expenses during the fiscal years ended June 30, 2003,
2002
and 2001 in the improper periods.
We
have a
material weakness related to the tracking and valuation of inventory, including
controls to identify and properly account for obsolete inventory. Our accounting
policies and practices over tracking and valuation of inventory, including
controls to identify and properly account for slow moving, obsolete inventory
were inconsistent with GAAP. This material weakness resulted in misstatements
in
the recording and presentation of inventories, including consigned inventory,
obsolete and slow-moving inventories, errors in the capitalization of overhead
expenses, errors in recording inventories at the lower of cost or market,
and
errors for inventory shrinkage.
We
have a
material weakness in accounting for leases, including classification as
operating or capital. Our accounting policies and practices over accounting
for
leases, including proper classification as operating or capital, were
inconsistent with GAAP. In evaluating the classification of leases, the Company
did not consider all periods for which failure to renew the lease imposes
a
penalty on the lessee in such amount that a renewal appears, at the inception
of
the leases, to be reasonably assured. Accordingly, certain leases were
classified as operating leases that should have been classified as capital
leases.
We
have a
material weakness in accounting for non-routine transactions, which include
business combinations, discontinued operations, sale of a business unit (other
than discontinued operations), and evaluation and recognition of impairment
charges. Our accounting policies and practices over accounting for such
non-routine transactions were inconsistent with GAAP. This material weakness
resulted in improper purchase price allocations in business combinations,
improper amortization and depreciation of long-lived assets, improper
identification and recording of activities related to discontinued operations,
improper recording and reporting the sale of business units, improper evaluation
of triggering events associated with impairment of long-lived assets (including
annual impairment tests for goodwill), and; improper calculating and recording
of impairment charges.
We
have a
material weakness in financial reporting. We lack personnel with adequate
experience in preparing financial statements and related footnotes in accordance
with GAAP.
52
The
following actions have been commenced since December 2003 in response to
the
inadequacies noted above:
|
·
|
Termination
or resignation of company officers and various financial and accounting
personnel.
|
|
·
|
Implementation
of policies imposing limits on shipments to distributors based
on an
evaluation of their credit and inventory stocking levels.
|
|
·
|
Initiation
of an evaluation and remediation process with respect to internal
controls
over financial reporting and related processes designed to identify
internal controls that mitigate financial reporting risk and identify
control gaps that may require further
remediation.
|
|
·
|
Reevaluation
of prior policies and procedures and the establishment of new policies
and
procedures for such matters as complex transactions, account
reconciliation procedures and contract management
procedures.
|
|
·
|
Ongoing
training and monitoring by management to ensure operation of controls
as
designed.
|
|
·
|
Adoption
of a Code of Ethics.
|
We
have
committed considerable resources to date to the reviews and remedies described
above, although certain of such items are ongoing and it will take time to
realize all the benefits. Additional efforts will be required to remediate
all
of the deficiencies in our controls. In addition, the effectiveness of any
system of disclosure controls and procedures is subject to certain limitations,
including the exercise of judgment in designing, implementing and evaluating
the
controls and procedures, the assumptions used in identifying the likelihood
of
future events, and the inability to eliminate improper conduct completely.
As a
result, there can be no assurance that our disclosure controls and procedures
will detect all errors or fraud.
Other
than as described above, since the evaluation date, there has been no change
in
our internal controls over financial reporting that has materially affected,
or
is reasonably likely to materially affect, our internal controls over financial
reporting.
53
PART
III
|
ITEM
10.
|
DIRECTORS
AND EXECUTIVE OFFICERS
|
Directors
and Executive Officers
Directors
The
following individuals are directors of ClearOne as of the date of this
report:
|
Name
|
Principal
Occupation during Past Five Years
|
Age
|
Director
Since
|
|||
|
Edward
Dallin Bagley
|
Edward
Dallin Bagley joined our board of directors in April 1994 and was
named
chairman of the board in February 2004. Mr. Bagley also served
as a
director from April 1987 to July 1991. He also currently serves
as a
director of Tunex International. Mr. Bagley has been licensed to
practice
law in Utah since 1965 and holds a juris doctorate degree from
the
University of Utah College of Law. For in excess of the past five
years,
Mr. Bagley has managed his own investments and served as a consultant
from
time to time.
|
66
|
1994
|
|||
|
Brad
R. Baldwin
|
Brad
R. Baldwin joined our board of directors in 1988. Mr. Baldwin is
an
attorney licensed to practice in Utah. Since April 2001, he has
been
engaged in the commercial real estate business with Commerce CRG
in Salt
Lake City. From February 2000 to March 2001, Mr. Baldwin was an
executive
with Idea Exchange Inc. From October 1994 to January 2000, he served
as
president and chief executive officer of Bank One, Utah, a commercial
bank
headquartered in Salt Lake City. Mr. Baldwin holds a degree in
finance
from the University of Utah and a juris doctorate degree from the
University of Washington.
|
49
|
1988
|
|||
|
Larry
R. Hendricks
|
Larry
R. Hendricks joined our board of directors in June 2003. Mr. Hendricks
is
a certified public accountant who retired in December 1992 after
serving
as vice president of finance and general manager of Daily Foods,
Inc., a
national meat processing company. During his 30-year career in
accounting,
he was also a self-employed CPA and worked for the international
accounting firm Peat Marwick & Mitchell. Mr. Hendricks currently
serves on the board of directors for Tunex International and has
served on
the boards of eight other organizations, including Habitat for
Humanity,
Daily Foods and Skin Care International. He earned a bachelor's
degree in
accounting from Utah State University and a master of business
administration degree from the University of Utah. Mr. Hendricks
is
currently a member of the American Institute of Certified Public
Accountants and the Utah Association of CPAs.
|
62
|
2003
|
|||
|
Scott
M. Huntsman
|
Scott
M. Huntsman joined our board of directors in June 2003. Mr. Huntsman
has
served as president and chief executive officer of GlobalSim, a
private
technology and simulation company, since February 2003 and chief
financial
officer from April 2002 to February 2003. Prior to GlobalSim, he
spent 11
years on Wall Street as an investment banker, where he focused
on mergers,
acquisitions and corporate finance transactions. From August 1996
to 2000,
Mr. Huntsman served at Donaldson, Lufkin and Jenrette Securities
Corporation until their merger with Credit Suisse First Boston
where he
served until January 2002. Mr. Huntsman earned a bachelor's degree
from
Columbia University and a master of business administration degree
from
The Wharton School at the University of Pennsylvania. He also studied
at
the London School of Economics as a Kohn Fellowship
recipient.
|
39
|
2003
|
54
|
Harry
Spielberg
|
Harry
Spielberg joined us as a director in January 2001. Since January
1996, Mr.
Spielberg has been the director of Cosentini Information Technologies’
Audiovisual Group, a division of the consulting engineering firm
Cosentini
Associates. Prior to 1996, Mr. Spielberg served as vice president,
engineering for Media Facilities Corp. and Barsky & Associates. Mr.
Spielberg received a bachelor’s degree in psychology from the State
University of New York.
|
53
|
2001
|
Director
Compensation
All
of
our directors serve until their successors are elected and have qualified
to
serve as directors. We pay the chairman of the board $4,000 per month and
all
other directors $2,000 per month for their services to us as directors.
Dal
Bagley, a director, served as a consultant to the Company from November 2002
through January 2004 and was paid $5,000 per month for his services. He
consulted with Company’s management on mergers and financial matters on an as
needed basis. Mr. Bagley’s services were performed pursuant to an oral
agreement, the terms of which were approved by the Board of
Directors.
Director
Committees
Our
board
of directors currently has two standing committees: the audit and compensation
committees.
The
Audit
Committee. The audit committee assists the board in its general oversight
of our
financial reporting, internal controls and audit functions and is directly
responsible for the appointment, retention, compensation and oversight of
our
independent auditor. The audit committee is currently composed of Brad R.
Baldwin, Scott M. Huntsman and Larry R. Hendricks. The board has determined
that
Mr. Hendricks is a financial expert and is independent within the meaning
of
NASDAQ Rule 4200(a)(15).
The
Compensation Committee. The compensation committee makes recommendations
to the
Board of Directors regarding remuneration of our executive officers and
directors, and administers the incentive plans for our directors, officers
and
employees. The compensation committee is currently composed of Brad R. Baldwin,
Scott M. Huntsman and Edward Dallin Bagley.
Meetings
of the Board of Directors and Committees
The
board
of directors held nine meetings during fiscal 2003 and nine meetings during
fiscal 2002. The audit committee held nineteen meetings during fiscal 2003
and
two meetings during fiscal 2002. The compensation committee held three meetings
during fiscal 2003 and one meeting during fiscal 2002. In 2003, each director
attended at least 75% of the meetings of the board of directors and the
committees on which they served, except for Frances Flood who did not attend
any
board meetings after she was placed on administrative leave.
Nomination
of Director Candidates: Security
holders may recommend candidates for nomination as directors. Any such
recommendations should include the nominee’s name, home and business addresses
and other contact information, detailed biographical data, and qualifications
for board membership, along with information regarding any relationships
between
the candidate and ClearOne within the last three fiscal years. Any such
recommendations should be sent to:
ClearOne
Communications, Inc.
1825
Research Way
Salt
Lake
City, Utah 84119
Attention:
Corporate Secretary
55
Executive
Officers
Our
executive officers as of the date of this filing are as follows:
|
Name
|
Age
|
Position
|
||
|
Zee
Hakimoglu
|
51
|
President
and Chief Executive Officer
|
||
|
Donald
Frederick
|
50
|
Chief
Financial Officer
|
||
|
Tracy
Bathurst
|
41
|
Vice
President of Product Line Management
|
||
|
DeLonie
Call
|
52
|
Vice
President of Human Resources
|
||
|
Werner
Pekarek
|
56
|
Vice
President of Operations
|
||
|
Joseph
Sorrentino
|
50
|
Vice
President of Worldwide Sales and
Marketing
|
Zee
Hakimoglu joined us in December 2003 with more than 15 years of executive
and
senior-level, high-tech management experience. She served in a variety of
executive business development, product marketing, and engineering roles
including vice president of product line management for ClearOne from December
2003 to July 2004; vice president of product line management for Oplink
Communications, a publicly traded developer of fiber optic subsystems and
components from December 2001 to December 2002; president of OZ Optics USA,
a
manufacturer of fiber optic test equipment and components from August 2000
to
November 2001; and various management positions including vice president
of
wireless engineering and wireless business unit vice president for Aydin
Corp.,
a telecommunications equipment company, formerly traded on the New York Stock
Exchange from May 1982 until it was acquired in September 1996. Her business
unit at Aydin was the largest provider of digital microwave radios to the
US
Army, which used the radios in Desert Storm and a variety of NATO operations.
She also was vice president of business development for Kaifa Technology
from
October 1998 to August 2000 and was instrumental in its acquisition by E-Tek
Dynamics, then again acquired by JDS Uniphase. Through these acquisitions,
she
held the role of deputy general manager of the Kaifa business unit. Ms.
Hakimoglu earned a bachelor’s degree in physics from California State College,
Sonoma, and a master’s degree in physics from Drexel University.
Donald
Frederick joined us in July 2004 with more than 25 years of financial management
experience. From January 2000 to February 2004, Mr. Frederick was most recently
chief financial officer of Datasweep, Inc., a privately held enterprise software
company. From June 1997 to September 1999, he was chief financial officer
of
ADFlex Solutions, Inc., a publicly held manufacturer of high-tech circuitry
for
consumer electronic products with more than $200 million in revenue. He was
also
vice president of finance for publicly held Flextronics International from
May
1995 to May 1997 and director of finance for Sony Electronics from May 1990
to
May 1995. Mr. Frederick earned a master’s degree in finance from San Jose State
University and a bachelor’s degree in accounting from Michigan Technological
University.
Tracy
Bathurst
joined us in September 1988 and held several positions with us until he was
named Vice President of Product Line Management in January 2005. He was most
recently ClearOne’s director of research and development and has nearly 20 years
experience in defining and developing communications-related products and
technology. Mr. Bathurst has lead the design and development of ClearOne’s high
performance audio and telecommunications equipment. He earned a Bachelor
of
Science degree in industrial technology from Southern Utah
University.
DeLonie
Call joined us in October 2001 with nearly 15 years experience in management
and
executive-level human resources positions. She currently serves as vice
president of human resources. From April 2000 to September 2001, Ms. Call
was
director of human resources for Iomega Corp. and from June 1996 to November
2000
she was vice president of human resources for Vitrex Corp., a start-up
technology company. Ms. Call graduated from Weber State University with a
bachelor’s degree in business management and economics.
56
Werner
Pekarek joined us in January 2005 with more than 15 years of executive level
operations experience, including responsibility for process development,
production planning and implementation, purchasing, supply chain management
and
customer service. Mr. Pekarek held executive operations roles with Siemens
Communications including vice president of operations for Siemens Communications
Devices, Consumer Products from 1997 to 2000, vice president of operations
for
Siemens Information & Communications Networks, Networking Gear from 1992 to
1997, vice president of operations for Siemens Wireless, consumer products
from
1989 to 1992, and various other management positions for Siemens from 1980
to
1989. His expertise includes low volume, high mix networking gear and high
volume consumer wireless and cordless phone products. He was also Vice President
of Operations for start-up high tech companies Break Points from July 2002
to
December 2004 and Optical Micro Machines from November 2000 to June 2002.
Mr.
Pekarek earned a Bachelor of Science degree in electrical engineering from
the
University of Paderborn in Germany.
Joseph
Sorrentino joined us in November 2004 with more than 25 years experience
in
various executive management and sales-related positions. From April 2002
to
November 2004, Mr. Sorrentino was vice president of sales for Polycom’s voice
communications division. In that role, he was responsible for driving sales
of
Polycom’s flagship voice products and launching its IP telephony, wireless and
installed conferencing products. Prior to Polycom, he served as vice president
of worldwide sales for 3Ware, a start-up storage company from July 1999 to
August 2001, and for IBM’s storage systems division from October 1997 to
February 1999, where he managed the company’s largest storage customers. He has
also worked for Motorola, Seagate and Adaptec. Mr. Sorrentino earned a
bachelor’s degree from San Jose State University.
Compliance
with Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and executive officers, and persons who own more than 10% of a registered
class
of our equity securities to file with the SEC initial reports of ownership
on
Form 3 and reports of changes of ownership of our equity securities on Forms
4
and 5. Officers, directors and greater than 10% shareholders are required
to
furnish us with copies of all Section 16(a) reports they file.
Based
solely on a review of the reports and amendments to reports furnished to
us, we
believe that all reports required by Section 16(a) were filed on a timely
basis,
except that the following reports were filed late: (i) the Form 4 dated December
10, 2002 for Frances M. Flood; (ii) the Form 3 dated February 12, 2003 for
Michael D. Keough; (iii) the Form 3 dated June 30, 2003 for Larry R. Hendricks;
(iv) the Form 3 dated June 30, 2003 for Scott M. Huntsman; (v) the Form 3
dated
November 14, 2003 for Charles A. Callis; (vi) the Form 3 dated July 27, 2004
for
David Hubbard; and (vii) the Form 3 dated July 27, 2004 for Donald E. Frederick.
Code
of Ethics
On
November 18, 2004, the board of directors adopted a code of ethics that applies
to our board of directors, executive officers and employees. A copy of our
code
of ethics is included as an exhibit to this report. Copies may also be
requested, free of charge, from our Corporate Secretary at the following
address:
ClearOne
Communications, Inc.
1825
Research Way
Salt
Lake
City, Utah 84119
Attention:
Corporate Secretary
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
Summary
Compensation
The
following table sets forth for the periods indicated the compensation paid
to or
accrued for the benefit of each person who served as our Chief Executive
Officer
during fiscal 2003, our next four most highly compensated executive officers
serving as of June 30, 2003 and one executive officer who served in such
position during a portion of 2003 (collectively referred to herein as the
“named
executive officers”). The position identified in the table for each person is
the position they held with us as of June 30, 2003. None of these persons
is
currently employed by us.
57
SUMMARY
COMPENSATION TABLE
|
Annual
Compensation
|
Long-Term
Compensation
|
|||||||||||
|
Awards
|
Payouts
|
|||||||||||
|
Name
and Position
|
Fiscal
Year
|
Salary
|
Bonus
|
Other
Annual Compensation1
|
Securities
Underlying Options /SARS
|
All
Other Compensation2
|
||||||
|
Executive
Officers as of June 30, 2003
|
||||||||||||
|
Frances
Flood President and Chief Executive Officer3
|
2003
|
$231,199
|
-
|
-
|
300,000
|
$1,095
|
||||||
|
2002
|
$179,615
|
$76,006
|
-
|
100,000
|
$2,148
|
|||||||
|
2001
|
$160,000
|
$58,400
|
-
|
-
|
$2,056
|
|||||||
|
Susie
Strohm Vice President and Chief Financial Officer4
|
2003
|
$140,838
|
-
|
-
|
50,000
|
$1,050
|
||||||
|
2002
|
$114,615
|
$30,505
|
-
|
-
|
$2,108
|
|||||||
|
2001
|
$110,000
|
$37,000
|
-
|
-
|
$2,316
|
|||||||
|
Mike
Keough Chief Executive Officer5
|
2003
|
$119,230
|
-
|
-
|
50,000
|
-
|
||||||
|
Greg
Rand President and Chief Operating Officer6
|
2003
|
$130,256
|
-
|
-
|
50,000
|
-
|
||||||
|
Angelina
Beitia Vice President7
|
2003
|
$116,226
|
-
|
$400
|
15,000
|
-
|
||||||
|
2002
|
$118,462
|
$5,000
|
$2,005
|
-
|
$3,900
|
|||||||
|
Former
Executive Officers
|
||||||||||||
|
Timothy
Morrison8
Former
Vice President
|
2003
|
$120,351
|
-
|
-
|
15,000
|
$735
|
||||||
|
2002
|
$159,808
|
$24,500
|
-
|
60,000
|
$637
|
|||||||
____________
|
1
|
The
Company did not pay or provide perquisites or other benefits during
the
periods indicated to any named executive officer in an aggregate
amount
exceeding $50,000.
|
| 2 |
These
amounts reflect our contributions to our deferred compensation
plan
(401(k) plan) on behalf of the named executive
officers.
|
| 3 |
Ms.
Flood’s employment and position as an executive officer terminated on
December 5, 2003.
|
| 4 |
Ms.
Strohm’s employment and position as an executive officer terminated on
December 5, 2003.
|
| 5 |
Mr.
Keough was employed as an executive officer on from November 18,
2002 to
June 24, 2004.
|
| 6 |
Mr.
Rand was employed as an executive officer on from August 12, 2002
to
February 25, 2004.
|
| 7 |
Ms.
Beitia’s employment and position as an executive officer terminated on
July 1, 2004.
|
| 8 |
Mr.
Morrison’s employment and position as an executive officer terminated on
February 4, 2003. The table does not include the amount paid to
Mr.
Morrison in May 2004 in settlement of the so-called “whistleblower action”
described in Item 3. Legal
Proceedings.”
|
58
Stock
Options
The
following table sets forth the stock option grants made to the named executive
officers for fiscal 2003. We did not grant any stock appreciation rights,
or
SARs, to the named executive officers during fiscal 2003.
The
exercise price per share of each option granted was equal to the closing
price
of our common stock on the date of grant.
OPTION
GRANTS IN FISCAL YEAR ENDED JUNE 30, 2003
(INDIVIDUAL
GRANTS)
|
Number
of Securities Underlying Options
|
Percent
of Total Options Granted to Employees
|
Exercise
or Base
|
Expiration
|
Potential
Realizable Value of Assumed Annual Rate of Stock Price Appreciation
for
Option
Term4
|
||||||||
|
Name
and Position
|
Granted
(#)
|
in
Fiscal Year1
|
Price
($/Sh)
|
Date
|
5%($)
|
10%($)
|
||||||
|
Executive
Officers as of June 30, 2003
|
||||||||||||
|
Frances
Flood
|
300,0002,5
|
36%
|
$3.55
|
10/24/2012
|
$756,511
|
$1,973,569
|
||||||
|
Susie
Strohm
|
50,0003,6
|
6%
|
$3.55
|
10/24/2012
|
$126,085
|
$328,928
|
||||||
|
Mike
Keough
|
50,0003
|
6%
|
$3.75
|
11/18/2012
|
$133,189
|
$347,459
|
||||||
|
Gregory
Rand
|
50,0003
|
6%
|
$3.55
|
10/24/2012
|
$126,085
|
$328,928
|
||||||
|
Angelina
Beitia
|
15,0003
|
2%
|
$3.55
|
10/24/2012
|
$37,826
|
$98,678
|
||||||
|
DeLonie
Call
|
15,0003
|
2%
|
$3.55
|
10/24/2012
|
$37,826
|
$98,678
|
||||||
|
Former
Executive Officers
|
||||||||||||
|
Timothy
J. Morrison
|
15,0003
|
2%
|
$3.55
|
10/24/2012
|
$37,826
|
$98,678
|
||||||
____________
|
1.
|
Based
on an aggregate of 835,500 shares subject to options granted to
our
employees in 2003, including the named executive
officers.
|
|
2.
|
The
options have a ten year term with one-third vesting on the day
following
the grant date and the remaining two-thirds vesting in equal installments
on July 22, 2003 and July 22, 2004, respectively. The options vest
immediately upon a change of control as defined in the plan or
our board
of directors has authority to accelerate vesting in the event of
certain
specified corporate transactions.
|
|
3.
|
The
options have a ten year term and vest over a four year period
with
one-fourth vesting on the first anniversary of the grant date
and the
remaining three-fourths vesting in equal monthly installments
over the
remaining 36 month period. The options vest immediately upon
a change of
control as defined in the plan or our board of directors has
authority to
accelerate vesting in the event of certain specified corporate
transactions.
|
59
|
4.
|
Potential
realizable values are computed by (1) multiplying the number of
shares of
common stock subject to a given option by the per-share assumed
stock
value compounded at the annual 5% or 10% appreciation rate shown
in the
table for the entire ten-year term of the option and (2) subtracting
from
that result the aggregate option exercise price. The 5% and 10%
assumed
annual rates of stock price appreciation are mandated by the rules
of the
SEC and do not represent our estimate or projection of the future
prices
of our common stock. Actual gains, if any, on stock option exercises
are
dependent on our future financial performance, overall market conditions,
and the named executive officer’s continued employment through the vesting
periods. The actual value realized may be greater or less than
the
potential realizable value set forth in the
table.
|
|
5.
|
Frances
Flood subsequently surrendered and cancelled a total of 706,434
stock
options, including the 300,000 options above, in accordance with
the
employment separation agreement between the Company and Ms.
Flood.
|
|
6.
|
Susie
Strohm subsequently surrendered and cancelled a total of 268,464
stock
options, including the 50,000 options above, in accordance with
the
employment separation agreement between the Company and Ms.
Strohm.
|
Aggregated
Stock Option/SAR Exercises
The
following table sets forth information concerning stock options exercised
by the
named executive officers during fiscal 2003 and the year-end value of
in-the-money, unexercised options:
AGGREGATED
OPTION EXERCISES IN FISCAL YEAR ENDED JUNE 30, 2003
AND
FISCAL YEAR-END OPTION VALUES
|
Number
of Securities Underlying Unexercised Options at FY-End (#)
|
Value
of Unexercised In-the-Money Options at FY-End ($)
|
|||||||
|
Name
and Position
|
Shares
Acquired on
Exercise (#)
|
Value
Realized
($)1
|
Exercisable/
Unexercisable
|
Exercisable/
Unexercisable2
|
||||
|
Executive
Officers as of June 30, 2003
|
||||||||
|
Frances
Flood
|
10,000
|
$36,600
|
377,333/329,101
|
$233,872/$0
|
||||
|
Susie
Strohm
|
0
|
$0
|
159,463/109,001
|
$94,810/$0
|
||||
|
Mike
Keough
|
0
|
$0
|
0/50,000
|
$0/$0
|
||||
|
Gregory
Rand
|
0
|
$0
|
0/50,000
|
$0/$0
|
||||
|
Angelina
Beitia
|
0
|
$0
|
4,375/140,625
|
$0/$0
|
||||
|
DeLonie
Call
|
0
|
$0
|
3,500/141,500
|
$0/$0
|
||||
|
Former
Executive Officers
|
||||||||
|
Timothy
J. Morrison
|
0
|
$0
|
0/0
|
$0/$0
|
____________
|
1
|
Based
upon the market price of the purchased shares on the exercise date
less
the option exercise price paid for such
shares.
|
|
2
|
Based
on the market price of $2.15 per share, which was the closing
selling
price of our common stock on the Pink Sheets on the last business
day of
our 2003 fiscal year, less the option exercise price payable
per
share.
|
60
Employment Contracts and Termination of Employment and Change-in-Control Arrangements
Employment
Agreement.
On
October 24, 2002, we entered into a three-year employment agreement with
Frances
Flood, which was terminated on December 5, 2003 as discussed below. Under
the
terms of the agreement, Ms. Flood agreed to serve as our Chairman of the
Board,
Chief Executive Officer and President. The agreement provided for the payment
to
Ms. Flood of a base salary of $250,000 per year from October 24, 2002 to
October
23, 2003; $300,000 per year from October 24, 2003 to October 23, 2004; and
$325,000 per year from October 24, 2004 to October 24, 2005, with an annual
bonus of up to 50% of her base salary. She was also granted stock
options.
The
employment agreement provided that if Ms. Flood’s employment were terminated
without “cause,” she would be entitled to her full monthly salary and health and
life insurance premiums as provided in the agreement for three years from
the
date of termination. If Ms. Flood’s employment were terminated upon death or for
“cause,” she would be entitled to receive her salary and other benefits earned
but not yet paid through the date of termination, subject to any legal
requirements. If Ms. Flood’s employment were terminated for disability, she
would continue to receive her full monthly salary and health and life insurance
premiums as provided in the agreement for one year.
The
agreement provided for a cash severance payment in the amount of $875,000
and
accelerated vesting of all remaining stock options granted to Ms. Flood in
the
event of a change in control of the Company.
Employment
Separation Agreements.
On
December 5, 2003, the Company entered into employment separation agreements
with
each of Frances Flood, the Company’s former chairman, chief executive officer
and president, and Susie Strohm, the Company’s former chief financial officer,
which generally provided that such persons would resign from their positions
and
employment with the Company, and the Company would make one-time, lump sum
payments to such persons in consideration of their surrender and delivery
to the
Company of shares of the Company’s common stock and Company stock options and
their release of claims against the Company. Such persons also agreed to
cooperate with the Company in the SEC action and related proceedings and
the
Company agreed to continue to indemnify such persons for attorneys fees incurred
in the SEC action and related proceedings, subject to the limitations imposed
by
Utah law. The Company also released any existing claims against such persons
except such claims as to which indemnification would not be permitted by
Utah
law. The agreement with Ms. Flood provided for a payment to her of $350,000
and
her surrender and delivery to the Company of 35,000 shares of the Company’s
common stock and 706,434 stock options (461,433 of which were vested). The
agreement with Ms. Strohm provided for a payment to her of $75,000 and her
surrender and delivery to the Company of 15,500 shares of the Company’s common
stock and 268,464 stock options (171,963 of which were vested). This summary
description of the employment separation agreements is qualified in its entirety
by reference to the employment separation agreements, copies of which are
included as exhibits to this report.
As
of the
end of fiscal 2003, no other named executive officer was party to an employment
or severance agreement with us, and each named executive officer’s employment
was on an “at-will” basis.
61
Settlement
Agreements and Releases.
We
entered into settlement agreements and releases with four former executive
officers in connection with the cessation of their employment, which generally
provided for their resignations from their positions and employment with
the
Company, the payment of severance in increments in accordance with the regular
payroll schedule, and a general release of claims against the Company by
each of
such persons. On February 27, 2004, an agreement was entered into with Greg
Rand, the Company’s former president and chief operating officer, which
generally provided for a severance payment of $75,000 and an accelerated
vesting
of 25,000 stock options. On April 6, 2004, an agreement was entered into
with
George Claffey, the Company’s former chief financial officer, which generally
provided for a severance payment of $61,192. On June 16, 2004, an agreement
was
entered into with Mike Keough, the Company’s former chief executive officer,
which generally provided for a severance payment of $46,154 and vested options
totaling 18,749 stock options. On July 15, 2004, an agreement was entered
into
with Angelina Beitia, the Company’s former vice president, which generally
provided for a lump sum payment of $100,000. In addition Ms. Beitia surrendered
and delivered to the Company all outstanding vested and unvested options.
In
accordance with the terms of our stock option plans, any unvested stock options
terminated on the date of termination of such persons’ employment with the
Company. This summary description of the settlement agreement and releases
are
qualified in their entirety by reference to the settlement agreement and
releases, copies of which are included as exhibits to this report.
Stock
Option Plans.
Under
the 1998 Stock Option Plan, our board of directors has the authority to
automatically accelerate the vesting of each outstanding option granted to
a
named executive officer in the event of specified corporate transactions,
including a change in control whether or not the outstanding option is assumed
or substituted in connection with the corporate transaction or change in
control. All options outstanding under the 1990 Stock Option Plan are fully
vested and there are no additional options available for grant.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
The
following table sets forth certain information regarding ownership of our
common
stock as of July 31, 2005 by (i) each person known to us to be the beneficial
owner of more than 5% of our outstanding common stock, (ii) each director,
(iii)
the named executive officers, and (iv) all of our executive officers and
directors as a group. Each person has sole investment and voting power with
respect to the shares indicated, subject to community property laws where
applicable, except as otherwise indicated below. The address for each director
and officer is in care of ClearOne Communications, Inc., 1825 Research Way,
Salt
Lake City, Utah 84119.
62
|
Names
of
Beneficial Owners
|
Amount
of
Beneficial Ownership
|
Percentage
of
Class1
|
|||||
|
Directors
and Executive Officers
|
|||||||
|
Edward
Dallin Bagley2
|
1,804,601
|
15.3
|
%
|
||||
|
Brad
R. Baldwin3
|
181,666
|
1.5
|
%
|
||||
|
DeLonie
Call4
|
74,312
|
0.6
|
%
|
||||
|
Zee
Hakimoglu5
|
63,888
|
0.5
|
%
|
||||
|
Harry
Spielberg6
|
59,000
|
0.5
|
%
|
||||
|
Tracy
Bathurst7
|
56,017
|
0.5
|
%
|
||||
|
Don
Frederick8
|
29,166
|
0.2
|
%
|
||||
|
Larry
Hendricks9
|
25,500
|
0.2
|
%
|
||||
|
Scott
Huntsman10
|
25,500
|
0.2
|
%
|
||||
|
Directors
and Executive Officers as a Group (11 people)11
|
2,319,650
|
19.6
|
%
|
||||
|
1
|
For
each individual included in the table, the calculation of percentage
of
beneficial ownership is based on 11,264,233 shares of common stock
outstanding as of July 31, 2005 and shares of common stock that
could be
acquired by the individual within 60 days of July 31, 2005, upon
the
exercise of options or otherwise.
|
|
2
|
Includes
126,166 shares held by Mr. Bagley’s spouse with respect to which he
disclaims beneficial ownership; and options to purchase 134,000
shares
that are exercisable within 60 days after July 31,
2005.
|
|
3
|
Includes
88,666 shares held in the Baldwin Family Trust; 9,000 shares owned
directly, which are held in an IRA under the name of Mr. Baldwin;
and
options to purchase 84,000 shares that are exercisable within 60
days
after July 31, 2005.
|
|
4
|
Includes
options to purchase 73,937 shares that are exercisable within 60
days
after July 31, 2005.
|
|
5
|
Includes
options to purchase 63,888 shares that are exercisable within 60
days
after July 31, 2005.
|
|
6
|
Includes
options to purchase 59,000 shares that are exercisable within 60
days
after July 31, 2005.
|
|
7
|
Includes
options to purchase 55,519 shares that are exercisable within 60
days
after July 31, 2005.
|
|
8
|
Includes
options to purchase 29,166 shares that are exercisable within 60
days
after July 31, 2005.
|
|
9
|
Includes
options to purchase 25,500 shares that are exercisable within 60
days
after July 31, 2005.
|
|
10
|
Includes
options to purchase 25,500 shares that are exercisable within 60
days
after July 31, 2005.
|
|
11
|
Includes
options to purchase a total of 550,510 shares that are exercisable
within
60 days after July 31, 2005 by executive officers and directors.
|
63
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS
|
Indemnification
of Officers and Directors.
The
Company’s by-laws and the Utah Revised Business Corporation Act provide for
indemnification of directors and officers against reasonable expenses incurred
by such persons in connection with civil or criminal actions or proceedings
to
which they have been made parties because they are or were directors or officers
of the Company or its subsidiaries. Indemnification is permitted if the person
satisfies the required standards of conduct. Certain of the litigation matters
described in "Item 3. Legal Proceedings" involved certain of the
Company’s current and former directors and officers, all of whom are covered by
the aforementioned indemnity and if applicable, certain prior period insurance
policies. The Company has indemnified such persons for legal expenses incurred
by them in such actions and has sought reimbursement from its insurance
carriers. The Company cannot predict with certainty the extent to which the
Company will recover the indemnification payments from its insurers. The
Company has made payments to the law firms representing such current and
former
directors and officers in the aggregate amount of approximately $1.5 million
during the period from January 2003 through June 30, 2005.
In
connection with the Insurance Coverage Action described herein under the
caption
“Item 3. Legal Proceedings,” the Company and its counsel entered into a Joint
Prosecution and Defense Agreement dated as of April 1, 2004 with Edward Dallin
Bagley, a director, and his counsel, which generally provides that ClearOne
and
Mr. Bagley will jointly prosecute their claims against the carriers of certain
prior period directors and officers liability insurance policies and jointly
defend the claims made by the insurance carriers in order to reduce litigation
expenses. In the litigation, ClearOne is generally pursuing claims to recover
the policy limits of certain officer and director liability insurance policies
and Mr. Bagley is pursuing related claims to recover losses he incurred as
a
result of such carriers’ refusal to pay the policy limits which refusals caused
ClearOne to enter into a settlement agreement in the class action litigation
that diluted Mr. Bagley’s shareholdings in ClearOne. The agreement, as amended,
provides that the two law firms shall jointly represent ClearOne and Mr.
Bagley,
the parties shall cooperate in connection with the conduct of the litigation
and
that ClearOne shall pay all litigation expenses, including attorneys’ fees of
its counsel and Bagley’s counsel, except litigation expenses which are solely
related to Mr. Bagley’s claims in the litigation. In February 2005, we entered
into a confidential settlement agreement with Lumbermens Mutual pursuant
to
which ClearOne and Bagley received a lump sum cash amount and the plaintiffs
agreed to dismiss their claims against Lumbermens Mutual with prejudice.
The
cash settlement will be held in a segregated account until the claims involving
National Union have been resolved, at which time the amounts received in
the
action will be allocated among the Company and Bagley.
| ITEM 14. |
PRINCIPAL
ACCOUNTING FEES AND
SERVICES
|
ClearOne
engaged KPMG LLP (KPMG) in December 2003 to replace Ernst & Young
LLP as its independent registered public accountants. ClearOne engaged KPMG
to audit its financial statements for its 2003 fiscal year and to reaudit
its
financial statements for its 2002 and 2001 fiscal years, as well as to perform
quarterly reviews on the quarters within each of these fiscal years.
The
fees
for the audits and quarterly reviews related to the June 30, 2003, 2002 and
2001
financial statements, taxes and audit related fees provided by KPMG were
as
follows:
|
Audit
Fees
|
$
|
2,258,913
|
||
|
Audit-Related
Fees
|
13,029
|
|||
|
Tax
Fees
|
126,106
|
|||
|
Total
|
$
|
2,398,048
|
“Audit
Fees” consisted of fees billed for services rendered for the audit of ClearOne’s
annual financial statements, as described above, reviews of quarterly financial
information included herein, and other services normally provided in connection
with statutory and regulatory filings. “Audit-Related Fees” consisted of fees
billed for consents on audit opinions for acquirees of the Company. “Tax Fees”
consisted of fees billed for tax payment planning and tax preparation services.
Our
Audit
Committee Charter provides for pre-approval of non-audit services performed
by
our independent registered public accountants. All of the services performed
by
KPMG described above under the captions "Audit-Related Fees" and "Tax Fees"
were
approved in advance by our Audit Committee.
64
|
ITEM
15.
|
EXHIBITS
AND FINANCIAL STATEMENT
SCHEDULES
|
|
(a)
|
1.
|
Financial
Statements
|
The
following financial statements are filed as part of this report in a separate
section of this Form 10-K beginning on page F-1.
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of June 30, 2003, 2002 and 2001
Consolidated
Statements of Operations and Comprehensive Income (Loss) for fiscal years
ended
June 30, 2003, 2002 and 2001
Consolidated
Statements of Stockholders’ Equity for fiscal years ended June 30, 2003, 2002
and 2001
Consolidated
Statements of Cash Flows for fiscal years ended June 30, 2003, 2002 and
2001
Notes
to
Consolidated Financial Statements
|
2.
|
Financial
Statement Schedules
|
All
schedules are omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements and notes
thereto.
|
3.
|
Exhibits
|
The
following documents are included as exhibits to this report.
|
Exhibit
No.
|
SEC
Ref. No.
|
Title
of Document
|
Location
|
|||||
|
3.1
|
3
|
Articles
of Incorporation and amendments thereto
|
Incorp.
by reference1
|
|||||
|
3.2
|
3
|
Bylaws
|
Incorp.
by reference2
|
|||||
|
10
|
Employment
Separation Agreement between ClearOne Communications, Inc.
and Frances
Flood, dated December 5, 2003.*
|
This
filing
|
||||||
|
10
|
Employment
Separation Agreement between ClearOne Communications, Inc.
and Susie
Strohm, dated December 5, 2003.*
|
This
filing
|
||||||
|
10
|
Share
Purchase Agreement between ClearOne Communications, Inc. and
ClearOne
Communications of Canada, Inc. and 3814149 Canada, Inc., 3814157
Canada,
Inc., Stechyson Family Trust, Jim Stechyson, Norm Stechyson,
and Heather
Stechyson Family Trust, dated as of August 16, 2002
|
This
filing
|
||||||
|
10
|
Asset
Purchase Agreement between ClearOne Communications, Inc. and
Comrex Corp.,
dated as of August 23, 2002.
|
This
filing
|
||||||
|
10.5
|
10
|
Agreement
and Plan of Merger dated January 21, 2003, between ClearOne
Communications, Inc., Tundra Acquisitions Corporation and E.mergent,
Inc.,
and the related Voting Agreement with E.mergent
shareholders
|
Incorp.
by reference3
|
|||||
|
10.6
|
10
|
Share
Purchase Agreement among ClearOne Communications, Inc. (then
named Gentner
Communications Corporation), Gentner Ventures, Inc. and the
shareholders
of Ivron Systems, Ltd. dated October 3, 2001, and amendment
thereto
|
Incorp.
by reference4
|
|||||
|
10
|
Joint
Prosecution and Defense Agreement dated April 1, 2004 between
ClearOne
Communications, Inc., Parsons Behle & Latimer, Edward Dallin Bagley
and Burbidge & Mitchell, and amendment thereto
|
This
filing
|
||||||
|
10
|
Asset
Purchase Agreement dated May 6, 2004 between ClearOne Communications,
Inc.
and M:SPACE, Inc.
|
This
filing
|
||||||
|
10.9
|
10
|
Asset
Purchase Agreement among Clarinet, Inc., American Teleconferencing
Services, Ltd. d/b/a Premier Conferencing, and ClearOne Communications,
Inc., dated July 1, 2004
|
Incorp.
by reference5
|
|||||
|
10
|
Stock
Purchase Agreement dated March 4, 2005 between 6351352 Canada
Inc. and
Gentner Ventures, Inc., a wholly owned subsidiary of ClearOne
Communications, Inc.
|
This
filing
|
||||||
|
10.11
|
10
|
1998
Stock Option Plan
|
Incorp.
by reference6
|
|||||
|
10.12
|
10
|
1990
Stock Option Plan
|
Incorp.
by reference7
|
|||||
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
Gregory Rand dated February 27, 2004.*
|
This
filing
|
||||||
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
George Claffey dated April 6, 2004.*
|
This
filing
|
||||||
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
Michael Keough dated June 16, 2004.*
|
This
filing
|
||||||
|
10
|
Employment
Settlement Agreement and Release between ClearOne Communications,
Inc. and
Angelina Beitia dated July 15, 2004.*
|
This
filing
|
||||||
|
14
|
Code
of Ethics, approved by the Board of Directors on November 18,
2004
|
This
filing
|
||||||
|
21
|
Subsidiaries
of the registrant
|
This
filing
|
||||||
|
31
|
Section
302 Certification of Chief Executive Officer
|
This
filing
|
||||||
|
31
|
Section
302 Certification of Chief Financial Officer
|
This
filing
|
||||||
|
32
|
Section
1350 Certification of Chief Executive Officer
|
This
filing
|
||||||
|
32
|
Section
1350 Certification of Chief Financial Officer
|
This
filing
|
||||||
|
99
|
Audit
Committee Charter, adopted November 18, 2004
|
This
filing
|
||||||
______________
*Constitutes
a management contract or compensatory plan or arrangement.
|
1
|
Incorporated
by reference to the Registrant’s Annual Reports on Form 10-K for the
fiscal years ended June 30, 1989 and June 30,
1991.
|
|
2
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended June 30, 1993.
|
|
3
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed February
6, 2002.
|
|
4
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed October
18, 2001 and the Current Report on Form 8-K filed April 10,
2002.
|
|
5
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K filed July 1,
2004.
|
|
6
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998.
|
|
7
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-KSB for the
fiscal year ended June 30,
1996.
|
65
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
CLEARONE
COMMUNICATIONS, INC.
|
||
|
August
16, 2005
|
By:
|
/s/
Zeynep Hakimoglu
|
|
Zeynep
Hakimoglu
|
||
|
President
and Chief Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in
the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Zeynep Hakimoglu
|
President
and Chief Executive Officer
|
August
16, 2005
|
||
|
Zeynep
Hakimoglu
|
(Principal
Executive Officer)
|
|||
|
/s/
Donald E. Frederick
|
Chief
Financial Officer
|
August
16, 2005
|
||
|
Donald
E. Frederick
|
(Principal
Financial and Accounting Officer)
|
|||
|
/s/
Edward Dallin Bagley
|
Director
|
August
16, 2005
|
||
|
Edward
Dallin Bagley
|
||||
|
/s/
Brad R. Baldwin
|
Director
|
August
16, 2005
|
||
|
Brad
R. Baldwin
|
||||
|
/s/
Larry R. Hendricks
|
Director
|
August
16, 2005
|
||
|
Larry
R. Hendricks
|
||||
|
/s/
Scott M. Huntsman
|
Director
|
August
16, 2005
|
||
|
Scott
M. Huntsman
|
||||
|
/s/
Harry Spielberg
|
Director
|
August
16, 2005
|
||
|
Harry
Spielberg
|
66
ClearOne
Communications, Inc.
Index
to Consolidated Financial Statements
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets as of June 30, 2003, 2002 and 2001
|
F-3
|
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss) for fiscal
years
ended June 30, 2003, 2002 and 2001
|
F-4
|
|
|
Consolidated
Statements of Stockholders' Equity for fiscal years ended June
30, 2003,
2002, and 2001
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for fiscal years ended June 30, 2003,
2002, and
2001
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-9
|
F-1
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
ClearOne
Communications, Inc.:
We
have audited the accompanying consolidated balance sheets of ClearOne
Communications, Inc. and subsidiaries as of June 30, 2003, 2002, and 2001,
and
the related consolidated statements of operations and comprehensive income
(loss), stockholders’ equity, and cash flows for each of the years then ended.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ClearOne
Communications, Inc. and subsidiaries as of June 30, 2003, 2002, and 2001 and
the results of their operations and their cash flows for each of the years
then
ended in conformity with U. S. generally accepted accounting
principles.
As
discussed in Note 3 to the accompanying consolidated financial statements,
the
consolidated balance sheets as of June 30, 2002 and 2001, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the years then ended, have been restated.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed, effective July 1, 2002, its method of accounting for goodwill and
other
intangible assets as required by Statement of Financial Accounting Standards
No.
142, Goodwill and Other Intangible Assets, Statement of Financial Accounting
Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, and Statement of Financial Accounting Standard No. 141, Business
Combinations.
KPMG
LLP
Salt
Lake City, Utah
August
12, 2005
F-2
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share amounts)
|
June
30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
ASSETS
|
||||||||||
|
Current
assets:
|
||||||||||
|
Cash
and cash equivalents
|
$
|
6,124
|
$
|
1,744
|
$
|
6,851
|
||||
|
Restricted
cash
|
200
|
-
|
-
|
|||||||
|
Marketable
securities
|
1,900
|
12,400
|
-
|
|||||||
|
Accounts
receivable, net of allowances of $246, $190 and $0,
respectively
|
4,208
|
4,322
|
2,027
|
|||||||
|
Inventories,
net
|
8,966
|
12,516
|
6,459
|
|||||||
|
Income
tax receivable
|
2,433
|
-
|
-
|
|||||||
|
Deferred
income tax assets
|
2,531
|
4,709
|
1,587
|
|||||||
|
Prepaid
expenses and other
|
555
|
621
|
680
|
|||||||
|
Total
current assets
|
26,917
|
36,312
|
17,604
|
|||||||
|
Property
and equipment, net
|
6,768
|
8,123
|
5,681
|
|||||||
|
Goodwill,
net
|
-
|
17,072
|
890
|
|||||||
|
Intangibles,
net
|
1,018
|
1,634
|
616
|
|||||||
|
Deferred
income tax assets, net
|
548
|
661
|
446
|
|||||||
|
Other
assets
|
25
|
74
|
74
|
|||||||
|
Total
assets
|
$
|
35,276
|
$
|
63,876
|
$
|
25,311
|
||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||
|
Current
liabilities:
|
||||||||||
|
Line
of credit
|
$
|
-
|
$
|
196
|
$
|
-
|
||||
|
Capital
lease obligations
|
802
|
784
|
619
|
|||||||
|
Note
payable
|
652
|
-
|
-
|
|||||||
|
Accounts
payable
|
1,948
|
3,056
|
652
|
|||||||
|
Accrued
liabilities
|
9,576
|
2,841
|
1,408
|
|||||||
|
Deferred
revenue
|
550
|
572
|
-
|
|||||||
|
Billings
in excess of costs on uncompleted contracts
|
615
|
-
|
-
|
|||||||
|
Income
taxes payable
|
-
|
265
|
224
|
|||||||
|
Total
current liabilities
|
14,143
|
7,714
|
2,903
|
|||||||
|
Capital
lease obligations, net of current portion
|
1,215
|
2,016
|
1,680
|
|||||||
|
Note
payable, net of current portion
|
931
|
-
|
-
|
|||||||
|
Deferred
revenue, net of current portion
|
244
|
254
|
-
|
|||||||
|
Total
liabilities
|
16,533
|
9,984
|
4,583
|
|||||||
|
Commitments
and contingencies (see Notes 11 and 13)
|
||||||||||
|
Stockholders'
equity:
|
||||||||||
|
Common
stock, 50,000,000 shares authorized, par value $0.001, 11,086,733,
11,178,392 and 8,612,978 shares issued and outstanding,
respectively
|
11
|
11
|
9
|
|||||||
|
Additional
paid-in capital
|
48,258
|
48,704
|
8,856
|
|||||||
|
Deferred
compensation
|
(75
|
)
|
(147
|
)
|
(122
|
)
|
||||
|
Accumulated
other comprehensive income
|
1,197
|
-
|
-
|
|||||||
|
Retained
earnings (accumulated deficit)
|
(30,648
|
)
|
5,324
|
11,985
|
||||||
|
Total
stockholders' equity
|
18,743
|
53,892
|
20,728
|
|||||||
|
Total
liabilities and stockholders' equity
|
$
|
35,276
|
$
|
63,876
|
$
|
25,311
|
||||
See
accompanying notes to consolidated financial statements.
F-3
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in
thousands, except share amounts)
|
Years
ended June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Revenue:
|
||||||||||
|
Product
|
$
|
27,512
|
$
|
26,253
|
$
|
22,448
|
||||
|
Conferencing
services
|
15,268
|
15,583
|
11,689
|
|||||||
|
Business
services
|
14,805
|
1,526
|
-
|
|||||||
|
Total
revenue
|
57,585
|
43,362
|
34,137
|
|||||||
|
Cost
of goods sold:
|
||||||||||
|
Product
|
15,940
|
10,939
|
8,789
|
|||||||
|
Product
inventory write-offs
|
2,175
|
2,945
|
416
|
|||||||
|
Conferencing
services
|
7,904
|
7,310
|
5,928
|
|||||||
|
Business
services
|
9,282
|
978
|
-
|
|||||||
|
Total
cost of goods sold
|
35,301
|
22,172
|
15,133
|
|||||||
|
Gross
profit
|
22,284
|
21,190
|
19,004
|
|||||||
|
Operating
expenses:
|
||||||||||
|
Marketing
and selling
|
12,187
|
10,739
|
7,711
|
|||||||
|
General
and administrative
|
18,011
|
5,345
|
4,198
|
|||||||
|
Research
and product development
|
2,995
|
3,810
|
2,747
|
|||||||
|
Impairment
losses
|
26,001
|
7,115
|
-
|
|||||||
|
Gain
on sale of court conferencing assets
|
-
|
(250
|
)
|
-
|
||||||
|
Purchased
in-process research and development
|
-
|
-
|
728
|
|||||||
|
Total
operating expenses
|
59,194
|
26,759
|
15,384
|
|||||||
|
Operating
income (loss)
|
(36,910
|
)
|
(5,569
|
)
|
3,620
|
|||||
|
Other
income (expense), net:
|
||||||||||
|
Interest
income
|
85
|
293
|
334
|
|||||||
|
Interest
expense
|
(236
|
)
|
(179
|
)
|
(164
|
)
|
||||
|
Other,
net
|
55
|
18
|
18
|
|||||||
|
Total
other income (expense), net
|
(96
|
)
|
132
|
188
|
||||||
|
Income
(loss) from continuing operations before income taxes
|
(37,006
|
)
|
(5,437
|
)
|
3,808
|
|||||
|
Provision
(benefit) for income taxes
|
(834
|
)
|
1,400
|
1,050
|
||||||
|
Income
(loss) from continuing operations
|
(36,172
|
)
|
(6,837
|
)
|
2,758
|
|||||
|
Discontinued
operations:
|
||||||||||
|
Income
from discontinued operations, net of income taxes of $439 in
2001
|
-
|
-
|
737
|
|||||||
|
Gain
on disposal of discontinued operations, net of income taxes of $119,
$104
and $72, respectively
|
200
|
176
|
123
|
|||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
See
accompanying notes to consolidated financial
statements.
F-4
|
Years
ended June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Basic
earnings (loss) per common share from continuing
operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.32
|
||
|
Diluted
earnings (loss) per common share from continuing
operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.30
|
||
|
Basic
earnings per common share from discontinued operations
|
$
|
0.02
|
$
|
0.02
|
$
|
0.10
|
||||
|
Diluted
earnings per common share from discontinued operations
|
$
|
0.02
|
$
|
0.02
|
$
|
0.09
|
||||
|
Basic
earnings (loss) per common share
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
||
|
Diluted
earnings (loss) per common share
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
||
|
Comprehensive
Income (Loss):
|
||||||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
|
Foreign
currency translation adjustments
|
1,197
|
-
|
-
|
|||||||
|
Comprehensive
income (loss)
|
$
|
(34,775
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
See
accompanying notes to consolidated financial statements.
F-5
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
thousands, except share amounts)
|
Accumulated
|
Retained
|
|||||||||||||||||||||
|
Additional
|
Other
|
Earnings
|
Total
|
|||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Deferred
|
Comprehensive
|
(Accumulated
|
Stockholders'
|
|||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Income
|
Deficit)
|
Equity
|
||||||||||||||||
|
Balances
at June 30, 2000 (as previously reported)
|
8,427,145
|
$
|
9
|
$
|
6,697
|
$
|
-
|
$
|
-
|
$
|
8,047
|
$
|
14,753
|
|||||||||
|
Adjustments
to opening retained earnings (Note 3)
|
-
|
-
|
-
|
-
|
-
|
320
|
320
|
|||||||||||||||
|
Balances
at June 30, 2000 (restated)
|
8,427,145
|
9
|
6,697
|
-
|
-
|
8,367
|
15,073
|
|||||||||||||||
|
Exercises
of employee stock options
|
75,125
|
-
|
325
|
-
|
-
|
-
|
325
|
|||||||||||||||
|
Income
tax benefits from stock option exercises
|
-
|
-
|
116
|
-
|
-
|
-
|
116
|
|||||||||||||||
|
Issuances
of common stock under employee stock purchase plan
|
1,137
|
-
|
15
|
-
|
-
|
-
|
15
|
|||||||||||||||
|
Issuance
of common stock in a purchase of business
|
129,871
|
-
|
1,814
|
-
|
-
|
-
|
1,814
|
|||||||||||||||
|
Repurchase
and retirement of common stock
|
(20,300
|
)
|
-
|
(244
|
)
|
-
|
-
|
-
|
(244
|
)
|
||||||||||||
|
Deferred
compensation resulting from the modification of stock
options
|
-
|
-
|
133
|
(133
|
)
|
-
|
-
|
-
|
||||||||||||||
|
Amortization
of deferred compensation
|
-
|
-
|
-
|
11
|
-
|
-
|
11
|
|||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
3,618
|
3,618
|
|||||||||||||||
|
Balances
at June 30, 2001 (restated)
|
8,612,978
|
9
|
8,856
|
(122
|
)
|
-
|
11,985
|
20,728
|
||||||||||||||
|
Exercises
of employee stock options
|
195,999
|
-
|
1,020
|
-
|
-
|
-
|
1,020
|
|||||||||||||||
|
Income
tax benefits from stock option exercises
|
-
|
-
|
452
|
-
|
-
|
-
|
452
|
|||||||||||||||
|
Issuances
of common stock under employee stock purchase plan
|
724
|
-
|
13
|
-
|
-
|
-
|
13
|
|||||||||||||||
|
Issuance
of common stock and warrants for cash
|
1,500,000
|
1
|
23,834
|
-
|
-
|
-
|
23,835
|
|||||||||||||||
|
Issuance
of common stock and options in a purchase of business
|
868,691
|
1
|
14,426
|
-
|
-
|
-
|
14,427
|
|||||||||||||||
|
Deferred
compensation resulting from the modification of stock
options
|
-
|
-
|
103
|
(103
|
)
|
-
|
-
|
-
|
||||||||||||||
|
Amortization
of deferred compensation
|
-
|
-
|
-
|
78
|
-
|
-
|
78
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(6,661
|
)
|
(6,661
|
)
|
|||||||||||||
|
Balances
at June 30, 2002 (restated)
|
11,178,392
|
11
|
48,704
|
(147
|
)
|
-
|
5,324
|
53,892
|
||||||||||||||
|
Exercises
of employee stock options
|
31,500
|
-
|
86
|
-
|
-
|
-
|
86
|
|||||||||||||||
|
Issuances
of common stock under employee stock purchase plan
|
1,841
|
-
|
8
|
-
|
-
|
-
|
8
|
|||||||||||||||
|
Repurchase
and retirement of common stock
|
(125,000
|
)
|
-
|
(430
|
)
|
-
|
-
|
-
|
(430
|
)
|
||||||||||||
|
Remeasurement
of stock options
|
-
|
-
|
(110
|
)
|
110
|
-
|
-
|
-
|
||||||||||||||
|
Net
reversal of previously amortized deferred compensation
|
-
|
-
|
-
|
(38
|
)
|
-
|
-
|
(38
|
)
|
|||||||||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
1,197
|
-
|
1,197
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(35,972
|
)
|
(35,972
|
)
|
|||||||||||||
|
Balances
at June 30, 2003
|
11,086,733
|
$
|
11
|
$
|
48,258
|
$
|
(75
|
)
|
$
|
1,197
|
$
|
(30,648
|
)
|
$
|
18,743
|
|||||||
See
accompanying notes to consolidated financial statements.
F-6
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Years
ended June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
|
Results
of discontinued operations, net of income taxes
|
(200
|
)
|
(176
|
)
|
(860
|
)
|
||||
|
Income
from continuing operations
|
$
|
(36,172
|
)
|
$
|
(6,837
|
)
|
$
|
2,758
|
||
|
Adjustments
to reconcile net income (loss) to net cash provided by
operations:
|
||||||||||
|
Loss
on impairment of long-lived assets, goodwill and
intangibles
|
26,001
|
7,115
|
-
|
|||||||
|
Depreciation
and amortization expense
|
3,469
|
3,012
|
2,230
|
|||||||
|
Stock-based
compensation
|
(38
|
)
|
78
|
11
|
||||||
|
Gain
on sale of certain assets
|
-
|
(250
|
)
|
-
|
||||||
|
Write-off
of inventory
|
2,175
|
2,945
|
416
|
|||||||
|
Write-off
of in-process research and development
|
-
|
-
|
728
|
|||||||
|
Income
tax benefits from stock option exercises
|
-
|
452
|
116
|
|||||||
|
Loss
(gain) on disposal of assets and fixed assets write-offs
|
(2
|
)
|
(4
|
)
|
(23
|
)
|
||||
|
Provision
for doubtful accounts
|
312
|
43
|
76
|
|||||||
|
Changes
in operating assets and liabilities, net of effect of
acquisitions:
|
||||||||||
|
Accounts
receivable
|
268
|
46
|
2,361
|
|||||||
|
Inventories
|
1,516
|
(5,395
|
)
|
(3,127
|
)
|
|||||
|
Prepaid
expenses and other assets
|
67
|
168
|
59
|
|||||||
|
Accounts
payable
|
(1,126
|
)
|
946
|
(115
|
)
|
|||||
|
Accrued
liabilities
|
6,142
|
(457
|
)
|
(464
|
)
|
|||||
|
Income
taxes
|
(669
|
) |
(1,783
|
)
|
(650
|
)
|
||||
|
Deferred
revenue
|
553
|
(48
|
)
|
-
|
||||||
|
Net
change in other assets/liabilities
|
47
|
-
|
(19
|
)
|
||||||
|
Net
cash provided by operating activities
|
2,543
|
31
|
4,357
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Restricted
cash
|
(200
|
)
|
-
|
-
|
||||||
|
Purchase
of property and equipment
|
(1,823
|
)
|
(2,805
|
)
|
(1,429
|
)
|
||||
|
Proceeds
from the sale of equipment
|
4
|
11
|
-
|
|||||||
|
Proceeds
from the sale of certain assets
|
80
|
160
|
-
|
|||||||
|
Purchase
of marketable securities
|
(18,500
|
)
|
(30,600
|
)
|
-
|
|||||
|
Sale
of marketable securities
|
29,000
|
18,200
|
-
|
|||||||
|
Cash
paid for acquisitions, net of cash received
|
(7,444
|
)
|
(14,436
|
)
|
(1,856
|
)
|
||||
|
Net
cash provided by (used in) investing activities
|
1,117
|
(29,470
|
)
|
(3,285
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Borrowings
under note payable
|
1,998
|
-
|
-
|
|||||||
|
Principal
payments on capital lease obligation
|
(784
|
)
|
(713
|
)
|
(552
|
)
|
||||
|
Principal
payments on note payable
|
(414
|
)
|
-
|
-
|
||||||
|
Proceeds
from sales of common stock
|
95
|
24,869
|
340
|
|||||||
|
Purchase
and retirement of stock
|
(430
|
)
|
-
|
(244
|
)
|
|||||
|
Net
cash provided by financing activities
|
465
|
24,156
|
(456
|
)
|
||||||
|
Cash
provided by discontinued operations, net of income taxes
|
200
|
176
|
860
|
|||||||
|
Net
changes in cash and cash equivalents
|
4,325
|
(5,107
|
)
|
1,476
|
||||||
|
Effect
of foreign exchange rates on cash and cash equivalents
|
55
|
-
|
-
|
|||||||
|
Cash
and cash equivalents at the beginning of year
|
1,744
|
6,851
|
5,375
|
|||||||
|
Cash
and cash equivalents at the end of year
|
$
|
6,124
|
$
|
1,744
|
$
|
6,851
|
||||
See
accompanying notes to consolidated financial
statements.
F-7
|
Supplemental
disclosure of cash flow information:
|
||||||||||
|
Cash
paid for interest
|
$
|
211
|
$
|
170
|
$
|
162
|
||||
|
Cash
paid (received) for income taxes
|
(79
|
)
|
3,529
|
2,523
|
||||||
|
Tax
benefits from stock option exercises
|
-
|
452
|
116
|
|||||||
|
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||||
|
Equipment
acquired under capital lease
|
$
|
-
|
$
|
1,155
|
$
|
1,021
|
||||
|
Supplemental
disclosure of acquisition activity:
|
||||||||||
|
Fair
value of assets acquired
|
$
|
8,235
|
$
|
33,712
|
$
|
2,942
|
||||
|
IPR&D
acquired
|
-
|
-
|
728
|
|||||||
|
Liabilities
assumed
|
599
|
4,484
|
-
|
|||||||
|
Value
of common shares issued
|
-
|
14,427
|
1,814
|
|||||||
|
Cash
paid for acquisition
|
$
|
7,636
|
$
|
14,801
|
$
|
1,856
|
See
accompanying notes to consolidated financial statements.
F-8
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
1.
|
Organization
and Summary of Significant Accounting
Policies
|
Organization
ClearOne
Communications, Inc. and its subsidiaries (collectively, the Company) develop,
manufacture, market and service a comprehensive line of audio conferencing
products, which range from tabletop conferencing phones to professionally
installed audio systems. The Company’s solutions create a natural communication
environment, designed to save organizations time and money by enabling more
effective and efficient communication between geographically separated
businesses, employees and customers.
The
Company’s customers include some of the world’s largest and most prestigious
companies and institutions, government organizations, educational institutions,
and small and medium sized businesses. The Company sells its products to these
customers directly and through a distribution network of independent
distributors and dealers, including systems integrators and value-added
resellers.
The
Company has restated its consolidated financial statements as of June 30, 2002
and 2001, and for each of the years then ended, as discussed in more detail
in
Note 3. Certain adjustments impacting the Company’s Consolidated Financial
Statements for periods prior to 2001 were also identified, as the Company has
recorded the cumulative effect of adjustments of $320 for 2000 to retained
earnings as of June 30, 2000.
|
2.
|
Summary
of Significant Accounting
Policies
|
Consolidation
-
These consolidated financial statements include the financial statements of
ClearOne Communications, Inc. and its wholly-owned subsidiaries, E.mergent,
Inc., ClearOne Communications EuMEA GmbH, ClearOne Communications of Canada,
Inc., OM Video, ClearOne Communications Limited UK, and Gentner Communications
Ltd. - Ireland. All intercompany balances and transactions have been eliminated
in consolidation.
Use
of Estimates
-
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
these accompanying notes. Actual results could differ from those estimates.
Key
estimates in the accompanying consolidated financial statements include, among
others, allowances for doubtful accounts and product returns, provisions for
obsolete inventory, valuation of long-lived assets including goodwill, and
deferred income tax asset valuation allowances.
Cash
Equivalents
-
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. As of June 30, 2003,
2002,
and 2001, cash equivalents totaled $5,049, $1,174, and $6,611, respectively,
and
consisted primarily of money market funds.
F-9
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Restricted
Cash
-
The Company’s restricted cash relates to obligations from the acquisition of OM
Video. The funds were held until OM Video met certain requirements as outlined
in the purchase agreement. In February 2004, the restricted cash was paid to
OM
Video.
Marketable
Securities
-
The Company’s marketable securities are classified as available-for-sale
securities and are comprised of municipal government auction rate notes and
auction preferred stock that have original maturities of greater than one year.
Management determines the appropriate classifications of investments at the
time
of purchase and reevaluates such designation as of each balance sheet date.
Unrealized holding gains and losses, net of the related tax effect on
available-for-sale securities are excluded from earnings and are reported as
a
separate component of other comprehensive income until realized.
Available-for-sale securities are carried at fair value which approximated
cost.
The
Company considers highly liquid marketable securities with an effective maturity
to the Company of less than one year to be current assets. The Company defines
effective maturity as the shorter of the original maturity to the Company or
the
effective maturity as a result of periodic auction or optional redemption
features of certain of its investments. Such investments are expected to be
realized in cash or sold or consumed during the normal operating cycles of
the
business. As of June 30, 2003 and 2002, all marketable securities were
classified as current assets.
Marketable
securities as of June 30, 2003 and 2002 were as follows:
|
2003
|
2002
|
||||||
|
Municipal
government auction rate notes
|
$
|
1,900
|
$
|
8,400
|
|||
|
Auction
preferred stock
|
-
|
4,000
|
|||||
|
$
|
1,900
|
$
|
12,400
|
||||
The
Company regularly monitors and evaluates the value of its marketable securities.
When assessing marketable securities for other-than-temporary declines in value,
the Company considers such factors, among other things, as how significant
the
decline in value is as a percentage of the original cost, how long the market
value of the investment has been less than its original cost, the collateral
supporting the investments, insurance policies which protect the Company’s
investment position, the interval between auction periods, whether or not there
have been any failed auctions, and the credit rating issued for the securities
by one or more of the major credit rating agencies. A decline in the market
value of any available-for-sale security below cost that is deemed to be
other-than-temporary results in a reduction in carrying amount to fair value.
The impairment is charged to earnings and a new cost basis for the security
is
established.
For
each of the fiscal years ended June 30, 2003 and 2002 realized gains and losses
upon the sale of available-for-sale securities were insignificant. Unrealized
gains and losses on available-for-sale securities are insignificant for all
periods and accordingly have not been recorded as a component of other
comprehensive income. The specific identification method is used to compute
the
realized gains and losses.
Accounts
Receivable
-
Accounts receivable are recorded at the invoiced amount. Credit is granted
to
customers without requiring collateral. The allowance for doubtful accounts
is
the Company’s best estimate of the amount of probable credit losses in the
Company’s existing accounts receivable. Management regularly analyzes accounts
receivable including historical bad debts, customer concentrations, customer
creditworthiness and current economic trends when evaluating the adequacy of
the
allowance for doubtful accounts.
Inventories
-
Inventories are valued at the lower of cost or market computed on a first-in,
first-out (FIFO) basis. Inventoried costs include material, direct engineering
and production costs, and applicable overhead, not in excess of estimated
realizable value. Consigned inventory includes product that has been delivered
to customers for which revenue recognition criteria have not been met.
Consideration is given to obsolescence, excessive levels, deterioration and
other factors in evaluating net realizable value. During the fiscal years ended
June 30, 2003, 2002, and 2001, the Company recorded inventory write-offs of
$2,175, $2,945, and $416, respectively.
F-10
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Property
and Equipment
-
Property and equipment are stated at cost. Costs associated with internally
developed software are capitalized in accordance with Statement of Position
(SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. Depreciation and amortization are calculated over the
estimated useful lives of the respective assets using the straight-line method.
Estimated useful lives are generally two to ten years. Leasehold improvement
amortization is computed using the straight-line method over the shorter of
the
lease term or the estimated useful life of the related assets. Repairs and
maintenance costs are expensed as incurred.
Goodwill
-
The Company amortized goodwill related to the ClearOne, Inc. (ClearOne)
acquisition from the acquisition date through June 30, 2002. During each of
the
fiscal years ended June 30, 2002 and 2001 goodwill amortization was $297, and
was reported in general and administrative expense. In June 2001, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142
eliminates amortization of goodwill and intangible assets with indefinite lives
and instead sets forth methods to periodically evaluate goodwill for impairment.
The nonamortization and amortization provisions of SFAS No. 142 are effective
immediately for goodwill and intangible assets acquired after June 30, 2001.
The
Company adopted the amortization provisions of SFAS No. 142 with respect to
its
fiscal year 2002 acquisitions of Ivron Systems, Ltd. (Ivron) and E.mergent,
Inc.
(E.mergent) and its fiscal year 2003 acquisition of OM Video. With respect
to
goodwill and intangible assets acquired prior to July 1, 2001, the Company
adopted this statement effective July 1, 2002.
The
following unaudited pro forma results of operations data for the years ended
June 30, 2003, 2002, and 2001 are presented as if the provisions of SFAS No.
142
had been in effect for all period presented:
|
Years
Ended June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Reported
net income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
|
Goodwill
amortization, net of income tax
|
-
|
186
|
186
|
|||||||
|
Adjusted
net income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,475
|
)
|
$
|
3,804
|
||
|
Basic
earnings per share:
|
||||||||||
|
As
reported
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
||
|
Goodwill
amortization
|
-
|
0.02
|
0.02
|
|||||||
|
As
adjusted
|
$
|
(3.21
|
)
|
$
|
(0.67
|
)
|
$
|
0.44
|
||
|
Diluted
earnings per share:
|
||||||||||
|
As
reported
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
||
|
Goodwill
amortization
|
-
|
0.02
|
0.02
|
|||||||
|
As
adjusted
|
$
|
(3.21
|
)
|
$
|
(0.67
|
)
|
$
|
0.41
|
||
As
of July 1, 2002, the Company’s gross goodwill balance was $17,072 from the
E.mergent, Inc. acquisition on May 31, 2002. Upon adoption of SFAS No. 142,
there was no impairment of goodwill. As of July 1, 2002, the Company adopted
all
remaining provisions of SFAS No. 142, including the annual impairment evaluation
provisions, and established its annual review for impairment as June 30.
Although goodwill will be tested at least annually for impairment, it is tested
more frequently if events and circumstances indicate that the asset might be
impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset’s fair value. The impairment testing is performed at
the reporting unit level in two steps: (i) the Company determines the fair
value
of a reporting unit and compares it to its carrying amount, and (ii) if the
carrying amount of a reporting unit exceeds its fair value, an impairment loss
is recognized for any excess of the carrying amount of the reporting unit’s
goodwill over the implied fair value of that goodwill. The implied fair value
of
goodwill is determined by allocating the fair value of the reporting unit in
a
manner similar to a purchase price allocation in accordance with SFAS No. 141,
Business Combinations.
F-11
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Prior
to the adoption of SFAS No. 142, the Company evaluated impairment of goodwill
under the provisions of SFAS No. 121, “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of.”
Impairment
of Long-Lived Assets
-
Through June 30, 2002, the Company accounted for long-lived assets, including
intangible assets with definite lives, in accordance with SFAS No.
121.
As
of July 1, 2002, the Company adopted SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” whereby long-lived assets, such as
property, equipment and definite-lived intangibles subject to amortization,
are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Recoverability
of
assets to be held and used is measured by a comparison of the carrying amount
of
an asset or asset group to estimated future undiscounted net cash flows of
the
related asset or group of assets over their remaining lives. If the carrying
amount of an asset exceeds its estimated future undiscounted cash flows, an
impairment charge is recognized for the amount by which the carrying amount
exceeds the estimated fair value of the asset. Impairment of long-lived assets
is assessed at the lowest levels for which there are identifiable cash flows
that are independent of other groups of assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value, less the estimated
costs to sell.
Fair
Value of Financial Instruments
-
The carrying values of cash equivalents, accounts receivable, accounts payable,
and accrued liabilities all approximate fair value due to the short-term
maturities of these assets and liabilities. The carrying values of lines of
credit also approximate fair value because applicable interest rates either
fluctuate based on market conditions or approximate the Company’s borrowing
rate.
Foreign
Currency -
The functional currency for OM Video is the Canadian Dollar. The functional
currency for the Company’s other foreign subsidiaries is the U.S. Dollar. The
results of operations for the Company’s other subsidiaries are recorded by the
subsidiaries in Euro and British Pound and remeasured in the U.S. Dollar. Assets
and liabilities are translated or remeasured into U.S. dollars at the exchange
rate prevailing on the balance sheet date or the historical rate, as
appropriate. Revenue and expenses are translated or remeasured at average rates
of exchange prevailing during the period. Adjustments resulting from the
translation of OM Video amounts are recorded as accumulated other comprehensive
income in the accompanying consolidated balance sheets. The impact from
remeasurement of all other subsidiaries is recorded in the accompanying
consolidated statements of operations.
Revenue
Recognition
-
The Company has three sources of revenue: (i) product revenue, primarily from
product sales to distributors, dealers and end users; (ii) conferencing services
revenue, primarily from full-service conference calling and on-demand,
reservationless conference calling; and (iii) business services revenue which
include technical services such as designing, constructing and servicing of
conference systems and maintenance contracts.
Product
revenue is recognized when (i) the products are shipped, (ii) persuasive
evidence of an arrangement exists, (iii) the price is fixed and determinable,
and (iv) collection is reasonably assured. Beginning in 2001, the Company
modified its sales channels to include distributors. These distributors were
generally thinly capitalized with little or no financial resources and did
not
have the wherewithal to pay for these products when delivered by the Company.
Furthermore, in a substantial number of cases, significant amounts of
inventories were returned or never paid for and the payment for product sold
(to
both distributors and non-distributors) was regularly subject to a final
negotiation between the Company and its customers. As a result of such
negotiations, the Company routinely agreed to significant concessions from
the
originally invoiced amounts to facilitate collection. These practices continued
to exist through the end of fiscal year 2003.
Accordingly,
amounts charged to both distributors and non-distributors were not considered
fixed and determinable or reasonably collectible until cash was collected.
As a
result, the June 30, 2003, 2002, and 2001 balance sheets reflect no accounts
receivable or deferred revenue related to product sales.
Conferencing
services revenue is recognized at the time of customer usage, and is based
upon
minutes used.
F-12
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Business
services activities involve designing and constructing conference systems under
fixed-price contracts. Revenues from fixed-priced construction contracts are
recognized on the completed-contract method. This method is used because the
typical contract is completed in three months or less and financial position
and
results of operations do not vary significantly from those which would result
from use of the percentage-of-completion method. A contract is considered
complete when all costs except insignificant items have been incurred and the
installation is operating according to specification or has been accepted by
the
customer. Contract costs include all direct material and labor costs. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined.
Revenue
from maintenance contracts on conference systems is recognized on a
straight-line basis over the maintenance period pursuant to Financial Accounting
Standards Board Technical Bulletin No. 90-1, “Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts.”
The
Company offers rebates to certain of its distributors based upon volume of
product purchased by such distributors. The Company records rebates as a
reduction of revenue in accordance with Emerging Issues Task Force (EITF) Issue
No. 00-22, “Accounting for Points and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered
in the Future.” Beginning January 1, 2002, the Company adopted EITF Issue No.
01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products).” The Company continues to record rebates as
a reduction of revenue.
The
Company estimates future product returns based upon historical experience and
maintains an allowance for estimated returns which has been reflected as a
reduction to accounts receivable. The allowance for estimated returns was $107,
$0, and $0 as of June 30, 2003, 2002, and 2001, respectively.
Shipping
and Handling Costs - Shipping and handling billed to customers is recorded
as
revenue. Shipping and handling costs are included in cost of goods
sold.
Stock-Based
Compensation
-
The Company accounts for stock-based compensation issued to directors, officers,
and employees in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations. Under APB No. 25, compensation expense is recognized if an
option’s exercise price on the measurement date is below the fair market value
of the Company’s common stock. The compensation, if any, is amortized to expense
over the vesting period.
SFAS
No. 123, “Accounting for Stock-Based Compensation,” required pro forma
information regarding net income (loss) as if the Company had accounted for
its
stock options granted under fair value method prescribed by SFAS No. 123. The
fair value of the options and employee stock purchase rights is estimated using
the Black-Scholes option pricing model. For purposes of the pro forma
disclosures, the estimated fair value of the stock options is amortized over
the
vesting periods of the respective stock options. The following is the pro forma
disclosure and the related impact on the net income (loss) attributable to
common stockholders and net income (loss) per common share for the years ended
June 30, 2003, 2002, and 2001.
In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required
for
fiscal years ending after December 15, 2002.
F-13
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Net
income (loss):
|
||||||||||
|
As
reported
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
|
Stock-based
employee compensation expense included in reported net income (loss),
net
of income taxes
|
(24
|
)
|
49
|
7
|
||||||
|
Stock-based
employee compensation expense determined under the fair-value method
for
all awards, net of income taxes
|
(966
|
)
|
(1,003
|
)
|
(1,139
|
)
|
||||
|
Pro
forma
|
$
|
(36,962
|
)
|
$
|
(7,615
|
)
|
$
|
2,486
|
||
|
Basic
earnings (loss) per common share:
|
||||||||||
|
As
reported
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
||
|
Pro
forma
|
(3.31
|
)
|
(0.79
|
)
|
0.29
|
|||||
|
Diluted
earnings (loss) per common share:
|
||||||||||
|
As
reported
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
||
|
Pro
forma
|
(3.31
|
)
|
(0.79
|
)
|
0.27
|
|||||
Research
and Product Development Costs
-
The Company expenses research and product development costs as incurred.
Advertising
-
The Company expenses advertising costs as incurred. Advertising expenses consist
of trade shows and magazine advertisements. Advertising expenses for the fiscal
years ended June 30, 2003, 2002, and 2001 totaled $361, $693, and $358,
respectively.
Income
Taxes
-
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and
their respective tax bases, and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date. A valuation allowance is provided
when
it is more likely than not that some or all of the deferred tax assets may
not
be realized.
Issued
but not yet Adopted Accounting Pronouncements -
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of
Variable Interest Entities.” This interpretation establishes new guidelines for
consolidating entities in which a parent company may not have majority voting
control, but bears residual economic risks or is entitled to receive a majority
of the entity’s residual returns, or both. As a result, certain subsidiaries
that were previously not consolidated under the provisions of Accounting
Research Bulletin No. 51 may now require consolidation with the parent company.
This interpretation applies in the first year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company has
evaluated this interpretation but does not expect that it will have a material
effect on its business, results of operations, financial position, or liquidity.
In
May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150).
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
It
requires that an issuer classify a financial instrument that is within its
scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15,
2003. The Company has evaluated this statement but does not expect that it
will
have a material effect on its business, results of operations, financial
position, or liquidity.
F-14
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
In
December 2003, the FASB issued a revision to Interpretation No. 46,
“Consolidation of Variable Interest Entities” (FIN46R). FIN46R clarifies the
application of ARB No. 51, “Consolidated Financial Statements” to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the
entity to finance its activities without additional subordinated financial
support. FIN46R requires the consolidation of these entities, known as variable
interest entities, by the primary beneficiary of the entity. The primary
beneficiary is the entity, if any, that will absorb a majority of the entity's
expected losses, receive a majority of the entity's expected residual returns,
or both.
Among
other changes, the revisions of FIN46R (a) clarified some requirements of
the original FIN46, which had been issued in January 2003, (b) eased
some implementation problems, and (c) added new scope exceptions. FIN46R
deferred the effective date of the Interpretation for public companies, to
the
end of the first reporting period ending after March 15, 2004. The adoption
of this interpretation did not have a material effect on the Company’s business,
results of operations, financial position, or liquidity.
In
March 2004, the FASB issued EITF No. 03-01, “The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments,” which provides new
guidance for assessing impairment losses on debt and equity investments. The
new
impairment model applies to investments accounted for under the cost or equity
method and investments accounted for under FAS 115, “Accounting for Certain
Investments in Debt and Equity Securities.” EITF No. 03-01 also includes new
disclosure requirements for cost method investments and for all investments
that
are in an unrealized loss position. In September 2004, the FASB delayed the
accounting provisions of EITF No. 03-01; however the disclosure requirements
remain effective. The Company will evaluate the effect, if any, of adopting
EITF
03-01.
In
November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs—an
amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to
converge U.S. accounting standards for inventories with International Accounting
Standards. FAS No. 151 requires idle facility expenses, freight, handling costs,
and wasted material (spoilage) costs to be recognized as current-period charges.
It also requires that allocation of fixed production overheads to the costs
of
conversion be based on the normal capacity of the production facilities. FAS
No.
151 will be effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company does not anticipate that the implementation
of
this standard will have a significant impact on its consolidated results of
operations, financial condition or cash flows.
In
December 2004, FASB issued Financial Accounting Standard No. 123R
(“SFAS 123R”), “Share-Based Payment.” SFAS 123R is a revision of SFAS 123. SFAS
123R establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. Primarily, SFAS
123R focuses on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. It also addresses transactions
in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity’s equity instruments or that may be
settled by the issuance of those equity instruments.
SFAS
123R requires the Company to measure the cost of employee services received
in
exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). That cost will be recognized over the
period during which an employee is required to provide service in exchange
for
the award—the requisite service period (usually the vesting period). No
compensation cost is recognized for equity instruments for which employees
do
not render the requisite service. Therefore, if an employee does not ultimately
render the requisite service, the costs recognized related to unvested options
will be reversed.
In
accordance with Staff Accounting Bulletin 107, SFAS 123R is effective as of
the
beginning of the annual reporting period that begins after June 15, 2005.
Under these guidelines, the Company will adopt SFAS 123R as of the beginning
of
the first quarter of fiscal year 2006 starting July 1, 2005. The Company expects
this statement to have an adverse impact on its future results of
operations.
F-15
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
3.
|
Restatement
and Reclassifications of Previously Issued Financial
Statements
|
The
Company’s previously issued consolidated balance sheets, consolidated statements
of operations and comprehensive income (loss), consolidated statements of
stockholders’ equity and cash flows for the years ended June 30, 2002 and 2001
have been restated to correct for certain accounting errors.
Summary
of restatement items
Errors
in previously issued financial statements were identified in the following
areas:
Revenue
Recognition and Related Sales Returns, Credit Memos, and Allowances.
The
Company recognized revenue before the amounts charged to both distributors
and
non-distributors were considered fixed and determinable or reasonably
collectible. Accordingly, revenue was inappropriately accelerated.
Beginning
in 2001 and through 2002, the Company modified its sales channels to include
distributors. These distributors were generally thinly capitalized with little
or no financial resources and did not have the wherewithal to pay for these
products when delivered by the Company. Furthermore, in a substantial number
of
cases, significant amounts of inventories were returned or never paid for and
the payment for product sold (to both distributors and non-distributors) was
regularly subject to final negotiation between the Company and its customers.
As
a result of such negotiations, the Company routinely agreed to significant
concessions from the originally invoiced amounts to facilitate collection.
Accordingly, amounts charged to both distributors and non-distributors were
not
considered fixed and determinable or reasonably collectible until cash was
collected. Accordingly, product revenues to distributors and non-distributors
were restated for the years ending June 30, 2002 and 2001.
Related
sales returns and allowances, rebates, and accounts receivables were revised
appropriately given the revenue adjustments.
Cutoff
and Period-End Close Adjustments Related to Accrued Liabilities and Prepaid
Assets. The
Company recorded accruals and amortized certain prepaid assets to operating
expenses during the fiscal years ended June 30, 2002 and 2001 in the improper
periods. Accordingly, adjustments to accrued liabilities, prepaid assets, and
operating expenses were recorded for the years ending June 30, 2002 and
2001.
Tracking
and Valuation of Inventory, Including Controls to Identify and Properly Account
for Obsolete Inventory. As
part of the restatement process, the Company discovered that it made errors
in
the recording and presentation of inventories, including consigned inventory,
obsolete and slow-moving inventories, errors in the capitalization of overhead
expenses, errors in recording inventories at the lower of cost or market, and
errors for inventory shrinkage. As a result, the Company made adjustments to
reflect consigned inventory, to properly capitalize overhead expenses, physical
inventory adjustments, adjustments to lower of cost or market, and adjustments
to reserves for excess, obsolete and slow-moving inventory. Accordingly,
inventories and cost of goods sold were restated to properly account for these
errors.
Accounting
for Leases, Including Classification as Operating or Capital. In
evaluating the classification of leases, the Company did not consider all
periods for which failure to renew the lease imposes a penalty on the lessee
in
such amount that a renewal appears, at the inception of the leases, to be
reasonably assured. Accordingly, certain leases were classified as operating
leases that should have been classified as capital leases. The effect of
properly recording the capital leases on the Company’s previously reported
financial statements is to record additional capital lease obligations, property
and equipment, and depreciation expense and reduce rental expense for fiscal
periods ending June 30, 2002 and 2001.
The
Company did not consider escalating rent payments and rent holidays for certain
operating leases. Accordingly, rent expense was inappropriately understated.
The
effect of straight-lining rent payments on the Company’s previously reported
financial statements is to record an accrued liability for future rent payments
and record additional rent expense.
F-16
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Classification
of Cash and Marketable Securities.
In previously issued consolidated financial statements, the Company classified
municipal government auction rate notes and auction rate preferred stocks as
cash instead of marketable securities. Accordingly, reclassifications were
made
to the 2002 cash balances to properly classify those as marketable securities
instead of cash.
Accounting
for Acquisitions. During
the restatement process, the Company determined that the valuations and purchase
price allocations in connection with its acquisitions of ClearOne, Ivron, and
E.mergent were not performed properly. The Company engaged independent
third-party valuation specialists to provide valuations and purchase price
allocations on these acquisitions. The Company re-examined the purchase price
allocations and adjusted for items that should have been recorded
previously.
|
·
|
In
the Company’s previously issued consolidated financial statements, the
Company valued the 129,871 shares of common stock issued in conjunction
with the acquisition of ClearOne at $15.40 per share. The Company
determined that the shares should have been valued at $13.97 per
share
based on the market prices a few days before and after the measurement
date.
|
|
·
|
The
Company recorded adjustments to the amounts allocated to certain
acquired
intangible assets, including developed technologies, patents and
trademarks, and distribution agreements. The Company also recorded
adjustments to the amounts allocated to in-process research and
development related to the ClearOne
acquisition.
|
|
·
|
The
Company recorded adjustments to the amounts allocated to certain
acquired
tangible assets and assumed liabilities, including cash, accounts
receivable, inventory, property and equipment, deferred tax assets,
and
deferred tax liabilities.
|
|
·
|
The
adjustments to purchase price, as well as the adjustments to the
amounts
allocated to acquired intangible assets, acquired tangible assets,
and
assumed liabilities, resulted in corresponding adjustments to the
amount
allocated to goodwill.
|
Accounting
for Equity and Other Significant Non-Routine Transactions.
|
·
|
During
the year ended June 30, 2001, the Company sold its remote control
product
line to Burk Technology. In previously issued consolidated financial
statements, the Company recognized a gain on the sale of its remote
control product line that included a significant note receivable
from the
buyer at the time of the sale, and recognized interest income associated
with the note receivable in periods subsequent to the sale. Based
on an
analysis of the facts and circumstances that existed at the date
of the
sale, the recognition of this gain was inappropriate as the buyer
did not
have the wherewithal to pay this note receivable, the operations
of the
remote control product line had not historically generated cash flows
sufficient to fund the required payments, and there were contingent
liabilities the Company had to the buyer. Accordingly, the Company
concluded that the gain should be recognized as cash is received
from the
buyer. As a result, the Company has reduced the gain on sale and
eliminated the note receivable at the time of the sale, and recognized
additional gain on the sale of the product line when-and-as cash
payments
on the note receivable are
obtained.
|
|
·
|
During
the year ended June 30, 2002, the Company experienced certain triggering
events that indicated that certain long-lived assets related to ClearOne
and Ivron were impaired. Accordingly, the Company performed an impairment
analysis in accordance with the provisions of SFAS No. 121. As a
result of
this analysis, the Company determined that goodwill, intangible assets,
and certain property and equipment related to the ClearOne and Ivron
acquisitions were fully impaired as of June 30, 2002. As a result,
the
Company recognized an impairment loss equal to the carrying value
of these
assets. In previously issued consolidated financial statements, the
Company failed to recognize that a triggering event had occurred
and did
not record an impairment loss for these assets.
|
|
·
|
During
the year ended June 30, 2001, the terms of certain outstanding stock
options were modified to allow for their acceleration in the event
the
Company met certain EPS targets. During the year ended June 30, 2001
the
Company cancelled certain outstanding stock options and issued a
replacement award with a lower exercise price, resulting in variable
accounting. In previously issued consolidated financial statements,
the
Company did not record compensation expense in connection with these
modifications in accordance with APB No. 25 and FASB Interpretation
Number
44, “Accounting for Certain Transactions involving Stock Compensation” (an
interpretation of APB No. 25).
|
F-17
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
·
|
On
June 29, 2001, the Company repurchased 5,000 shares of its previously
issued and outstanding common shares. In previously issued consolidated
financial statements, the Company did not record the effects of this
transaction until fiscal year 2002.
|
Accounting
for Income Taxes.
During the fiscal periods ending June 30, 2002 and 2001, the Company’s income
before income taxes was restated to correct for certain accounting errors,
resulting in less pre tax book income and correspondingly less income tax
expense. In conjunction with the restatement, the Company evaluated the
realizability of deferred tax assets. In 2002, the Company recorded an increased
domestic valuation allowance to reflect its determination that not all of its
deferred tax assets were more likely than not realizable pursuant to the
provisions of SFAS 109, “Accounting for Income Taxes”.
F-18
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Restated
Financial Statements
Impact
on Consolidated Statements of Operations
|
As
of June 30, 2002
|
As
of June 30, 2001
|
||||||||||||
|
As
Previously Reported
|
Restated
|
As
Previously Reported
|
Restated
|
||||||||||
|
Revenue:
|
|||||||||||||
|
Product
|
$
|
37,215
|
$
|
26,253
|
$
|
28,190
|
$
|
22,448
|
|||||
|
Conferencing
services
|
17,328
|
15,583
|
11,689
|
11,689
|
|||||||||
|
Business
services
|
-
|
1,526
|
-
|
-
|
|||||||||
|
Total
revenue
|
54,543
|
43,362
|
39,879
|
34,137
|
|||||||||
|
Cost
of goods sold:
|
|||||||||||||
|
Product
|
15,057
|
10,939
|
10,634
|
8,789
|
|||||||||
|
Product
inventory write-offs
|
-
|
2,945
|
-
|
416
|
|||||||||
|
Conferencing
services
|
7,943
|
7,310
|
5,869
|
5,928
|
|||||||||
|
Business
services
|
-
|
978
|
-
|
-
|
|||||||||
|
Total
cost of goods sold
|
23,000
|
22,172
|
16,503
|
15,133
|
|||||||||
|
Gross
profit
|
31,543
|
21,190
|
23,376
|
19,004
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Marketing
and selling
|
10,705
|
10,739
|
7,753
|
7,711
|
|||||||||
|
General
and administrative
|
6,051
|
5,345
|
4,649
|
4,198
|
|||||||||
|
Research
and product development
|
4,053
|
3,810
|
2,502
|
2,747
|
|||||||||
|
Impairment
losses
|
-
|
7,115
|
-
|
-
|
|||||||||
|
Gain
on sale of court conferencing assets
|
-
|
(250
|
)
|
-
|
-
|
||||||||
|
Purchased
in-process research and development
|
-
|
-
|
-
|
728
|
|||||||||
|
Total
operating expenses
|
20,809
|
26,759
|
14,904
|
15,384
|
|||||||||
|
Operating
income (loss)
|
10,734
|
(5,569
|
)
|
8,472
|
3,620
|
||||||||
|
Other
income, net
|
509
|
132
|
373
|
188
|
|||||||||
|
Income
(loss) from continuing operations before income taxes
|
11,243
|
(5,437
|
)
|
8,845
|
3,808
|
||||||||
|
Provision
for income taxes
|
3,831
|
1,400
|
3,319
|
1,050
|
|||||||||
|
Income
(loss) from continuing operations
|
7,412
|
(6,837
|
)
|
5,526
|
2,758
|
||||||||
|
Discontinued
operations:
|
|||||||||||||
|
Income
from discontinued operations, net of income taxes
|
-
|
-
|
737
|
737
|
|||||||||
|
Gain
on disposal of a component of our business, net of income
taxes
|
-
|
176
|
1,220
|
123
|
|||||||||
|
Net
income (loss)
|
$
|
7,412
|
$
|
(6,661
|
)
|
$
|
7,483
|
$
|
3,618
|
||||
|
Basic
earnings (loss) per common share from continuing
operations
|
$
|
0.77
|
$
|
(0.71
|
)
|
$
|
0.64
|
$
|
0.32
|
||||
|
Diluted
earnings (loss) per common share from continuing
operations
|
$
|
0.74
|
$
|
(0.71
|
)
|
$
|
0.61
|
$
|
0.30
|
||||
|
Basic
earnings per common share from discontinued operations
|
$
|
-
|
$
|
0.02
|
$
|
0.23
|
$
|
0.10
|
|||||
|
Diluted
earnings per common share from discontinued operations
|
$
|
-
|
$
|
0.02
|
$
|
0.22
|
$
|
0.09
|
|||||
|
Basic
earnings (loss) per common share
|
$
|
0.77
|
$
|
(0.69
|
)
|
$
|
0.87
|
$
|
0.42
|
||||
|
Diluted
earnings (loss) per common share
|
$
|
0.74
|
$
|
(0.69
|
)
|
$
|
0.83
|
$
|
0.39
|
||||
F-19
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Impact
on Consolidated Balance Sheets
|
As
of June 30, 2002
|
As
of June 30, 2001
|
||||||||||||
|
As
Previously Reported
|
As
Restated
|
As
Previously Reported
|
As
Restated
|
||||||||||
|
ASSETS
|
|||||||||||||
|
Current
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
14,248
|
$
|
1,744
|
$
|
6,852
|
$
|
6,851
|
|||||
|
Marketable
securities
|
-
|
12,400
|
-
|
-
|
|||||||||
|
Accounts
receivable, net
|
20,317
|
4,322
|
7,213
|
2,027
|
|||||||||
|
Inventories
|
8,606
|
12,516
|
4,132
|
6,459
|
|||||||||
|
Note
receivable, current portion
|
196
|
-
|
71
|
-
|
|||||||||
|
Deferred
income tax assets
|
1,293
|
4,709
|
248
|
1,587
|
|||||||||
|
Prepaid
expenses and other
|
610
|
621
|
780
|
680
|
|||||||||
|
Total
current assets
|
45,270
|
36,312
|
19,296
|
17,604
|
|||||||||
|
Property
and equipment, net
|
5,770
|
8,123
|
3,697
|
5,681
|
|||||||||
|
Goodwill,
net
|
20,553
|
17,072
|
2,634
|
890
|
|||||||||
|
Intangibles,
net
|
6,991
|
1,634
|
182
|
616
|
|||||||||
|
Deferred
income tax assets
|
-
|
661
|
-
|
446
|
|||||||||
|
Note
Receivable, net of current portion
|
1,490
|
-
|
1,716
|
||||||||||
|
Other
assets
|
73
|
74
|
73
|
74
|
|||||||||
|
Total
assets
|
$
|
80,147
|
$
|
63,876
|
$
|
27,598
|
$
|
25,311
|
|||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||||||||
|
Current
liabilities:
|
|||||||||||||
|
Line
of credit
|
$
|
196
|
$
|
196
|
$
|
-
|
|||||||
|
Capital
lease obligations
|
60
|
784
|
182
|
619
|
|||||||||
|
Accounts
payable
|
3,053
|
3,056
|
568
|
652
|
|||||||||
|
Accrued
liabilities
|
2,299
|
2,841
|
1,130
|
1,408
|
|||||||||
|
Deferred
revenue
|
607
|
572
|
-
|
-
|
|||||||||
|
Income
taxes payable
|
820
|
265
|
422
|
224
|
|||||||||
|
Total
current liabilities
|
7,035
|
7,714
|
2,302
|
2,903
|
|||||||||
|
Capital
lease obligations, net of current portion
|
41
|
2,016
|
48
|
1,680
|
|||||||||
|
Deferred
revenue, net of current portion
|
277
|
254
|
-
|
-
|
|||||||||
|
Deferred
income tax liabilities
|
1,458
|
-
|
746
|
-
|
|||||||||
|
Total
liabilities
|
8,811
|
9,984
|
3,096
|
4,583
|
|||||||||
|
Commitments
and contingencies
|
|||||||||||||
|
Stockholders'
equity:
|
|||||||||||||
|
Common
stock
|
11
|
11
|
9
|
9
|
|||||||||
|
Additional
paid-in capital
|
48,384
|
48,704
|
8,963
|
8,856
|
|||||||||
|
Deferred
compensation
|
-
|
(147
|
)
|
-
|
(122
|
)
|
|||||||
|
Retained
earnings
|
22,941
|
5,324
|
15,530
|
11,985
|
|||||||||
|
Total
stockholders' equity
|
71,336
|
53,892
|
24,502
|
20,728
|
|||||||||
|
Total
liabilities and stockholders' equity
|
$
|
80,147
|
$
|
63,876
|
$
|
27,598
|
$
|
25,311
|
|||||
Impact
on Stockholders’ Equity
The
restatement adjustments resulted in a cumulative net reduction to stockholders’
equity of $17,444 and $3,774 as of June 30, 2002 and 2001, respectively. The
Company has also restated the June 30, 2000 retained earnings balance to reflect
cumulative adjustments through that date of $320.
F-20
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Impact
on Cash Flows
The
following table presents selected consolidated statements of cash flows
information showing previously reported and restated cash flows, for the years
ended June 30, 2002 and 2001:
|
Years
ended June 30,
|
Years
ended June 30,
|
||||||||||||
|
2002
|
2001
|
||||||||||||
|
As
previously reported
|
As
restated
|
As
previously reported
|
As
restated
|
||||||||||
|
Net
cash from (used in) operating activities
|
$
|
105
|
$
|
31
|
$
|
3,708
|
$
|
4,357
|
|||||
|
Net
cash (used in) investing activities
|
(17,044
|
)
|
(29,470
|
)
|
(3,114
|
)
|
(3,285
|
)
|
|||||
|
Net
cash from (used in) financing activities
|
24,335
|
24,156
|
(104
|
)
|
(456
|
)
|
|||||||
|
4.
|
Inventories
|
Inventories,
net of reserves, consist of the following as of June 30, 2003, 2002 and 2001:
|
June
30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Raw
materials
|
$
|
3,881
|
$
|
2,159
|
$
|
2,655
|
||||
|
Finished
goods
|
3,343
|
2,977
|
1,414
|
|||||||
|
Consigned
inventory
|
1,742
|
7,380
|
2,390
|
|||||||
|
Total
inventory
|
$
|
8,966
|
$
|
12,516
|
$
|
6,459
|
||||
Consigned
inventory represents inventory at distributors and other customers where revenue
recognition criteria have not been achieved.
|
5.
|
Costs
and Estimated Earnings on Uncompleted
Contracts
|
Information
with respect to uncompleted contracts is as follows as of June 30,
2003:
|
2003
|
||||
|
Costs
incurred on uncompleted contracts
|
$
|
416
|
||
|
Less
billings on uncompleted contracts
|
(1,031
|
)
|
||
|
$
|
(615
|
)
|
||
The
above amounts are reported in the consolidated balance sheet in billings in
excess of costs on uncompleted contracts.
|
6.
|
Property
and Equipment
|
Major
classifications of property and equipment and estimated useful lives are as
follows as of June 30, 2003, 2002 and 2001:
F-21
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
Estimated
|
June
30,
|
||||||||||||
|
useful
lives
|
2003
|
2002
|
2001
|
||||||||||
|
(Restated)
|
(Restated)
|
||||||||||||
|
Office
furniture and equipment
|
3
to 10 years
|
$
|
7,309
|
$
|
7,381
|
$
|
4,904
|
||||||
|
Manufacturing
and test equipment
|
2
to 10 years
|
3,276
|
2,622
|
2,305
|
|||||||||
|
Telephone
bridging equipment
|
5
to 7 years
|
4,693
|
4,545
|
3,212
|
|||||||||
|
Vehicles
|
3
to 5 years
|
9
|
9
|
-
|
|||||||||
|
15,287
|
14,557
|
10,421
|
|||||||||||
|
Accumulated
depreciation and amortization
|
(8,519
|
)
|
(6,434
|
)
|
(4,740
|
)
|
|||||||
|
Net
property and equipment
|
$
|
6,768
|
$
|
8,123
|
$
|
5,681
|
|||||||
During
2003, the Company recorded impairment losses of $270 and $265 related to
property and equipment associated with the E.mergent and the OM Video asset
groupings, respectively. During 2002, the Company recorded impairment losses
of
$72 related to property and equipment associated with the Ivron asset
grouping.
|
7.
|
Acquisitions
|
During
the fiscal year ended June 30, 2001, the Company completed the acquisition
of
ClearOne, a developer of video conferencing technology and audio conferencing
products. During the fiscal year ended June 30, 2002, the Company completed
the
acquisitions of Ivron, a developer of videoconferencing technology and product,
and E.mergent, a developer and manufacturer of document cameras, a manufacturer
of conferencing furniture and an integration services business. During the
fiscal year ended June 30, 2003, the Company completed the acquisition of
Stechyson Electronics Ltd., doing business as OM Video, an integration business
services company. The total consideration for each acquisition was based on
negotiations between the Company and the acquired company’s shareholders that
took into account a number of factors of the business, including historical
revenues, operating history, products, intellectual property and other factors.
Each acquisition was accounted for under the purchase method of accounting.
The
operations of each acquisition are included in the accompanying statements
of
operations for the period since the date of each acquisition.
Accounting
for the acquisition of a business requires an allocation of the purchase price
to the assets acquired and the liabilities assumed in the transaction at their
respective estimated fair values. The Company use information available at
the
date of the acquisitions to estimate the individual fair values of properties,
equipment, identifiable intangible assets and liabilities to make these fair
value determinations and, for significant business acquisitions, engaged
third-party valuation firms to assist in the fair value determinations of the
acquired net assets. The following summarizes the consideration and purchase
price allocations of each acquisition:
|
ClearOne
|
Ivron
|
E.mergent
|
OM
Video
|
||||||||||
|
(Restated)
|
(Restated)
|
(Restated)
|
|||||||||||
|
Cash
|
$
|
1,758
|
$
|
6,650
|
$
|
7,300
|
$
|
6,276
|
|||||
|
Holdback
account
|
-
|
-
|
-
|
600
|
|||||||||
|
Common
stock and fully-vested options
|
1,814
|
-
|
14,427
|
-
|
|||||||||
|
Direct
acquisition costs
|
98
|
248
|
603
|
110
|
|||||||||
|
Total
consideration
|
$
|
3,670
|
$
|
6,898
|
$
|
22,330
|
$
|
6,986
|
|||||
|
Net
tangible assets acquired
|
$
|
831
|
$
|
310
|
$
|
3,591
|
$
|
337
|
|||||
|
Intangible
assets:
|
|||||||||||||
|
In-process
research and development
|
728
|
-
|
-
|
-
|
|||||||||
|
Developed
technologies
|
680
|
5,260
|
-
|
-
|
|||||||||
|
Patents
and trademarks
|
207
|
1,110
|
1,060
|
-
|
|||||||||
|
Customer
relationships
|
37
|
-
|
392
|
-
|
|||||||||
|
Non-compete
agreements
|
-
|
-
|
215
|
574
|
|||||||||
|
Goodwill
|
1,187
|
218
|
17,072
|
6,075
|
|||||||||
|
Total
purchase price allocation
|
$
|
3,670
|
$
|
6,898
|
$
|
22,330
|
$
|
6,986
|
|||||
F-22
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
ClearOne,
Inc.
In
May 2000, the Company entered into an agreement to purchase substantially all
of
the assets of ClearOne, Inc. for $3,572 consisting of $1,758 of cash and 129,871
shares of restricted common stock valued at $13.97 per share. The acquisition
was consummated on July 5, 2000.
As
of the acquisition date, the Company acquired tangible assets consisting of
property and equipment of $473, deposits of $59 and inventory of
$299.
In
conjunction with a third-party valuation firm, the Company determined the useful
lives and amounts of the developed technologies, trademarks and distribution
agreements. The developed technologies, trademarks and distribution agreement
had estimated useful lives of three years. Goodwill was being amortized on
a
straight-line basis over four years until the adoption of SFAS No. 142 on July
1, 2002.
The
Company charged $728 to expense representing acquired in-process research and
development that had not yet reached technological feasibility. The Company
anticipated the technology would require an additional 18 to 20 months of
development at a minimum cost of $1,150. The technology had no alternative
future use. After the acquisition, the Company initially continued to develop
the technology; however, it experienced significant difficulties in completing
the development of the videoconferencing technologies and subsequently
determined that the technology was not viable and never brought the in-process
videoconferencing technology to market.
The
Company continued to sell the acquired teleconferencing product until the fourth
quarter of the fiscal year ended June 30, 2002. Due to declining sales, negative
margins beginning in the fourth quarter of the fiscal year ended June 30, 2002,
and management’s decision to stop investing in the acquired teleconferencing
product, the Company determined that a triggering event had occurred in the
fourth quarter of the fiscal year ended June 30, 2002. The Company performed
an
impairment test and determined that an impairment loss on the ClearOne assets
should be recognized (see Note 9 below).
Ivron
Systems, Ltd.
On
October 3, 2001, the Company purchased all of the issued and outstanding shares
of Ivron. Ivron was located in Dublin, Ireland. Under the terms of the original
agreement, the shareholders of Ivron received $6,000 of cash at closing of
the
purchase. As part of the purchase, all outstanding options to purchase Ivron
shares were cancelled in consideration for an aggregate cash payment of $650.
Further, under that agreement, after June 30, 2002, each former Ivron
shareholder would be entitled to receive approximately .08 shares of the
Company’s common stock for each Ivron share previously held by such shareholder,
provided that certain video product development contingencies were achieved.
This represented approximately 429,000 shares of common stock. Thereafter,
for
the fiscal years ending June 30, 2003 and 2004, the former Ivron shareholders
would be entitled to share in up to approximately $17,000 of additional cash
and
stock consideration provided that certain agreed upon earnings per share targets
for the Company were achieved. In addition, former optionees of Ivron who
remained with the Company were eligible to participate in a cash bonus program
paid by the Company, based on the combined performance of the Company and Ivron
in the fiscal years ending June 30, 2003 and 2004. The maximum amount payable
under this cash bonus program was approximately $1,000.
As
of the acquisition date, the Company acquired tangible assets consisting of
cash
of $297, accounts receivable of $92, inventory of $337, and property and
equipment of $22. The Company assumed liabilities consisting of trade accounts
payable of $174 and accrued compensation and other accrued liabilities of $264.
On
March 26, 2002, the Company entered into negotiations with the former
shareholders of Ivron to modify the terms of the original purchase agreement
because, upon further analysis, certain aspects of the acquired technology
did
not meet the intended product objectives established by the Company in its
original purchase negotiations.
The
amendment, which was finalized on April 8, 2002, revised the contingent
consideration that the Ivron shareholders would have been entitled to receive
in
subsequent years such that upon meeting certain gross profit targets for the
“V-There” and “Vu-Link” set-top videoconferencing products, technologies, and
sub-elements thereof (including licensed products), the former Ivron
shareholders had the opportunity to receive up to 109,000 shares of common
stock, issuable in four installments, on a quarterly basis, through July 15,
2003. No performance targets were met and accordingly, no contingent
consideration was or will be paid.
F-23
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
With
the assistance of a third-party valuation firm and after considering the facts
and circumstances surrounding the Company’s intentions, the Company determined
the useful lives and amounts of the developed technologies and patents. The
developed technologies had estimated useful lives of three to fifteen years
and
the patents had an estimated useful life of fifteen years.
After
the acquisition, the Company experienced significant difficulties in selling
the
acquired videoconferencing products. Due to the phasing out of a product line
occasioned by technological difficulties and negative projected cash flows,
the
Company determined that a triggering event had occurred during the fourth
quarter of the fiscal year ended June 30, 2002. The Company performed an
impairment test and determined that an impairment loss on the Ivron assets
should be recognized. Subsequent to June 30, 2003, the Company discontinued
selling the “V-There” and “Vu-Link” set-top videoconferencing products.
E.mergent,
Inc.
On
May 31, 2002, the Company completed its acquisition of E.mergent pursuant to
the
terms of an Agreement and Plan of Merger dated January 21, 2002 where by the
Company paid $7,300 of cash and issued 868,691 shares of common stock valued
at
$16.55 per share to former E.mergent stockholders.
In
addition to the shares of the Company’s common stock issued, the Company assumed
all options to purchase E.mergent common stock that were vested and outstanding
on the acquisition date. These options were converted into rights to acquire
a
total of 4,158 shares of the Company’s common stock at a weighted average
exercise price of $8.48 per share. A
value of approximately $49 was assigned to these options using the Black-Scholes
option pricing model with the following assumptions: expected dividend yield
of
0%, risk free interest rate of 2.9%, expected volatility of 81.8% and an
expected life of two years.
As
of the acquisition date, the Company acquired tangible assets consisting of
cash
of $68, accounts receivable of $2,201, inventory of $3,270, property and
equipment of $475 and other assets of $1,341. The Company assumed liabilities
consisting of accounts payable of $1,284, line of credit borrowings of $484,
unearned maintenance revenue of $873, accrued compensation (other than
severance) and other accrued liabilities of $656. The Company incurred severance
costs of approximately $468 related to the termination of four E.mergent
executives and seven other E.mergent employees as a result of duplication of
positions upon consummation of the acquisition. In June 2002, $52 was paid
to
such individuals. The severance accrual of $416 as of June 30, 2002 was paid
during the fiscal year ended June 30, 2003. With the assistance of a third-party
valuation firm and after considering the facts and circumstances surrounding
the
acquisition, the Company recorded intangible assets related to customer
relationships and patents. Customer relationships had estimated useful lives
of
18 months to three years and patents had estimated useful lives of fifteen
years. The term of the non-compete agreement was three years.
The
Company’s management at the time believed the E.mergent acquisition would
complement its existing operations and its core competencies would allow the
Company to acquire market share in this industry. However, the Company’s entry
into the services business was perceived as a threat by its systems integrators
and value-added resellers, many of whom the Company began competing against
for
sales. In order to avoid this conflict and maintain good relationships with
its
systems integrators and value-added resellers, the Company decided to stop
pursuing new services contracts in the fourth quarter of the fiscal year ended
June 30, 2003 which was considered a triggering event for evaluation of
impairment. Ultimately, the Company exited the U.S. audiovisual integration
market and subsequently sold its U.S. audiovisual integration business to
M:Space in May 2004 (see Note 24 - Subsequent Events). Although the Company
continues to sell camera and furniture products acquired from E.mergent, its
decision to exit the U.S. integration services market adversely affected future
cash flows. The Company determined that a triggering event occurred in the
fourth quarter of the fiscal year ended June 30, 2003. The Company performed
an
impairment test and determined that an impairment loss on certain E.mergent
assets should be recognized.
F-24
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
OM
Video
On
August 27, 2002, the Company purchased all of the outstanding shares of
Stechyson Electronics Ltd., doing business as OM Video, an audiovisual
integration firm headquartered in Ottawa, Canada. Under the terms of the
agreement, the shareholders of OM Video received $6,276 in cash at closing.
During the fiscal years ended June 30, 2003 and 2004, the Company paid an
additional $500 of a potential $600 that was held pending certain
representations and warranties associated with the acquisition. During the
second quarter of fiscal 2003, the Company also paid $750 of a potential $800
earn-out provision. The earn-out provision was recorded as additional
consideration and booked to goodwill. No further payment related to the holdback
or contingent consideration will be paid.
As
of the acquisition date, the Company acquired tangible assets consisting of
cash
of $193, accounts receivable of $470, inventory of $122, property and equipment
of $145 and prepaid expenses of $6. The Company assumed liabilities consisting
of accrued liabilities of $378 and accrued tax liabilities of $221.
The
Company obtained a non-compete agreement with a term of two years from the
former owner of OM Video.
The
Company’s management believed the OM Video acquisition would complement its
existing operations and its core competencies would allow the Company to acquire
market share in this industry. However, the Company’s entry into the services
business was perceived as a threat by its systems integrators and value-added
resellers, many of whom the Company began competing against for sales. In order
to avoid this conflict and maintain good relationships with its systems
integrators and value-added resellers, the Company deemphasized the audiovisual
integration market serving the Ottawa Canada region beginning in the fourth
quarter of the fiscal year ended June 30, 2003. This decision was considered
a
triggering event for evaluation of impairment. On March 4, 2005, the Company
sold all of its Canadian audio visual integration business (see Note 24 -
Subsequent Events). On June 30, 2003, the Company performed an impairment test
and determined that an impairment loss on the OM Video assets should be
recognized.
Pro
forma financial information
The
following unaudited pro forma combined financial information reflects operations
as if the acquisitions of ClearOne, Ivron and E.mergent had occurred as of
July
1, 2000 and as if the acquisition of OM Video had occurred as of July 1, 2001.
The unaudited pro forma combined financial information is presented for
illustrative purposes only and is not indicative of what the Company’s actual
results of operations may have been had the acquisitions been consummated on
July 1, 2000 and 2001, respectively.
|
June
30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Revenue
from continuing operations
|
$
|
58,728
|
$
|
72,327
|
$
|
58,085
|
||||
|
Loss
from continuing operations
|
(36,234
|
)
|
(9,022
|
)
|
(4,396
|
)
|
||||
|
Net
loss
|
(36,034
|
)
|
(8,846
|
)
|
(3,536
|
)
|
||||
|
Basic
and diluted loss per common share from continuing
operations
|
$
|
(3.24
|
)
|
$
|
(0.94
|
)
|
$
|
(0.51
|
)
|
|
|
Basic
and diluted loss per common share from net income
|
(3.22
|
)
|
(0.92
|
)
|
(0.41
|
)
|
||||
|
8.
|
Goodwill
and Other Intangible
Assets
|
The
Company had goodwill and definite-lived intangible assets related to the
acquisition of ClearOne in 2001, the acquisitions of Ivron and E.mergent in
2002
and the acquisition of OM Video in 2003.
F-25
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Goodwill
The
following presents details of the Company’s goodwill by reporting unit for the
years ended June 30, 2003, 2002 and 2001:
|
Products
|
Business
Services
|
Total
|
||||||||
|
Balances
as of June 30, 2000
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Acquisition
of ClearOne
|
1,187
|
-
|
1,187
|
|||||||
|
Amortization
of ClearOne goodwill
|
(297
|
)
|
-
|
(297
|
)
|
|||||
|
Balances
as of June 30, 2001
|
890
|
-
|
890
|
|||||||
|
Acquisition
of Ivron
|
218
|
-
|
218
|
|||||||
|
Acquisition
of E.mergent
|
5,026
|
12,046
|
17,072
|
|||||||
|
Amortization
of ClearOne goodwill
|
(297
|
)
|
-
|
(297
|
)
|
|||||
|
Impairment
of ClearOne and Ivron goodwill
|
(811
|
)
|
-
|
(811
|
)
|
|||||
|
Balances
as of June 30, 2002
|
5,026
|
12,046
|
17,072
|
|||||||
|
E.mergent
goodwill purchase price adjustment
|
-
|
20
|
20
|
|||||||
|
Acquisition
of OM Video
|
-
|
6,725
|
6,725
|
|||||||
|
Foreign
currency translation related to OM Video goodwill
|
-
|
1,049
|
1,049
|
|||||||
|
Impairment
of E.mergent and OM Video goodwill
|
(5,026
|
)
|
(19,840
|
)
|
(24,866
|
)
|
||||
|
Balances
as of June 30, 2003
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
Acquired
Intangibles
The
following table presents the Company’s intangible assets as of June 30, 2003,
2002, and 2001:
|
2003
|
2002
|
2001
|
||||||||||||||||||||
|
Useful
Lives
|
Gross
Value
|
Accumulated
Amortization
|
Gross
Value
|
Accumulated
Amortization
|
Gross
Value
|
Accumulated
Amortization
|
||||||||||||||||
|
Developed
technologies
|
3
to 15 years
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
680
|
$
|
(227
|
)
|
||||||||
|
Patents
and trademarks
|
3
to 15 years
|
1,060
|
(75
|
)
|
1,060
|
(6
|
)
|
207
|
(69
|
)
|
||||||||||||
|
Customer
relationships
|
18
months to 3 years
|
-
|
-
|
392
|
(22
|
)
|
37
|
(12
|
)
|
|||||||||||||
|
Non-compete
agreements
|
2
to 3 years
|
52
|
(19
|
)
|
215
|
(5
|
)
|
-
|
-
|
|||||||||||||
|
Total
|
$
|
1,112
|
$
|
(94
|
)
|
$
|
1,667
|
$
|
(33
|
)
|
$
|
924
|
$
|
(308
|
)
|
|||||||
Amortization
of intangible assets was $680, $787, and $308 for the years ended June 30,
2003,
2002, and 2001, respectively. Amortization of costs related to developed
technologies and patents was reported in product cost of goods sold.
Amortization of costs related to trademarks, customer and partner relationships,
and non-compete agreements was reported in general and administration expense
and marketing and selling expense.
F-26
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Estimated
future amortization expense is as follows:
|
Years
Ending June 30,
|
||||
|
2004
|
$
|
88
|
||
|
2005
|
87
|
|||
|
2006
|
71
|
|||
|
2007
|
71
|
|||
|
2008
|
71
|
|||
|
Thereafter
|
630
|
|||
|
Total
estimated amortization expense
|
$
|
1,018
|
||
|
9.
|
Impairments
|
During
the fiscal year ended June 30, 2002, the Company experienced declining sales
from the teleconferencing products acquired in the ClearOne acquisition.
Although sales declined throughout the year, through March 31, 2002, gross
margins and cash flows remained positive. However, during the fourth quarter
of
the fiscal year ended June 30, 2002, the gross margins and cash flows became
negative as sales continued to decline. Additionally, in the fourth quarter
of
fiscal 2002, the Company also made a decision to stop investing in the acquired
teleconferencing products. Furthermore, during the fourth quarter of the fiscal
year ended June 30, 2002, the Company experienced difficulties in selling the
acquired videoconferencing products acquired in the Ivron acquisition. The
difficulties were due to the phasing out of an older product line occasioned
by
technological difficulties of product implementation. Such triggering events
required an impairment analysis to be performed in accordance with SFAS No.
121.
The estimated undiscounted future cash flows generated by the long-lived asset
groupings related to ClearOne and Ivron were less than their carrying values.
The analysis resulted in an impairment loss of $7,115 for the fiscal year ended
June 30, 2002. Management estimated the fair market value of the long-lived
assets using the present value of expected future discounted cash
flows.
During
the fourth quarter of the fiscal year ended June 30, 2003, the Company decided
to deemphasize the audiovisual integration services. The Company entered into
the audiovisual integration services through the E.mergent and OM Video
acquisitions. At the time of the acquisitions, management believed that the
audiovisual integration services would complement existing core competencies
and
allow the Company to acquire market share in this market segment. However,
the
Company’s entry into the audiovisual integration services was perceived as a
threat by its systems integrators and value-added resellers, many of whom the
Company began competing against for sales. In order to avoid this conflict,
the
Company decided to deemphasize the audiovisual integration services beginning
in
the fourth quarter of the fiscal year ended June 30, 2003.
These
changes in facts and circumstances as well as the change in our business
environment constituted a triggering event requiring an impairment analysis
to
be performed in accordance with SFAS No. 142 and SFAS No. 144. The estimated
fair value of the reporting units, for purposes of evaluating goodwill for
impairment, was less than their carrying values. Additionally, the estimated
undiscounted future cash flows generated by certain other long-lived assets,
excluding goodwill, was less than their carrying values. The impairment analyses
performed in accordance with SFAS No. 142 and SFAS No. 144, resulted in an
impairment loss of $26,001 for the fiscal year ended June 30, 2003. Management
estimated the fair value of reporting units using third-party appraisals.
Management estimated the fair market value of the long-lived assets, excluding
goodwill, using the present value of expected future discounted cash flows.
F-27
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
impairment losses relate to the following:
|
Year
Ended June 30,
|
|||||||
|
2003
|
2002
|
||||||
|
(Restated)
|
|||||||
|
Goodwill:
|
|||||||
|
ClearOne
|
$
|
-
|
$
|
593
|
|||
|
Ivron
|
-
|
218
|
|||||
|
E.mergent
- Business Services
|
12,066
|
-
|
|||||
|
E.mergent
- Products
|
5,026
|
-
|
|||||
|
OM
Video
|
7,774
|
-
|
|||||
|
24,866
|
811
|
||||||
|
Intangible
assets:
|
|||||||
|
ClearOne
|
-
|
308
|
|||||
|
Ivron
|
-
|
5,924
|
|||||
|
E.mergent
- Business Services
|
195
|
-
|
|||||
|
E.mergent
- Products
|
18
|
-
|
|||||
|
OM
Video
|
387
|
-
|
|||||
|
600
|
6,232
|
||||||
|
Property
and equipment:
|
|||||||
|
Ivron
|
-
|
72
|
|||||
|
E.mergent
- Business Services
|
212
|
-
|
|||||
|
E.mergent
- Products
|
58
|
-
|
|||||
|
OM
Video
|
265
|
-
|
|||||
|
535
|
72
|
||||||
|
Total
|
$
|
26,001
|
$
|
7,115
|
|||
|
10.
|
Lines
of Credit
|
As
of June 30, 2003, the Company maintained a revolving line of credit in the
amount of $10,000 with a commercial bank. Prior to November 22, 2002, the line
of credit was in the amount of $5,000. The line of credit was secured by the
Company’s accounts receivable and inventory. The interest rate on the line of
credit was a variable interest rate (250 basis points over the London Interbank
Offered Rate (LIBOR) or prime less 0.25%, at the Company’s option). The
borrowing rate was 3.62% as of June 30, 2003. The weighted average interest
rate
for the fiscal years ended June 30, 2003, 2002 and 2001, was 3.98%, 5.17% and
8.14%, respectively. The terms of the line of credit prohibited the payment
of
dividends and required the Company to maintain other defined financial ratios
and restrictive covenants. The Company was not in compliance with the debt
coverage ratio as of June 30, 2002 or June 30, 2003, however the Company
obtained a waiver from the lender under the revolving credit facility. No
compensating balance arrangements were required. Amounts outstanding under
the
line of credit were $0, $196 and $0 as of June 30, 2003, 2002 and 2001,
respectively.
On
May 16, 2003, the bank froze the line of credit as the Company had not provided
the bank with financial statements for the quarter ended December 31, 2002.
The
line of credit expired on December 22, 2003 and was not renewed.
On
October 14, 2002, the Company entered into a note payable in the amount of
$2,000. The note payable encompassed previous expenditures related to our Oracle
ERP implementation. The term of the note was 36 months with monthly payments
of
$60. The Company had $1,583 outstanding under the note payable as of June 30,
2003. The Company paid the balance of the note payable in October
2004.
F-28
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
11.
|
Leases
|
The
Company has capital leases with finance companies which facilitated the purchase
of equipment. Additionally, the Company has noncancelable operating leases
related to facilities and vehicles.
Future
minimum lease payments under capital leases and noncancelable operating leases
with initial terms of one year or more are as follows as of June 30,
2003:
|
Capital
|
Operating
|
||||||
|
For
years ending June 30:
|
|||||||
|
2004
|
$
|
961
|
$
|
828
|
|||
|
2005
|
920
|
676
|
|||||
|
2006
|
437
|
262
|
|||||
|
2007
|
-
|
80
|
|||||
|
2008
|
-
|
20
|
|||||
|
Total
minimum lease payments
|
2,318
|
$
|
1,866
|
||||
|
Less
use taxes
|
(141
|
)
|
|||||
|
Net
minimum lease payments
|
2,177
|
||||||
|
Less
amount representing interest
|
(160
|
)
|
|||||
|
Present
value of net minimum lease payments
|
2,017
|
||||||
|
Less
current portion
|
(802
|
)
|
|||||
|
Long
term capital lease obligation
|
$
|
1,215
|
|||||
Certain
operating leases contain rent escalation clauses based on the consumer price
index. Rental expense is recognized on a straight-line basis. Rental expense,
which was composed of minimum payments under operating lease obligations, was
$1,328, $755 and $720 for the years ended June 30, 2003, 2002 and 2001,
respectively.
Property
and equipment under capital leases are as follows:
|
June
30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Office
furniture and equipment
|
$
|
1,051
|
$
|
1,077
|
$
|
983
|
||||
|
Manufacturing
and test equipment
|
471
|
471
|
479
|
|||||||
|
Telephone
bridging equipment
|
3,816
|
3,816
|
2,749
|
|||||||
|
5,338
|
5,364
|
4,211
|
||||||||
|
Accumulated
amortization
|
(3,099
|
)
|
(2,270
|
)
|
(1,558
|
)
|
||||
|
Net
property and equipment under capital leases
|
$
|
2,239
|
$
|
3,094
|
$
|
2,653
|
||||
Depreciation
expense for assets recorded under capital leases was $841, $739 and $569 for
the
years ended June 30, 2003, 2002 and 2001, respectively.
|
12.
|
Accrued
Liabilities
|
Accrued
liabilities consist of the following as of June 30, 2003, 2002 and
2001:
|
As
of June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
(Restated)
|
(Restated)
|
|||||||||
|
Accrued
salaries and bonuses
|
$
|
883
|
$
|
759
|
$
|
410
|
||||
|
Legal
contingencies
|
147
|
-
|
-
|
|||||||
|
Class
action settlement
|
7,326
|
-
|
-
|
|||||||
|
Other
accrued liabilities
|
1,220
|
2,082
|
998
|
|||||||
|
Total
|
$
|
9,576
|
$
|
2,841
|
$
|
1,408
|
||||
F-29
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
13.
|
Commitments
and Contingencies
|
In
addition to the legal proceedings described below, the Company is also involved
from time to time in various claims and other legal proceedings which arise
in
the normal course of business. Such matters are subject to many uncertainties
and outcomes that are not predictable. However, based on the information
available to the Company today, the Company does not believe any such other
proceedings will have a material, adverse effect on its financial condition
or
results of operations.
The
SEC Action.
On January 15, 2003, the U.S. Securities and Exchange Commission (SEC) filed
a
civil complaint against the Company, Frances Flood, then the Company’s chairman,
chief executive officer and president, and Susie Strohm, then the Company’s
chief financial officer. The complaint alleged that from the quarter ended
March
31, 2001, the defendants engaged in a program of inflating the Company’s
revenues, net income and accounts receivable by engaging in improper revenue
recognition in violation of generally accepted accounting principles (GAAP),
and
Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a) and 13(b)
of the Securities Exchange Act of 1934, and various regulations promulgated
thereunder. Following the filing of the complaint, the Company placed Ms. Flood
and Ms. Strohm on administrative leave and they subsequently resigned from
their
positions with the Company. On December 4, 2003, the Company settled the SEC
action by entering into a consent decree in which, without admitting or denying
the allegations of the complaint, it consented to the entry of a permanent
injunction prohibiting future securities law violations. No fine or penalty
was
assessed against the Company as part of the settlement.
The
Whistleblower Action.
On February 11, 2003, the Company’s former vice president of sales filed a
whistleblower claim with the Occupational Safety and Health Administration
(OSHA) under the employee protection provisions of the Sarbanes-Oxley Act
alleging that the Company had wrongfully terminated his employment for reporting
the Company’s alleged improper revenue recognition practices to the SEC in
December 2002, which precipitated the SEC action against the Company. In
February 2004, OSHA issued a preliminary order in favor of the former officer,
ordering that he be reinstated with back pay, lost benefits, and attorney’s
fees. The former officer had also filed a separate lawsuit against the Company
in the United States District Court for the District of Utah, Central Division,
alleging various employment discrimination claims. In May 2004, the
Administrative Law Judge approved a settlement agreement with the former officer
pursuant to which he released the Company from all claims asserted by him in
the
OSHA proceeding and the federal court action in exchange for a cash payment
by
the Company. The settlement did not have a material impact on the Company's
results of operations or financial condition.
The
Shareholders’ Class Action.
On June 30, 2003, a consolidated complaint was filed against the Company,
eight present or former officers and directors of the Company, and Ernst &
Young LLP (Ernst & Young), the Company’s former independent accountants, by
a class consisting of purchasers of the Company’s common stock during the period
from April 17, 2001 through January 15, 2003. The action followed the
consolidation of several previously filed class action complaints and the
appointment of lead counsel for the class. The allegations in the complaint
were
essentially the same as those contained in the SEC complaint described above.
On
December 4, 2003, the Company, on behalf of itself and all other defendants
with
the exception of Ernst & Young, entered into a settlement agreement with the
class pursuant to which the Company agreed to pay the class $5,000 and issue
the
class 1,200,000 shares of its common stock. The cash payment was made in two
equal installments, the first on November 10, 2003 and the second on January
14,
2005. On May 23, 2005, the court order was amended to require the Company to
pay
cash in lieu of stock to those members of the class who would otherwise have
been entitled to receive fewer than 100 shares of stock. As of June 30, 2005,
228,000 shares of the Company’s common stock had been issued to the class and
the Company plans to issue the remaining shares in the near future, subject
to
the receipt of any required approvals from state regulatory
authorities.
The
Shareholder Derivative Actions.
Between March and August, 2003, four shareholder derivative actions were
filed, by certain shareholders of the Company against various present and past
officers and directors of the Company and against Ernst & Young. The
complaints asserted allegations similar to those asserted in the SEC action
and
shareholders’ class action described above and also alleged that the defendant
directors and officers violated their fiduciary duties to the Company by causing
or allowing the Company to recognize revenue in violation of GAAP and issue
materially misstated financial statements, and that Ernst & Young breached
its professional responsibilities to the Company and acted in violation of
generally accepted auditing standards by failing to identify or prevent the
alleged revenue recognition violations and by issuing unqualified audit opinions
with respect to the Company’s 2002 and 2001 financial statements. One of these
actions was dismissed without prejudice on June 13, 2003. As to the other
three actions, the Company’s board of directors appointed a special litigation
committee of independent directors to evaluate the claims. That committee
determined that the maintenance of the derivative proceedings was not in the
best interest of the Company. Accordingly, on December 12, 2003, the Company
moved to dismiss the actions. In March 2004, the Company’s motions were
granted, and the derivative claims were dismissed with prejudice as to all
defendants except Ernst & Young. The Company was substituted as the
plaintiff in the action and is now pursuing in its own name the claims against
Ernst & Young.
F-30
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Employment
Separation Agreements.
On December 5, 2003, the Company entered into employment separation agreements
with Frances Flood, the Company’s former chairman, chief executive officer and
president, and Susie Strohm, the Company’s former chief financial officer, which
generally provided that these individuals would resign from their positions
and
employment with the Company, and the Company would make one-time, lump sum
payments in consideration of their surrender and delivery to the Company of
shares of the Company’s common stock and Company stock options and their release
of claims against the Company. Ms. Flood and Ms. Strohm also agreed to cooperate
with the Company in the SEC action and related proceedings and the Company
agreed to continue to indemnify such persons for attorneys fees incurred in
the
SEC action and related proceedings, subject to the limitations imposed by Utah
law. The Company also released any existing claims against such persons except
such claims as to which indemnification would not be permitted by Utah law.
The
agreement with Ms. Flood provided for a payment to her of $350 and her surrender
and delivery to the Company of 35,000 shares of the Company’s common stock and
706,434 stock options (461,433 of which were vested). The agreement with Ms.
Strohm provided for a payment to her of $75 and her surrender and delivery
to
the Company of 15,500 shares of the Company’s common stock and 268,464 stock
options (171,963 of which were vested).
Indemnification
of Officers and Directors.
The Company’s by-laws and the Utah Revised Business Corporation Act provide for
indemnification of directors and officers against reasonable expenses incurred
by such persons in connection with civil or criminal actions or proceedings
to
which they have been made parties because they are or were directors or officers
of the Company or its subsidiaries. Indemnification is permitted if the person
satisfies the required standards of conduct. The litigation matters described
above involved certain of the Company’s current and former directors and
officers, all of whom are covered by the aforementioned indemnity and if
applicable, certain prior period insurance policies. The Company has indemnified
such persons for legal expenses incurred by them in such actions and, as
discussed below, has sought reimbursement from its insurance carriers. However,
as also discussed below the Company cannot predict with certainty the extent
to
which the Company will recover the indemnification payments from its
insurers. Pursuant to these agreements, the Company has made payments to
the law firms representing such current and former directors and officers in
the
aggregate amount of approximately $1.5 million during the period from January
2003 through June 30, 2005.
The
Insurance Coverage Action. On
February 9, 2004, the Company and Edward Dallin Bagley (Bagley), the chairman
of
the board of directors and a principal shareholder of the Company, jointly
filed
an action against National Union Fire Insurance Company of Pittsburgh,
Pennsylvania and Lumbermens Mutual Insurance Company, the carriers of certain
prior period directors and officers liability insurance policies, to recover
the
costs of defending and resolving claims against certain of the Company’s present
and former directors and officers in connection with the SEC action, the
shareholders’ class action and the shareholder derivative actions described
above, and seeking other damages resulting from the refusal of such carriers
to
timely pay the amounts owing under such liability insurance policies. This
action has been consolidated into a declaratory relief action filed by one
of
the insurance carriers on February 6, 2004 against the Company and certain
of
its current and former directors. In this action, the insurers assert that
they
are entitled to rescind insurance coverage under our directors and officers
liability insurance policies, $3,000 of which was provided by National Union
and
$2,000 of which was provided by Lumbermens Mutual, based on alleged
misstatements in the Company’s insurance applications. In February 2005, the
Company entered into a confidential settlement agreement with Lumbermens Mutual
pursuant to which the Company and Bagley received a lump sum cash amount and
the
plaintiffs agreed to dismiss their claims against Lumbermens Mutual with
prejudice. The cash settlement will be held in a segregated account until
the claims involving National Union have been resolved, at which time the
amounts received in the action will be allocated among the Company and Bagley.
The amount distributed to the Company and Bagley will be determined based on
future negotiations between the Company and Bagley. The Company cannot currently
estimate the amount of the settlement which it will ultimately receive. Upon
determining the amount of the settlement which the Company will ultimately
receive, the Company will record this as a contingent gain. The Company and
Bagley are vigorously pursuing their claim against National Union although
no
assurances can be given that they will be successful. The Company and Bagley
have entered into a Joint Prosecution and Defense Agreement in connection with
the action.
F-31
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
Pacific Technology & Telecommunications Collection Action.
On August 12, 2003, the Company initiated a commercial arbitration
proceeding against Pacific Technology & Telecommunications (PT&T), a
former distributor, seeking to collect approximately $1,754 that PT&T owed
the Company for inventory purchased but not paid for. PT&T denied the
Company’s claim and asserted counterclaims. Subsequently, on April 20,
2004, PT&T filed for protection under Chapter 7 of the United States
Bankruptcy Code, which had the effect of staying the proceeding. Following
PT&T’s bankruptcy filing, the Company successfully negotiated a settlement
with the bankruptcy trustee. Under the settlement, which has been approved
by
the bankruptcy court, the Company paid $25 and obtained the right to recover
all
unsold ClearOne inventory held by PT&T and the right to pursue on the basis
of an assignment any claims that PT&T may have against any of its own
officers or directors, subject, however, to a maximum recovery of $800. The
Company is currently in the process of investigating whether any such claims
exist and, if so, whether it would be in the Company’s best interest to pursue
them given the anticipated legal expenses and the uncertainties of being able
to
collect any resulting favorable judgment. The settlement also resulted in the
release and dismissal with prejudice of all of PT&T’s claims against the
Company. To date, the Company has not recovered any inventory held by PT&T.
U.S.
Attorney’s Investigation. On
January 28, 2003, the Company was advised that the U.S. Attorney’s Office for
the District of Utah has begun an investigation stemming from the complaint
in
the SEC action described above. No pleadings have been filed to date and the
Company is cooperating fully with the U.S. Attorney’s Office.
The
Company establishes contingent liabilities when a particular contingency is
both
probable and estimable. For the contingencies noted above the Company has
accrued amounts considered probable and estimable. The Company is not aware
of
pending claims or assessments, other than as described above, which may have
a
material adverse impact on the Company’s financial position or results of
operations.
|
14.
|
Stockholders’
Equity
|
Private
Placement
On
December 11, 2001, the Company closed a private placement of 1,500,000 shares
of
common stock. Gross proceeds from the private placement were $25,500, before
costs and expenses associated with this transaction, which totaled
$1,665.
The
Company also issued warrants to purchase 150,000 shares of its common stock
at
$17.00 per share to its financial advisor. Such warrants vested immediately
and
were valued at $1,556 using the Black-Scholes option pricing model with the
following assumptions: expected dividend yield of 0%, risk-free interest rate
of
4.4%, expected price volatility of 68.0% and contractual life of five years.
The
warrants expire on November 27, 2006.
Stock
Repurchase Program
During
April 2001, the Company’s board of directors approved a stock repurchase program
to purchase up to 500,000 shares of the Company’s common stock over the
following six months on the open market or in private transactions. During
the
fiscal year ended June 30, 2001, the Company repurchased 20,300 shares on the
open market for $244. All repurchased shares were retired. During October 2002,
the Company’s board of directors approved a stock repurchase program to purchase
up to 1,000,000 shares of the Company’s common stock over the following 12
months on the open market or in private transactions. During the fiscal year
ended June 30, 2003, the Company repurchased 125,000 shares on the open market
for $430. All repurchased shares were retired. The stock repurchase program
expired in October 2003 and no additional shares were repurchased.
Stock
Options
The
Company’s 1990 Incentive Plan (the 1990 Plan) has shares of common stock
available for issuance to employees and directors. Provisions of the 1990 Plan
include the granting of stock options. Generally, stock options vest over a
five-year period at 10%, 15%, 20%, 25% and 30% per year. Certain other stock
options vest in full after eight years. As of June 30, 2003, there were 271,548
options outstanding under the 1990 Plan and no additional options were available
for grant under such plan.
F-32
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
Company also has a 1998 Stock Option Plan (the 1998 Plan). Provisions of the
1998 Plan include the granting of stock options. Of the options granted through
December 1999, 1,066,000 will cliff vest after 9.75 years; however, such vesting
may be accelerated if earnings per share goals through the fiscal year ended
June 30, 2003 were met. Of the options granted subsequent to December 1999
through June 2002, 1,248,250 will cliff vest after six years; however, such
vesting may be accelerated if earnings per share goals through the fiscal year
ending June 30, 2005 are met. Under the 1998 Plan, 2,500,000 shares were
authorized for grant. The 1998 Plan expires June 10, 2008, or when all the
shares available under the plan have been issued if this occurs earlier. As
of
June 30, 2003, there were 1,701,208 options outstanding under the 1998 Plan
and
496,668 options available for grant in the future.
Stock
option information for the fiscal years ending June 30, 2003, 2002 and 2001
with
respect to the Company’s stock option plans is as follows:
|
Stock
Options
|
Number
of Shares
|
Weighted
Average Exercise Price
|
|||||
|
Outstanding
at June 30, 2000
|
1,508,548
|
$
|
7.01
|
||||
|
Options
granted (as restated)
|
515,500
|
12.73
|
|||||
|
Options
expired and canceled (as restated)
|
(198,125
|
)
|
10.97
|
||||
|
Options
exercised
|
(75,125
|
)
|
4.33
|
||||
|
Outstanding
at June 30, 2001
|
1,750,798
|
8.37
|
|||||
|
Options
granted
|
366,908
|
13.24
|
|||||
|
Options
expired and canceled
|
(402,751
|
)
|
13.04
|
||||
|
Options
exercised
|
(195,999
|
)
|
5.21
|
||||
|
Outstanding
at June 30, 2002
|
1,518,956
|
8.71
|
|||||
|
Options
granted
|
835,500
|
3.57
|
|||||
|
Options
expired and canceled
|
(350,200
|
)
|
11.57
|
||||
|
Options
exercised
|
(31,500
|
)
|
2.72
|
||||
|
Outstanding
at June 30, 2003
|
1,972,756
|
$
|
6.12
|
||||
F-33
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
following table summarizes information about stock options outstanding as of
June 30, 2003:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Exercise
Price Range
|
Options
Outstanding
|
Weighted
Average Contractual Remaining Life
|
Weighted
Average Exercise Price
|
Options
Exercisable
|
Weighted
Average Exercise Price
|
|||||||||||
|
$0.00
to $2.04
|
271,548
|
0.5
years
|
$
|
0.78
|
271,548
|
$
|
0.78
|
|||||||||
|
$2.05
to $4.09
|
1,084,850
|
3.8
years
|
3.34
|
369,669
|
3.08
|
|||||||||||
|
$4.10
to $8.18
|
3,081
|
8.9
years
|
7.15
|
3,081
|
7.15
|
|||||||||||
|
$8.19
to $10.22
|
15,256
|
6.3
years
|
9.67
|
6,144
|
9.65
|
|||||||||||
|
$10.23
to $12.26
|
204,000
|
3.2
years
|
11.33
|
45,235
|
11.34
|
|||||||||||
|
$12.27
to $14.31
|
176,321
|
7.0
years
|
13.45
|
75,214
|
13.56
|
|||||||||||
|
$14.32
to $16.35
|
180,200
|
3.2
years
|
15.25
|
62,387
|
15.25
|
|||||||||||
|
$16.36
to $18.40
|
35,750
|
7.0years
|
17.15
|
5,005
|
17.15
|
|||||||||||
|
$18.41
to $20.45
|
1,750
|
1.9
years
|
18.97
|
1,588
|
18.90
|
|||||||||||
|
Total
|
1,972,756
|
3.6
years
|
$
|
6.12
|
839,871
|
$
|
4.80
|
|||||||||
The
following are the options exercisable at the corresponding weighted average
exercise price as of June 30, 2003, 2002 and 2001, respectively: 839,871 at
$4.80, 793,965 at $6.10 and 741,219 at $5.44.
The
grant date weighted average fair value of options granted during the years
ended
June 30, 2003, 2002 and 2001 was $2.50, $9.33 and $9.45, respectively. The
fair
value of options was determined using the Black-Scholes option pricing model
with the following weighted average assumptions for the fiscal years ended
June
30, 2003, 2002 and 2001: expected dividend yield, 0% for each year; risk-free
interest rate was 2.46%, 4.09% and 4.85%, respectively; expected price
volatility, 89.98%, 81.16%, and 82.75%; and expected life of options, 4.90,
5.54, and 6.25 years.
During
fiscal 2001, the Company modified 25,000 options to reduce the exercise price
of
the award. The award is being accounted for as variable and the intrinsic value
of the award is remeasured until the date the award is exercised, is forfeited,
or expires unexercised. Compensation cost with respect to a variable award
is
being recognized on an accelerated basis in accordance with Financial Accounting
Standards Board Interpretation No. 28, Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans.
Due
to the Company’s failure to remain current in its filing of periodic reports
with the SEC, employees, executive officers and directors are currently not
allowed to exercise options under either the 1990 Plan or the 1998 Plan. In
June
2004, individual grants that had been affected by this situation were modified
to extend the life of the option through the date the Company becomes current
in
its filings with the SEC and options again become exercisable.
Employee
Stock Purchase Program
The
Company has an Employee Stock Purchase Plan (ESPP). A total of 500,000 shares
of
common stock were reserved for issuance under the ESPP. The Company’s board of
directors or a committee established by the board of directors administers
the
ESPP and has authority to interpret the terms of the ESPP and determine
eligibility. The ESPP is intended to qualify under Section 423 of the Internal
Revenue Code. All employees were eligible after thirty days
employment.
Employees
can purchase common stock through payroll deductions of up to 10% of their
base
pay. Amounts deducted and accumulated by the employees are used to purchase
shares of common stock on the last day of each month. The Company directs a
participating broker to conduct open market purchases of the common stock and
the purchase price is the price of the employee’s shares. The Company
contributes to the account of the employee one share of common stock for every
nine shares purchased by the employee under the ESPP. An employee may end
participation at any time. Participation in the ESPP ends upon termination
of
employment. During the fiscal years ended June 30, 2003, 2002 and 2001, 1,841,
724 and 1,137 share of common stock were issued under the ESPP. The ESPP is
compensatory under APB 25. Compensation expense from the ESPP was $8, $13,
and
$15 for the years ended June 30, 2003, 2002, and 2001, respectively. The program
was suspended during 2003 due to the Company’s failure to remain current in its
filing of periodic reports with the SEC.
F-34
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
15.
|
Sale
of Assets
|
Court
Conferencing. As
part of the Company’s conferencing services segment, its court conferencing
customers engaged in the audio and/or video conferencing of legal proceedings
including remote appearances in state and federal courts and/or administrative
tribunals within the United States. On October 26, 2001, the Company sold its
court conferencing customer list, including all contracts relating to its court
conferencing services to CourtCall LLC and recognized a gain of
$250.
|
16.
|
Income
Taxes
|
Income
(loss) from continuing operations and before income taxes consisted of the
following:
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Domestic
|
$
|
(28,583
|
)
|
$
|
956
|
$
|
3,686
|
|||
|
Foreign
|
(8,423
|
)
|
(6,393
|
)
|
122
|
|||||
|
$
|
(37,006
|
)
|
$
|
(5,437
|
)
|
$
|
3,808
|
|||
The
provision (benefit) for income taxes on income from continuing operations
consisted of the following:
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
(3,055
|
)
|
$
|
3,390
|
$
|
2,582
|
|||
|
State
|
(50
|
)
|
456
|
378
|
||||||
|
Foreign
|
47
|
22
|
67
|
|||||||
|
Stock
Option Benefit Credited to Paid in Capital
|
-
|
452
|
116
|
|||||||
|
Total
Current
|
(3,058
|
)
|
4,320
|
3,143
|
||||||
|
Deferred:
|
||||||||||
|
Federal
|
2,174
|
(3,180
|
)
|
(1,751
|
)
|
|||||
|
State
|
50
|
259
|
(341
|
)
|
||||||
|
Foreign
|
-
|
1
|
(1
|
)
|
||||||
|
Total
Deferred
|
2,224
|
(2,920
|
)
|
(2,093
|
)
|
|||||
|
$
|
(834
|
)
|
$
|
1,400
|
$
|
1,050
|
||||
F-35
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
following table presents the principal reasons for the difference between the
actual effective income tax rate and the expected U.S. federal statutory income
tax rate of 34% on income from continuing operations:
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
U.S.
federal statutory income tax rate
|
$
|
(12,582
|
)
|
$
|
(1,849
|
)
|
$
|
1,295
|
||
|
State
income tax rate, net of federal income tax effect
|
-
|
512
|
35
|
|||||||
|
Extraterritorial
income exclusion
|
-
|
(79
|
)
|
(111
|
)
|
|||||
|
Research
and development credit
|
-
|
(46
|
)
|
(144
|
)
|
|||||
|
Foreign
earnings or losses taxed at different rates
|
255
|
132
|
24
|
|||||||
|
Impairment
of investment in foreign subsidiary
|
2,596
|
2,112
|
-
|
|||||||
|
Impairment
of E.mergent goodwill
|
5,811
|
-
|
-
|
|||||||
|
Change
in federal valuation allowance attributable to operations
|
2,946
|
534
|
-
|
|||||||
|
Non-deductible
items and other
|
140
|
84
|
(49
|
)
|
||||||
|
Total
|
$
|
(834
|
)
|
$
|
1,400
|
$
|
1,050
|
|||
Deferred
income taxes are determined based on the differences between the financial
reporting and income tax bases of assets and liabilities using enacted income
tax rates expected to apply when the differences are expected to be settled
or
realized. As of June 30 significant components of the net U.S. deferred income
tax assets and liabilities were as follows:
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Deferred
income tax assets:
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
|
Net
operating loss carryforwards
|
724
|
293
|
-
|
|||||||
|
Accrued
liabilities
|
2,980
|
253
|
25
|
|||||||
|
Allowance
for sales returns and doubtful accounts
|
155
|
141
|
-
|
|||||||
|
Inventory
reserve
|
1,939
|
1,380
|
101
|
|||||||
|
Deferred
revenue
|
1,796
|
4,046
|
1,218
|
|||||||
|
Installment
sale
|
128
|
149
|
149
|
|||||||
|
Accumulated
research and development credits
|
142
|
142
|
66
|
|||||||
|
Basis
difference in intangible assets
|
852
|
712
|
524
|
|||||||
|
Other
|
162
|
381
|
196
|
|||||||
|
Subtotal
|
8,878
|
7,497
|
2,279
|
|||||||
|
Valuation
allowance
|
(5,252
|
)
|
(1,726
|
)
|
-
|
|||||
|
Deferred
income tax assets
|
3,626
|
5,771
|
2,279
|
|||||||
|
Deferred
income tax liabilities:
|
||||||||||
|
Basis
difference in fixed assets
|
(458
|
)
|
(401
|
)
|
(237
|
)
|
||||
|
Other
|
(89
|
)
|
-
|
(9
|
)
|
|||||
|
Deferred
income tax liabilities
|
(547
|
)
|
(401
|
)
|
(246
|
)
|
||||
|
Net
deferred income tax assets
|
$
|
3,079
|
$
|
5,370
|
$
|
2,033
|
||||
F-36
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Deferred
income tax assets and liabilities were netted by income tax jurisdiction and
were reported in the consolidated balance sheets as of June 30 as
follows:
|
2003
|
2002
|
2001
|
||||||||
|
(restated)
|
(restated)
|
|||||||||
|
Current
deferred income tax assets
|
$
|
2,531
|
$
|
4,709
|
$
|
1,587
|
||||
|
Non-current
deferred income tax assets
|
548
|
661
|
446
|
|||||||
|
Current
deferred income tax liabilities
|
-
|
-
|
-
|
|||||||
|
Non-current
deferred income tax liabilities
|
-
|
-
|
-
|
|||||||
|
Net
deferred income tax assets
|
$
|
3,079
|
$
|
5,370
|
$
|
2,033
|
||||
The
Company has not provided for U.S. deferred income taxes or foreign withholding
taxes on the undistributed earnings of its non-U.S. subsidiaries since these
earnings are intended to be reinvested indefinitely and therefore, the foreign
currency translation adjustment included in other comprehensive income has
not
been tax effected. It is not practical to estimate the amount of additional
taxes that might be payable on such undistributed earnings. Total undistributed
earnings from foreign subsidiaries were $56, $152 and $205 for 2001, 2002 and
2003, respectively.
As
of June 30, 2003, the Company has a net operating loss (“NOL”) and research
credit carryforward for U.S. federal income tax reporting purposes of $697
and
$121 respectively, which will expire in 2021. These carryforwards were generated
by E.mergent before it was acquired by the Company and are subject to a full
valuation allowance. When these carryforwards are subsequently recognized,
the
tax benefit will be credited to operations since the intangible assets of
E.mergent were all impaired at June 30, 2003. The Company also has state NOL
and
research and development tax credit carryforwards of approximately $9,739 and
$21, respectively, which expire depending on the rules of the various states
to
which the carryovers relate. The Company also has a NOL carryover in its Irish
subsidiary. However, the Company is in the process of closing its Irish
subsidiary and does not anticipate ever being able to use these losses and
has
not separately reported these amounts. The Company also has a small amount
of
deferred tax assets, subject to a full valuation allowance, at its Canadian
subsidiary. As discussed in Footnote 24, the Company has sold its Canadian
subsidiary and therefore has not separately reported these amounts.
The
Internal Revenue Code contains provisions that reduce or limit the availability
and utilization of NOL and credit carryforwards if certain changes in ownership
have taken place. As a result of an ownership change associated with the
acquisition of E.mergent, utilization of E.mergent’s NOL and research and
development credit carryfowards, arising prior to the ownership change date,
will be limited to an amount not to exceed the value of E.mergent on the
ownership change date multiplied by the Federal long-term tax-exempt rate.
If
the annual limitation of $1,088 is not utilized in any particular year, it
will
remain available on a cumulative basis through the expiration date of the
applicable NOL and credit carryforwards. Management does not believe that these
rules will adversely impact the Company’s ability to utilize these losses.
Certain states also have rules that could limit the Company’s ability to use its
state NOL and research credit carryovers.
SFAS
No. 109, Accounting
for Income Taxes,
requires that a valuation allowance be established when it is more likely than
not that all or a portion of a deferred tax asset will not be realized.
For
the year ended June 30, 2002, the NOL and research and development credit
generated by E.mergent prior to acquisition are subject to a full valuation
allowance recorded as part of E.mergent’s purchase price allocation.
Additionally, for the years ended June 30, 2002 and 2003, the Company has also
recorded a valuation allowance against a portion of its deferred tax assets
due
to the uncertainty of realization of the assets based upon a number of factors,
including lack of profitability in 2002 and 2003 and the limited taxable income
in carryback years as permitted by the tax law. No valuation allowance was
recorded to the extent that the reversal of the deferred tax assets would
generate a NOL that could be carried back to prior tax years.
The
net change in the Company’s domestic valuation allowance was $0 for 2001, and an
increase of $1,726 and $3,526, in 2002 and 2003 respectively.
F-37
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
17.
|
Discontinued
Operations
|
On
April 12, 2001, the Company sold the assets of the remote control portion of
the
RFM/Broadcast division to Burk Technology, Inc. (Burk), a privately held
developer and manufacturer of broadcast facility control systems products.
The
Company retained the accounts payable of the remote control portion of the
RFM/Broadcast division. Burk assumed obligations for unfilled customer orders
and satisfying warranty obligations to existing customers and for inventory
sold
to Burk. However, the Company retained certain warranty obligations to Burk
to
ensure that all of the assets sold to Burk were in good operating condition
and
repair.
Consideration
for the sale consisted of $750 in cash at closing, $1,750 in the form of a
seven-year promissory note, with interest at the rate of nine percent per year,
and up to $700 as a commission over a period of up to seven years. The payments
on the promissory note may be deferred based upon Burk not meeting net quarterly
sales levels established within the agreement. The promissory note is secured
by
a subordinate security interest in the personal property of Burk. Based on
an
analysis of the facts and circumstances that existed on April 12, 2001, and
considering the guidance from Topic 5U of the SEC Rules and Regulations, Gain
Recognition on the Sale of a Business or Operating Assets to a Highly Leveraged
Entity, the gain is being recognized as cash is collected (as collection was
not
reasonably assured, and the Company had contingent liabilities to Burk). The
commission is based upon future net sales of Burk over base sales established
within the agreement. The Company realized a gain on the sale of $200 (net
of
applicable income taxes of $119), $176 (net of applicable income taxes of $104)
and $123 (net of applicable income taxes of $72) for the fiscal years ended
June
30, 2003, 2002 and 2001, respectively. As of June 30, 2003, $1,505 of the
promissory note remains outstanding and the Company has received $20 in
commissions.
Summary
operating results of the discontinued operations are as follows:
|
Year
Ended June 30, 2001
|
||||
|
(restated)
|
||||
|
Revenue
- product
|
$
|
2,369
|
||
|
Cost
of goods sold - product
|
806
|
|||
|
Marketing
and selling expenses
|
282
|
|||
|
Product
development expenses
|
105
|
|||
|
Income
before income taxes
|
1,176
|
|||
|
Provision
for income taxes
|
(439
|
)
|
||
|
Income
from discontinued operations, net of income taxes
|
$
|
737
|
||
|
18.
|
Sale
of Broadcast Telephone
Interface
|
On
August 23, 2002, the Company entered into an agreement with Comrex Corporation
(Comrex). In exchange for $1,300, Comrex received certain inventory associated
with the broadcast telephone interface product line, a perpetual software
license to use the Company’s technology related to broadcast telephone interface
products along with one free year of maintenance and support, and transition
services for 90 days following the effective date of the agreement. The
transition services included training, engineering assistance, consultation,
and
development services.
The
software license included in the arrangement is more than incidental to the
products and services as a whole. All products and services are considered
software and software related. Consequently, the agreement has been accounted
for pursuant to Statement of Position (SOP) 97-2, Software Revenue Recognition.
As the software is essential to the functionality of other elements in the
agreement and there is not vendor specific objective evidence for the fair
value
of the maintenance and support, the Company recognized the software license
revenue, products, and services over time as services are performed, using
the
percentage-of-completion method of accounting based on a zero estimate of
profit.
F-38
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
As
this is the first time the Company has licensed software in this manner, it
was
impractical to estimate the final outcome of the agreement except to assure
that
no loss will be incurred. Consequently, the Company recognized revenue equal
to
cost until maintenance and support was the only undelivered element of the
agreement. Once maintenance and support was the only undelivered element of
the
agreement, the remaining revenue was recognized ratably over the remaining
maintenance and support period in accordance with SOP 97-2. The Company
recognized $1,054 in revenue related to this transaction in the fiscal year
ended June 30, 2003.
The
Company has entered into a manufacturing agreement to continue to manufacture
additional product for Comrex distribution one year following the agreement
described above on a when-and-if needed basis. Comrex will pay the Company
for
any additional product on a per item basis of cost plus 30%. Given the future
revenue stream associated with each unit produced, revenue will be recognized
when-and-if received.
|
19.
|
Earnings
Per Share
|
The
following table sets forth the computation of basic and diluted net income
(loss) per common share:
|
Year
Ended June 30,
|
||||||||||
|
2003
|
2002
|
2001
|
||||||||
|
|
(restated)
|
(restated)
|
||||||||
|
Numerator:
|
||||||||||
|
Income
(loss) from continuing operations
|
$
|
(36,172
|
)
|
$
|
(6,837
|
)
|
$
|
2,758
|
||
|
Discontinued
operations
|
200
|
176
|
860
|
|||||||
|
Net
income (loss)
|
$
|
(35,972
|
)
|
$
|
(6,661
|
)
|
$
|
3,618
|
||
|
Denominator:
|
||||||||||
|
Basic
weighted average shares
|
11,183,339
|
9,588,118
|
8,593,725
|
|||||||
|
Dilutive
common stock equivalents using treasury stock method
|
-
|
-
|
600,284
|
|||||||
|
Diluted
weighted average shares
|
11,183,339
|
9,588,118
|
9,194,009
|
|||||||
|
Basic
earnings (loss) per common share:
|
||||||||||
|
Continuing
operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.32
|
||
|
Discontinued
operations
|
0.02
|
0.02
|
0.10
|
|||||||
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.42
|
|||
|
Diluted
earnings (loss) per common share:
|
||||||||||
|
Continuing
operations
|
$
|
(3.23
|
)
|
$
|
(0.71
|
)
|
$
|
0.30
|
||
|
Discontinued
operations
|
0.02
|
0.02
|
0.09
|
|||||||
|
$
|
(3.21
|
)
|
$
|
(0.69
|
)
|
$
|
0.39
|
|||
Options
to purchase 1,972,756, 1,518,956 and 663,250 shares of common stock were
outstanding as of June 30, 2003, 2002 and 2001, respectively, but were not
included in the computation of diluted earnings per share as the effect would
be
anti-dilutive. Warrants to purchase 150,000 shares of common stock were
outstanding as of June 30, 2003 and 2002, but were not included in the
computation of diluted earnings per share as the effect would be
anti-dilutive.
|
20.
|
Related
Party Transactions
|
Edward
Dallin Bagley, a director and significant shareholder of the Company, served
as
a consultant to the Company from November 2002 through January 2004 and was
paid
$5,000 per month for his services. He consulted with Company’s management on
mergers and financial matters on an as needed basis. Mr. Bagley’s services were
performed pursuant to an oral agreement, the terms of which were approved by
the
Board of Directors.
F-39
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
Company and Edward Dallin Bagley jointly filed an action against National Union
Fire Insurance Company and Lumbermens Mutual Insurance Company. See Note 13.
Commitments and Contingencies. The
Insurance Coverage Action.
The
Company was a general partner in two limited partnerships, Gentner Research
Ltd.
(GRL) and Gentner Research II, Ltd. (GR2L). GRL owned rights to a proprietary
interest in a remote control product. The Company obtained rights to utilize
the
proprietary interest under royalty agreements. Royalty expense under the
agreements with GRL for the year ended June 30, 2001 was $4. GRL was dissolved
in February 2001 after consent to dissolution and liquidation was received
by a
majority of the partners of GRL. The product line, which incorporated the
proprietary interest, was deemed no longer integral to the Company’s business.
GR2L
owned rights to a proprietary interest in a new remote control product. The
Company obtained rights to utilize the proprietary interest under a royalty
agreement. Royalty expense under this agreement with GR2L for the year ended
June 30, 2001 was $91. The Company paid $179 to GR2L in the year ended June
30,
2001, representing GR2L’s royalty on the gain on the sale of the remote control
product line. This amount is included in the determination of gain on disposal
of discontinued operations in the year ended June 30, 2001.
|
21.
|
Significant
Customers
|
As
of June 30, 2003, 2002 and 2001 and for the periods then ended, the Company
did
not have any customers that accounted for more than 10% of total revenue and/or
accounts receivable balances.
|
22.
|
Retirement
Savings and Profit Sharing
Plan
|
The
Company has a 401(k) retirement savings and profit sharing plan to which it
makes discretionary matching contributions, as authorized by the Board of
Directors. All full-time employees who are at least 21 years of age and have
a
minimum of sixty days of service with the Company are eligible to participate
in
the plan. Matching contributions are 20% up to 6% of the employee’s earnings,
paid bi-weekly. Prior to the fiscal year ended June 30, 2003, the Company paid
matching contributions at fiscal year end. The Company’s retirement plan
contribution expense for the fiscal years ended June 30, 2003, 2002 and 2001
totaled $0, $72 and $66, respectively.
|
23.
|
Segment
and Geographic Information
|
Operating
Segments
The
Company has three operating segments - products, conferencing services, and
business services. The Company’s Chief Executive Officer and senior management
rely on internal management reports that provide financial and operational
information by operating segment. The Company’s management makes financial
decisions and allocates resources based on the information it received from
these internal management reports. The business services segment was established
in 2002 as a result of the acquisition of E.mergent and includes certain
operations of E.mergent and the operations of OM Video.
The
products segment includes products for audio conferencing products,
videoconferencing products, sound reinforcement products, broadcast telephone
interface products and assistive listening system products. The conferencing
services segment includes full-service conference calling; on-demand,
reservationless conference calling; Web conferencing; audio and video streaming;
and, customer training and education. The business services segment provided
services in the United States and Canada, including technical services such
as
design, installation and services of systems, maintenance, and value added
services such as proactive field support, training, system consulting and help
desk.
The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
For
operating segments, segment profit (loss) is measured based on income from
continuing operations before provision (benefit) for income taxes. Other income
(expense), net is unallocated.
F-40
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
The
Company’s segments are strategic business units that offer products and services
to satisfy different customer needs. They are managed separately because each
segment requires focus and attention on its market and distribution channel.
The
United States was the only country to contribute more than 10% of total revenues
in each fiscal year. Canada contributed more than 10% of total revenues in
the
fiscal year ended June 30, 2003. There were no significant long-lived assets
held outside the United States.
The
following tables summarize the segment and geographic information:
Operating
Segment
|
Fiscal
Year
|
Products
|
Conferencing
Services
|
Business
Services
|
Corporate
|
Totals
|
||||||||||||||
|
Net
revenue
|
2003
|
$
|
27,512
|
$
|
15,268
|
$
|
14,805
|
$
|
-
|
$
|
57,585
|
||||||||
|
2002
|
26,253
|
15,583
|
1,526
|
-
|
43,362
|
||||||||||||||
|
2001
|
22,448
|
11,689
|
-
|
-
|
34,137
|
||||||||||||||
|
Operating
income (loss)
|
2003
|
(13,099
|
)
|
31
|
(23,842
|
)
|
-
|
(36,910
|
)
|
||||||||||
|
2002
|
(8,666
|
)
|
2,827
|
270
|
-
|
(5,569
|
)
|
||||||||||||
|
2001
|
1,884
|
1,736
|
-
|
-
|
3,620
|
||||||||||||||
|
Discontinued
operations, net of taxes
|
2003
|
200
|
-
|
-
|
-
|
200
|
|||||||||||||
|
2002
|
176
|
-
|
-
|
-
|
176
|
||||||||||||||
|
2001
|
860
|
-
|
-
|
-
|
860
|
||||||||||||||
|
Identifiable
assets
|
2003
|
14,255
|
4,153
|
2,779
|
14,089
|
35,276
|
|||||||||||||
|
2002
|
23,497
|
5,325
|
15,294
|
19,760
|
63,876
|
||||||||||||||
|
2001
|
11,491
|
4,849
|
-
|
8,971
|
25,311
|
||||||||||||||
|
Depreciation
and amortization
|
2003
|
2,192
|
999
|
278
|
-
|
3,469
|
|||||||||||||
|
2002
|
2,176
|
802
|
34
|
-
|
3,012
|
||||||||||||||
|
2001
|
1,697
|
533
|
-
|
-
|
2,230
|
||||||||||||||
Geographic
|
Fiscal
Year
|
United
States
|
Canada
|
All
Other Countries
|
Totals
|
||||||||||||
|
Net
revenue
|
2003
|
$
|
42,591
|
$
|
6,316
|
$
|
8,678
|
$
|
57,585
|
|||||||
|
2002
|
39,144
|
474
|
3,744
|
43,362
|
||||||||||||
|
2001
|
30,076
|
973
|
3,088
|
34,137
|
||||||||||||
|
Long-Lived
Assets
|
2003
|
7,747
|
-
|
39
|
7,786
|
|||||||||||
|
2002
|
26,788
|
-
|
41
|
26,829
|
||||||||||||
|
2001
|
7,161
|
-
|
26
|
7,187
|
||||||||||||
F-41
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
|
24.
|
Severance
Charges
|
During
the fiscal year ended June 30, 2003, the Company recorded a total of $362
in
severance and other related costs associated with a reduction of 43 employees
in
the United States and Ireland. Such costs were included in operating
expenses during the year ended June 30, 2003. The Company paid out this
entire amount during the year ended June 30, 2003.
|
25.
|
Subsequent
Events
|
Early
Buyout of Operating Lease Agreements. The Company leased an office
in Woburn, Mass. that it initially acquired through the purchase of ClearOne,
Inc. in July 2000. The facility consisted of 2,206 square feet. The Company
negotiated an early buyout of the lease effective September 2003. The Company's
U.S. business services operations were conducted from a facility totaling
25,523
square feet located in Golden Valley, Minnesota. The Company leased these
facilities under a lease agreement the expired in December 2004. The Company
negotiated an early buyout of the lease effective June 2004.
Settlement
Agreements and Releases. We
entered into settlement agreements and releases with four former executive
officers in connection with the cessation of their employment, which generally
provided for their resignations from their positions and employment with the
Company, the payment of severance in increments in accordance with the regular
payroll schedule, and a general release of claims against the Company by each
of
such persons. On February 27, 2004, an agreement was entered into with Greg
Rand, the Company’s former president and chief operating officer, which
generally provided for a severance payment of $75 and an accelerated vesting
of
25,000 stock options. On April 6, 2004, an agreement was entered into with
George Claffey, the Company’s former chief financial officer, which generally
provided for a severance payment of $61. On June 16, 2004, an agreement was
entered into with Mike Keough, the Company’s former chief executive officer,
which generally provided for a severance payment of $46 and vested options
totaling 18,749 stock options. On July 15, 2004, an agreement was entered into
with Angelina Beitia, the Company’s former vice president, which generally
provided for a lump sum payment of $100. In addition Ms. Beitia surrendered
and
delivered to the Company all outstanding vested and unvested options. In
accordance with the terms of our stock option plans, any unvested stock options
terminated on the date of termination of such persons’ employment with the
Company. This summary description of the settlement agreement and releases
are
qualified in their entirety by reference to the settlement agreement and
releases, copies of which are included as exhibits to this report.
Sale
of U.S. Audiovisual Integration Services. On May 6, 2004, the
Company sold certain assets of its U.S. audiovisual integration services
operations to M:Space, Inc. (M:Space) for no cash compensation. M:Space is
a
privately held audiovisual integration services company. In exchange for M:Space
assuming obligations for completion of certain customer contracts, and
satisfying maintenance contract obligations to existing customers, the Company
transferred to M:Space certain assets including inventory valued at $569. The
Company expects that the operations of the U.S. audiovisual integration services
will be classified as discontinued operations in the fiscal year 2004. As of
June 30, 2003 the assets of audiovisual integration services were classified
as
held and used.
Sale
of Conferencing Services Business. On July 1, 2004, the Company
sold its conferencing services business segment to Clarinet, Inc., an affiliate
of American Teleconferencing Services, Ltd. d/b/a Premier Conferencing for
$21,300. Of the purchase price $1,000 was placed into an 18-month Indemnity
Escrow account and an additional $300 was placed into a working capital escrow
account. We received the $300 working capital escrow funds approximately 90
days
after the execution date of the contract. Additionally, $1,365 of the proceeds
was utilized to pay off equipment leases pertaining to assets being conveyed
to
Clarinet. The Company expects that the conferencing services operations will
be
classified as discontinued operations in the fiscal year 2005. As of June 30,
2003, the assets of conferencing services were classified as held and
used.
Closing
of Germany Office. During December 2004, the Company closed its
Germany office and consolidated its activity with the United Kingdom office.
Costs associated with closing the Germany office totaled $305 and included
operating leases and severance payments.
Sale
of OM Video.
On March 4, 2005, the Company sold all of the issued and outstanding stock
of
its Canadian subsidiary, ClearOne Communications of Canada, Inc. (ClearOne
Canada) to 6351352 Canada Inc., a Canada corporation. ClearOne Canada owned
all
the issued and outstanding stock of Stechyson Electronics Ltd., which conducts
business under the name OM Video. The Company agreed to sell the stock of
ClearOne Canada for $200 in cash; a $1,256 note payable over a 15-month period,
with interest accruing on the unpaid balance at the rate of 5.25% per year;
and
contingent consideration ranging from 3% to 4% of related gross revenues over
a
five-year period. The Company expects that the operations of the Canada
audiovisual integration services will be classified as discontinued operations
in fiscal year 2005. As of June 30, 2003, the assets of the Canada audiovisual
integration business were classified as held and used. In June 2005, we were
advised that the OM Purchaser had settled an action brought by the former
employer of certain of OM Purchaser's owners and employees alleging violation
of
non-competition agreements. The settlement reportedly involved a cash payment
and an agreement not to sell certain products for a period of one year. We
are
evaluating what impact, if any, this settlement may have on the OM Purchaser's
ability to make the payment required under the note.
F-42
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands except share and per share amounts)
Third-Party
Manufacturing Agreement.
On August 1, 2005, ClearOne Communications, Inc. (the “Company”) entered into a
Manufacturing Agreement with Inovar, Inc., a Utah-based electronics
manufacturing services provider (“Inovar”), pursuant to which the Company agreed
to outsource its Salt Lake City manufacturing operations to Inovar. The
agreement is for an initial term of three years, which shall automatically
be
extended for successive and additional terms of one year each unless terminated
by either party upon 120 days’ advance notice at any time after the second
anniversary of the agreement. The agreement generally provides, among other
things, that Inovar shall: (i) furnish the necessary personnel, material,
equipment, services and facilities to be the exclusive manufacturer of
substantially all the Company’s products that were previously manufactured at
its Salt Lake City, Utah manufacturing facility, and the non-exclusive
manufacturer of a limited number of products, provided that the total cost
to
the Company (including price, quality, logistic cost and terms and conditions
of
purchase) is competitive; (ii) provide repair service and warranty support
and
proto-type services for new product introduction on terms to be agreed upon
by
the parties; (iii) purchase certain items of the Company’s manufacturing
equipment; (iv) lease certain other items of the Company’s manufacturing
equipment and have a one-year option to purchase such leased items; (v) have
the
right to lease the Company’s former manufacturing employees from a third party
employee leasing company; and (vi) purchase the Company’s parts and materials on
hand and in transit at the Company’s cost for such items with the purchase price
payable on a monthly basis when and if such parts and materials are used by
Inovar. The parties also entered into a one-year sublease for approximately
12,000 square feet of manufacturing space located in the Company’s headquarters
in Salt Lake City, Utah, which sublease may be terminated by either party upon
ninety days’ notice. The agreement provides that products shall be manufactured
by Inovar pursuant to purchase orders submitted by the Company at purchase
prices to be agreed upon by the parties, subject to adjustment based upon such
factors as volume, long range forecasts, change orders etc. The Company also
granted Inovar a right of first refusal to manufacture new products developed
by
the Company at cost to the Company (including price, quality, logistic cost
and
terms and conditions of purchase) that is competitive. Costs associated with
outsourcing the Company’s manufacturing totaled $429 including severance
payments, facilities no longer used by the Company and fixed assets that will
be
disposed of.
F-43
Exhibit
10.1
EMPLOYMENT
SEPARATION AGREEMENT
This
Employment Separation Agreement (“Agreement”) is entered into by and between
ClearOne Communications, Inc. (“ClearOne” or the “Company”) and Frances M. Flood
(“Flood”) (ClearOne and Flood shall sometimes be hereinafter referred to
collectively as the “Parties”).
RECITALS
A. Flood
has
been employed by ClearOne in a variety of positions, most recently as the
Company’s Chief Executive Officer, President, and Chairman of the
Board.
B. Flood
has
a written Employment Agreement with the Company, effective as of August 1,
2002 (“Employment Agreement”). The Employment Agreement, which is for a
three-year term expiring July 31, 2005, specifies the compensation and
benefits to which Flood is entitled to receive over the term of the contract.
The Employment Agreement also provides that the Company may terminate Flood’s
employment for cause only if Flood commits “willful misconduct,” with the term
“willful” expressly defined as an act “done, or omitted to be done, by [Flood]
not in good faith and without reasonable belief that [her] action or omission
was in the best interest of the Company.”
C. On
January 15, 2003, the United States Securities and Exchange Commission
filed a civil action against ClearOne, Flood, and Susie S. Strohm, who was
then
serving as the Company’s Chief Financial Officer, alleging various improprieties
and misstatements in connection with the Company’s financial statements (the
“SEC Action”).
D. The
filing of the SEC Action has spawned, and may continue to spawn, multiple
related proceedings, including, but not limited to, multiple shareholder
securities class actions, multiple shareholder derivative actions, a grand
jury
investigation being conducted by the United States Department of Justice, a
dispute and potential litigation between the Company and its directors and
officers liability insurers, and potential litigation between the Company and
its former auditor, Ernst & Young (collectively, “Related
Proceedings”).
E. Soon
after the filing of the SEC Action, the Company placed Flood on a paid
administrative leave of absence, and this paid administrative leave has
continued in effect at all times up to the execution of this
Agreement.
F. Flood
has
employed separate counsel, Max D. Wheeler, Richard A. Van Wagoner, and the
law
firm of Snow Christensen & Martineau (collectively, “SC&M”), to defend
her in the SEC Action and the Related Proceedings. SC&M has also represented
Flood in connection with the negotiation and drafting of this
Agreement.
G. Flood
has
made various demands on the Company for indemnification and for advancement
of
the attorneys’ fees and costs she has incurred to date, as well as the
attorneys’ fees and costs she may subsequently incur, in connection with the SEC
Action and the Related Proceedings and has provided the Company with a written
undertaking, dated August 27, 2003, in conformity with the requirements of
Utah Code Ann. § 16-10a-904.
H. ClearOne
referred Flood’s demand for indemnification to its Special Litigation Committee
(“SLC”) comprised of two independent directors. The SLC reviewed those demands,
as well as similar demands for indemnification made by other present or former
officers and directors of the Company, in conjunction with its investigation
of
the various claims asserted in the multiple shareholder derivative actions
filed
against certain of the Company’s present and former officers and directors,
including Flood. On October 13, 2003, the SLC completed its investigation
concerning the derivative actions and the indemnification demands and issued
its
reports to the Company wherein it concluded, inter alia,
that
pursuing the derivative actions was not in the best interest of the Company
and
that the Company should attempt to negotiate a settlement of Flood’s
indemnification demand in the context of negotiating a global settlement of
all
potential claims and counterclaims between the Company and Flood. In reliance
on
the SLC’s conclusions and recommendations, the Company has moved to dismiss the
derivative actions pursuant to Utah Code Ann. § 16-10a-740(4)(a) and has
negotiated this Agreement with Flood.
I. Flood
and
ClearOne desire to resolve any and all disputes that may exist between them,
whether known or unknown, including, but not limited to, disputes regarding
Flood’s demand for indemnification, disputes relating to Flood’s employment with
ClearOne, and disputes relating to the dissolution of that employment
relationship.
AGREEMENT
NOW,
THEREFORE, in consideration of the mutual promises, covenants, warranties,
and
agreements set forth herein, the Parties mutually agree as follows:
1. Effective
Date.
This
Agreement is effective on the eighth day following Flood’s signing of this
Agreement, provided that Flood does not revoke her execution of this Agreement
as provided in Paragraph 19 below.
2. Receipt
of this Agreement.
Flood
acknowledges that she received a copy of this Agreement on December 2,
2003, and that she has 21 days from the receipt of this Agreement in which
to
consider and consult with an attorney regarding this Agreement. Flood further
acknowledges that she has had an adequate amount of time in which to consult
with SC&M, her counsel of choice, with respect to the contents of this
Agreement prior to signing.
3. Payment
to Flood.
Upon
the expiration of the revocation period described in Paragraph 19 below and
the unrevoked signing of this Agreement by Flood, ClearOne shall pay Flood
the
sum of $350,000. The Parties acknowledge and agree that this payment is being
made in consideration of, inter alia,
the
Company’s purchase of Flood’s shares of the Company’s common stock, the
Company’s cancellation of Flood’s options to purchase additional shares of the
Company’s common stock, and the release of all claims that Flood may have
against the Company, all as more fully stated in Paragraphs 5, 6, and 9
below. The Parties also acknowledge and agree that the Company is not
responsible for the withholding of any federal or state taxes from said payment
and that Flood is responsible for paying any taxes that may become due and
owing
as a result of her receipt of said payment.
4. Separation
of Employment and Dissolution of Employment Agreement.
Flood
hereby resigns her employment with ClearOne, as well as her membership on the
Company’s board of directors, effective December 5, 2003. Flood’s
Employment Agreement is dissolved and cancelled as of the effective date of
this
Agreement, except that Flood’s post-termination obligations under Sections 8 and
9 of the Employment Agreement shall remain in effect to the full extent provided
in the Employment Agreement.
5. Cancellation
of Stock Options.
As
partial consideration for the payment specified in Paragraph 3 above, upon
the expiration of the revocation period described in Paragraph 19 below and
the unrevoked signing of this Agreement by Flood, all unexercised stock options
acquired by Flood during her employment with the Company, whether vested or
unvested, shall immediately be deemed cancelled. Flood represents and warrants
that, immediately prior to the effective date of this Agreement, she holds
vested and unvested stock options entitling her to purchase up to a total of
706,434 shares of the Company’s common stock and that 461,433 of these options
are vested. Flood further agrees that all of her rights, entitlements, and
benefits under the 1990 Gentner Stock Option Plan and the 1998 ClearOne Stock
Option Plan, including any agreements entered into in relation to the foregoing
plans, are hereby terminated and cancelled.
6. Transfer
of Stock.
As
partial consideration for the payment specified in Paragraph 3 above, upon
the expiration of the revocation period described in Paragraph 19 below and
the unrevoked signing of this Agreement by Flood, Flood shall transfer, assign,
and sell to the Company 35,000 shares of the Company’s common
stock.
7. Cooperation
in Related Proceedings.
Flood
shall cooperate with the Company and its counsel in the defense and/or
prosecution of the SEC Action and the Related Proceedings. Flood’s cooperation
shall include, but shall not be limited to, voluntarily providing deposition
and
trial testimony, meeting with the Company and its counsel for the purpose of
preparing for depositions or trial proceedings, and providing information and
documents to the Company or its counsel in connection with the defense and/or
prosecution of the SEC Action and the Related Proceedings. With respect to
any
request by the Company and/or its counsel for deposition or trial testimony,
meetings, information, or documents, the Company shall give reasonable notice
to
Flood of its request, including the time and place of the deposition, trial,
or
meeting, and shall reimburse Flood for all reasonable expenses incurred by
her,
including reasonable attorneys’ fees and costs, in providing the requested
cooperation. Despite the foregoing, this Agreement does not require Flood to
forego any constitutional rights.
8. Indemnification.
Subject
to the limitations imposed by Utah Code Ann. § 16-10a-902 and the Company’s
articles of incorporation and bylaws, and also subject to the undertaking
referred to in Recital G above, ClearOne shall indemnify Flood for any liability
and for all reasonable attorneys’ fees and costs incurred by her in connection
with the SEC Action or any Related Proceedings, whether incurred before or
after
the effective date of this Agreement. The Company’s duty to indemnify Flood is
further conditioned upon Flood’s fulfillment of her duty under Paragraph 7 above
to cooperate with the Company and its counsel in connection with the SEC Action
and Related Proceedings. Subject to the foregoing limitation, ClearOne will
continue to pay for the reasonable defense costs incurred by Flood in defending
matters or future matters, if any, which may arise from or relate to her tenure
as an officer or director of ClearOne.
9. Release
of Claims by Flood.
Flood,
on behalf of herself and her heirs and assigns, hereby completely releases
and
discharges ClearOne and all of ClearOne’s predecessors, successors, parents,
subsidiaries, and affiliates, and all of their respective present and former
directors, officers, employees, attorneys and agents (hereinafter collectively
referred to as “Releasees”) from any and all existing claims and causes of
action of every kind and nature, whether presently known or unknown by the
Parties, including but not limited to any claims or causes of action for breach
of implied or express contract (including the Employment Agreement), libel,
slander, wrongful discharge or termination, discrimination claims under the
Age
Discrimination in Employment Act and/or Older Workers Benefit Protection Act,
Title VII of the Civil Rights Act of 1964, as amended, the Utah
Antidiscrimination Act, local laws prohibiting age, race, religion, sex,
national origin, disability and other forms of discrimination, or any other
federal or state law that may be applicable thereto, claims growing out of
any
legal restrictions on ClearOne’s right to terminate its employees, any tort
claim or other claim arising in any way out of the employment relationship
between Flood and ClearOne or the termination of that relationship. Flood
specifically waives any and all claims for back pay, front pay, or any other
form of compensation for services, except as set forth herein.
Except
as
expressly stated in Paragraph 8 above, Flood hereby waives any right to
recover damages, costs, attorneys’ fees, and any other relief in any proceeding
or action brought against ClearOne by any other party, including without
limitation the Equal Employment Opportunity Commission and the Utah
Antidiscrimination and Labor Division, on Flood’s behalf asserting any claim,
charge, demand, grievance, or cause of action released by Flood as stated
above.
Notwithstanding
the foregoing, Flood does not waive rights, if any, Flood may have to
unemployment insurance benefits or workers’ compensation benefits. Nothing in
this Paragraph 9 prohibits Flood from paying COBRA premiums to maintain
Flood’s participation, if any, in ClearOne’s group health plan to the extent
allowed by law and by the terms, conditions, and limitations of the health
plan.
10. Release
of Claims by ClearOne.
Except
for any claim as to which indemnification is not allowed by Utah Code Ann.
§ 16-10a-902 and any claim that may accrue under the undertaking referenced
in Recital G above, ClearOne, on behalf of itself and its successors and
assigns, hereby completely releases and discharges Flood from all existing
claims and causes of action of any kind and nature, whether presently known
or
unknown by the Parties, including but not limited to any claims or causes of
action arising out of or relating to Flood’s Employment Agreement or her
employment with ClearOne.
11. No
Assignment of Claims.
Flood
represents and warrants that she has not previously assigned or transferred,
or
attempted to assign or transfer, to any third party, any of the claims waived
and released herein.
12. No
Claim Filed.
Flood
represents that she has not filed any claim, complaint, charge, or lawsuit
against ClearOne or any other Releasee with any governmental agency or any
state
or federal court, and covenants not to file any lawsuit at any time hereafter
for any matter, claim, or incident known or unknown which occurred or arose
out
of occurrences prior to the date hereof.
13. No
Admission of Liability.
This
Agreement does not constitute an admission of any fault, liability, or
wrongdoing by any Releasee, nor an admission that Flood has any claim whatsoever
against ClearOne or any other Releasee. ClearOne and all other Releasees
specifically deny having any liability to Flood or having committed any wrongful
acts against Flood. This Agreement does not constitute an admission of any
fault, liability, or wrongdoing by Flood, nor an admission that ClearOne has
any
claim against Flood. Flood specifically denies having any liability to ClearOne
or having committed any wrongful acts against ClearOne.
14. Additional
Consideration.
Flood
acknowledges and agrees that as of the date she signs this Agreement, ClearOne
has paid to Flood (a) all compensation for wages earned, less normal
payroll deductions, (b) all amounts due for earned vacation pay less normal
payroll deductions, and (c) all other amounts due and owing to Flood by
ClearOne. Notwithstanding the foregoing, ClearOne will pay Flood her normal
paycheck on December 12, 2003, which covers Flood’s compensation through
December 5, 2003, the effective date of her resignation. Flood agrees and
acknowledges that the sums paid pursuant to this Agreement are in addition
to
any sums or payments to which Flood would be entitled but for the signing of
this Agreement.
15. Conditions
Subsequent.
This
Agreement is conditioned upon Flood signing settlement documents in the SEC
Action by December 5, 2003, and upon the final approval of the settlement
of the SEC Action, as it applies to Flood, by January 31, 2004. If for any
reason Flood fails to satisfy either of these conditions, this Agreement will
automatically become null and void, and the Parties shall forthwith return
to
each other any and all consideration received by them pursuant to this
Agreement.
16. Integration
Clause.
This
Agreement contains the entire agreement and understanding of ClearOne and Flood
concerning the subject matter hereof, and except as expressly noted herein,
this
Agreement supersedes and replaces all prior negotiations, proposed agreements,
agreements or representations whether written or oral concerning the subject
matter hereof, including Flood’s Employment Agreement. ClearOne and Flood agree
and acknowledge that neither ClearOne or Flood, nor any agent or attorney of
either, has made any representation, warranty, promise or covenant whatsoever,
express or implied, not contained in this Agreement, to induce the other to
execute this Agreement. No amendment, alteration, or modification of this
Agreement shall be effective unless made in writing and signed by both
Parties.
17. Governing
Law.
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of Utah, without giving effect to Utah’s choice of law rules.
18. Voluntary
and Knowing Signing.
Flood
acknowledges that she has read this Agreement carefully and fully understands
this Agreement and that she has consulted with her counsel, SC&M, prior to
signing this Agreement. Flood acknowledges that she has executed this Agreement
voluntarily and of her own free will and that she is knowingly and voluntarily
releasing and waiving all claims she may have against Releasees, including
ClearOne.
19. Revocation
Period.
Flood
has seven (7) days from the date on which she signs this Agreement to revoke
this Agreement by providing written notice, by mail, hand delivery, or
facsimile, of her revocation to:
Raymond
J. Etcheverry
Parsons
Behle & Latimer
Counsel
for ClearOne
201
South
Main Street
Suite
1800
Salt
Lake
City, Utah 84111
Facsimile:
(801) 536-6111
Flood’s
revocation, to be effective, must be received by the above-named person by
the
end of the seventh day after Flood signs this Agreement. This Agreement becomes
effective on the eighth day after Flood signs this Agreement, providing that
Flood has not revoked this Agreement as provided above.
IN
WITNESS WHEREOF, the Parties have executed this Agreement on the dates indicated
below.
|
Dated:
December 5, 2003
|
CLEARONE
COMMUNICATIONS, INC.
/s/
Mike Keough
By:
Mike Keough
Its:
CEO
|
|
Dated:
December 5, 2003
|
/s/
Frances M. Flood
Frances
M. Flood
FRANCES
M. FLOOD
|
Exhibit
10.2
EMPLOYMENT
TERMINATION
AGREEMENT
This
Employment Termination Agreement (“Agreement”) is entered into by and between
ClearOne Communications, Inc. (“ClearOne” or the “Company”) and Susie S. Strohm
(“Strohm”) (ClearOne and Strohm shall sometimes be hereinafter referred to
collectively as the “Parties”).
RECITALS
A. Strohm
has been employed by ClearOne in a variety of positions, most recently as the
Company’s Chief Financial Officer.
B. On
January 15, 2003, the United States Securities and Exchange Commission
filed a civil action against ClearOne, Strohm, and Frances M. Flood, who was
then serving as the Company’s Chief Executive Officer, alleging various
improprieties and misstatements in connection with the Company’s financial
statements (the “SEC Action”).
C. The
filing of the SEC Action has spawned, and may continue to spawn, multiple
related proceedings, including, but not limited to, multiple shareholder
securities class actions, multiple shareholder derivative actions, a grand
jury
investigation being conducted by the United States Department of Justice, a
dispute and potential litigation between the Company and its directors and
officers liability insurers, and potential litigation between the Company and
its former auditor, Ernst & Young (collectively, “Related
Proceedings”).
D. Soon
after the filing of the SEC Action, the Company placed Strohm on a paid
administrative leave of absence, and this paid administrative leave has
continued in effect at all times up to the execution of this
Agreement.
E. Strohm
has employed separate counsel, Milo Steven Marsden and the law firm of
Bendinger, Crockett, Peterson & Casey, PC (collectively, “BCP&C”), to
defend her in the SEC Action and the Related Proceedings. BCP&C has also
represented Strohm in connection with the negotiation and drafting of this
Agreement.
F. Strohm
has made various demands on the Company for indemnification and for advancement
of the attorneys’ fees and costs she has incurred to date, as well as the
attorneys’ fees and costs she may subsequently incur, in connection with the SEC
Action and the Related Proceedings and has provided the Company with written
undertakings, dated August 29, 2003 and September 3, 2003, in
conformity with the requirements of Utah Code Ann.
§ 16-10a-904.
G. ClearOne
referred Strohm’s demands for indemnification to its Special Litigation
Committee (“SLC”) comprised of two independent directors. The SLC reviewed those
demands, as well as similar demands for indemnification made by other present
or
former officers and directors of the Company, in conjunction with its
investigation of the various claims asserted in the multiple shareholder
derivative actions filed against certain of the Company’s present and former
officers and directors, including Strohm. On October 13, 2003, the SLC
completed its investigation concerning the derivative actions and the
indemnification demands and issued its reports
to the Company wherein it concluded, inter alia,
that
pursuing the derivative actions was not in the best interest of the Company
and
that the Company should attempt to negotiate a settlement of Strohm’s
indemnification demands in the context of negotiating a global settlement of
all
potential claims and counterclaims between the Company and Strohm. In reliance
on the SLC’s conclusions and recommendations, the Company has moved to dismiss
the derivative actions pursuant to Utah Code Ann. § 16-10a-740(4)(a) and
has negotiated this Agreement with Strohm.
1
H. Strohm
and ClearOne desire to resolve any and all disputes that may exist between
them,
whether known or unknown, including, but not limited to, disputes regarding
Strohm’s demand for indemnification, disputes relating to Strohm’s employment
with ClearOne, and disputes relating to the termination of that employment
relationship.
AGREEMENT
NOW,
THEREFORE, in consideration of the mutual promises, covenants, warranties,
and
agreements set forth herein, the Parties mutually agree as follows:
1. Effective
Date.
This
Agreement is effective on the eighth day following Strohm’s signing of this
Agreement, provided that Strohm does not revoke her execution of this Agreement
as provided in Paragraph 19 below.
2. Receipt
of this Agreement.
Strohm
acknowledges that she received a copy of this Agreement on December 2,
2003, and that she has 21 days from the receipt of this Agreement in which
to
consider and consult with an attorney regarding this Agreement. Strohm further
acknowledges that she has had an adequate amount of time in which to consult
with BCP&C, her counsel of choice, with respect to the contents of this
Agreement prior to signing.
3. Payment
to Strohm.
Upon
the expiration of the revocation period described in Paragraph 19 below and
the unrevoked signing of this Agreement by Strohm, ClearOne shall pay Strohm
the
sum of $75,000. The Parties acknowledge and agree that this payment is being
made in consideration of, inter alia,
the
Company’s purchase of Strohm’s shares of the Company’s common stock, the
Company’s cancellation of Strohm’s options to purchase additional shares of the
Company’s common stock, and the release of all claims that Strohm may have
against the Company, all as more fully stated in Paragraphs 5, 6, and 9
below. The Parties also acknowledge and agree that the Company is not
responsible for the withholding of any federal or state taxes from said payment
and that Strohm is responsible for paying any taxes that may become due and
owing as a result of her receipt of said payment.
4. Resignation
of Employment.
Strohm
hereby resigns her employment with ClearOne effective December 5,
2003.
5. Cancellation
of Stock Options.
As
partial consideration for the payment specified in Paragraph 3 above, upon
the expiration of the revocation period described in Paragraph 19 below and
the unrevoked signing of this Agreement by Strohm, all unexercised stock options
acquired by Strohm during her employment with the Company, whether vested or
unvested, shall immediately
be deemed cancelled. Strohm represents and warrants that, immediately prior
to
the effective date of this Agreement, she holds vested and unvested stock
options entitling her to purchase up to a total of 268,464 shares of the
Company’s common stock and that 171,963 of these options are vested. Strohm
further agrees that all of her rights, entitlements, and benefits under the
1990
Gentner Stock Option Plan and the 1998 ClearOne Stock Option Plan, including
any
agreements entered into in relation to the foregoing plans, are hereby
terminated and cancelled.
2
6. Transfer
of Stock.
As
partial consideration for the payment specified in Paragraph 3 above, upon
the expiration of the revocation period described in Paragraph 19 below and
the unrevoked signing of this Agreement by Strohm, Strohm shall transfer,
assign, and sell to the Company 15,500 shares of the Company’s common
stock.
7. Cooperation
in Related Proceedings.
Strohm
shall cooperate with the Company and its counsel in the defense and/or
prosecution of the SEC Action and the Related Proceedings. Strohm’s cooperation
shall include, but shall not be limited to, voluntarily providing deposition
and
trial testimony, meeting with the Company and its counsel for the purpose of
preparing for depositions or trial proceedings, and providing information and
documents to the Company or its counsel in connection with the defense and/or
prosecution of the SEC Action and the Related Proceedings. With respect to
any
request by the Company and/or its counsel for deposition or trial testimony,
meetings, information, or documents, the Company shall give reasonable notice
to
Strohm of its request, including the time and place of the deposition, trial,
or
meeting, and shall reimburse Strohm for all reasonable expenses incurred by
her,
including reasonable attorneys’ fees and costs, in providing the requested
cooperation.
8. Indemnification.
Subject
to the limitations imposed by Utah Code Ann. § 16-10a-902 and the Company’s
articles of incorporation and bylaws, and also subject to the undertakings
referred to in Recital F above, ClearOne shall indemnify Strohm for any
liability and for all reasonable attorneys’ fees and costs incurred by her in
connection with the SEC Action or any Related Proceedings, whether incurred
before or after the effective date of this Agreement. The Company’s duty to
indemnify Strohm is further conditioned upon Strohm’s fulfillment of her duty
under Paragraph 7 above to cooperate with the Company and its counsel in
connection with the SEC Action and Related Proceedings.
9. Release
of Claims by Strohm.
Strohm,
on behalf of herself and her heirs and assigns, hereby completely releases
and
discharges ClearOne and all of ClearOne’s predecessors, successors, parents,
subsidiaries, and affiliates, and all of their respective present and former
directors, officers, employees, attorneys and agents (hereinafter collectively
referred to as “Releasees”) from any and all existing claims and causes of
action of every kind and nature, whether presently known or unknown by the
Parties, including but not limited to any claims or causes of action for breach
of implied or express contract, libel, slander, wrongful discharge or
termination, discrimination claims under the Age Discrimination in Employment
Act and/or Older Workers Benefit Protection Act, Title VII of the Civil Rights
Act of 1964, as amended, the Utah Antidiscrimination Act, local laws prohibiting
age, race, religion, sex, national origin, disability and other forms of
discrimination, or any other federal or state law that may be applicable
thereto, claims growing out of any legal restrictions on ClearOne’s right to
terminate its
employees, any tort claim or other claim arising in any way out of the
employment relationship between Strohm and ClearOne or the termination of that
relationship. Strohm specifically waives any and all claims for back pay, front
pay, or any other form of compensation for services, except as set forth
herein.
3
Except
as
expressly stated in Paragraph 8 above, Strohm hereby waives any right to
recover damages, costs, attorneys’ fees, and any other relief in any proceeding
or action brought against ClearOne by any other party, including without
limitation the Equal Employment Opportunity Commission and the Utah
Antidiscrimination and Labor Division, on Strohm’s behalf asserting any claim,
charge, demand, grievance, or cause of action released by Strohm as stated
above.
Notwithstanding
the foregoing, Strohm does not waive rights, if any, Strohm may have to
unemployment insurance benefits or workers’ compensation benefits. Nothing in
this Paragraph 9 prohibits Strohm from paying COBRA premiums to maintain
Strohm’s participation, if any, in ClearOne’s group health plan to the extent
allowed by law and by the terms, conditions, and limitations of the health
plan.
10. Release
of Claims by ClearOne.
Except
for any claim as to which indemnification is not allowed by Utah Code Ann.
§ 16-10a-902 and any claim that may accrue under the undertakings
referenced in Recital F above, ClearOne, on behalf of itself and its successors
and assigns, hereby completely releases and discharges Strohm from all existing
claims and causes of action of any kind and nature, whether presently known
or
unknown by the Parties, including but not limited to any claims or causes of
action arising out of or relating to Strohm’s employment with
ClearOne.
11. No
Assignment of Claims.
Strohm
represents and warrants that she has not previously assigned or transferred,
or
attempted to assign or transfer, to any third party, any of the claims waived
and released herein.
12. No
Claim Filed.
Strohm
represents that she has not filed any claim, complaint, charge, or lawsuit
against ClearOne or any other Releasee with any governmental agency or any
state
or federal court, and covenants not to file any lawsuit at any time hereafter
for any matter, claim, or incident known or unknown which occurred or arose
out
of occurrences prior to the date hereof.
13. No
Admission of Liability.
This
Agreement does not constitute an admission of any fault, liability, or
wrongdoing by any Releasee, nor an admission that Strohm has any claim
whatsoever against ClearOne or any other Releasee. ClearOne and all other
Releasees specifically deny having any liability to Strohm or having committed
any wrongful acts against Strohm. This Agreement does not constitute an
admission of any fault, liability, or wrongdoing by Strohm, nor an admission
that ClearOne has any claim against Strohm. Strohm specifically denies having
any liability to ClearOne or having committed any wrongful acts against
ClearOne.
14. Additional
Consideration.
Strohm
acknowledges and agrees that as of the date she signs this Agreement, ClearOne
has paid to Strohm (a) all compensation for wages earned, less normal
payroll deductions, (b) all amounts due for earned vacation pay less normal
payroll deductions, and (c) all other amounts due and owing to Strohm by
ClearOne. Strohm agrees and acknowledges that the sums paid pursuant to this
Agreement are in addition to any sums or payments to which Strohm would be
entitled but for the signing of this Agreement.
4
15. Conditions
Subsequent.
This
Agreement is conditioned upon Strohm signing settlement documents in the SEC
Action by December 5, 2003, and upon the final approval of the settlement
of the SEC Action, as it applies to Strohm, by January 31, 2004. If for any
reason Strohm fails to satisfy either of these conditions, this Agreement will
automatically become null and void, and the Parties shall forthwith return
to
each other any and all consideration received by them pursuant to this
Agreement.
16. Integration
Clause.
This
Agreement contains the entire agreement and understanding of ClearOne and Strohm
concerning the subject matter hereof, and except as expressly noted herein,
this
Agreement supersedes and replaces all prior negotiations, proposed agreements,
agreements or representations whether written or oral concerning the subject
matter hereof. ClearOne and Strohm agree and acknowledge that neither ClearOne
or Strohm, nor any agent or attorney of either, has made any representation,
warranty, promise or covenant whatsoever, express or implied, not contained
in
this Agreement, to induce the other to execute this Agreement. No amendment,
alteration, or modification of this Agreement shall be effective unless made
in
writing and signed by both Parties.
17. Governing
Law.
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of Utah, without giving effect to Utah’s choice of law rules.
18. Voluntary
and Knowing Signing.
Strohm
acknowledges that she has read this Agreement carefully and fully understands
this Agreement and that she has consulted with her attorney, BCP&C, prior to
signing this Agreement. Strohm acknowledges that she has executed this Agreement
voluntarily and of her own free will and that she is knowingly and voluntarily
releasing and waiving all claims she may have against Releasees, including
ClearOne.
19. Revocation
Period.
Strohm
has seven (7) days from the date on which she signs this Agreement to revoke
this Agreement by providing written notice, by mail, hand delivery, or
facsimile, of her revocation to:
Raymond
J. Etcheverry
Parsons
Behle & Latimer
Counsel
for ClearOne
201
South
Main Street
Suite
1800
Salt
Lake
City, Utah 84111
Facsimile:
(801) 536-6111
Strohm’s
revocation, to be effective, must be received by the above-named person by
the
end of the seventh day after Strohm signs this Agreement. This Agreement becomes
effective on the eighth day after Strohm signs this Agreement, providing that
Strohm has not revoked this Agreement as provided above.
5
IN
WITNESS WHEREOF, the Parties have executed this Agreement on the dates indicated
below.
|
Dated:
December 5, 2003
|
CLEARONE
COMMUNICATIONS, INC.
/s/
Mike Keough
By:
Mike Keough
Its:
CEO
|
|
Dated:
December 2, 2003
|
/s/
Susie Strohm
Susie
Strohm
SUSIE
S. STROHM
|
Exhibit
10.3
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
SHARE
PURCHASE AGREEMENT
TABLE
OF CONTENTS
| Page No. | |||
|
ARTICLE
1 – INTERPRETATION
|
2
|
||
|
|
1.1
|
Definitions
|
2
|
|
|
1.2
|
Time
of the Essence
|
8
|
|
|
1.3
|
Calculation
of Time
|
8
|
|
|
1.4
|
Business
Days
|
8
|
|
|
1.5
|
Currency
|
8
|
|
|
1.6
|
Headings
|
8
|
|
|
1.7
|
Plurals
and Gender
|
8
|
|
|
1.8
|
Statutory
References
|
8
|
|
|
1.9
|
Construction
|
9
|
|
|
1.10
|
Exhibits
|
9
|
|
|
|
|
|
|
ARTICLE
2 – PURCHASE AND SALE OF PURCHASED SHARES
|
9
|
||
|
|
2.1
|
Purchase
and Sale of Purchased Shares
|
9
|
|
|
2.2
|
Purchase
Price
|
9
|
|
|
|
|
|
|
ARTICLE
3 – CLOSING ARRANGEMENTS
|
10
|
||
|
|
3.1
|
Place
of Closing
|
10
|
|
|
3.2
|
Delivery
of Certificates
|
10
|
|
|
3.3
|
Payment
of Purchase Price
|
11
|
|
|
3.4
|
Payoff
of Liabilities/Merchaniaries of Holdback
|
12
|
|
|
3.5
|
Lock
Up
|
13
|
|
|
|
|
|
|
ARTICLE
4 – REPRESENTATION AND WARRANTIES
|
13
|
||
|
|
4.1
|
Representations
and Warranties of the Vendors
|
13
|
|
|
4.2
|
Representations
and Warranties of the Purchase and the Parent
|
35
|
|
|
4.3
|
Non-Waiver
|
37
|
|
|
4.4
|
Nature
and Survival of Vendor’s Representations and Warranties
|
37
|
|
|
4.5
|
Survival
of Purchaser’s and Parent’s Representations and Warranties
|
37
|
|
|
4.6
|
Vendors
Covenants
|
37
|
|
|
|
|
|
|
ARTICLE
5 – CONDITIONS PRECENDENT TO THE PERFORMANCE BY
THE
PARTIES OF THEIR OBLIGATIONS UNDER THIS
AGREEMENT
|
38
|
||
|
|
5.1
|
The
Purchaser’s Conditions
|
38
|
|
|
5.2
|
Conditions
of the Vendors
|
41
|
|
|
5.3
|
Waiver
by Purchaser
|
43
|
|
|
5.4
|
Waiver
by Vendors
|
43
|
|
|
|
|
|
|
ARTICLE
6 – INDEMNIFICATION
|
43
|
||
|
|
6.1
|
Indemnification
by Vendors
|
43
|
|
|
6.2
|
Indemnification
by the Purchase and the Parent
|
44
|
|
|
6.3
|
Limitation
of Liability
|
44
|
(ii)
|
|
6.4
|
The
Parent’s Guarantee
|
44
|
|
|
6.5
|
Procedure
for Indemnification
|
44
|
|
|
6.6
|
Additional
Rules and Procedures
|
45
|
|
|
6.7
|
Rights
Cumulative
|
46
|
|
|
6.8
|
GST
|
47
|
|
|
6.9
|
Set-Off
Rights
|
47
|
|
|
6.10
|
Exception
|
47
|
|
|
|
|
|
|
ARTICLE
7 – GENERAL
|
47
|
||
|
|
7.1
|
Public
Notices
|
47
|
|
|
7.2
|
Term
Sheet
|
48
|
|
|
7.3
|
Confidentiality
|
48
|
|
|
7.4
|
Stand-Off
|
48
|
|
|
7.5
|
Expenses
|
48
|
|
|
7.6
|
Further
Assurances
|
48
|
|
|
7.7
|
Assignment
and Enurement
|
48
|
|
|
7.8
|
Entire
Agreement
|
49
|
|
|
7.9
|
Waiver
|
49
|
|
|
7.10
|
Notices
|
49
|
|
|
7.11
|
Severability
|
50
|
|
|
7.12
|
Execution
by Facsimile
|
50
|
|
|
7.13
|
Counterparts
|
51
|
|
|
7.14
|
Governing
Law and Jurisdiction for Disputes
|
51
|
|
|
7.15
|
Resolution
of Disputes by Arbitrator
|
51
|
|
|
7.16
|
Remedies
|
51
|
|
|
7.17
|
Undisputed
Amounts
|
52
|
|
|
7.18
|
Survival
|
52
|
|
|
7.19
|
Good
Faith
|
52
|
(iii)
SHARE
PURCHASE AGREEMENT
THIS
AGREEMENT
made as
of the 16th day of August, 2002
B
E T W E E N:
ClearOne
Communications of Canada Inc..,
a
corporation incorporated under the laws of the Province of New Brunswick,
Canada, and wholly owned by Gentner Ventures, Inc., a corporation organised
under the laws of the State of Utah, United States;
(the
“Purchaser”)
-
and
-
ClearOne
Communications, Inc.,
a
corporation incorporated under the laws of the State of Utah, United States,
and
the sole shareholder of Gentner Ventures, Inc.
(the
“Parent”)
-
and
-
3814149
Canada, Inc. , 3814157 Canada Inc
Stechyson Family Trust, Jim Stechyson, Norm Stechyson and Heather Stechyson
Family Trust
(collectively,
the “Vendors”)
RECITALS:
1. The
Vendors are the owners of all of the issued and outstanding shares in the
capital of Stechyson Electronics Ltd., a corporation organised under the Canada
Business Corporations Act (the “Corporation”); and
2. The
Vendors wish to sell to the Purchaser and the Purchaser wishes to purchase
from
the Vendors all of the issued and outstanding shares in the capital of the
Corporation.
NOW
THEREFORE
in
consideration of the mutual covenants set out in this Agreement and for other
good and valuable consideration (the receipt and sufficiency of which is hereby
irrevocably acknowledged), the parties agree as follows:
1
ARTICLE
1 -
INTERPRETATION
1.1 Definitions
Throughout
this Agreement, except as otherwise expressly provided, the following words
and
expressions shall have the following meanings:
(a) “Accredited
Investor”
has
the
meaning set out in
Regulation D, Rule 501(a) of the Securities Act of 1933, and
(b) “Adverse
Consequences”
means
all actions, suits, proceedings, hearings, investigations, charges, complaints,
claims, demands, injunctions, judgments, orders, decrees, rulings, damages,
dues, penalties, fines, costs, amounts paid in settlement, liabilities,
obligations, taxes, liens, losses, damages of any kind, expenses and fees,
including court costs and attorney fees and expenses
(c) "Ordinary
Course of Business"
means
the ordinary course of business consistent with past custom and practice
(including with respect to quantity and frequency).
(d) “Accepting
Party”
has
the
meaning attributed thereto in Section 7.18;
(e) “Accounts
Receivable”
has
the
meaning attributed thereto in Section 4.1(v);
(f) “Act”
has
the
meaning attributed thereto in Section 7.15;
(g) “Affiliate”
shall
have the meaning given to it in the Business Corporations Act
(Ontario);
(h) “Agreement”,
“this
Agreement”,
“the
Agreement”,
“hereof”,
“herein”,
“hereto”,
“hereby”,
“hereunder”
and
similar expressions mean this share purchase agreement, including all of its
exhibits and all instruments supplementing, amending or confirming this
Agreement. All references to “Articles”
or
“Sections”
mean
and refer to the specified Article or Section of this Agreement;
(i) “Arm’s
Length”
has
the
meaning attributed thereto in the Tax Act and the related
jurisprudence;
(j) “Authority”
means
any governmental authority, body, agency or department, whether federal,
provincial or municipal and any court, tribunal or similar body;
(k) “Balance
Sheet”
means
the audited balance sheet of the Corporation as at October 31, 2001 forming
part
of the Financial Statements;
(l) “Business”
means
the business presently carried on by the Corporation consisting of the
distribution and sale of services, audio /video products and accessories;
2
(m) “Business
Day”
means
any day which is not a Saturday, a Sunday or a day observed as a holiday under
the laws of the Province of Ontario, the federal laws of Canada applicable
to
the Province of Ontario, or the State of Utah, United States;
(n) “Cash”
shall
mean Canadian dollars, which amounts shall be in the cash accounts of the
Corporation as of the Time of Closing
(o) “Claim”
has
the
meaning attributed thereto in Section 6.1;
(p) “Closing”
means
the completion of the transactions described in this Agreement and Closing
shall
be deemed to have occurred and shall be effective at such time that counsel
for
Vendors and counsel for Parent shall have each faxed to the other instructions
to deliver all documents, certificates and instruments held in trust by such
counsel to his respective client and funds required to wired at Closing shall
have been received in the account designated by Vendors;
(q) “Closing
Date”
or
“Date of Closing” means the date on which Close shall be deemed to have
occurred;
(r)
“Closing
Financial Statements”
means
the unaudited balance sheet, income statement, and statement of cash flow as
of
the closing date, and the nine-month period ended on July 31, 2002 and an
internal trial balance which shows shows all accounts of the Corporation
including but not limited to assets, liabilities, equity, sales, expenses,
and
income as of the August 16, 2002 along with a bring-down certificate as of
the
Closing Date signed by Norm Stechyson e
(s)
“Corporation”
means
Stechyson Electronics Ltd., a corporation incorporated under the Canada Business
Corporations Act, and its successors;
(t) “Cost
of Goods Sold”
means
the purchase price of products plus applicable exchange rate, duties, brokerage
and freight, less any applicable discounts and rebates payable in relation
to
the products and less any wages paid in relation to the services provided.
(u) “Debt”
means
all current liabilities and long term debt of the Corporation;
(v) “Deficiency”
shall
have the meaning as defined in Section 2.2(ii)(b);
(w) “EBITDA”
means
earnings before interest, taxes, depreciation and amortization calculated in
accordance with U.S. GAAP;
(x) “Encumbrance”
means
any mortgage, lien (including any construction lien or certificate of action
filed with respect thereto), pledge, charge, security interest, restriction,
claim, set-off or encumbrance of any nature whatsoever;
3
(y) “Environmental
Laws”
means
all applicable Laws relating in whole or in part to the pollution or protection
of the environment, occupational or public health and safety, Hazardous
Substances.
(z) “Holdback
Funds”
has
the
meaning set forth in Section 3.3(e);
(aa) “Holdback
Account”
has
the
meaning set forth in Section 3.3(e).
(bb) “ETA”
means
the Excise Tax Act (Canada);
(cc) “Financial
Statements”
means
the Closing Financial Statements, and the audited financial statements of the
Corporation for the fiscal year ended October 31, 2001, consisting of balance
sheet as of those dates, statement of income (loss) and retained earnings
(deficit) and, for the fiscal years ended October 31, 1999 and October 31,
2000,
unaudited financial statements consisting of balance sheets, statements of
income (loss) and retained earnings (deficit), statements of cash flows and
all
notes thereto, copies of which are annexed as Exhibit 1.1(cc)
hereto;
(dd) “Future
Products”
means
products created, developed or distributed by the Corporation, as same may
be
further developed, modified or enhanced from time to time, after the date of
this Agreement;
(ee)
“GAAP”
means
Canadian generally accepted accounting principles applied on a consistent basis
and which are in accordance with recommendations from time to time of the
Canadian Institute of Chartered Accountants (as published in the CICA handbook)
at the date on which such generally accepted accounting principles are
applied;
(ff)
“Governmental
Entity”
means
Canadian federal and provincial regulatory and taxing authorities;
(gg) “Gross
Sales”
shall
mean sales of all Products and services invoiced during the applicable period.
(hh) “GST”
means
all Taxes payable under the ETA or under any provincial legislation similar
to
the ETA and any reference to a specific provision of the ETA or any such
provincial legislation shall refer to any successor provision thereto of like
or
similar effect;
(ii) “Hazardous
Substance”
means
a
Substance which is or is deemed to be alone, or in any combination, any
pollutant, contaminant, waste, solid waste, liquid waste, industrial waste,
hazardous waste, hazardous toxic, dangerous substance or dangerous good, a
deleterious substance, a pollution or contamination or any other substance
or
material currently or hereafter prohibited, controlled or regulated under any
Environmental Laws whether or not such substance is defined as hazardous under
the Environmental Law.
(jj)
“Indemnified
Party”
has
the
meaning attributed thereto in Section 6.5;
4
(kk) “Indemnifying
Party”
has
the
meaning attributed thereto in Section 6.5;
(ll) “Intellectual
Property”
means
all intellectual property of any nature owned or used by the Corporation which
is reasonably necessary in the operation of the Business, including, but not
limited to, all trade names (including, for certainty, the trade names “OM Video
“ and “Omvideo.ca”, domain names, business names, service marks, logos,
trademarks, certification marks, distinguishing guises, industrial designs,
copyrights, copyrightable works, formulae, processes, research data, technical
expertise, know how, trade secrets, inventions and patents, whether domestic
or
foreign and whether registered or unregistered, whether in existence or now
under development and all applications for registration in respect thereof,
any
rights to royalties, any claims for past infringements of such Intellectual
Property (but only to the extent they exist and are legal) and including such
intellectual property listed in Exhibit 1.1(ll) to this Agreement;
(mm) “Inventories”
has
the
meaning attributed thereto in Section 4.1(u);
(nn) "Laws”
means
all applicable federal, provincial, municipal or local laws, statutes,
regulations, ordinances, rules, guidelines, orders, directives or other
requirements of any Authority.
(oo) “Lease”
means
the lease between Commercial Property
Developments as
landlord and the Corporation, dated August 1, 2000 and amended on February
1,
2002;
(pp) “Liability”
means
any direct or indirect indebtedness, liability, guaranty, endorsement, claim,
loss, damage, deficiency, cost, expense, obligation or responsibility, fixed
or
unfixed, known or unknown, asserted or unasserted, liquidated or unliquidated,
secured or unsecured.
(qq) “Location”
means
the premises leased by the Corporation pursuant to the Lease;
(rr) “Material
Adverse Effect”
means,
where used in relation to the Corporation, a material adverse effect on the
business, operations, assets, financial condition or prospects of the
Corporation, as the case may be;
(ss) “Material
Change”
means
a
material adverse change in the condition, business, operations, prospects,
affairs, assets and personnel of the Business;
(tt) “Operating
Profit Margin”
shall
mean income (determined according to US GAAP) before interest and taxes and
the
items listed in Exhibit 2.2(ii)(b).
(uu) “Net
Working Capital”
shall
mean an amount which shall be calculated as the net amount of current assets
less current liabilities, specifically defined as [(Cash
+
short-term investments + accounts receivable + other receivables + inventory
+
prepaid expenses + GST credits + any other non-capital assets) less (accounts
payable + accruals + unearned or deferred revenues + currency exchange premiums
+ payroll payable + commissions payable + payroll benefits payable + taxes
payable + any other liabilities due to others within the period of the next
12
months)];
5
(vv)
“Offer”
means
an attempt or solicitation to buy securities of the Corporation or an interest
in its securities, or to acquire a substantial portion of its assets, for
value;
(ww) “Options”
has
the
meaning attributed thereto in Section 4.1(e);
(xx) “Parent”
means
ClearOne
Communications, Inc., a corporation organised under the laws of the State of
Utah, United States,
Inc.;
(yy) “Parties”
means,
collectively, the Purchaser, the Parent and each of the Vendors, and “Party”
means any of them;
(zz)
“Payment”
has
the
meaning attributed thereto in Section 6.8;
(aaa) “Person”
means
an individual, partnership, unincorporated association, organization, syndicate,
corporation, trust and a trustee, executor, administrator or other legal or
personal representative;
(bbb)
“Plans”
means
all plans, arrangements, programs, policies, practices or undertakings, whether
oral or written, formal or informal, funded or unfunded, registered or
unregistered which the Corporation is a party to or bound by or under which
the
Corporation has any liability or which has any application to the employees
of
the Corporation relating to retirement savings, pensions or benefits, including
any defined benefit pension plan, defined contribution pension plan, group
registered retirement savings plan, or supplemental pension or retirement plan,
or any bonus, profit sharing, stock option, share purchase, stock appreciation,
deferred compensation, incentive compensation, supplemental unemployment
benefits, hospitilization, health, dental, disability, life insurance, death
or
survivor’s benefit, employment insurance, vacation pay, severence or termination
pay or other benefit plan with respect to any of its employees, retired
employees or former employees and individuals working on contract with the
Corporation or other individuals providing services to the Corporation of a
kind
normally provided by employees, or eligible dependents of any such
person;
(ccc)
“Products”
means
the audio products, video products, and audio/video accessories and services
currently provided, distributed and sold by the Corporation;
(ddd)
“Pro
Rata Portion”
and
“Pro
Rata Portions”
have
the meanings attributed thereto in Section 2.1;
(eee) “Purchased
Shares”
means
the shares listed in Exhibit 4.1(f) which are all of the_ issued and outstanding
common shares in the capital of the Corporation;
(fff)
“Purchase
Price”
has
the
meaning attributed thereto in Section 2.2;
6
(ggg)
“Purchaser”
means
ClearOne Communications of Canada
Inc.,
a
corporation incorporated under the laws of the Province of New Brunswick, Canada
and wholly owned by Gentner Ventures, Inc., a corporation organised under the
laws of the State of Utah, United States;
(hhh)
“Real
Property”
means
any real property, whether owned or leased, and used for the conduct of the
Business or previously used for such purpose;
(iii)
“Regulatory
Approvals”
means
all necessary approvals, permits, sanctions, rulings, orders or consents from
any Authority or self-regulatory organization within or outside of Canada with
respect to the transactions contemplated by this Agreement;
(jjj) "Security
Interest"
means
any mortgage, pledge, lien, encumbrance, charge, or other security
interest
(kkk)“Substance”
means
any substance, waste, liquid, gaseous or solid matter, fuel, micro-organism,
sound, vibration, heat, odour, radiation, energy vector, plasma, and organic
or
inorganic matter.
(lll)
“Tax
Act”
means
the Income Tax Act (Canada);
(mmm) “Tax”
;“Tax”
or
“Taxes”
shall
mean all federal, provincial, municipal, state, local, foreign and other duties,
levies, taxes, assessments, reassessments or other Government charges of any
nature whatsoever, including, without limitation,
income,
estimated income, capital, land transfer, value-added, business, occupation,
franchise, property, sales, transfer, use, employment, wage, payroll, commercial
rent or withholding taxes, workers compensation levies, customs excise duties,
social security and unemployment insurance charges and retirement contributions,
including interest, penalties, fines and additions in connection therewith
for
which the Corporation may be liable;
(nnn)
“Tax
Return”
means
any return, report, information return, election, designation or other document
(including any related or supporting information) with respect to
Taxes;
(ooo)
“Time
of Closing”
means
4:00 PM on the Closing Date or such other time as the Purchaser and the Vendors
may agree upon;
(ppp)
“Threshold”
has
the
meaning attributed thereto in Section 6.6(f);
(qqq)
“Third
Party Claim”
has
the
meaning attributed thereto in Section 6.5;
(rrr)
“Undisputed
Amount”
has
the
meaning attributed thereto in Section7.17; and
(sss)
“Vendors”
has
the
meanings set forth in the recitals, above.
7
| 1.2 |
Time
of the Essence
|
Time
shall be of the essence in and of this Agreement and every part hereof. Any
extension, waiver or variation of any provision of this Agreement shall not
be
deemed to affect this provision and there shall be no implied waiver of this
provision.
| 1.3 |
Calculation
of Time
|
Unless
otherwise specified, time periods within or following which any payment is
to be
made or act is to be done shall be calculated by excluding the day on which
the
period commences and including the day on which the period ends. Where the
last
day of any such time period is not a Business Day, such time period shall be
extended to the next Business Day following the day on which it would otherwise
end.
| 1.4 |
Business
Days
|
Whenever
any action to be taken or payment to be made pursuant to this Agreement would
otherwise be required to be made on a day that is not a Business Day in the
United States or in Canada, such action shall be taken or such payment shall
be
made on the first Business Day that is a Business Day both in the United States
and in Canada on the following such day.
| 1.5 |
Currency
|
Unless
otherwise specified, all references to amounts of money in this Agreement refer
to Canadian currency. Conversions to/from U.S. dollars shall be made in
accordance with the rates published in the Wall Street Journal for the date
prior to the date when the conversion needs to be made.
| 1.6 |
Headings
|
The
descriptive headings preceding Articles and Sections of this Agreement are
inserted solely for convenience of reference and are not intended as complete
or
accurate descriptions of the content of such Articles or Sections. The division
of this Agreement into Articles and Sections shall not affect the interpretation
of this Agreement.
| 1.7 |
Plurals
and Gender
|
The
use
of words in the singular or plural, or referring to a particular gender, shall
not limit the scope or exclude the application of any provision of this
Agreement to such persons or circumstances as the context otherwise
permits.
| 1.8 |
Statutory
References
|
8
Any
reference to a statute shall mean the statute in force as at the date of this
Agreement (together with all regulations promulgated thereunder) as the same
may
be amended, re-enacted, consolidated or replaced from time to time, and any
successor statute thereto, unless otherwise expressly provided.
| 1.9 |
Construction
|
The
words
“including”, “include”, and “includes” shall mean “including without
limitation”, “include, without limitation” and “includes, without limitation”,
respectively.
| 1.10 |
Exhibits
|
The
Exhibits described herein and annexed hereto are incorporated by this reference
and are deemed to form part of this Agreement.
ARTICLE
2 -
PURCHASE AND SALE OF PURCHASED SHARES
| 2.1 |
Purchase
and Sale of Purchased
Shares
|
Subject
to the terms and conditions of this Agreement, at the Time of Closing, each
of
the Vendors (as beneficial owner) shall sell, convey and assign those of the
Purchased Shares set out opposite his or her name on Exhibit 3.3(a) free and
clear from all liens, charges and encumbrances for that portion of the Purchase
Price set out opposite each Vendor’s name in Exhibit 3.3(a) (each such portion
being that Vendor’s “Pro Rata Portion” and, collectively, the Vendors’“Pro Rata
Portions”), and the Purchaser shall purchase such shares.
| 2.2 |
Purchase
Price
|
The
consideration to be paid by the Purchaser for the Purchased Shares shall be
US$8,000,000 subject to adjustments set out herein. Payment of the Purchase
Price is more fully described in Section 3.3, below.
(i) Pre
Closing Adjustments:
The
Cash
Proceeds (as hereinafter defined) and the Purchase Price shall be decreased
by
the amount that Purchaser or Parent has paid as of Closing to Corporation or
any
affiliate pursuant to that certain letter agreement dated April 18, 2002, a
copy
of which is attached hereto as Exhibit 2.2(i) which amounts the Parties agree
shall constitute a non-refundable deposit toward the Purchase Price. The Vendors
do hereby agree that notwithstanding the fact that such amount was not paid
to
any of them, such payments constitute part of the Purchase Price.
(ii) Post
Closing Adjustments:
(a)
Within
six months following Closing, Purchaser shall examine the financial records
of
Corporation and determine if the following conditions (the “Post Closing
Conditions”) existed at the Time of Closing: (a) Corporation had in its accounts
at least $300,000 Canadian Cash (which for purposes of this calculation will
not
include
9
checks
which were in the possession of the Corporation at the time of Closing but
have
not been honoured and collected as of the date of this calculation) , (b)
Corporation had a minimum of $675,000 Canadian Net Working Capital, (c)
Corporation had no long-term liabilities and (d) there were no amounts owing
on
any line of credit of the Corporation. If any of these conditions have failed
to
exist at the Time of Closing, then, if the failure is as to (a), (b) or (c)
above then Purchaser shall draw from Holdback Funds an amount sufficient to
remedy the deficiency, and if the failure is as to (d) above, Purchaser shall
draw from Holdback Funds an amount necessary to pay off all amounts outstanding
pursuant to any line of credit Purchaser may draw such amounts as provided
above
from the Holdback Funds without notice and without complying with the procedure
set out in Article 6 hereof, (without limitation, without complying with the
procedures set out in Section 6.9 hereof) and seek additional remedies for
any
deficiency. . Purchaser’s calculations to determine if the above conditions were
met, shall be unilateral and not subject to discussion with Vendors. Within
10
days following any draw, Purchaser shall provide a courtesy notice to Vendors
that such draws from Holdback Funds have been made and provide such information
as is reasonably requested by Vendors.
(b) Subject
to Section 2.2(ii)(c) below, if during the ninety (90) day period following
Closing, Corporation requires Cash in excess of the amount in the Corporation’s
accounts at the Time of Closing (the “Deficiency”), then Purchaser may draw from
the Holdback Funds without notice and without complying with the procedure
set
out in Article 6 hereof, (without limitation, without complying with the
procedures set out in Section 6.9 hereof) an amount sufficient to fund such
Deficiency, but not to exceed Can
$150,000, and the Purchase Price shall be reduced by such amount. The
determination of the Deficiency by Purchaser shall be unilateral and not subject
to discussion with Vendors. The expense items listed on Exhibit 2.2(ii)(b)
shall
not be included in the calculation of the Deficiency. Exhibit 2.2(ii)(b) must
be
signed by all parties in order to be operative.
(c) If
the
Corporations Net Working Capital at Closing exceeds Can$675,000, then the amount
that may be drawn from the Holdback Funds pursuant to Section 2.2(ii)(a) or
(b)
above or to satisfy obligations owed pursuant to the
pending audit by the Canada Customs and Revenue Agency
shall be
decreased by the amount that the Corporation’s Net Working Capital exceeds
Can$675,000.
ARTICLE
3 -
CLOSING ARRANGEMENTS
| 3.1 |
Place
of Closing
|
The
Closing shall take place at the Time of Closing by express delivery of executed
documents to each party’s counsel in trust with faxed instructions for disbursal
or by another means agreed upon by the Purchaser and the Vendors.
| 3.2 |
Delivery
of Certificates
|
The
Vendors shall transfer and deliver to the Purchaser’s counsel prior to the Time
of Closing share certificates representing the Purchased Shares duly endorsed
in
blank for transfer, or accompanied by irrevocable security transfer powers
of
attorney duly executed in blank. The
10
| 3.3 |
Payment
of Purchase Price
|
Subject
to the pre closing and post closing adjustments provided for above, the Purchase
Price shall be paid by the Purchaser in the following manner:
(a) By
delivery to the Vendors at the Closing by wire transfer of $5,000,000 less
$324,000 totalling $4,676,000 to an account of James B. Curran, (pursuant to
instructions to be delivered by Mr Curran) who is hereby appointed by Vendor’s
and each of them as Vendors’ agent to receive such wire transfer and Vendors
agree that wire of funds to Mr Curran constitutes delivery of funds to each
of
the Vendors. The respective Pro Rata Portions, of each Vendor in the Purchase
Price is as set out on Exhibit 3.3(a) and as adjusted pursuant to Paragraph
2.2
above;
(b) US
$1,600,000 by wire transfer to CIBC World Markets pursuant to the written
agreement attached hereto as Exhibit 3.3(b) which provides irrevocable, not
subject to amendment, instructions to CIBC World Markets to purchase over a
period of ninety (90) days in the market, shares of ClearOne common stock based
upon the formula set out therein;
(c) IF
the
separate operations of the Corporation, during the 12-month period beginning
on
Date of Closing and ending 12 months after the Date of Closing (the “Earn Out
Calculation Period”) achieves the following earn out criteria, then an amount of
earn out calculated as follows shall be paid in the manner set forth
below:
11
|
Earn
Out Criteria
|
“Earn
Out Amount”
|
|
1.
IF the Corporation’s Gross Sales during the Earn Out Calculation Period
exceed Canadian $11,900,000 (“Earn Out Sales”).
2.
IF the Corporation’s Operating Profit Margin during the Earn Out
Calculation Period exceeds 15.6% (“Earn Out OPM”).
3.
IF Jim Stechyson is fired by Corporation following Closing without
“Cause”
as that term is defined in the Employment Agreement attached hereto
as
Exhibit 4.6(a)(1)
|
1.
THEN
an amount equal to (Earn Out Sales - C$11,900,000) multiplied by
US
$0.3077, up to a maximum of US $400,000 shall be paid pursuant to
the
following subsection.
By
way of examples only:
if
Earn Out Sales are Can$12,800,000 , minus Can$ 11,900,000, equals
Can$900,000 multiplied by .3077 equals US$276,930
If
Earn Out Sales are Can$ 13,200,000, minus Can$ 11,900,000 multiplied
by
.3077 equals $US400,010 and the Earn Out Amount would be
$US400,000.
2.
THEN
an amount equal to (Earn Out OPM) - (15.6%) multiplied by US $800,000
up
to a maximum of US$400,000 shall be paid pursuant to the following
subsection. By way of examples only:
if Earn Out OPM is 16.1%, the calculation would be as
follows:
16.1%
minus 15.6% equals .5%
Ignore
the % sign
.5
multiplied by $800,000 US equals $400,000US
if
Earn Out OPM is 15.9%,minus 15.6% equals .3%
Ignore
the % sign
.3
multiplied by $800,000 equals $US240,000
3.
THEN $800,000 US_shall be paid pursuant to the following subsection.
|
12
(d) The
Earn
Out Amount will be paid (promptly following determination) in cash wired to
CIBC
World Markets for the purchase over a period of ninety (90) days in the market,
of shares of ClearOne Common Stock pursuant to the written agreement attached
hereto as Exhibit 3.3(b) which provides irrevocable, not subject to amendment,
instructions to CIBC World Markets to purchase shares of ClearOne common stock.
Determination by Purchaser of the Earn-Out conditions shall be
unilateral and not subject to discussion with Vendors. ;
Purchaser shall act reasonably to promptly calculate any Earn Out Amount .
(e) Transfer
of US $600,000 (the “Holdback Funds”) to a separate account held by Parent (the
“Holdback Account”), to be disbursed in accordance with the terms hereof.; The
Holdback Account shall be at a commercial bank in the United States. The
Holdback Funds shall be invested in a money market account with such bank and
shall be invested for liquidity rather than highest return. The interest earned
on the Holdback Funds shall be considered part of the Holdback Funds, and will
be disbursed in accordance with this agreement.
3.4
Payoff
of Liabilities/Mechanics of
Holdback
(a) Excluding
ordinary course of business trade payables which are not in default, payroll
tax
not in default, and sales taxes not in default prior to Closing the Vendors
will
cause the Corporation to pay-off those liabilities set forth on Exhibit 3.4(a),
and those set forth in the Closing Financial Statements, and any liabilities
of
the Corporation accruing prior to the date of Closing and not reflected thereon
(the “Liabilities”);
(b) To
the
extent that the Cash or Net Working Capital remaining in the Corporation
following the Closing is insufficient to pay-off the Liabilities then Purchaser
may draw an amount from Holdback Funds sufficient to pay-off such liabilities
and Purchaser may draw such amount without notice and without complying with
the
procedures set out in Article 6 hereof, (without limitation, without complying
with the procedures set out in Section 6.9 hereof)
Without
limitation, the Parties agree that the Holdback Funds will be available to
satisfy any obligation of the Corporation based on the pending audit by the
Canada Customs and Revenue Agency without
notice and without complying with the procedure set out in Article 6 hereof,
(without limitation, without complying with the procedures set out in Section
6.9 hereof) and seek additional remedies for any deficiency.
(c) If
at the
end of the six month period following Closing all of the Post Closing Conditions
have been determined by Purchaser to have been met, then Purchaser shall
transfer to the Vendors 1/3 of the Holdback Funds which remain in the Holdback
Account, pro rata as set out in Exhibit 3.3 (a)
(d)
At
such
time that Purchaser shall have received from its Canadian counsel reasonable
assurances that the pending audit by the Canada Customs and Revenue Agency
has
been completed and that there is a final determination that there is no
liability
13
owed
by
the Corporation based on such audit, then Purchaser shall transfer to the
Vendors 25% of the Holdback Funds which remain in the Holdback
Account, pro rata as set out in Exhibit 3.3 (a)
3.5
Lockup
All
shares of
ClearOne common stock purchased pursuant to Paragraphs 3.3 (b), (c) and (d)
shall be subject to the Lockup Agreement the form of which is attached hereto
as
Exhibit 3.5 and which shall generally prohibit the resale of any such shares
for
a period of 12 months as to 3814157
Canada Inc, Jim Stechyson, and Heather Stechyson Family Trust
and 90
days as to 3814149
Canada, Inc., Stechyson Family Trust, Norm Stechyson, from
the
date of purchase.
ARTICLE
4
- REPRESENTATIONS, WARRANTIES,
AND COVENANTS
4.1
Representations
and Warranties of the Vendors
The
Corporation and the Vendors and each of them, jointly and severally represent
and warrant to the Purchaser and the Parent (and acknowledge that the Purchaser
and the Parent are relying on such representations and warranties in completing
the transactions contemplated by this Agreement) that as of the Closing
Date:
(a)
Corporate
The
Corporation is a corporation duly incorporated and organized and is validly
existing and in good standing under the federal laws of Canada and the Province
of Ontario and has all necessary corporate power, authority and capacity to
own
its properties and assets and to carry on the Business as presently conducted.
The Corporation is a private company as that term is defined in the Securities
Act
(Ontario). Neither the nature of the Business nor the location or character
of
the property owned or leased by the Corporation requires the Corporation to
be
registered, licensed or otherwise qualified in any jurisdiction other than
in
Ontario, where as at the Time of Closing it shall be duly registered, licensed
or otherwise qualified for such purpose. Copies of the articles and by-laws
of
the Corporation, including any amendments thereto, are attached hereto as
Exhibit 4.1(a).
(b)
Subsidiaries
The
Corporation does not own, directly or indirectly, nor has it agreed to acquire
(i) any of the outstanding shares or securities convertible into shares of
any other corporation, or (ii) any participating interest in any
partnership, joint venture or other business enterprise.
(c)
Binding
Agreement, Validity of
Transactions
Vendors,
and Corporation and each of them has full power and authority (including full
corporate and trust power and authority) to execute and deliver
this
14
Agreement
and to perform its obligations hereunder. Without limiting the generality
of the
foregoing, the board of directors of Corporation and the trustees of all
vendors
have duly authorized the execution, delivery, and performance of this Agreement.
This
Agreement constitutes a legal, valid, and binding obligation of the Vendors
and
the Corporation and each of them, enforceable against each in accordance
with
its terms (subject, as to the enforcement of remedies, to bankruptcy,
reorganization, insolvency, moratorium, and other laws relating to or affecting
creditors’ rights generally and subject to the availability of equitable
remedies). The execution and delivery of this Agreement by the Vendors and
the
Corporation , the consummation of the transactions contemplated by this
Agreement and the fulfilment by the Vendors and Corporation of the terms,
conditions and provisions hereof do not and will not, except as set out in
Exhibit 4.1(c):
(i) Contravene,
or conflict with or violate or result in the breach or default (with or without
the giving of notice or lapse of time, or both) or acceleration of any
obligations of any of the Vendors or the Corporation under, or require the
consent or approval of any Person under:
(A) Any
constitution, statute, law, or rule, applicable to such Vendor or the
Corporation;
(B) any
judgment, order, writ, injunction, ruling or decree of any court or of any
Authority which is presently applicable to such Vendor or the
Corporation;
(C) the
articles, by-laws or any resolutions of the Corporation or amendments thereto
or
restatements thereof;
(D) the
constituent documents of the Vendors’, as applicable; or
(E) the
provisions of any agreement, arrangement or understanding to which such Vendor
or the Corporation is a party or by which any of them are bound.
(ii) create
in
any party the right to accelerate, terminate, modify or cancel any agreement
to
which the Corporation or any Vendor is a party, and Vendors further represent
and warrant that there are no single source suppliers for any item it purchases
from its suppliers.
(iii) require
any notice under any agreement, contract, lease, license, instrument, or
other
arrangement to which any of Corporation or Vendor is a party or by which
it is
bound or to which any of its assets is subject (or result in the imposition
of
any Security Interest upon any of its assets).
(iv) require
any notice to, make any filing with, or obtain any authorization, consent,
or
approval of any government or governmental agency in order for the Parties
to
consummate the transactions contemplated by this Agreement. Corporation and
Vendors have obtained each and every third party
15
consent
necessary to accomplish the intent of this Agreement. Neither Corporation
nor
any Vendor has any liability or obligation to pay any fees to any broker,
finder, with the exception of a nominal filing fee which must paid in connection
with a post closing notice with Investment Canada
(d) Licences,
Permits and Authorizations
The
Corporation has conducted the Business in compliance with, and the Corporation
holds all licenses, permits and authorizations necessary for the lawful
operation of the Business pursuant to, all applicable statutes, laws,
ordinances, rules and regulations of all Authorities having jurisdiction over
the Corporation or over any part of the Business, all of which licenses, permits
and authorizations are listed on Exhibit 4.1(d) and all of which are valid
and
subsisting and in good standing with no violations in respect thereof as of
the
date of this Agreement.
(e)
Capitalization
The
authorized share capital of the Corporation is as follows:.
an
unlimited number of common shares, one vote per share, discretionary dividends,
an unlimited number of Class A preferred shares, Class B preferred shares,
Class
C preferred shares, Class D preferred shares, Class E preferred shares, Class
F
preferred shares, all of which are non-voting, redeemable and
retractable.
The
number of shares that are issued and outstanding are as set forth on Exhibit
4.1(e). The issued and outstanding share capital has been duly and validly
issued and is outstanding as fully paid and non-assessable shares in the capital
of the Corporation. There are no outstanding securities (of any kind)
convertible into or exchangeable or exercisable for any shares of the capital
stock of the Corporation, nor does the Corporation have outstanding any rights
to subscribe for or to purchase, or any options rights or warranties for the
purchase of, or any agreements providing for the issuance of, any shares of
its
capital stock or any securities convertible into or exchangeable or exercisable
for any shares of its capital stock. On the Closing Date, the Purchased Shares
shall constitute all the issued and outstanding shares in the capital of the
Corporation and all of the Options shall have been extinguished and shall be
void and of no further effect.
(f)
Ownership
of Purchased Shares/Authority
The
Vendors are the only registered and beneficial owners of the Purchased Shares
free and clear of any Encumbrances, owning the number of shares set out beside
each Vendors’ name in Exhibit 4.1(f) attached hereto. There is no contract,
option or other right of another binding upon or which at any time in the future
may become binding upon any of the Vendors to sell, transfer, assign, pledge,
charge, mortgage or in any other way dispose of or encumber any of the Purchased
Shares, respectively, other than pursuant to this Agreement.
(g)
Financial
Statements
The
Financial Statements present fairly the financial position of the Corporation
as
of and for the periods stated therein, have been prepared in accordance with
(Canadian) GAAP, applied on a consistent basis throughout the periods covered
thereby and consistent with prior fiscal years of the Corporation. The Balance
Sheet presents fairly a true and complete statement of the assets, liabilities
(whether accrued, absolute,
16
contingent
or otherwise) and financial condition of the Corporation as of the dates
stated
therein, and the statements of income (loss) and retained earnings (deficit)
and, for the periods covered thereby, statement of cash flows forming a part
of
the Financial Statements accurately set forth the results of the operations
of
the Corporation and the source and application of the funds thereof throughout
the periods covered thereby. The Corporation has not produced or had prepared
audited financial statements for any period ending, or as at a date, after
October 31, 2001 nor are any of the Vendors in possession of such financial
statements.
(h)
Absence
of Undisclosed Liabilities
Except
to
the extent reflected or reserved against in the Balance Sheet or incurred
subsequent to the date thereof and disclosed in Exhibit 4.1(h)(1) and except
normal trade creditors payable in the ordinary and normal course of business,
the Corporation does not have any outstanding indebtedness or any liabilities
or
obligations (whether accrued, absolute, contingent or otherwise) nor any
outstanding commitments or obligations of any kind whether or not such
obligations or commitments are presently considered liabilities of the
Corporation under Canadian GAAP. At the Time of Closing, all long-term debt
of
the Corporation shall be paid in full. Corporation will not during the period
between the date of this agreement and Closing make any payments other than
in
the Ordinary Course of Business and as are set out in Exhibit
4.1(h)(2).
(i)
Tax
Matters
Except
as
disclosed in Exhibit 4.1(i):
(i) The
Corporation has duly filed on a timely basis with the appropriate Governmental
Entities, all Tax Returns required to be filed for taxable periods ending on
or
before the Closing Date. All such Tax Returns are true, correct and complete
in
all material respects. To the best of the Corporation’s knowledge, no such Tax
Return contains any misstatement or omits any statement that should have been
included therein. No Tax Return has been amended. The Corporation is not the
beneficiary of any extension of time within which to file any Income Tax
Return.
(ii) The
tax
liability of the Corporation for previous taxation periods is as indicated
in
its Tax Returns. All Taxes shown as due on such Tax Returns or otherwise due
or
claimed to be due by any Governmental Entity have been paid. All instalments,
assessments and reassessments of which the Corporation is aware of or has
received notice of and all other Taxes which are due and payable by it, have
been paid in full. Reserves and provisions for Taxes accrued but not yet due
on
or before the Closing Date as reflected in the Corporation’s Financial
Statements are adequate as of the date of the Corporation’s Financial
Statements, in accordance with Canadian generally accepted accounting
principles. No deficiencies for Taxes have been proposed, asserted or assessed
against the Corporation that are not adequately reserved against.
17
(iii) Attached
as Exhibit 4.1(i) are complete and correct copies of all Tax Returns that
have
been filed from 1999 to the date hereof and copies of all correspondence
with
taxing authorities.
(iv) No
claim
has ever been made by or is expected from any Governmental Entity in a
jurisdiction in which any one of the members of the Corporation does not
file
Tax Returns that it is or may be subject to taxation in that
jurisdiction.
(v) No
unresolved assessments, reassessments, audits, claims, actions, suits,
proceedings, or investigations exist or have been initiated with regard to
any
Taxes or Tax Returns of the Corporation. To the knowledge of the Corporation,
no
assessment, reassessment, audit or investigation by any Governmental Entity
is
underway, threatened or imminent with respect to Taxes for which the Corporation
may be liable, in whole or part.
(vi) The
Tax
Returns of the Corporation have not been audited by Revenue Canada. The Ontario
Ministry of Revenue has audited the Corporation’s 2000 Tax Return.
(vii) No
election, consent for extension, nor any waiver that extends any applicable
statute of limitations relating to the determination of a Tax liability of
the
Corporation has been filed or entered into and is still effective.
(viii) There
are
no liens for Taxes on the assets of the Corporation.
(ix) The
Corporation is not a party to, is not bound by, nor has any obligation under,
any tax sharing agreement, tax indemnification agreement or similar contract
or
arrangement.
(x) The
Corporation has properly withheld and remitted all amounts required to be
withheld and remitted (including without limitation, income tax, Canadian
Pension Plan contributions, Unemployment Insurance and Workman’s Compensation
premiums) and has paid such amounts due to the appropriate authority on a
timely
basis and in the form required under the appropriate legislation.
(xi) The
Corporation has not been and currently is not required to file any Tax Returns
in any jurisdiction outside of Canada.
(xii) There
has
never been a change of control of the Corporation for the purposes of the
Income
Tax Act (Canada).
(xiii) No
amount
in respect of any outlay or expense that is deductible for the purposes of
computing the Corporation’s income for the purposes of the Tax
Act has
been
owing by the Corporation for longer than two (2) years to a person with whom
the
Corporation was not dealing at arm’s length (for the purposes of the
Tax
Act)
at the
time the outlay or expense was incurred. The
18
Corporation
has not, either directly or indirectly, transferred property to or acquired
property from a person with whom it was not dealing at arm’s length (for the
purposes of the Tax
Act)
for
consideration other than consideration equal to the fair market value of
the
property at the time of the disposition or acquisition
thereof.
(xiv) The
Corporation has not claimed a deduction with respect to an outlay or expense
that may be considered unreasonable under the circumstances.
(xv) All
amounts of consideration paid or agreed to be paid by the Corporation with
respect to the acquisition from, the use or reproduction of property of, or
services rendered by, a non-resident of Canada with whom the Corporation was
not
dealing at arm’s length for the purposes of and within the meaning of the
Income
Tax Act (Canada)
have been no greater than amounts which would be considered reasonable in the
circumstances had such non-resident been dealing at arm'’ length with the
Corporation. All amounts of consideration paid or agreed to be paid to the
Corporation with respect to the acquisition by, the use or reproduction of
property by, loan to, or services rendered to, a non-resident of Canada with
whom the Corporation was not dealing at arm’s length for the purposes of and
within the meaning of the Income
Tax Act (Canada)
have been no less than amounts which would be considered reasonable in
circumstances had such non-resident been dealing at arm’s length with the
Corporation.
(xvi) There
are
no circumstances which exist and would result in, or which have existed and
resulted in, any of Sections 80 to and including Section 80.04 of the
Income
Tax Act (Canada)
applying to the Corporation.
(xvii) The
Corporation is a registrant for the purposes of the ETA
having
registration number
R105007314 T001,
and is
not a financial institution within the meaning of the Excise
Tax Act (Canada).
The Corporation has not made any elections under the ETA.
(xviii) The
Vendors are not non-residents of Canada within the meaning of the Tax
Act.
(j)
Absence
of Changes
Since
June 30, 2002:
(i) no
Material Change has occurred in any of the assets, business, financial
condition, results of operation or prospects of the Corporation nor has any
other event, condition or state of facts occurred or arisen that might
materially and adversely affect, or threaten to materially and adversely affect,
the Corporation or the business, the results of operations or prospects of
the
Corporation or the ability of the Corporation to carry on its business
substantially the same as such business was being conducted as of June 30,
2002;
19
(ii) no
damage, destruction or loss, labour trouble or any other event, development
or
condition of any character (whether or not covered by insurance) has occurred
which might have a Material Adverse Effect; and
(iii) the
Corporation has been operated in the ordinary course of
business.
(k) Absence
of Unusual Transactions
Since
June 30, 2002, the Corporation has not:
(i) transferred,
assigned, sold or otherwise disposed of any of its assets or cancelled any
debts
or claims except in each case in the ordinary and normal course of
business;
(ii) incurred
or assumed any obligation or liability including capitalized lease obligations,
(direct or contingent), except those listed in Exhibit 4.1(k) hereto and except
unsecured current obligations and liabilities incurred in the ordinary and
normal course of business;
(iii) issued
or
sold any shares in its capital or any warrants, bonds, debentures or other
corporate securities of the Corporation or issued, granted or delivered any
right, option or other commitment for the issuance of any such other
securities;
(iv) discharged
or satisfied any lien or encumbrance, or paid any obligation or liability (fixed
or contingent) other than liabilities included in the Balance Sheet and
liabilities incurred since the date thereof in the ordinary and normal course
of
business;
(v) except
as
disclosed in Exhibit 4.1(k), declared, set aside, or made any payment of any
dividend or other distribution in respect of any shares in its capital or
purchased or redeemed any such shares or effected any subdivision, consolidation
or reclassification of any such shares or repaid in full or in part any
shareholder loans;
(vi) suffered
an operating loss or any extraordinary loss, or waived any rights of substantial
value, or entered into any commitment or transaction not in the ordinary and
normal course of business where such loss, rights, commitment or transaction
is
or would be material in relation to the Corporation;
(vii) except
as
set out in Exhibit 4.1(k) qualified, amended or changed or taken any action
to
amend or change its constating documents or by-laws;
(viii) except
as
disclosed in Exhibit 4.1(k), made any wage or salary increases or in respect
of
personnel which it employs, including officers and directors;
20
(ix) except
as
disclosed in Exhibit 4.1(k) hereto, mortgaged, pledged, subjected to lien,
granted as security interest in or otherwise encumbered any of its assets
or
property, whether tangible or intangible;
(x) except
as
disclosed in Exhibit 4.1(k), paid or become liable for any management fee
or any
other fee or charge whatsoever to the Vendors or any Person who is an associate
of the Vendors or paid or agreed to pay any bonus or like payment to any
Person;
(xi) loaned
or
agreed to lend money to any Person including a shareholder; or
(xii) entered
into any material agreement, contract, lease, or license outside the Ordinary
Course of Business;
(xiii) received
any information that any party (including Corporation) has accelerated,
terminated, made material modifications to, or cancelled any material agreement,
contract, lease, or license to which Corporation is bound;
(xiv) made
any
material capital expenditures outside the Ordinary Course of
Business;
(xv) made
any
material capital investment in, or any material loan to, any other Person
outside the Ordinary Course of Business;
(xvi) granted
any license or sublicense of any material rights under or with respect to
any
Intellectual Property;
(xvii) entered
into any employment contract or collective bargaining agreement, written
or
oral, or modified the terms of any existing such contract or
agreement;
(xviii) adopted,
amended, modified, or terminated any bonus, profit-sharing, incentive,
severance, or other plan, contract, or commitment for the benefit of any
of its
directors, officers, and employees (or taken any such action with respect
to any
other Employee Benefit Plan) except as otherwise provided in this
Agreement;
(xix) made
any
other material change in employment terms for any of its directors, officers,
and employees
(xx) authorized
or agreed or otherwise become committed to any of the
foregoing.
(l)
Title
to Properties
Except
as
disclosed in the Balance Sheet or in Exhibit 4.1(l) hereto, the Corporation
has
good and marketable title to all of its assets, real and personal, including
21
but
not
limited to those reflected on the Balance Sheet or acquired since the date
of
the Balance Sheet (except as since transferred, sold or otherwise disposed
of in
the ordinary and normal course of business), free and clear of all
Encumbrances.
(m) Leases
of Personal Property
Exhibit
4.1(m) sets forth a true and complete list in all material respects of all
equipment, other personal property and fixtures in the possession or custody
of
the Corporation which, as of the date hereof, is leased or held under licence
or
similar arrangement and of the leases, licenses, agreements, or other
documentation relating thereto.
(n)
Leases
of Real Property
(i) Other
than the Lease, the Corporation is not a party to or bound by any lease,
sublease, license or other instrument relating to real property and the
Corporation has not entered into any other instrument relating to real property.
The interest held by the Corporation under the Leases is free and clear of
any
and all Encumbrances.
(ii) The
Lease
is in good standing and in full force and effect without amendment, and the
Corporation is entitled to the benefit of the Lease.
(iii) All
amounts of rent and other amounts presently owing under the Lease have been
paid.
(iv) The
Corporation has complied with all of its obligations under the Lease and
the
Corporation is not in default or breach, nor has it received a notice of
default
or breach of its obligations under the Lease.
(v) Attached
hereto as Exhibit 4.1(n) is a consent to assignment executed by the landlord
as
is necessary for this transaction
(o) Real
Property
The
Corporation does not own any real property or, except for the Lease, any
interest in real property.
(p) Fixed
Assets
Each
item of
tangible assets, machinery, equipment, vehicles, furniture, office equipment,
computer hardware and software with a value greater than C$2,000 wherever
situate and owned by the Corporation is set out in Exhibit 4.1(p)
hereto.
22
(q)
Condition
of Assets
All
tangible
assets of the Corporation are in good condition, repair and (where applicable)
proper working order, having regard to the use and age thereof, except only
for
reasonable wear and tear.
(r)
Services
Warranty
All
of the
services rendered by Corporation have conformed in all material respects with
all applicable contractual commitments and all express and implied warranties,
and ,
after
diligent inquiry, Corporation has no knowledge of any material liability (,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due) for damages in connection therewith.
(s) Product
Liability
After
diligent inquiry, Corporation has no knowledge of any material
liability (whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due) arising out of any injury to individuals or property
as a
result of the ownership, possession, or use of any product manufactured, sold,
leased, or delivered by Corporation.
(t) Litigation
Except
as
disclosed in Exhibit 4.1(t) there is no suit, action, dispute, civil or criminal
litigation, claim, arbitration or legal, administrative or other proceeding
or
governmental investigation, including appeals and applications for review
(collectively, “Claims”), pending or, to the best of the Vendors’ knowledge,
threatened against the Corporation or affecting any of its assets or properties
or the Business. There are no facts or circumstances known to the Vendors which
are likely to give rise to any such Claims. Except as disclosed in Exhibit
4.1(t), there is not presently outstanding against the Corporation ( or
affecting its Business or properties) any judgement, execution, decree,
injunction, rule or order of any court, Authority, administrative agency or
arbitrator.
(u) Inventories
Exhibit
4.1(u) sets forth a detailed list of the inventories (the “Inventories”) of the
Corporation as at July 31, 2002 and as of August 16, 2002e, which list is true
and correct. The Inventories are in good condition, are merchantable, are of
a
quality and quantity useable or saleable in the ordinary course of business,
are
fit for the purposes for which they are intended (except to the extent, if
any,
written down to net realizable value on the Financial Statements) and are
carried on the books of the Corporation at the lower of cost or net realizable
value. Inventories are labelled and stored in compliance with all applicable
federal, provincial and local laws, ordinances, and governmental rules and
regulations.
23
(v) Accounts
Receivable
Exhibit
4.1(v) sets forth a detailed list of the accounts receivable (the “Accounts
Receivable”) of the Corporation as at July 31, 2002 and as of August 16, 2002
which list is true and correct. The Accounts Receivable of the Corporation
set
out in Exhibit 4.1(v) are, and all other accounts receivable at the Time of
Closing shall be, bona fide and good and collectible at their face amounts
in
the ordinary course of business (subject to no defence, counterclaim or set-off)
except to the extent of any reserves provided for doubtful accounts in the
ordinary course of business which reserves are set out in Exhibit
4.1(v).
(w)
Material
Contracts
Except
for the Encumbrances referred to in Exhibit 4.1(l), the leases and agreements
referred to in Exhibit 4.1(m), the Leases, the written employment contracts
referred to in Exhibit 4.1(x) and the contracts and agreements (including
government grants or incentives) referred to in Exhibit 4.1(w), the Corporation
is not a party to or bound by any material contract or commitment either now
or
in the future, whether oral or written. The contracts, leases and agreements
referred to in the Leases and Exhibits 4.1(m), 4.1(x) and 4.1(w) are all legal,
valid, binding, enforceable and in full force and effect unamended and no
default exists in respect thereof on the part of the Corporation or on the
part
of any of the other parties thereto. The Corporation is not in default or in
breach of any lease, contract or commitment to which it is a party and there
exists no condition, event or act which, with the giving of notice or lapse
of
time or both would constitute such a default or breach and all such contracts
and commitments are in good standing and in full force and effect without
amendment thereto and the Corporation is entitled to all benefits thereunder.
No
party to any contract has repudiated such contract or express an intention
to
not perform such contract.
The
term
“material contract” as used in this paragraph shall be deemed to include but not
be limited to the following:
(i)
any
agreement (or group of related agreements) in excess of $20,000Can for the
sale
or lease of personal property to or from any Person;
(ii)
any
agreement (or group of related agreements)
in
excess of $20,000Can
for the
purchase or sale of raw materials, commodities, supplies, products, or other
personal property, or for the furnishing or receipt of services;
(iii)
any
agreement concerning a partnership or joint venture;
(iv)
any
agreement (or group of related agreements) under which it has created, incurred,
assumed, or guaranteed any indebtedness for borrowed money, or any capitalized
lease obligation or under which it has imposed a Security Interest on any of
its
assets, tangible or intangible;
(v)
any
agreement concerning confidentiality or noncompetition;
24
(vi)
any
agreement involving any Vendors;
(vii)
any
profit sharing, stock option, stock purchase, stock appreciation, deferred
compensation, severance, or other material plan or arrangement for the benefit
of its current or former directors, officers, and employees;
(viii)
any
license of Intellectual Property
(ix)
any
written agreement for the employment of any individual on a full-time,
part-time, consulting, or other basis;
(x) any
agreement under which it has advanced or loaned any amount to any of its
directors, officers, and employees
(xi)
any
agreement under which the consequences of a default or termination could have
a
material adverse effect on the business, financial condition, operations,
results of operations, or future prospects of the Corporation; or
(xii)
any
other
agreement (or group of related agreements) the performance of which involves
consideration in excess of $20,000 Can.
(x) Employment
Matters
(i) Exhibit
4.1(x) contains a complete and accurate list of all employees, agents and
independent contractors of the Corporation and, to the extent applicable, their
positions, current salaries, benefits and other remunerations, dates of last
salary increases and dates of hire with the Corporation or any predecessors
of
the Corporation. Exhibit 4.1(x) also indicates which employees are parties
to a
written or oral agreement of employment (including confidentiality and
non-competition agreements).
(ii) Except
as
disclosed in Exhibit 4.1(x), the Corporation is not a party to any agreements
with past employees, agents or independent contractors in respect of whom the
Corporation has continuing obligations. There are no oral contracts of
employment entered into with any employees employed by the Corporation, which
are not terminable in accordance with applicable law and the Corporation has
not
entered into any agreements with such employees with respect to the termination
of employment. The Corporation does not have any obligation to re-instate any
employees.
(iii) Except
for Norm Stechyson, Heather Stechyson and Janice Stechyson, who have resigned
and executed full releases which are attached hereto as Exhibit 4.1(x)(iii),
at
the Time of Closing, the Corporation will not have terminated, laid-off or
dismissed (whether such dismissal is actual or constructive) in the four weeks
preceding the Date of Closing any employees of the Corporation.
25
(iv) All
liabilities in respect of employees have or shall have been paid in full
to the
Closing Date, including premium contributions, remittance and assessments
for
unemployment insurance, employer health tax, Canada Pension Plan, income
tax,
Workers’ Compensation and any other employment related legislation, accrued
wages, Taxes, salaries, commissions and employee benefit plan
payments.
(v) There
are
no outstanding, pending, threatened or anticipated assessments, actions,
causes
of action, claims, complaints, demands, orders, prosecutions or suits against
the Corporation, or its directors, officers or agents pursuant to or under
any
applicable rules, regulations, orders or laws, including Canada Pension Plan,
unemployment insurance, Tax, employer health tax, employment standards, labour
relations, occupational health and safety, human rights, workers’ compensation
and pay equity laws.
(vi) The
Corporation has not made any agreements, whether directly or indirectly,
with
any labour union, employee association or other similar entity or made
commitments to or conducted negotiations with any labour union or employee
association or similar entity with respect to any future agreements. No trade
union, employee association or other similar entity has any bargaining rights
acquired by either certification or voluntary recognition with respect to
the
employees of the Corporation. The Vendors, after diligent inquiry, are not
aware
of any current attempts to organize or establish any other labour union,
employee association or other similar entity.
(vii) All
vacation pay, bonuses, commissions and other emoluments relating to the
employees of the Corporation are accurately reflected in all respects and
have
been accrued in the financial records of the Corporation.
(viii) Except
as
described in Exhibit 4.1(x), the Corporation is in compliance with all federal,
provincial, state, local foreign and other applicable law respecting employment
and employment practices, terms and conditions of employment and wages and
hours.
(ix)
Corporation has no liability, and anticipates no liability, to the Canada
Customs and Revenue Agency, or to employees, in connection with any audit
by
that agency.
(x) There
is
no unfair labour practice, complaint, charge or other matter against or
involving the Corporation pending or threatened before any governmental
authority.
(xi) All
officers and employees have been thoroughly interviewed (the notes from such
interviews are attached as Exhibit 4.1(x)(xi)) and based upon such interviews
no
officer or employee employed by the Corporation has indicated his or her
intention to resign following Closing except that Norm, Heather and Janice
Stechyson will not continue their employment.
26
(xii) The
consummation of the transaction contemplated by this agreement will not entitle
any current or former officer or employee of the Corporation to severance
pay,
pay in lieu of notice, unemployment compensation, or any other similar payment,
nor accelerate the time of payment or date of vesting, nor increase the amount
of any compensation due to any officer or employee of the
Corporation.
(y) Pension
and Benefit Matters
(i) Exhibit
4.1(y) hereto is a complete list of each written or unwritten employee benefit,
pension or retirement plan, program, agreement or arrangement whether formal
or
informal and whether legally binding or not, including any plan or arrangement
relating to bonuses, incentive compensation, stock purchase rights, stock
options, severance or termination pay, hospitalization or other medical or
dental benefits, disability, life or other insurance, supplemental unemployment
benefits or profit sharing (“Employee Plan”), and all deferred compensation
arrangements in which any of the employees of Vendor re
participants.
(ii) Each
of
the Employee Plans is duly registered where required by law, is in good standing
and is maintained in material compliance with applicable laws.
(iii) Neither
the execution, delivery and performance of this Agreement nor the consummation
of the transactions herein or therein contemplated will cause Buyer or any
affiliate thereof to be liable to any person pursuant to the terms of any
Employee Plan or applicable law.
(iv) Vendor
is
not a party to any pending or threatened action, claim, suit or proceeding
by
any person or governmental instrumentality concerning any Employee Plan which
relates to Vendor or any of its employees.
(v) All
payments due from Vendor (on account of employment contracts or otherwise)
for
Employee Plans have been paid for all periods ended on or prior to the date
hereof, and for the period from the date hereof through the Closing Date, shall
be paid by Vendor. Vendor has no Employee Plan that constitutes a “registered
pension plan” as that term is defined in s. 248(1) of the Income Tax Act
(Canada).
(z) Legal
Compliance
After
diligent inquiry, Corporation represents and warrants that to the best of
Vendors knowledge it has complied with all applicable laws (including rules,
regulations, codes, plans, injunctions, judgments, orders, decrees, rulings,
and
charges thereunder) of federal, state, local, and foreign governments (and
all
agencies thereof), and no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, or notice has been filed or commenced against
any of
27
them
alleging any failure so to comply, except where the failure to comply would
not
have a material adverse effect on the business, financial condition, operations,
results of operations, or future prospects of the Corporation and its
business.
(aa) Insurance
The
Corporation has all of its assets, property and undertaking and the Business
insured against loss or damage by all insurable hazards or risks on a
replacement cost basis and such insurance coverage will be continued in full
force and effect (with all premiums paid) up to and including the Closing Date.
Exhibit
4.1(aa) sets forth the following information with respect to each material
insurance policy (including policies providing property, casualty, liability,
and workers' compensation coverage and bond and surety arrangements) with
respect to which Corporation is a party, a named insured, or otherwise the
beneficiary of coverage:
(i)
the
name,
address, and telephone number of the agent;
(ii)
the
name
of the insurer, the name of the policyholder, and the name of each covered
insured;
(iii)
the
policy number and the period of coverage;
(iv)
the
scope
(including an indication of whether the coverage is on a claims made,
occurrence, or other basis) and amount (including a description of how
deductibles and ceilings are calculated and operate) of coverage;
and
(v)
a
description of any retroactive premium adjustments or other material
loss-sharing arrangements.
With
respect to each such insurance policy: (A) the policy is legal, valid, binding,
enforceable, and in full force and effect in all material respects; (B)
Corporation is not in material breach or default (including with respect to
the
payment of premiums or the giving of notices), and no event has occurred which,
with notice or the lapse of time, would constitute such a material breach or
default, or permit termination, modification, or acceleration, under the policy;
and (C) no party to the policy has repudiated any material provision thereof.
(bb) Intellectual
Property
General
(i) Exhibit
1.1(ll) contains a complete and accurate list of all of the Intellectual
Property, and details, if any, of all registrations thereof and all applications
for registration in respect thereof, and indicate in each case whether such
Intellectual Property is owned by or licensed to the Corporation.
(ii) All
registrations with, and applications to, Authorities on behalf of, or for the
benefit of, the Corporation in respect of the Intellectual Property are
28
valid
and
in full force and effect (subject to adjudication, of which there is presently
none) and are not in arrears in respect of payment of any taxes or maintenance
fees or the taking of any other actions by the Corporation to maintain their
validity or effectiveness, other than routine filings and payments applicable
to
registrations of that kind.
(iii) All
intellectual property reasonably necessary for the conduct of the Business
by
the Corporation, as currently conducted, is owned by, or licensed to, the
Corporation.
(A) Except
as
disclosed in Exhibit 1.1(ll) hereto, no licences or sublicenses have been
granted by the Corporation to third parties permitting the use of any
Intellectual Property, nor is there any obligation on the part of the
Corporation to enter into a licence or sublicense with a third party to permit
such third party to use any of the Intellectual Property. With regard to the
items listed in Exhibit 1.1(ll), the
license, sublicense, agreement, or permission covering the item is legal, valid,
binding, enforceable, and in full force and effect in all material
respects;
(B)
no
party
to the license, sublicense, agreement, or permission is in material breach
or
default, and no event has occurred which with notice or lapse of time would
constitute a material breach or default or permit termination, modification,
or
acceleration thereunder;
(C)
no
party
to the license, sublicense, agreement, or permission has repudiated any material
provision thereof; and
(iv) Except
as
disclosed in the Exhibit 4.1(bb)(iv) hereto, to the best of the Vendors’
knowledge, there has been no infringement or violation of the rights of the
Corporation in and to any of the Intellectual Property. The Corporation has
not
interfered with, infringed upon, misappropriated, or violated any material
intellectual property rights of third parties in any material respect, and
neither Vendors nor their affiliates nor the Corporation has ever received
any
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that
Corporation must license or refrain from using any intellectual property rights
of any third party).
(v) The
Corporation has all rights necessary to enable it to lawfully and without
infringement of the rights of any third party place on its websites and in
its
Products the content currently on the Corporation’s websites (and to permit
others to view and/or download and use such content in the manner allowed by
those sites), and contained in the Products. The Corporation has not placed
any
content on any website or in any Product or distributed such content in a manner
which infringes the rights of any third party to a materially adverse extent
or
which could reasonably be expected to give rise to any claim having any Material
Adverse Effect. No legal proceedings alleging infringement in respect of the
content on the Corporation’s websites or Products of any type (including CD-ROMs
and software) have ever been brought.
29
(vi) The
software listed on Exhibit 1.1(ll) shall not contain any clock, timer, counter,
or other limiting or disabling code, design or routine that would cause the
software to be erased, made inoperable or otherwise rendered incapable of
performing in accordance with its performance specifications and descriptions
or
otherwise limit or restrict the Purchaser’s ability to use a copy of the
software after a specific or random number of years or copies, or any viruses,
Trojan horses, or other disabling or disruptive codes or commands.
(vii)
Corporation
has not ever agreed to indemnify any Person for or against any interference,
infringement, misappropriation, or other conflict with respect to the use of
any
intellectual property.
Copyrights
(i) The
Corporation owns
all
equitable and legal rights in and to all copyrightable works forming part of
the
Intellectual Property (including all source code versions of the Products),
other than works used in the Business under a contract listed in Exhibit
4.1(w) (“Works”).
All Works are protectable under the copyright laws of the United States and
Canada and have been, or are capable of being, registered in the United States
and Canadian copyright offices. A complete list of all Works reasonably
necessary for the conduct of Business is included on Exhibit
1.1(ll).
(ii) The
Works
listed on Exhibit 1.1(ll) have not been incorporated, in whole or in part,
into
any completed works which are not listed on Exhibit 1.1(ll), whether published
or unpublished.
(iii) Except
as
noted in Exhibit 1.1(ll), the Works listed thereon are each original works
of
authorship and are comprised of material created solely by the Corporation’s
employees in the course of their employment or by contractors who have executed
forms of assignment vesting all rights in such Works in the Corporation. No
material created by any other persons or any other legal entities have been
incorporated in any of the Works except where the Corporation has acquired
the
rights to do so.
(iv) The
Corporation has taken no action, and the Vendors are aware of no facts, which
would cause any of the Works listed on Exhibit 1.1(ll) to be adjudicated in
any
legal forum to have entered the public domain.
(v) The
authors of all Works have waived, to the extent permitted by law, in whole
any
moral rights he or she may have in the Works, in favour of all future acquirors
of the Works.
Trademarks
(i) The
Corporation owns all equitable and legal title to all words, symbols, devices,
designs, logos, artistic renderings, and similar items which have
30
come
to
indicate a particular source of origin with respect to the Corporation’s goods
and/or services and which are reasonably necessary for the conduct of Business.
Collectively, these properties are referred to in this Agreement as “the
Marks”.
(ii) To
the
knowledge of the Vendors, the Corporation is entitled to use in Canada all
generic, descriptive and non-distinctive words, symbols, devices, photographs,
designs, artistic renderings and packages designs which it has incorporated
in
the sale, promotion, advertising or licensing of its goods and/or
services.
(iii) There
are
no claims pending or which, to the Vendors’ knowledge, may be successfully
brought against the continued use, or attempted or continued registration of
any
of the marks presently being used by the Corporation in the United States,
Canada or throughout the world.
(iv) There
are
no claims pending or which, to the Vendors’ knowledge, may be validly brought
against the continued use of any generic, descriptive and/or non-distinctive
words, symbols, devices, photographs, designs, artistic renderings and package
designs which have been incorporated in the sale, promotion, advertising or
licensing of the Corporation’s goods and/or services in the United States or
throughout the world. The Vendors are aware of no facts which would support
any
such claims, actual or potential.
(v) All
properties which the Corporation recognizes as Marks are listed on Exhibit
1.1(ll) by mark, goods or services, registration number, and date the Mark
was
first used.
(vi) All
Marks
listed on Exhibit 1.1(ll) are currently in use in Canada.
Domain
Names
(i) All
domain names listed on Exhibit 1.1(ll) have been duly registered with an ICANN
approved Registrar of the corresponding country top level domain name
registration authority approved registrar(“ICANN”) through ICANN’s registration
procedures, and are operating, active domain names. The Corporation has taken
all reasonable steps to maintain in force the domain name registrations listed
on Exhibit 1.1(ll).
(ii) ICANN’s
records show the Corporation to be the sole Person in exclusive control of
the
domain names listed in Exhibit 1.1(ll).
(iii) Neither
ICANN nor any third party has advised the Corporation that any of the domain
names listed in Exhibit 1.1(ll) infringe,
dilute, or interfere with the rights of any other party, or may infringe, dilute
or interfere with the rights of any other party.
31
(iv) ICANN
has
not notified the Corporation that any of the domain names listed in Exhibit
1.1(ll) have been placed on “hold” or are otherwise subject to a dispute or
potential dispute pursuant to NSI's dispute resolution policy.
(v) There
are
no claims pending or, to the knowledge of the Vendors, which may be validly
brought against the continued use or registration of any of the domain names
presently being used by the Corporation in the United States or throughout
the
world, as listed on Exhibit 1.1(ll). The Vendors are aware of no facts which
would support any such claims, actual or potential.
(cc) Computer
Systems
The
Corporation owns or licences all of the computer systems reasonably necessary
for the operation of the Business as it is currently conducted. All such
computer systems of the Corporation, including, but not limited to, mainframes,
mini-computers and special purpose systems are fully operational.
(dd) Source
Code Versions
All
source code versions of the Products are accurate and complete in all material
respects and are sufficient for the ongoing operation and conduct of the
Business, and for the enhancement and/or modification of the Products to which
such source code versions relate.
(ee) Contracts
with Non-Arm’s Length Persons
Except
as
set forth in Exhibit 4.1(ee), there are no existing contracts or arrangements
to
which the Corporation is a party in which any of the Vendors, any director
or
officer of the Corporation or any other Person not dealing at arm’s length with
the Vendors or the Corporation, or any director or officer of the Corporation
has an interest, whether directly or indirectly, including, without limitation,
arrangements for the payment of management or consulting fees of any kind
whatsoever.
(ff) Agreements
Restricting Business
The
Corporation is not a party to any agreement or arrangement which restricts
the
freedom of the Corporation to carry on the Business, including any contract
or
agreement which contains covenants by the Corporation not to compete in any
line
of business with any other Person.
(gg) Bank
Accounts, etc.
There
is
set forth in Exhibit 4.1(gg) hereto the name of each bank or other depository
in
which the Corporation maintains any bank account, trust account or safety
deposit box and the names of all persons authorized to draw thereon or who
have
access thereto.
32
(hh) Absence
of Guarantees
The
Corporation has not given or agreed to give and is not a party to or bound
by
any guarantee of indebtedness, indemnity, bond or suretyship or other
obligations of another Person or Persons or any other commitment by which the
Corporation is, or is contingently, responsible for such indebtedness or other
obligations except as specifically provided for or referred to in this Agreement
or in any exhibit hereto.
(ii) Corporate
Records
The
minute books of the Corporation contain, and will contain at the Closing Date,
accurate and complete minutes of all meetings and resolutions of its directors
and shareholders held since its incorporation. All resolutions of the
Corporation were duly passed and all meetings of the Corporation were duly
held,
and its share certificate books and share certificate registers are, and will
at
the Closing Date be, complete and accurate and shall reflect all transactions
contemplated by this Agreement.
(jj)
Consents
No
consent, approval or authorization of, or declaration, filing (other than
administrative filings with Tax authorities, companies registries and the like)
or registration with, any Authority or other person is required to be made
or
obtained by the Corporation or the Vendors prior to, or as a condition of,
the
consummation of the transactions contemplated in this Agreement.
(kk) Powers
of Attorney
The
Corporation has not given any power of attorney to any Person for any purpose
whatsoever.
(ll) Brokers
The
Vendors and the Corporation have not engaged any broker or other agent in
connection with the transactions contemplated in this Agreement and,
accordingly, there is no commission, fee or other remuneration payable to any
broker or agent who purports or may purport to act or have acted for the Vendors
or the Corporation.
(mm) Full
Disclosure
None
of
the foregoing representations and statements of fact contains any untrue
statement of a material fact or omits to state any material fact necessary
to
make any such statement or representation not misleading to a prospective
purchaser of the Purchased Shares seeking full information as to the Corporation
and its properties, businesses and affairs. There is no fact that the Vendors
have not disclosed to the Purchaser in writing having, or, so far as the Vendors
can foresee, that might have, a Material Adverse Effect or that might materially
adversely effect the ability of the Vendors to perform their obligations under
this Agreement. No condition exists that would materially adversely affect
Purchaser’s ability to continue to conduct the Business following Closing. The
33
parties
hereto agree that a fact disclosed in one Exhibit hereto does not constitute
disclosure in any other Exhibit hereto.
(nn) Only
Business-Customer and Supply Relationships
The
Corporation has not in the last 5 years carried on and does not currently carry
on any business other than the Business. After diligent inquiry, to the best
of
Vendors knowledge, no condition presently exists which would cause an adverse
change in Business following Closing which change is based upon relationships
with customers or suppliers of the Corporation or the Business. After diligent
inquiry, to the best of Vendors knowledge, no person has committed any act
or
omitted to commit any act which act or omission has had, or with the passage
of
time would have the effect of damaging relationships with Corporation’s
customers or suppliers. There is set forth in Exhibit 4.1(nn) copies of all
correspondence from customers or suppliers, within the past 24 months which
contains material complaints or criticism, regarding the Corporation, its
conduct or the conduct of employees or business practices. Exhibit 4.1(nn)
also
contains all information (whether or not it has been reduced to writing or
not)
regarding any other material problems of any kind which Corporation has had
with
customers or suppliers which has occurred in the last 24 months.
(oo) US
Securities Laws
Each
Vendor agrees that: (1) Purchaser has made no recommendation to any Vendor
to
purchase shares of ClearOne common stock in the market as provided in this
Agreement and has made no representation regarding the current or future price
of ClearOne common stock (2) Purchaser has provided no information to any Vendor
which is not contained in any publicly available document () Each Vendor has
been advised by its professional advisors regarding the merits and risks of
an
investment in ClearOne common stock (4) each Vendor agrees and acknowledges
that
the investment in ClearOne common stock involves substantial risk based upon
the
future performance of ClearOne as well as risks associated with the market
generally(5) each Vendor can sustain the a loss of its investment in the
ClearOne common stock.
(pp) Ontario
Securities Laws
Each
of
the Vendors is by virtue of such Vendor’s net worth, investment experience and
sophistication able to evaluation and assess the merits and risks associated
with holding the ClearOne Shares as an investment.
(i)
Each
of
the Vendors is acquiring the ClearOne Shares as principal for such Vendor’s own
account and not for the benefit of any other person.
(ii)
Each
of
the Vendors is a resident of the Province of Ontario.
34
(iii)
Each
of
the Vendors acknowledges that the ClearOne Shares may not be resold otherwise
than in compliance with the resale restrictions applicable to the Vendors and
any purchaser of the ClearOne Shares, including, without limitation, such
restrictions under the Ontario Securities Laws.
(qq) Environmental
Matters
(i) The
Corporation has carried and is carrying on its business and its assets always
have been and are now in compliance with all Environmental Laws. Neither the
Corporation nor any of its directors or officers has ever been convicted of
any
offence for non-compliance with any Environmental Law, been fined or otherwise
penalized for non-compliance with an Environmental Law, or settle any
prosecution for non-compliance with any Environmental Law short of
conviction.
(ii) The
Corporation has filed all reports and other information and obtained all
permits, certifications, programs, registrations, licences and other approvals
(collectively “Permits”)
copies
or a list of which are attached as Exhibit 4.1(qq)(ii) to
enable
it to carry on its business as now conducted in compliance with Environmental
Laws. All of the Permits are valid and in good standing and transferable, there
has been no violation of any Permit by the Corporation and no proceeding is
pending, or to the knowledge of the Sellers, threatened to revoke or limit
any
Permit.
(iii) No
control orders, stop orders or other orders or directives have been issued
from
an Authority with respect to any environmental matter to the Corporation in
respect to its business or assets (including any owned or leased real property)
or, to the knowledge of the Vendors (after due inquiry), to any other Person
in
respect of any such matter. To the knowledge of the Vendors (after due inquiry),
no fact or circumstance exists which could give rise to such an order or
directive being issued.
(iv) No
Hazardous Substance originating from any real property owned or leased by the
Corporation, or any other assets of the Corporation, has been released onto
nor
has migrated or is migrating to any neighbouring, adjoining or proximate
property. No Hazardous Substance originating from any neighbouring or adjoining
properties, has been released onto, has migrated onto, or is migrating towards
any real property owned or leased by the Corporation or any other asset of
the
Corporation. No Hazardous Substance is present on, in or under any real property
owned or leased by the Corporation or any other asset of the Corporation in
levels or concentrations in excess of those prescribed by Environmental Laws,
whether or not such presence is in violation of Environmental Laws.
(v) The
Corporation has stored, treated and disposed of all Hazardous Substances used
or
generated in or otherwise relating to its business and assets in compliance
with
Environmental Laws. The Corporation has not incurred and is not incurring any
liability pursuant to Environmental Law in connection with its business and
assets including arising as a result of dealing in Hazardous
Substances.
35
(vi) None
of
the Sellers nor the Corporation has received any written or oral notice of
any
alleged violation of Environmental Laws or other damage to the environment
emanating from or occurring on any of the real property owned or leased by
the
Corporation or on any property in the vicinity of any of the real property,
owned or leased by the Corporation or has incurred any environmental Liability
in connection with any of the Corporation's assets and, to the knowledge of
the
Sellers (after due inquiry), no present or past fact, condition or circumstance
exists which would give rise to such a claim or liability, or potential
liability.
(vii) There
are
no above ground or underground storage tanks at, on, in or under the real
property owned or leased by the Corporation. None of the real property owned
or
leased by the Corporation has ever been used by any Person as a landfill site,
a
waste disposal site, or as a location for the disposal of Hazardous Substances
or waste, has ever had any urea formaldehyde foam insulation, asbestos, pcbs,
or
radioactive substances located thereon.
(viii) All
information provided to the Purchaser or its environmental consultants or
similar representatives in connection with any environmental audit or other
investigation will be true and complete in all material respects. The Sellers
and the Corporation have not conducted an environmental audit (including any
evaluation, assessment, review or study) of any of the real property owned
or
leased by the Corporation, the business or assets of the Corporation except
those in respect of which copies have been provided to the Purchaser, as listed
on Exhibit 4.1(qq)(viii). The Purchaser has been provided with correct and
complete copies of all reports required to be made to Authorities under
Environmental Laws, and all correspondence relating thereto.
The
representations contained in Environmental Matters subparagraphs (iv) and (vii)
are limited to the best knowledge of the Vendors upon the condition that the
Vendors have used best efforts to determine if those representations are true.
If Vendors have not used such best efforts, then those representations are
not
subject to a best knowledge limitation.
4.2
Representations
and Warranties of the Purchaser and the
Parent
The
Purchaser and the Parent hereby jointly and severally represent and warrant
to
the Vendors (and acknowledge that the Vendors are relying on the representations
and warranties in completing the transactions contemplated hereby)
that:
(a) Corporate
- Purchaser
The
Purchaser is a corporation duly incorporated and validly existing under the
laws
of the Province of New Brunswick. The Purchaser has the corporate power and
authority to own and hold its properties and to carry on its business as now
conducted.
36
(b) Corporate
- Parent
The
Parent is a corporation duly incorporated, validly existing and in good standing
under the laws of the State of Utah, United States. The Parent has the corporate
power and authority to own and hold its properties and to carry on its business
as now conducted and as proposed to be conducted.
(c) Authority
Each
of
the Purchaser and the Parent has all necessary corporate power, authority and
capacity to enter into this Agreement and to perform its obligations hereunder
and the execution and delivery of this Agreement and the performance by each
of
the Purchaser and the Parent of its obligations hereunder has been duly
authorized by all necessary corporate action on the part of the Purchaser and
the Parent, respectively.
(d) Capitalization
- Parent
The
authorized capital stock of the Parent consists of fifty million
(50,000,000)
common
shares,
of
which 10,269,117 are outstanding as of May 1, 2002. All of the outstanding
shares are validly issued and outstanding, fully paid and non-assessable, with
no personal liability attaching to the ownership thereof.
(e) Enforceability
This
Agreement constitutes a legal, valid and binding obligation of each of the
Purchaser and the Parent, enforceable against each of them in accordance with
its terms (subject, as to the enforcement of remedies, to bankruptcy,
reorganization, insolvency, moratorium, and other laws relating to or affecting
creditors’ rights generally and subject to the availability of equitable
remedies). The execution and delivery of this Agreement by the Purchaser and
the
Parent, the consummation of the transactions contemplated hereby and the
fulfilment by the Purchaser and the Parent of the terms, conditions and
provisions hereof will not: contravene or violate or result in the breach (with
or without the giving of notice or lapse of time, or both) or acceleration
of
any obligations of the Purchaser or the Parent under:
(A) any
laws
applicable to the Purchaser or the Parent;
(B) any
judgement, order, writ, injunction or decree of any court or of any Authority
which is presently applicable to the Purchaser or the Parent;
(C) the
articles of incorporation, by-laws or any resolutions of the Purchaser or the
Parent or any amendments thereto or restatements thereof; or
(D) the
provisions of any agreement, arrangement or understanding to which the Purchaser
or the Parent is a party or by which it is bound.
37
(f) Brokers
The
Purchaser has not engaged any broker or other agent in connection with the
transactions contemplated in this Agreement and, accordingly, there is no
commission, fee or other remuneration payable to any broker or agent who
purports or may purport to have acted for the Purchaser.
4.3 Non-Waiver
No
investigations made by or on behalf of any party at any time shall have the
effect of waiving, diminishing the scope of or otherwise affecting any
representation or warranty made by the other parties herein or pursuant
hereto.
4.4 Nature
and Survival of Vendor’s Representations and
Warranties
The
representations and warranties of the Vendors contained in this Agreement or
in
any document or certificate given pursuant to this Agreement shall survive
the
Closing for the benefit of the Purchaser and Parent as follows:3 years for
Claims based on breaches of warranties regarding tax matters and two years
for
all other Claims unless a bona fide notice of Claim shall have been made in
writing before the expiry of that period, in which case the representation
and
warranty to which such notice applies shall survive in respect of that Claim
until the final determination or settlement of that claim.
4.5 Survival
of Purchaser’s and Parent’s Representations and
Warranties
The
representations and warranties of the Purchaser and the Parent contained in
this
Agreement or any document or certificate given pursuant to this Agreement shall
survive the Closing for the benefit of the Vendors for a period of two (2)
years
unless a bona fide notice of Claim shall have been made in writing before the
expiry of that period, in which case the representation and warranty to which
such notice applies shall survive in respect of that Claim until the final
determination or settlement of that claim.
4.6 Vendors
Covenants
(a) Non-Compete.
With
the
exception of Jim Stechyson each Vendor agrees that, for a period of three (3)
years following the Closing, it will not compete directly or indirectly with
the
Purchaser, as more fully described in the Non-Compete Agreement substantially
in
the form set forth in Exhibit 4.6(a). Jim Stechyson will execute and deliver
the
Employment Agreement attached hereto as Exhibit 4.6(a)(1).
(b) Employee
Matters.
No
employees of Corporation shall be terminated as a result of this transaction
except for Norm, Heather and Janice Stechyson each of whom has executed and
delivered a release as attached hereto as Exhibit 4.1(x)(iii).
38
(c) Matters
Regarding the Share Resale
(i) The
Vendors will comply with all applicable securities laws in connection with
the
resale of the shares of ClearOne common stock purchased in the market pursuant
to Section 3 above, including, without limitation, the provisions of the
Securities Act of 1933, Securities
Act (Ontario)
and the regulations, rules, policies, blanket orders and rulings thereunder
(the
“Ontario Securities Laws”), and shall consult with its own legal advisors to
ensure such compliance.
(ii) The
Vendors will execute and deliver within the applicable time periods all
documentation as may be required by any applicable securities laws, including,
without limitation, the Ontario Securities Laws, to permit the resale by
the
Vendors of ClearOne shares.
ARTICLE
5 -
CONDITIONS PRECEDENT TO THE PERFORMANCE
BY
THE PARTIES OF THEIR OBLIGATIONS UNDER THIS AGREEMENT
5.1
The
Purchaser’s Conditions
The
obligation of the Purchaser to complete the purchase of the Purchased Shares
hereunder shall be subject to the satisfaction of, or compliance with, at or
before the Time of Closing, each of the following conditions (each of which
is
hereby acknowledged to be inserted for the exclusive benefit of the
Purchaser):
(a) Representations
and Warranties
All
representations and warranties of the Vendors made pursuant to this Agreement
shall be true and correct with the same force and effect as if made at and
as of
the Time of Closing and the Vendors shall have delivered to the Purchaser at
the
Time of Closing a certificate dated the Closing Date, duly executed by a senior
officer of each of the Vendors reasonably acceptable to the Purchaser, to such
effect. The receipt of such certificate and the closing of the transaction
of
purchase and sale provided for in this Agreement shall not be nor deemed to
be a
waiver of the representations and warranties of the Vendors contained in this
Agreement, which representations and warranties shall continue in full force
and
effect for the benefit of the Purchaser as provided in Article
4.
(b) Performance
of Obligations
The
Vendors shall have performed or complied with, in all respects, all of their
obligations, covenants and agreements in this Agreement which are to be
performed or complied with by the Vendors at or prior to the Time of Closing,
and the Vendors shall have delivered to the Purchaser at the Time of Closing
a
certificate dated the Closing Date under corporate seal, duly executed by a
senior officer of each of the Vendors reasonably acceptable to the Purchaser,
to
such effect.
39
(c) Receipt
of Closing Documentation
All
documentation relating to the due authorization and completion of the purchase
and sale of the Purchased Shares and all actions and proceedings taken on
or
prior to the Closing Date in connection with the performance by the Vendors
of
their obligations, covenants and agreements under this Agreement , including
but
not limited to delivery of the Closing Financial Statements and all Exhibits
hereto shall be satisfactory to the Purchaser and its counsel, acting
reasonably, and the Purchaser shall have received copies of all such
documentation or other evidence as it may reasonably request in order to
establish the consummation of the transactions contemplated hereby and the
taking of all corporate proceedings in connection therewith in compliance
with
these conditions, in form and substance satisfactory to the Purchaser and
its
counsel, acting reasonably.
(d) Vendors’
Closing Opinion
The
Purchaser
shall have received an opinion dated as of the Closing Date in form and
substance reasonably satisfactory to Purchaser’s counsel, from counsel for the
Vendors and from counsel to the Corporation in such form and as to such matters
as the Purchaser or its counsel may request provided that, insofar as the
opinions expressed in such opinion are based on matters of fact, such opinions
may be based upon certificates of the Vendors, public officials and officers
of
the Corporation as counsel may deem reasonably appropriate and, as to matters
involving the laws of jurisdictions in which such counsel is not qualified
to
practice, on opinions of recognized local counsel in such
jurisdictions.
(e) Employment
Agreements
Jim
Stechyson shall
have entered into Employment Agreements with the Corporation in the form
attached as Exhibit 4.6(a)(1) respectively.
(f) Approvals
The
acquisition of all of the Purchased Shares pursuant to this Agreement shall
have
been approved by the Board of Directors and, if necessary, by the shareholders
of the Corporation and approvals or waivers, if any, required by the Investment
Canada Act.
(g) Lease
Matters
The
Vendors
shall have obtained from the landlord under the Lease an acknowledgement
that:
(i) the
Lease
is in good standing and in full force and effect without amendment;
(ii) the
closing of the transactions contemplated herein (including the amalgamation
of
the Corporation into the Purchaser) will not result in the
40
termination
of or an increase in the rent presently being paid under the Lease or any change
in terms of the Lease as they exist on the date hereof; and
(iii) the
Corporation has paid or caused to be paid all rents and other amounts presently
owing under the Lease.
(h) No
Action to Restrain
No
action or
proceeding shall be pending or threatened by any Authority or any other Person
(including a party hereto) to restrain or prohibit the completion of the
transactions contemplated by this Agreement or to prevent or restrain the
Corporation from carrying on the Business as presently carried on.
(i) Directors
and Officers
All
directors
and officers of the Corporation specified by the Purchaser shall have resigned
and shall have executed a form of release satisfactory to the Purchaser and
its
counsel. In addition, all employees (other than Norm Stechyson) deemed necessary
to the successful operation of the Corporation by the Purchaser shall continue
to be in the employ of the Corporation as of the Closing.
(j) Due
Diligence
The
Purchaser
has commenced the conduct of investigations of the business and financial
position of the Corporation and shall continue such investigations after the
execution of this Agreement and prior to the Closing and the Purchaser shall
have been satisfied, in its absolute discretion, with the results of its due
diligence review of the Corporation and the Business, including its review
of
the Financial Statements, the Closing Financial Statements and all Exhibits
hereto.
k) Board
Approval
The
board of
directors of the Purchaser and the Parent shall have approved of the transaction
contemplated in this Agreement.
(l) Options
Cancelled (if applicable)
Any
Optionee
of the Corporation
shall,
upon payment of consideration (if any) by the Vendors (and not by the
Corporation, the Purchaser or the Parent), have surrendered to the Corporation
all of the his
or
her
Options
for cancellation and delivered a general release to and in favour of the
Corporation and all of its directors, officers and shareholders past and
present, in form and substance satisfactory to the Purchaser, acting
reasonably.
(m) Vendor
Agreements
Each
beneficial owner of the Vendors shall have entered into his or her respective
Vendor Agreement.
41
(n) Cash
The
cash
account of the Company shall contain at least C$300,000 including checks
that
are dated prior to Closing and were received prior to Closing.
(o) Net
Working Capital
The
Net
Working Capital of the Company
shall be at least C$675,000.
(p) Liabilities
The
Liabilities shall have been paid or terminated, as applicable, as of the
Closing
with the exception of accounts payable and other amounts owing to various
government agencies in the ordinary course of business.
(q) Encumbrances
All
encumbrances on property of the Corporation shall have been released and
Purchaser shall have received copies of such releases and such encumbrances
shall be shown on the public record to have been released.
(r) Line
of Credit
All
of the
Corporation’s lines of credit shall have been terminated and copies of such
termination shall have been delivered to Purchaser.
(s)
Ernst
and Young shall provide an opinion regarding the Corporation’ equity and no
detrimental effect from corporate reorganization, in form and substance
satisfactory to Purchaser.
(t) The
Closing Financial Statements shall be satisfactory to the Purchaser both
in form
and content.
5.2
Conditions
of the Vendors
The
obligation of the Vendors to complete the sale of the Purchased Shares hereunder
shall be subject to the satisfaction of or compliance with in all material
respects, at or before the Time of Closing, of each of the following conditions
(each of which is hereby acknowledged to be inserted for the exclusive benefit
of the Vendors):
(a)
Representations
and Warranties
All
representations and warranties that the Purchaser and the Parent made pursuant
to this Agreement shall be true and correct with the same force and effect
as if
made at and as of the Time of Closing and the Purchaser and the Parent shall
have delivered to the Vendors at the Time of Closing a certificate dated the
Closing Date, duly executed by a senior officer of the Purchaser and the Parent
acceptable to the Vendors, to such effect. The receipt of such certificate
and
the Closing of the transaction of purchase
42
and
sale
provided for in this Agreement shall not be nor be deemed to be a waiver
of the
representations and warranties of the Purchaser and the Parent contained
in this
Agreement, which representations and warranties shall continue in full force
and
effect for the benefit of the Vendors as provided in Article
4.
(b)
Performance
of Agreement
The
Purchaser
and the Parent shall have performed or complied with, in all respects all of
its
obligations, covenants and agreements in this Agreement which are to be
performed or complied with by the Purchaser and the Parent at or prior to the
Time of Closing and shall have delivered to the Vendors at the time of Closing
a
certificate dated the Closing Date under corporate seal, duly executed by a
senior officer of the Purchaser and the Parent acceptable to the Vendors, to
such effect.
(c)
Receipt
of Closing Documentation
All
documentation relating to the due authorization and completion of the purchase
and sale of the Purchased Shares and all actions and proceedings taken on or
prior to the Closing Date in connection with the performance by the Purchaser
and the Parent of their respective obligations under this Agreement shall be
satisfactory to the Vendors and their counsel, acting reasonably, and the
Vendors shall have received copies of all such documentation or other evidence
as they may reasonably request in order to establish the consummation of the
transactions contemplated hereby and the taking of all corporate proceedings
in
connection therewith in compliance with these conditions, in form and substance
satisfactory to the Vendors and their counsel, acting reasonably.
(d) No
Action to Restrain
No
action or
proceeding shall be pending or threatened by any Authority or any other Person
(including a party hereto) to restrain or prohibit the completion of the
transactions contemplated by this Agreement.
(e)
Opinion
of Parent’s General Counsel
The
Vendors
shall have received an opinion dated the Closing Date, in form and substance
reasonably satisfactory to Vendors Counsel, from Parent’s General Counsel,
confirming the matters warranted in paragraphs b, c, d, e, f of Section 4.2
hereof, provided that, insofar as the opinion, expressed with respect to such
matters as are based on matters of fact, such opinions may be based solely
upon
an officer of the Parent and such evidence as such general counsel may
reasonably deem appropriate.
(f) Opinion
of Purchaser’s Counsel
The
Vendors
shall have received an opinion dated the Closing Date, in form and substance
reasonably satisfactory to Vendors Counsel, from Purchaser’s Counsel, confirming
the matters warranted in paragraphs a, c and f of Section 4.2 hereof, provided
that, insofar as the opinion, expressed with respect to such matters as are
based on
43
matters
of fact, such opinions may be based solely upon an officer of the Parent
or
Purchaser and such evidence as such counsel may reasonably deem
appropriate.
5.3
Waiver
by Purchaser
If
any of
the conditions set forth in Section 5.1
have not
been fulfilled, performed or satisfied at or prior to August 19, 2002 the
Purchaser may, by written notice to the Vendors terminate all of its obligations
hereunder and the Purchaser shall be released from all its obligations under
this Agreement. Any of such conditions may be waived in whole or in part by
the
Purchaser by instrument in writing given to the Vendors without prejudice to
any
of the Purchaser’s rights of termination in the event of non-performance of any
other condition, obligation or covenant in whole or in part, and without
prejudice to its right to complete the transaction of purchase and sale
contemplated by this Agreement and claim damages for breach of representation,
warranty or covenant.
5.4
Waiver
by Vendors
If
any of
the conditions set forth in Section 5.2
have not
been fulfilled, performed or satisfied at or prior to _August 19, 2002 the
Vendors may, by written notice executed by all of the Vendors and given to
the
Purchaser, terminate all of their obligations hereunder and the Vendors shall
be
released from all their obligations under this Agreement. Any of such conditions
may be waived in whole or in part by the Vendors by instrument in writing
executed by all of the Vendors and given to the Purchaser, without prejudice
to
any of the Vendors’ rights of termination in the event of non-performance of any
other condition, obligation or covenant in whole or in part, and without
prejudice to their right to complete the transaction of purchase and sale
contemplated by this Agreement and claim damages for breach of representation,
warranty or covenant.
ARTICLE
6 -
INDEMNIFICATION
6.1 Indemnification
by Vendors
The
Vendors jointly and severally covenant and agree with the Purchaser and the
Corporation to indemnify and save harmless the Purchaser and the Corporation,
from and against any claim, demand, action, cause of action, damage, loss
(including lost profits), cost, liability or expense (including reasonable
professional fees and disbursements) (a “Claim”) (including without limitation
any liability based on an employee’s dismissal prior to Closing or other
liability to any employee prior to Closing)which may be made or brought against
the Purchaser or the Corporation or any one or more of them, or which they
or
any one or more of them may suffer or incur in respect of, as a result of,
or
arising out of:
(a) any
nonfulfillment of any covenant or agreement on the part of the Vendors, or
any
one or more of them, contained in this Agreement or any document or certificate
given pursuant to this Agreement;
44
(b) any
inaccuracy in or breach of any representation or warranty of the Vendors, or
any
one or more of them, contained in this Agreement or any document or certificate
given pursuant to this Agreement; or
(c) any
debts
and liabilities of the Corporation for Taxes existing at the Time of Closing,
or
any reassessment for Taxes for any period ending on or before the
Closing
Date,
for which no adequate reserve has been provided for and disclosed in the Balance
Sheet.
6.2
Indemnification
by the Purchaser
and the Parent
The
Purchaser and the Parent covenant and agree with the Vendors to jointly and
severally indemnify and save harmless the Vendors, from and against any Claim
which may be made or brought against the Vendors, or one or more of them, or
which they or one or more of them may suffer or incur, directly or indirectly,
in respect of, as a result of, or arising out of:
(a) any
non-fulfillment of any covenant or agreement on the part of the Purchaser under
this Agreement or any document or certificate given pursuant to this
Agreement;
(b) any
inaccuracy in or breach of any of the Purchaser’s representations or warranties
contained in this Agreement or any document or certificate given pursuant to
this Agreement;
6.3
Limitation
of Liability
In
no
event shall an Indemnifying Party be liable for Claims, whether or not
previously made by an Indemnified Party, to the extent the aggregate value
of
all Claims exceeds the Purchase Price. The parties acknowledge that Purchase
Price represents the maximum liability of the Purchaser and the Parent, on
the
one hand, and the Vendors, on the other hand. Further, all demand for payment
of
indemnification shall be subject to Sections 4.4 and 4.5 hereof and all other
provisions of this Agreement.
6.4
The
Parent’s Guarantee
The
Parent hereby guarantees the performance of and compliance with all of the
Purchaser’s obligations, covenants and agreements under this Agreement and Jim
Stechyson’s employment agreement in the form attached hereto as Exhibit
4.6(a)(1)
6.5
Procedure
for Indemnification
(a) Claims
Other Than Third Party Claims
Following
receipt from the Vendors or the Purchaser, as the case may be (the “Indemnified
Party”), of a written notice of a claim for indemnification which has not arisen
in respect of a Third Party Claim, the party who is in receipt of such notice
(the “Indemnifying Party”) shall have 30 days to make such investigation of the
Claim as the Indemnifying Party considers desirable. For the purpose of such
investigation, the
45
Indemnified
Party shall make available to the Indemnifying Party the information relied
upon
by the Indemnified Party to substantiate the claim. If the Indemnified Party
and
the Indemnifying Party agree at or prior to the expiration of such 30 day
period
(or any mutually agreed upon extension thereof) to the validity and amount
of
the Claim, the Indemnifying Party shall immediately pay to the Indemnified
Party
the Undisputed Amount. If the Indemnified Party and the Indemnifying Party
do
not agree within such period (or any mutually agreed upon extension thereof),
such dispute shall be resolved by arbitration as set out in Section 7.15.
(b) Third
Party Claims
The
Indemnified Party shall notify the Indemnifying Party in writing as soon
as is
reasonably practicable after being informed in writing that facts exist which
may result in a Claim originating from a Person other than the Indemnified
Party
(a “Third Party Claim”) and in respect of which a right of indemnification given
pursuant to Section 6.1
or
6.2
may
apply. The Indemnifying Party shall have the right to elect, by written notice
delivered to the Indemnified Party within 10 days of receipt by the Indemnifying
Party of the notice from the Indemnified Party in respect of the Third Party
Claim, at the sole expense of the Indemnifying Party, to participate in or
assume control of the negotiation, settlement or defence of the Third Party
Claim, provided that:
(i) such
will
be done at all times in a diligent and bona fide matter;
(ii) the
Indemnifying Party acknowledges in writing its obligation to indemnify the
Indemnified Party in accordance with the terms contained in this Agreement
in
respect of that Third Party Claim; and
(iii) the
Indemnifying Party shall pay all reasonable out-of-pocket expenses incurred
by
the Indemnified Party as a result of such participation or
assumption.
If
the
Indemnifying Party elects to assume such control, the Indemnified Party shall
co-operate with the Indemnifying Party and its counsel and shall have the
right
to participate in the negotiation, settlement or defence of such Third Party
Claim at its own expense. If the Indemnifying Party does not so elect or,
having
elected to assume such control, thereafter fails to proceed with the settlement
or defence of any such Third Party Claim, the Indemnified Party shall be
entitled to assume such control. In such case, the Indemnifying Party shall
co-operate where necessary with the Indemnified Party and its counsel in
connection with such Third Party Claim and the Indemnifying Party shall be
bound
by the results obtained by the Indemnified Party with respect to such Third
Party Claim.
6.6
Additional
Rules and Procedures
The
obligation of the parties to indemnify each other pursuant to this Article
6
shall
also be subject to the following:
46
(a) an
Indemnified Party shall only be entitled to make a claim for indemnification
pursuant to Section 6.1
or
6.2,
as the
case be, if written notice containing reasonable particulars of such Claim
is
delivered to the Indemnifying Party within the time periods provided for
in
Section 6.5(a) or 6.5(b) as the case may be;
(b) if
any
Third Party Claim is of a nature such that the Indemnified Party is required
by
applicable law to make a payment to any Person (a “Third Party”) with respect to
such Third Party Claim before the completion of settlement negotiations or
related legal proceedings, the Indemnified Party may make such payment and
the
Indemnifying Party shall, forthwith after demand by the Indemnified Party,
reimburse the Indemnified Party for any such payment. If the amount of any
liability under the Third Party Claim in respect of which such a payment
was
made, as finally determined, is less than the amount which was paid by the
Indemnifying Party to the Indemnified Party, the Indemnified Party shall,
forthwith after receipt of the difference from the Third Party, pay such
difference to the Indemnifying Party;
(c) except
in
the circumstances contemplated by Section 6.5 above, and whether or not the
Indemnifying Party assumes control of the negotiation, settlement or defence
of
any Third Party Claim, the Indemnified Party shall not settle or compromise
any
Third Party Claim except with the prior written consent of the Indemnifying
Party (which consent shall not be unreasonably withheld). A failure by the
Indemnifying Party to respond in writing to a written request by the Indemnified
Party for consent for a period of five days or more, shall be deemed a consent
by the Indemnifying Party to such request;
(d) the
Indemnifying Party and the Indemnified Party shall provide each other on
an
ongoing basis with all information which may be relevant to the other’s
liability hereunder and shall supply copies of all relevant documentation
promptly as they become available;
(e) notwithstanding
Section 6.5, the Indemnifying Party shall not settle any Third Party Claim
or
conduct any related legal or administrative proceeding in a manner which
would,
in the opinion of the Indemnified Party, acting reasonably, have a material
adverse impact on the Indemnified Party, provided the Indemnified Party agrees
to release the Indemnifying Party from any liability in relation to third
party
claims; and
(f) no
party
will have any liability in respect of indemnification under this Article
6 until
the total dollar amount arising thereunder exceeds C$50,000 (the “Threshold
Amount”). In the event a party’s liabilities under this Section 6 exceeds the
Threshold Amount, then in such event the party obligated for indemnification
shall fully indemnify and reimburse the other party for all amounts up to
the
Threshold Amount, as well as amounts in excess of such amount.
6.7
Rights
Cumulative
The
rights of indemnification contained in this Article
6 are
cumulative and are in addition to every other right or remedy of the parties
contained in this Agreement or otherwise.
47
6.8
GST
If
the
Vendors and the Purchaser acting reasonably determine that any payment (the
“Payment”) made pursuant to this Article
6
is
subject to GST or are deemed by the ETA to be inclusive of GST, the Indemnifying
Party agrees to pay to the Indemnified Party in addition to the Payment an
amount equal to the Payment multiplied by the applicable rate of
GST.
6.9
Set-Off
Rights
The
Holdback Funds shall be placed in a separate account of the Purchaser or Parent
at Closing pursuant to Article 3 above, for a period of one year from the
Closing (the “Holdback Period).. If Purchaser determines that it has a Claim it
shall notify Jim Stechyson on behalf of the Vendors (hereinafter for purposes
of
this Section, the “Vendor”) in writing of such Claim (the “Set-Off Claim”)
stating (i) the amount of the Claim, and (ii) the basis for such Claim for
the
Vendor to evaluate the Set-Off Claim; Vendor shall have ten (10) days to
evaluate and respond to the Set-Off Claim in writing. If Vendor does not dispute
the Set-Off Claim, Purchaser shall be entitled to set off such claim against
the
Holdback Funds. In the event that the Vendor disputes a Set-Off Claim, the
parties will resolve such dispute using the procedure described in Section
7.15
below, provided that, if the HoldbackPeriod described in this section expires
during the existence of a dispute involving a Set-Off Claim, the Purchaser
shall
retain an amount equal to the Set-Off Claim pending resolution of the dispute,
and will release the balance of the Holdback Funds to Vendor.
6.10 Exception
Notwithstanding
any other provision in this Agreement, if Purchaser has an expressed right
pursuant to this Agreement to draw HoldbackFunds without compliance with Article
6 then Purchaser may draw Holdback Funds without regard to any limitation in
this Article 6 and without compliance with any provision of this Article 6
and,
without limiting the generality of the above, such draw Holdback Funds shall
not
be subject to the limitations set out in Section 6.6(f) hereof. However, any
draw from Holdback Funds by Purchaser shall be based on Purchaser’s reasonable
interpretation of this Agreement and applicable facts and Vendors reserve the
right to arbitrate any claim that Purchaser was not entitled to draw funds
from
the Holdback under the terms of this Agreement.
The
foregoing indemnification provisions in this Article 6 are in addition to,
and
not in derogation of, any statutory, equitable, or common law remedy any Party
may have with respect to the transactions contemplated by this
Agreement.
ARTICLE
7 -
GENERAL
7.1
Public
Notices
All
public notices to third parties and all other publicity concerning the matters
contemplated by this Agreement shall be jointly planned and co-ordinated by
the
Parties and no Party shall act unilaterally in this regard without the prior
approval of the other Parties, except where the Party making such notice is
required to do so by law or by the applicable regulations
48
or
policies of any regulatory agency of competent jurisdiction or any stock
exchange in circumstances where prior consultation with the other Parties
is not
practicable.
7.2
Term
Sheet
The
Parties acknowledge that this Agreement supersedes any and all versions of
that
that certain unexecuted term sheet between the Vendors and the Purchaser.
7.3
Confidentiality
The
existence and terms and conditions of this Agreement are confidential until
publicly disclosed. The parties acknowledge and agree that they are parties
to a
mutual non-disclosure agreement, and continue to be bound by the terms thereof.
7.4
Stand-Off
The
Vendors, on behalf of themselves, the Corporation, its officers, directors,
attorneys, and advisors, agree not to (i) solicit, initiate, or encourage
the submission of any proposal or offer from any person relating to the
acquisition of any capital stock or other voting securities, or any substantial
portion of the assets, of the Corporation (including any acquisition structured
as a merger, consolidation, or share exchange), or (ii) participate other
than with Purchaser in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any person to do or seek any of the
foregoing (collectively, the “Stand-Off”). The Vendors and/or the Corporation
will notify Parent immediately if any person makes any proposal, offer, inquiry,
or contact with respect to any of the foregoing. The Corporation will deal
exclusively with Purchaser notwithstanding any third party proposals. The Stand
Off will expire at the earlier of (i) sixty (60) days from the effective date
of
this Agreement (ii) or the Closing.
7.5
Expenses
Each
Party to this Agreement shall pay its respective legal, accounting and other
professional advisory fees, costs and expenses incurred in connection with
the
negotiation, preparation or execution of this Agreement and all documents and
instruments executed or delivered pursuant to this Agreement, as well as any
other costs and expenses incurred.
7.6
Further
Assurances
The
Parties shall do all such things and provide all such reasonable assurances
as
may be required to consummate the transactions contemplated by this Agreement,
and each Party shall provide such further documents or instruments required
by
any other party as may be reasonably necessary or desirable to effect the
purpose of this Agreement and carry out its provisions, whether before or after
Closing.
7.7
Assignment
and Enurement
Neither
this Agreement nor any benefits or duties accruing under this Agreement shall
be
assignable by any Party without the prior written consent of each of the other
Parties, which
49
consent
shall not be unreasonably
withheld or delayed. Subject to the foregoing, this Agreement shall ensure
to
the benefit of and be binding upon the Parties and their respective successors
(including any successor by reason of amalgamation of any Party) and
permitted assigns.
7.8
Entire
Agreement
With
respect to the subject matter of this Agreement, this Agreement and its
Exhibits supersedes all prior understandings and communications between the
parties or any of them, oral or written. This Agreement, together with any
exhibits and checklists attached hereto and any document delivered pursuant
to
this Agreement, constitutes the entire agreement between the Parties with
respect to the matters herein and supersedes all prior agreements,
understandings, negotiations and discussions relating to the subject matter
hereof. The execution of this Agreement has not been induced by, nor do any
of
the Parties rely upon or regard as material, any representations, promises,
agreements or statements whatsoever not incorporated herein and made a part
hereof. This Agreement shall not be amended, altered or qualified except by
written agreement signed by all of the Parties.
7.9
Waiver
Except
as
otherwise expressly set out herein, no waiver of any provision of this Agreement
shall be binding unless it is in writing. No indulgence or forbearance by a
Party shall constitute a waiver of such Party’s right to insist on performance
in full and in a timely manner of all covenants in this Agreement. Waiver of
any
provision shall not be deemed to waive the same provision thereafter, or any
other provision of this Agreement at any time.
7.10 Notices
All
payments and communications which may be or are required to be given by any
party to any other party, shall be in writing and (i) delivered personally,
(ii) sent by prepaid courier service or mail, or (iii) sent by prepaid
telecopier or other similar means of electronic communication to the parties
at
their following respective addresses:
For
the
Purchaser and the Parent:
Susie
Strohm
ClearOne
Communications, Inc.
1825
West
Research Way
Salt
Lake
City, Utah 84119
Attention:
Susie
Strohm
Telecopier:
(801)
974-3742
50
with
a
copy to:
J.
Scott
Hunter
Clyde,
Snow, Sessions, & Swenson
201
South
Main
Salt
Lake
City, Utah 84119
Attention:
J.
Scott
Hunter
Telecopier:
(801)
521-6280
For
the Vendors:
Jim
Stechyson
5597
Goddard St
Ottawa,
Ontario
K4M1C5
with
a copy to:
Norm
Stechyon
1080
Tomkins Farm Crescent
Greely,
ON, K4P 1M5
Telecopier:
613
822 1109
Any
such
notice so given shall be deemed conclusively to have been given and received
when so personally delivered or delivered, by courier or on the day on which
termination is confirmed if sent by telecopier or other electronic communication
or on the fifth day following the sending thereof by mail. Any party may
from
time to time change its address hereinbefore set forth by notice to the other
parties in accordance with this section.
7.11 Severability
If
any
provision of this Agreement or portion thereof or the application thereof
to any
Person or circumstance shall to any extent be invalid or unenforceable:
(a) the remainder of this Agreement or the application of such provision or
portion thereof to any other Person or circumstance shall not be affected
thereby; and (b) the Parties will negotiate in good faith to amend this
Agreement to implement the intentions set forth herein. If the Parties cannot
agree on an appropriate amendment, any Party may refer the matter for
determination pursuant to and in accordance with Section 7.15.
Each
provision of this Agreement shall be valid and enforceable to the fullest
extent
permitted by law.
7.12 Execution
by Facsimile
The
signature of any of the Parties hereto may be evidenced by a facsimile copy
of
this Agreement bearing such signature.
51
7.13 Counterparts
This
Agreement may be signed in one or more counterparts, each of which so signed
shall be deemed to be an original, and such counterparts together shall
constitute one and the same instrument. Notwithstanding the date of execution
of
any counterpart, each counterpart shall be deemed to bear the effective date
set
forth below.
7.14 Governing
Law and Jurisdiction for Disputes
This
Agreement shall be governed by and construed in accordance with the laws
of the
Province of Ontario and the federal laws of Canada applicable therein and
shall
be treated, in all respects, as an Ontario contract and the parties hereto
do
attorn to the exclusive jurisdiction of the Courts of Ontario.
7.15 Resolution
of Disputes by Arbitrator
(a) Any
dispute, controversy or claim arising out of this contract, including any
question regarding its existence, validity or termination, shall be submitted
by
any party to be finally resolved by arbitration under the Ontario
Arbitration Act,
1991 as
amended (the “Act”). The Act is incorporated by reference into this
clause.
(b) The
language of the arbitration shall be English. The arbitration shall be governed
by the substantive and procedural law of Ontario. The venue for the arbitration
shall be Ottawa.
(c) The
arbitration shall be conducted by a single arbitrator appointed by agreement
between the parties, or in the absence of agreement, in accordance with the
Act.
(d) The
arbitration must be complete, and a decision rendered, within ninety (90)
days
of the submission of the dispute to arbitration.
(e) The
decision arrived at pursuant to the arbitration shall be final and binding.
No
appeal shall lie from the arbitration. Any award granted as a result of
arbitration proceedings under this section shall be recognized internationally,
and may be entered in any court having jurisdiction to enforce such
awards.
(f) The
prevailing Party in any arbitration brought to enforce or interpret this
Agreement shall be entitled to reasonable costs, fees, losses, and expenses
including attorney’s fees.
7.16 Remedies
The
parties hereto agree that irreparable damage would occur in the event that
any
of the provisions of this Agreement are not performed in accordance with
their
specific terms or are otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in an arbitration proceeding brought pursuant to Section 7.15 of this
Agreement.
52
7.17 Undisputed
Amounts
Subject
to the express provisions of this Agreement, where there is any dispute as
to
the amount of money owing by any Party to any other Party hereunder, the
portion
of the amount owing that is not in dispute or otherwise contested or challenged
(the “Undisputed Amount”) if any, shall be paid within the time required herein
or if the required time has elapsed, shall be paid immediately, without
deduction or abatement, but without prejudice to the rights of the Parties
to
contest, challenge or otherwise dispute the appropriate disposition of the
remaining portion of the money claimed hereunder.
7.18
Survival
Unless
replaced, amended or withdrawn prior to any detrimental reliance thereon
by the
Accepting Party (as defined in this paragraph), all covenants, agreements,
indemnities, warranties and representations set forth herein or in any
certificate or other document delivered pursuant to or in connection with
this
Agreement by or on behalf of one Party to another Party (the “Accepting Party”)
shall be deemed to have been relied upon by the Accepting Party notwithstanding
any investigations heretofore or hereafter made by or on behalf of the Accepting
Party or its agents, and shall, unless expressly provided otherwise, survive
in
full force and effect and not merge upon the execution, termination or expiry
of
this Agreement.
7.19 Good
Faith
All
parties hereto covenant to act in good faith and fairly in connection with
all
obligations set out herein including, without limitation, allowing Vendors
a
good faith attempt to earn the Earn Out Amount. In connection therewith,
James
Stechyson shall have reasonable rights and responsibilities regarding operations
of the Corporation subject to reasonable controls by Parent.
[Signatures
appear on the following page]
53
IN
WITNESS WHEREOF
the
parties have hereunto duly executed this Agreement on the date first above
written.
|
/s/ Brian R.
Woodland
Witness
|
PURCHASER:
ClearOne
Communications of Canada, Inc., a
New
Brunswick corporation
Per: /s/ Frances
M. Flood
Its: President
&
CEO
|
|
/s/ Brian R.
Woodland
Witness
|
PARENT:
ClearOne
Communications, Inc., a Utah
corporation
Per: /s/ Frances
M. Flood
Its: President
&
CEO
|
|
Witness
|
VENDORS:
3814149
Canada Inc., a Canadian corporation
Per:
Its:
|
|
Witness
|
3814157
Canada Inc., a Canadian corporation
Per:
Its:
|
|
Witness
|
Stechyson
Family Trust
Per:
Its:
|
|
Witness
|
Heather
Stechyson Family Trust
Per:
Its:
Jim
Stechyson
Norm
Stechyson
|
Exhibit
10.4
PRODUCT
LINE PURCHASE AGREEMENT
This
Agreement is entered into as of August 23, 2002, (the “Effective Date”) by and
between ClearOne Communications, Inc., a Utah corporation (the “Seller”), and
Comrex Corporation, a Massachusetts corporation (the “Buyer”). Buyer and Seller
are referred to collectively herein as “Party” in the singular and “Parties”
in
the
plural.
This
Agreement contemplates a transaction in which Buyer will purchase certain
of the
assets and assume certain of the liabilities of Seller’s DH20, DH22 and DH30
digital hybrid product line, and the Parties shall engage in certain other
transactions, as further described herein.
Concurrently
with this Agreement the Parties are entering into that certain Manufacturing
Agreement and that certain Software License Agreement of even date
herewith.
Now,
therefore, in consideration of the premises and the mutual promises herein
made,
and the representations, warranties, and covenants herein contained and subject
to the terms and conditions hereinafter set forth, and intending to be legally
bound, the Parties agree as follows.
1. Definitions.
(a) “Acquired
Assets”
means
all of the right, title, and interest that Seller possesses and has the right
to
transfer in and to all of the assets constituting the Products as more fully
set
forth in Schedule
1,
and
including:
(i) the
manufacturing rights, Product documentation, all Source Code and Object Code
for
the Products as set forth in Schedule
1;
(ii)
the Intellectual Property; (iii) the tooling, dies, accessories, and other
tangible personal property owned by Seller identified and in the quantities
set
forth in Schedule
1;
(iv)
the sales and marketing materials in printed and in editable electronic file
format as set forth in Schedule
1;
and (v)
to the extent transferable or assignable by Seller, the governmental licenses,
permits, approvals and certifications, ratings, compliance reports and listings
from product or quality control certification organizations, as set forth
in
Schedule
1;
provided,
however,
that
the Acquired Assets shall not include the specific Source Code or Object
Code
for the Gentner/ClearOne proprietary acoustic echo canceling routines and
line
echo canceling routines which shall be licensed in Object Code form to Buyer
pursuant to the Software License Agreement and the Non-Exclusive Files licensed
to Buyer pursuant to §2(b) below.
(b) “Assumed
Liabilities”
has
the
meaning set forth in §6(c) below.
(c) “Audio
and Video Conferencing Environment”
means
the market segment where individuals or groups that are in physically separate
locations to communicate with each other through electronic media without
the
intent for such communications to be distributed to the general public for
profit.
(d) “Buyer”
has the
meaning set forth in the preface above.
(e) “Buyer’s
Disclosure Schedule”
has
the
meaning as set forth in §4 below.
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(f) “Closing”
has
the
meaning set forth in §2(e) below.
(g) “Closing
Date”
has
the
meaning set forth in §2(e) below.
(h) “Confidential
Information”
means
any information concerning the businesses and affairs of the disclosing Party
that is not already generally available to the public; provided, however,
that
Confidential Information shall not include, any information that: (i) at
the
time of the disclosure is already in the possession of the receiving Party
and
not subject to an existing obligation of confidentiality; (ii) is independently
made available to the receiving Party by an unrelated third party whose
disclosure would not constitute a breach of any duty of confidentiality owed
to
the disclosing Party; (iii) is generally available to the public through
no
wrongful act of the receiving Party; or (iv) is independently developed by
the
receiving Party without using the Confidential Information, as demonstrated
by
documentary evidence.
(i) “Customer
Warranties”
means
any obligations pursuant the written warranty for the Product in the form
attached hereto as Schedule
2,
Customer Warranties.
(j) “Digital
Hybrid”
means
the method of separating, sending and receiving audio on a telephone line
using
digital signal processing technology.
(k) “Excluded
Liabilities”
has
the
meaning set forth in §2(c) below.
(l) “Intellectual
Property”
means
(i) the following only with respect to the Acquired Assets and not to the
technology licensed to Buyer under this Agreement: all domestic and foreign
letters patent, patents, patent applications, docketed patent disclosures,
patent licenses, other patent rights, trademarks, trademark registrations,
trademark applications, trademark licenses, other trademark rights, service
marks, service mark registrations, service mark applications, service mark
licenses, other service mark rights, trade names, trade name licenses, trade
dress, brand names, brand marks, logos, slogans, ideas, processes, copyrights,
copyright registrations, copyright applications, Know-How, Know-How licenses,
computer software licenses, computer data, licenses and sublicenses granted
and
obtained with respect thereto,
and any
divisions, extensions, renewals, reissues, continuations, or continuations
in
part and rights thereunder, and goodwill associated therewith, and remedies
against infringement thereof ; and (ii) the following rights as each may
apply
after the Closing Date: all rights of Seller in and to, including rights
to
enforce the terms of, confidentiality agreements and noncompetition agreements
of, and any agreements relating to the assignment of Intellectual Property
made
by, prior and present employees and/or contractors of Seller, and any such
agreements with any other Person with respect to the Intellectual Property
and
rights to protection of interests therein under the laws of all jurisdictions
with respect to any of the foregoing.
(m) “Know-How”
means
the following as each relates exclusively to the Acquired Assets: trade secrets,
know-how (including product know-how and use and application know-how),
formulas, processes, product designs, inventions, specifications, quality
control procedures, manufacturing, cost and pricing data, parts trading
information, engineering and other drawings, technology, technical information,
safety information, lab journals, engineering data and design and
2
engineering
specifications, research records, market surveys and creative materials,
advertising and promotional literature, customer and supplier lists and similar
data, including all depictions, descriptions, drawings and plans thereof;
the
foregoing definition shall not be implied to include the technology licensed
to
Buyer under the Software License Agreement.
(n) “Lien”
means
any mortgage, pledge, security interest, encumbrance, lien or charge of any
kind
(including, without limitation: any conditional sale or other title retention
agreement, any lease in the nature thereof, and the filing of or agreement
to
give any financing statement under the Uniform Commercial Code or comparable
law
of any jurisdiction in connection with such mortgage, pledge, security interest,
encumbrance, lien or charge).
(o) “Manufacturing
Agreement”
has
the
meaning set forth in §6(f) below.
(p) “Material
Adverse Effect”
means
any change, event, circumstance, development, or effect that has or is
reasonably likely to have a material adverse effect on the Acquired Assets
or
the consummation or fulfillment of any obligations under this Agreement or
any
other agreement contemplated by Buyer or Seller hereunder.
(q) “Non-Exclusive
Files”
means
those data and routine files which are not unique to the Products and used
in
other ClearOne products.
(r) “Object
Code”
means
the computer programs assembled or compiled in magnetic or electronic binary
form on software media, which are readable and usable by machines, but not
generally readable by humans without reverse assembly, reverse compiling,
or
reverse engineering.
(s) “Other
Inventory”
has
the
meaning set forth in Exhibit
D2,
attached hereto and incorporated herein by reference.
(t) “Other
Raw Materials”
has
the
meaning set forth in Exhibit
D2,
attached hereto and incorporated herein by reference.
(u) “Party”
or “Parties”
has
the
meaning set forth in the preface above.
(v) “Permits”
has
the
meaning set forth in §3(j).
(w) “Person”
means
an individual, a partnership, a corporation, an association, a limited liability
company, a joint stock company, a trust, a joint venture, an unincorporated
organization, other entity, or a governmental entity (or any department,
agency,
or political subdivision thereof).
(x) “Product”
or
“Products”
has
the
meaning set forth in Schedule
1,
attached hereto and incorporated herein by reference.
(y) “Purchase
Price”
has
the
meaning set forth in §2(d) below.
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(z) “Residuals”
means
information which may be remembered by persons who have received or worked
with
Seller’s Confidential Information, including ideas, concepts, know-how or
techniques contained therein.
(aa) “Seller”
has
the
meaning set forth in the preface above.
(bb) “Software
License Agreement”
means
that certain Software License Agreement between the Parties for the license
of
acoustic echo canceling and line echo canceling routines entered into
simultaneously herewith.
(cc) “Source
Code”
means
the computer programs written in higher-level, human-readable programming
language, including comments, and all documentation reasonably necessary
to
build and/or modify such code.
(dd) “Studio
Environment”
means
the market segment where movies, shows, or programs are produced in order
to
mass distribute such programs to the public through radio, television or
other
means of mass media distribution.
(ee) Tax
or
Taxes”
means
any federal, state, local, or foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits,
environmental, customs duties, capital, franchise, profit, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
(ff) “Transition
Period”
means
that period of time commencing upon Closing and continuing until the Seller
and
Buyer have performed the actions described in the Transition Plan, but in
no
event shall such period exceed ninety (90) days.
(gg) “Transition
Plan”
means
the plan attached as Schedule 5.
2. Basic
Transaction.
Subject
to the terms of this Agreement, the Parties hereby agree as
follows:
(a) Purchase
and Sale of Assets.
Buyer
agrees to purchase from Seller, and Seller agrees to sell, assign, transfer
and
convey to Buyer at the Closing, all of the Acquired Assets, free and clear
of
any and all Liens, for the consideration specified below in this §2. The
Acquired Assets shall be delivered to Buyer at the Closing or as may otherwise
be set forth in the Transition Plan.
(b) License
Agreement.
Seller
agrees to license certain technology to Buyer in accordance with the terms
of
the Software License Agreement between the Parties in substantially the form
set
forth in Exhibit
A
attached
hereto. Seller also grants to Buyer a perpetual, royalty-free license to
copy,
modify and create derivatives of the Non-Exclusive Files, provided that such
license is for the use by Buyer for the Products or Product upgrades, and
for
new products to be developed
4
by
Buyer.
Seller agrees that it will not grant a license or otherwise grant a right
to use
the Non-Exclusive Files to third-parties for use in Digital Hybrid products
designed for the Studio Environment.
(c) Limited
Assumption of Liabilities.
Except
for the assumption of Customer Warranties, Buyer does not and shall not assume
or be otherwise responsible for any liability of or obligation associated
with
the Acquired Assets arising from or related to activities which occurred
prior
to the end of business on the Closing Date, including without
limitation:
(i) any
debts, liabilities, obligations, contracts or Taxes with respect to any period
whether known or unknown, contingent or fixed, liquidated or
unliquidated;
(ii) litigation
to which Seller is a party or subject to, or arising from or related to any
litigation relating to any events, occurrences or facts connected to Seller,
the
Acquired Assets, or Seller's operation of the Acquired Assets, or to which
Seller is a party or subject;
(iii) claims
by
employees, former employees or retirees of Seller, including without limitation,
those relating to terms or conditions of employment policies, practices,
compensation, medical benefits, benefit or welfare plans or any other
employment-related obligation;
(iv) personal
injury, product liability or property damage claims whether arising by
negligence, strict liability or otherwise, for any products manufactured,
fabricated, made, distributed or sold by Seller, or any Inventory, Other
Inventory or Other Raw Materials;
(v) any
compensation or benefits claims (including, without limitation, pension,
profit-sharing or vacation benefits) for services rendered for Seller;
or
(vi) Seller's
compliance with any applicable laws, rules, regulations, ordinances or orders
of
federal, state or local laws, the conduct of Seller's operations, the Acquired
Assets, including, without limitation, all applicable environmental, health
and
safety matters, except that Seller shall not be liable for FCC compliance
testing for the DH30 product except as set forth in the Transition Plan in
Schedule
5.
(The
foregoing are collectively referred to as the “Excluded
Liabilities”).
(d) Purchase
Price.
At the
Closing (defined below), Buyer agrees to pay to Seller the sum of One Million
Three Hundred Thousand Dollars ($1,300,000) (the “Purchase
Price”)
for
the Acquired Assets, payable in immediately available funds deposited to
such
bank account as Seller shall designate to Buyer in writing not less than
three
(3) business days prior to the Closing
5
Date.
The
amount stated as the Purchase Price does not include the additional amount
to be
paid by Buyer for Other Raw Materials and Other Inventory, which amount shall
be
allocated to inventory.
(e) The
Closing.
Subject
to and after fulfillment of or waiver of the conditions set forth in §7 of this
Agreement, the closing of the transactions contemplated by this Agreement
(the
“Closing”)
shall
take place on a date selected by Buyer within five (5) days following the
satisfaction or waiver of all conditions to the obligations of the Parties
to
consummate the transactions contemplated hereby (other than conditions with
respect to actions the respective Parties will take at the Closing itself),
or
such other date as the Parties may mutually determine (the “Closing
Date”)
through the mutual exchange of documents by overnight mail and telecopy,
or such
other manner as the parties may otherwise agree.
(f) Deliveries
at the Closing.
At the
Closing, (i) Seller will deliver to Buyer: (A) a bill of sale conveying to
Buyer
the Acquired Assets, duly executed by Seller in substantially the form attached
hereto as Exhibit
B
(the
“Bill of Sale”); (B) termination statements, as prescribed by the Uniform
Commercial Code as in effect in the State of Utah, or other evidence of release
satisfactory to Buyer, in any case duly prepared and properly executed, by
each
Person that has a security interest in or a Lien against any of the Acquired
Assets; (C) such other documents, instruments and certificates as Buyer may
reasonably request in connection with the transactions contemplated by this
Agreement; and (D) the immediate possession of the Acquired Assets, except
as
may otherwise be provided in the Transition Plan, in which case delivery
of
possession shall made in accordance with the Transition Plan; and (ii) Buyer
will deliver to Seller the Purchase Price.
(g) Sales,
Transfer, and Use Taxes.
Seller
shall be responsible for paying any transfer taxes arising from the transactions
contemplated by this Agreement, and the Buyer shall be responsible for paying
any sales and use taxes resulting from the sale of the Acquired Assets and/or
any other transaction contemplated by this Agreement.
(h) Allocation.
The
Parties agree to allocate the Purchase Price (and all other capitalizable
costs)
among the Acquired Assets for all purposes (including financial accounting
and
tax purposes) in accordance with the Allocation Schedule attached hereto
as
Exhibit
C.
The
Parties acknowledge that such allocation was determined by arm's length
negotiation, and that no Party will take a position on any Tax return, before
any governmental agency charged with collection of any Tax, or in any action
that is inconsistent with Exhibit C, without the prior written consent of
the
other Party. Both parties agree to file identical Form 8594 with their
respective corporate tax returns for the year in which the sale of the Acquired
Assets pursuant to this Agreement occurs.
(i) Other
Raw Materials and Other Inventory.
At
Closing, in addition to the Inventory constituting a portion of the Acquired
Assets, Buyer agrees to purchase the Other Raw Materials and Other Inventory
identified in Exhibit
D2
attached
hereto at the pricing set forth therein, all of which shall be delivered
to
Buyer in accordance with the Transition Plan and in the amounts as reduced
by
those amounts used during the Transition Period.
3. Representations
and Warranties of Seller.
Seller
represents and warrants to Buyer that the statements contained in this §3 are
true, correct and complete as of the date of this
6
Agreement,
and will be true, correct and complete as of the Closing Date (as though
made
then and as though the Closing Date were substituted for the date of this
Agreement throughout this §3), except as set forth in Seller disclosure schedule
accompanying this Agreement (the “Seller’s Disclosure Schedule”). The Seller’s
Disclosure Schedule will be arranged corresponding to the lettered and numbered
paragraphs contained in this §3.
(a) Organization
of Seller.
Seller
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Utah, with full power and authority to own or lease
its
properties and conduct its business in the manner and the place where such
properties are owned or leased or such business is conducted.
(b) Authorization
of Transaction.
Seller
has full power and authority (including full corporate power and authority)
to
execute and deliver this Agreement and to perform its obligations hereunder.
Seller is not required to obtain approval from Seller’s Board of Directors in
order to enter into this Agreement. This Agreement constitutes the valid
and
legally binding obligation of Seller, enforceable in accordance with its
terms
and conditions, except
as
the same may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors’ rights
generally and general equitable principles regardless of whether such
enforceability is considered in a proceeding at law or in
equity.
(c) Non-contravention.
Except
as set forth in the Seller’s Disclosure Schedule, neither the execution and the
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby (including the assignments referred to in §2 above), will:
(i) violate any statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency,
or
court to which Seller or the Acquired Assets are subject or any provision
of the
charter, organizational documents or bylaws of any of Seller; or (ii) violate,
conflict with, result in a breach of, constitute a default under, result
in the
acceleration of, create in any party the right to accelerate, terminate,
modify,
or cancel, or require any notice under any agreement, contract, license,
instrument, or other arrangement to which Seller is a party or by which it
is
bound or to which any of the Acquired Assets is subject or result in the
imposition of any Lien upon any of the Acquired Assets.
(d) Consents.
No
consent, approval or authorization of, or declaration, filing or registration
with any Person (including, without limitation, any governmental or regulatory
authority pursuant to any other state or federal regulation) is required
in
connection with the execution and delivery by Seller of this Agreement or
the
performance by Seller of its obligations hereunder, except as listed in the
Disclosure Schedule.
(e) Financial
Data.
Schedule
3(e)
of the
Seller’s Disclosure Schedule describes the data provided by Seller to Buyer
relating to Seller’s sales of the Acquired Assets.
(f) Intellectual
Property.
The
Disclosure Schedule identifies each registered Intellectual Property right
(or
pending application therefore), whether patent, trademark, or otherwise,
that
has been issued to Seller in connection with the Acquired Assets, and identifies
each material license, agreement, or other permission which Seller has obtained
or granted to any third
7
party
with respect to any of its Intellectual Property forming a part of, or
incorporated in, the Acquired Assets. Except
as
set forth
on the
Disclosure Schedule, Seller has full legal right, title and interest
in
the
Intellectual Property
and has
not granted any rights in or to the same to any third party. To Seller's
knowledge, (i) Seller's use of the Acquired Assets has not and does not infringe
or misappropriate any Intellectual Property rights held or asserted by any
Person, (ii) no Person is infringing on the Intellectual Property in the
Acquired Assets, (iii) no payments are required for the continued use of
the
Acquired Assets, and (iv) none of the Acquired Assets has ever been declared
invalid or unenforceable, or is the subject of any pending or threatened
action
for opposition, cancellation, declaration, infringement, or invalidity,
unenforceability or misappropriation or like claim, action or
proceeding.
(g) Compliance
with Laws.
To
Seller’s knowledge, Seller has received no notice of any claim by any
governmental authority that Seller is in material violation of any provision
of
any such laws, rules or regulations relating to the use, possession or ownership
of the Acquired Assets; and, to Seller’s knowledge, Seller has materially
complied and is in material compliance with all such laws, rules and regulations
where non-compliance would have a Material Adverse Effect. To the knowledge
of
Seller, no such violation claim, or investigation is threatened or pending
in
respect of the Acquired Assets.
(h) Insurance.
All
insurance policies owned or held by Seller which cover the Acquired Assets
are
in full force and effect, all premiums with respect thereto have been paid
to
the extent due, no notice of cancellation or termination has been received
with
respect to any such policy (other than those policies which Seller has replaced
or intends to replace prior to the expiration thereof by policies providing
substantially the same types and amounts of coverage), and no claim is currently
reserved under any such policy. Seller insurance includes liability and products
liability policies covering the Acquired Assets.
(i) Good
Title, Adequacy and Condition.
Seller
has, and at the Closing Date will have, good and marketable title to the
Acquired Assets with full power to sell, transfer and assign the same free
and
clear of any Lien, and by delivery of the Bill of Sale as contemplated by
§2(f),
Seller will deliver to Buyer at Closing title to such Acquired Assets free
and
clear of any Lien. The equipment included in the Acquired Assets is in good
operating condition, normal wear and tear excepted, and has been maintained
in
accordance with all applicable specifications and warranties. Seller has
no
knowledge of any material defects in the equipment included in the Acquired
Assets.
(j) Licenses
and Permits.
To
Seller’s knowledge, Seller possesses all licenses and required governmental or
official approvals, permits or authorizations (collectively, the “Permits”)
relating to the Acquired Assets, and the Disclosure Schedule sets forth a
complete list of all such Permits. To Seller’s knowledge, all such Permits are
valid and in full force and effect, Seller is in material compliance with
the
respective requirements thereof, except as set forth on Schedule 3(j), and
no
proceeding is pending or threatened to revoke or amend any of them.
(k) Brokers'
Fees.
Seller
has no liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this Agreement
for which Buyer could become liable or obligated.
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4. Representations
and Warranties of Buyer.
Buyer
represents and warrants to Seller that the statements contained in this §4 are
true, correct and complete as of the date of this Agreement and will be true,
correct and complete as of the Closing Date (as though made then and as though
the Closing Date were substituted for the date of this Agreement throughout
this
§4), as except as set forth in Buyer disclosure schedule accompanying this
Agreement (“Buyer’s Disclosure Schedule”). Buyer‘s Disclosure Schedule will be
arranged corresponding to the lettered and numbered paragraphs contained
in this
§4.
(a) Organization
of Buyer.
Buyer
is a corporation duly organized, validly existing, and in good standing under
the laws of the Commonwealth of Massachusetts.
(b) Authorization
of Transaction.
Buyer
has full power and authority (including full corporate power and authority)
to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of Buyer,
enforceable in accordance with its terms and conditions, except as the same
may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or
similar laws affecting the enforcement of creditors’ rights generally and
general equitable principles regardless of whether such enforceability is
considered in a proceeding at law or in equity.
(c) Non-contravention.
Neither
the execution and the delivery of this Agreement, nor the consummation of
the
transactions contemplated hereby will: violate any statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction
of any
government, governmental agency, or court to which Buyer is subject or any
provision of the charter, organizational documents or bylaws of any of Buyer;
or
violate, conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any party the right to accelerate,
terminate, modify, or cancel, or require any notice under any agreement,
contract, license, instrument, or other arrangement to which Buyer is a party
or
by which it is bound.
(d) Consents.
No
consent, approval or authorization of, or declaration, filing or registration
with any Person (including, without limitation, any governmental or regulatory
authority pursuant to any other state or federal regulation) is required
in
connection with the execution and delivery by Buyer of this Agreement or
the
performance by Buyer of its obligations hereunder, except as listed in the
Buyer’s Disclosure Schedule.
(e) Brokers'
Fees.
Buyer
has no liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this Agreement
for which Seller could become liable or obligated.
5. Pre-Closing
Covenants.
The
Parties agree as follows with respect to the period between the execution
of
this Agreement and the Closing:
(a) General.
Each of
the Parties will use its reasonable best efforts to take all action and to
do
all things necessary, proper, or advisable in order to consummate and make
effective the transactions contemplated by this Agreement (including
satisfaction, but not waiver,
9
of
the
closing conditions set forth in §7 below). Between the date hereof and the
Closing, Seller will comply with the following covenants:
(i) Seller
will maintain in full force and effect its present insurance policies with
respect to the Acquired Assets, and will not knowingly take any action which
would enable the insurers thereunder to avoid liabilities for claims arising
out
of occurrences prior to the date of Closing.
(ii) Seller
will duly observe and conform to the lawful requirements of any governmental
authorities relating to any of the Acquired Assets and the covenants, terms
and
conditions upon or under which any of the Acquired Assets are held, provided
that, with respect to the FCC compliance testing for the DH30, duly observe
and
conform shall mean fulfilling those obligations set forth in paragraph 8
of the
Transition Plan in Schedule
5.
(iii) Seller
will cooperate with Buyer in Buyer’s efforts to obtain any and all approvals and
consents, governmental or otherwise, and provide all notices which are necessary
for the consummation of the transactions contemplated by this Agreement in
accordance with its terms.
(iv) Seller
shall not enter into any contract, commitment or transaction binding on or
affecting the Acquired Assets that is not in the usual and ordinary course
of
business or that would obligate Buyer without first obtaining Buyer's prior
written authorization.
(b) Notice
of Developments.
Each
party shall notify the other of any development causing a breach of any of
its
representations and warranties in §3 or §4, above.
6. Post-Closing
Covenants.
The
Parties agree as follows with respect to the period following the
Closing:
(a) Further
Assurances.
At any
time and from time to time whether before or after the Closing Date, each
Party
shall execute and deliver any further instruments and/or documents and take
all
further action as the other Party may reasonably request in order to consummate
this Agreement.
(b) Seller’s
Liabilities.
Seller
will pay, and will be solely responsible for all debts, liabilities, and
obligations relating to or arising from the Excluded Liabilities, provided
however, Buyer, not Seller, shall assume Customer Warranties.
(c) Buyer’s
Liabilities.
Buyer,
subject to the limitations of §2(c) above, will be responsible for: (i) all
debts, liabilities and obligations arising after the Closing Date that relate
to
product liability or claims for defective products or other claims for Products
manufactured and sold by Buyer; (ii) all Customer Warranties for the Products,
including Products produced or sold by Seller prior to the Closing Date;
and
(iii) technical support obligations arising after the Closing with
10
respect
to Products sold by either Seller or Buyer and not otherwise explicitly agreed
to by Seller as set forth in §6(d) below. (The foregoing are collectively
referred to as the “Assumed Liabilities”).
(d) Additional
Support.
In
order to complete the transfer of the Acquired Assets, Seller agrees and
covenants to provide Buyer the following assistance after the Closing for
the
time periods indicated or as otherwise indicated in the Transition Plan.
Buyer
agrees to assume those obligations with respect to FCC compliance testing
and
certification for the DH30, as set forth in the Transition Plan.
(i) Training.
Without
charge, Seller agrees to provide Buyer up to one (1) business day (8 hours)
of
training to Buyer's designated personnel at Seller's facilities in the areas
of
manufacturing, technical support and marketing, including training on the
workings of the Object Code licensed to Buyer under the Software License
Agreement at a mutually agreeable time and date, and to provide an additional
business day (8 hours) of such training to Buyer’s technical support personnel
at a mutually agreeable time and date.
(ii) Telephone
and E-mail Assistance.
During
the sixty (60) days following Closing, without charge Seller will make available
its technical, marketing, and manufacturing employees to Buyer's personnel
as
reasonably requested for telephone and/or e-mail consultation regarding the
Products and sales related issues during normal business hours.
(iii) Engineering
Assistance.
Seller
will provide forty (40) hours of engineering assistance without charge in
connection with the transition of the manufacturing process for the Products.
Additional engineering assistance will be provided by Seller as requested
by
Buyer at $150 per hour for the next additional forty (40) hours of engineering
assistance and $200 per hour for the following forty (40) hours.
(iv) Warranty
Assistance.
All of
the foregoing shall be in addition to any assistance that is reasonably
requested by Buyer to meet the warranty obligations described in §6(c) of this
Agreement, which Seller will provide to Buyer without charge.
(v) Sales
Support.
For a
period of twelve (12) months after the Closing, in response to all customer
inquiries with regard to the Products, Seller agrees to provide Buyer’s contact
information, including the names of certain individuals, addresses, and phone
numbers identified to Seller by Buyer in writing, and to request customer
contact information and submit to Buyer.
(e) Confidential
Information.
(i) Each
Party will treat and hold as such all of the Confidential Information received
from the other Party, and refrain from using any of the
11
Confidential
Information except in connection with this Agreement, and deliver promptly
to
the disclosing Party (meaning the party originally disclosing the Confidential
Information to the other Party and, additionally, Buyer's Confidential
Information shall include any Confidential Information of Seller assigned
to
Buyer pursuant to this Agreement, in which case Buyer shall be deemed the
disclosing party) or destroy, at the request and option of the disclosing
Party,
all tangible embodiments (and all copies) of the Confidential Information
which
are in its possession.
(ii) Notwithstanding
anything to the contrary contained herein, any Confidential Information of
Seller relating exclusively to the Acquired Assets and transferred to Buyer
as
part of the Acquired Assets pursuant to this Agreement shall be deemed to
be
Confidential Information of Buyer at Closing for purposes of the confidentiality
obligations of the parties under this Agreement.
(iii) In
the
event that a Party is requested or required (by oral question or request
for
information or documents in any legal proceeding, interrogatory, subpoena,
civil
investigative demand, or similar process) to disclose any Confidential
Information of the other Party, the non-disclosing Party will notify the
disclosing Party promptly of the request or requirement so that the disclosing
Party may seek an appropriate protective order or waive compliance with the
provisions of this §6(e). If, in the absence of a protective order or the
receipt of a waiver hereunder, the non-disclosing Party is, on the advice
of
counsel, compelled to disclose any Confidential Information to any tribunal
or
else stand liable for contempt, the non-disclosing Party may disclose the
Confidential Information to the tribunal; provided,
however,
that
the non-disclosing Party shall use its reasonable efforts to obtain, at the
reasonable request of the disclosing Party, an order or other assurance that
confidential treatment will be accorded to such portion of the Confidential
Information required to be disclosed as the non-disclosing Party shall
designate.
(iv) Upon
the
Closing Date, that certain Mutual Confidentiality and Non-Disclosure Agreement,
dated January 17, 2002, shall terminate.
(v) The
parties’ obligations of confidentiality under this Agreement shall not be
construed to limit Buyer’s right to independently develop or acquire products
without use of the Seller’s Confidential Information. Further, except as
otherwise provided herein, Buyer shall be free to use, in accordance with
the
limitations set forth in Section 10(b), the Residuals resulting from Seller’s
disclosure of or Buyer’s work with such Confidential Information, provided that
such party shall otherwise maintain the Residuals as Confidential Information
hereunder. Buyer shall not have any obligation to limit or restrict the
assignment of its persons or to pay obligation to limit or restrict the
12
assignment
of its persons or to pay royalties for any work resulting from the use of
Residuals.
(f) Manufacturing.
The
Parties acknowledge and agree that, concurrently herewith, they are entering
into a Manufacturing and Exclusive Distribution Agreement, substantially
in the
form of Exhibit
E
attached
hereto and incorporated herein by reference, providing for the manufacture
by
Seller for Buyer of the TS-612 Product, as defined therein on and subject
to the
terms and conditions set forth therein
7. Conditions
to Obligation to Close.
(a) Conditions
to Obligation of Buyer.
The
obligation of Buyer to consummate the transactions to be performed by it
in
connection with the Closing is subject to satisfaction of the following
conditions:
(i) the
representations and warranties set forth in §3 above shall be true and correct
in all material respects at and as of the Closing Date with the same force
and
effect as though made as and at such time, except that the Parties agree
that
the non-compliance of the DH30 with FCC certification requirements is not
material for purposes of this §7;
(ii) Seller
shall have performed and complied with all of its covenants hereunder in
all
material respects through the Closing; and Seller shall have delivered to
Buyer
the documents required under §2(f);
(iii) there
shall not be any injunction, judgment, order, decree, ruling, or charge in
effect preventing consummation of any of the transactions contemplated by
this
Agreement;
(iv) the
Parties shall have entered into those agreements and Seller shall have delivered
those documents in form and substance substantially as set forth in Exhibit
A
and
Exhibit
E,
and the
same shall be in full force and effect;
(v) all
actions to be taken by Seller in connection with consummation of the
transactions contemplated hereby and all certificates, instruments, and other
documents required to effect the transactions contemplated hereby will be
reasonably satisfactory in form and substance to Buyer; and
(vi) there
shall not be pending or threatened any action or proceeding by or before
any
court or other governmental body which shall seek to restrain, prohibit,
invalidate or collect damages arising out of the transactions contemplated
hereby, and which, in the judgment of Buyer, makes it inadvisable to proceed
with the transactions contemplated hereby.
13
Buyer
may
waive any condition specified in this §7(a) if it executes a writing so stating
at or prior to the Closing.
(b) Conditions
to Obligation of Seller.
The
obligation of Seller to consummate the transactions to be performed by it
in
connection with the Closing is subject to satisfaction of the following
conditions:
(i) the
representations and warranties set forth in §4 above shall be true and correct
in all material respects at and as of the Closing Date;
(ii) Buyer
shall have performed and complied with all of its covenants hereunder in
all
material respects through the Closing;
(iii) there
shall not be any injunction, judgment, order, decree, ruling, or charge in
effect preventing consummation of any of the transactions contemplated by
this
Agreement;
(iv) the
Parties shall have entered into agreements in form and substance substantially
as set forth in Exhibit
A
and
Exhibit
E
and the
same shall be in full force and effect;
(v) all
actions to be taken by Buyer in connection with consummation of the transactions
contemplated hereby and all certificates, instruments, and other documents
required to effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to Seller; and
(vi) there
shall not be pending or threatened any action or proceeding by or before
any
court or other governmental body which shall seek to restrain, prohibit,
invalidate or collect damages arising out of the transactions contemplated
hereby, and which, in the judgment of Seller, makes it inadvisable to proceed
with the transactions contemplated hereby.
Seller
may waive any condition specified in this §7(b) if it executes a writing so
stating at or prior to the Closing.
8. Remedies
for Breaches of this Agreement.
(a) Survival
of Representations and Warranties.
All of
the representations and warranties of Seller and Buyer contained in §3 and §4 of
this Agreement shall survive the Closing (unless Buyer knew or had reason
to
know of any misrepresentation or breach of warranty at the time of Closing)
and
continue in full force and effect for a period of one (1) year except that
the
representations and warranties made by Seller with the first sentence of
§3(i)
with respect to good and marketable title shall be in full force and effect
for
a period of three (3) years, provided that any claims made pursuant to any
representations and warranties must be within such survival period and the
notice procedures in pursuant to §11(g) below.
14
(b) Indemnification
Provisions for Benefit of Buyer.
In
the
event Seller breaches any of its representations or warranties contained
in §3,
subject to the limitations and notice requirements in §8(a) above, or any of its
covenants contained in this Agreement, then Seller agrees to indemnify Buyer
from and against the entirety of any damages Buyer shall suffer through and
after the date of the claim for indemnification (but excluding
any
damages the Buyer shall suffer after the end of any applicable survival period)
caused by the breach. Notwithstanding the foregoing, Seller shall have no
obligation to indemnify Buyer until Buyer has suffered damages by reason
of all
such breaches in excess of $25,000, in the aggregate, and then, only to the
extent the damages which Buyer has suffered by reason of all such breaches
is
less than or equal to $1,000,000 (after which point Seller will have no
obligation to indemnify Buyer from and against further such damages). In
all
circumstances, Seller’s indemnification obligation under this §8(b) of this
Agreement shall not exceed $1,000,000.
(c) Indemnification
Provisions for Benefit of Seller.
In
the
event Buyer breaches any of its representations or warranties contained in
§4,
subject to the limitations and notice requirements in §8(a) above, or any of its
covenants contained in this Agreement, then Buyer agrees to indemnify Seller
from and against the entirety of any damages Seller shall suffer through
and
after the date of the claim for indemnification (but excluding
any
damages Seller shall suffer after the end of any applicable survival period)
caused proximately by the breach. Notwithstanding the foregoing, Buyer shall
have no obligation to indemnify Seller until Seller has suffered damages
by
reason of all such breaches in excess of $25,000.00, in the aggregate, and
then,
only to the extent the damages which Seller has suffered by reason of all
such
breaches is less than or equal to $1,000,000.00 (after which point Buyer
will
have no obligation to indemnify Seller from and against further such damages).
In all circumstances, Buyer’s indemnification obligation under this §8(c) of
this Agreement shall not exceed $1,000,000.00.
(d) Matters
Involving Third Parties.
(i) If
any
third party shall notify any Party (the “Indemnified
Party”)
with
respect to any matter (a “Third
Party Claim”)
which
may give rise to a claim for indemnification against the other Party (the
“Indemnifying
Party”)
under
this §8, then the Indemnified Party shall promptly (and in any event within five
business days after receiving notice of the Third Party Claim) notify the
Indemnifying Party thereof in writing.
(ii) The
Indemnifying Party will have the right at any time to assume and thereafter
conduct the defense of the Third Party Claim with counsel of its
15
choice;
provided,
however,
that
the Indemnifying Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnified Party (not to be withheld unreasonably)
unless the judgment or proposed settlement involves only the payment of money
damages and does not impose an injunction or other equitable relief upon
the
Indemnified Party.
(iii) Unless
and until the Indemnifying Party assumes the defense of the Third Party Claim
as
provided in §8(d)(ii) above, the Indemnified Party may defend against the Third
Party Claim in any manner it reasonably may deem appropriate.
(iv) In
no
event will the Indemnified Party consent to the entry of any judgment or
enter
into any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnifying Party.
(e) Exclusive
Remedy.
Buyer
and Seller acknowledge and agree that the foregoing indemnification provisions
in this §8 shall be the exclusive remedy of Buyer and Seller with respect to the
transactions contemplated by this Agreement.
9. Termination.
(a) Termination
of Agreement.
The
Parties may terminate this Agreement as provided below:
(i) Buyer
and
Seller may terminate this Agreement by mutual written consent at any time
prior
to the Closing;
(ii) Buyer
may
terminate this Agreement by giving written notice to Seller at any time prior
to
the Closing (A) in the event Seller has breached any material representation,
warranty, or covenant contained in this Agreement in any material respect,
and
Buyer has notified Seller of the breach, and the breach has continued without
cure for a period of fifteen (15) days after the notice of breach, or (B)
if the
Closing shall not have occurred on or before August 31, 2002, by reason of
the
failure of any condition precedent under §7(a) hereof (unless the failure
results primarily from Buyer itself breaching any representation, warranty,
or
covenant contained in this Agreement); and
(iii) Seller
may terminate this Agreement by giving written notice to Buyer at any time
prior
to the Closing (A) in the event Buyer has breached any material representation,
warranty, or covenant contained in this Agreement in any material respect,
and
Seller has notified Buyer of the breach, and the breach has continued without
cure for a period of fifteen (15) days after the notice of breach, or (B)
if the
Closing shall not have occurred on or before August 31, 2002, by reason of
the
failure of any condition precedent under
16
§7(b)
hereof (unless the failure results primarily from Seller itself breaching
any
representation, warranty, or covenant contained in this Agreement).
(b) Effect
of Termination.
If any
Party terminates this Agreement pursuant to §9(a) above, all rights and
obligations of the Parties hereunder shall terminate without any liability
of
any Party to the other Party (except for any liability of any Party then
in
breach); provided,
however,
that the
confidentiality provisions of §6(e) and the indemnification provisions of §8
shall survive termination.
10. Restrictive
Covenants.
(a) The
Seller shall not, for a period of five (5) years following the Closing, engage
in the business of designing, developing, manufacturing (except as provided
in
the Manufacturing Agreement) or marketing the Products and/or Digital Hybrid
products for use in the Studio Environment, provided however, that the
beneficial ownership of less than five percent (5%) of any class of securities
of any entity having a class of equity securities actively traded on a national
securities exchange or over-the-counter market shall not be deemed, in and
of
itself, to violate the prohibitions of this §10(a).
(b) The
Buyer
shall not, for a period of five (5) years following the Closing, engage in
the
business of designing, developing, manufacturing, or marketing the Products
or
Digital Hybrid products for use in the Audio and Video Conferencing Environment,
provided that the beneficial ownership of less than five percent (5%) of
any
class of securities of any entity having a class of equity securities actively
traded on a national securities exchange or over-the-counter market shall
not be
deemed, in and of itself, to violate the prohibitions of this
§10(b).
(c) The
Buyer
and the Seller agree and acknowledge that the restrictions contained in this
§10
are reasonable in scope and duration, and are necessary to protect the Buyer
and
the Seller, and are material inducement for the Buyer and the Seller to enter
into this Agreement. The Buyer and the Seller agree and acknowledge that
any
breach of this §10 will cause irreparable injury to the other party and upon any
breach or threatened breach of any provision of this §10, the Buyer and the
Seller shall be entitled to injunctive relief, specific performance or other
equitable relief, without the necessity of posting bond; provided, however,
that
this shall in no way limit any other remedies which the Buyer or the Seller
may
have as a result of such breach, including the right to seek monetary damages.
The Buyer and the Seller hereby agree that either party may assign, without
limitation and without the other party’s consent, the foregoing restrictive
covenants to any successor to its business.
11. Miscellaneous.
(a) Press
Releases and Public Announcements.
No
Party shall issue any press release or make any public announcement relating
to
the subject matter of this Agreement without the prior written approval of
the
other Party; provided,
however,
that
any Party may make any public disclosure it believes in good faith is required
by applicable law or any listing or trading agreement
17
concerning
its publicly-traded securities (in which case the disclosing Party will use
its
reasonable best efforts to advise the other Party prior to making the
disclosure).
(b) No
Third-Party Beneficiaries.
This
Agreement shall not confer any rights or remedies upon any Person other than
the
Parties and their respective successors and permitted assigns.
(c) Entire
Agreement.
This
Agreement (including the documents referred to herein) constitutes the entire
agreement between the Parties and supersedes any prior understandings,
agreements, or representations by or between the Parties, written or oral,
to
the extent they relate in any way to the subject matter hereof. The exhibits
and
schedules constitute a part hereof as though set forth in full above. This
Agreement is not intended to confer upon any Person, other than the parties
hereto, any rights or remedies hereunder.
(d) Succession
and Assignment.
This
Agreement shall be binding upon and inure to the benefit of the Parties named
herein and their respective successors and permitted assigns. Seller may
not
assign either this Agreement or any of its rights, interests, or obligations
hereunder without the prior written approval of Buyer.
(e) Counterparts.
This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed an original but all of which together will constitute one and the
same
instrument. A telecopy signature of any party shall be considered to have
the
same binding legal effect as an original signature.
(f) Headings.
The
section headings contained in this Agreement are inserted for convenience
only
and shall not affect in any way the meaning or interpretation of this
Agreement.
(g) Notices.
All
notices, requests, demands, claims, and other communications hereunder will
be
in writing. Any notice, request, demand, claim, or other communication hereunder
shall be deemed duly given if it is sent via telefax or overnight courier
(and
shall be deemed given on the date of dispatch), and addressed to the intended
recipient as set forth below:
If
to
Seller:
ClearOne
Communications, Inc.
1825
Research Way
Salt
Lake
City, UT 84119
Telefax: (801)
974-3742
Attention: Randall
J. Wichinski
If
to
Buyer:
Comrex
Corporation
19
Pine
Road
Devens,
MA 04132
Telefax: (978)
784-1717
Attention: Lynn
Distler
18
with
a copy to:
Geoffrey
C. Cheney, Esq.
Akerman,
Senterfitt & Eidson, P.A.
One
S.E.
Third Avenue, Suite 2800
Miami,
FL
33131
Any
Party
may send any notice, request, demand, claim, or other communication hereunder
to
the intended recipient at the address set forth above using any other means
(including personal delivery, messenger service, ordinary mail, or electronic
mail); but no such notice, request, demand, claim, or other communication
shall
be deemed to have been duly given unless and until it actually is received
by
the intended recipient. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Party notice in the manner herein set
forth.
(h) Governing
Law.
This
Agreement shall be governed by and construed in accordance with the laws
of the
State of Utah without giving effect to any choice or conflict of law provision
or rule thereof.
(i) Dispute
Resolution.
Any
dispute arising out of the interpretation and effect of this Agreement or
alleged breaches thereof, shall be fully and finally settled first, by good
faith negotiation for a period of ten (10) days, and if unsuccessful, then
by
mediation, and if unsuccessful within thirty (30) days of the commencement
thereof, then by arbitration in accordance with the applicable rules of the
American Arbitration Association then in effect, by one (1) Arbitra-tor
appointed in accordance with such Rules, with the arbitration to take place
at
Chicago, Illinois. Judgment of the arbitrator may be entered in any court
having
jurisdiction over the Party against whom the judgment is rendered.
(j) Interpretation.
When a
reference is made in this Agreement to an article, section, subsection,
paragraph, clause, schedule or exhibit, such reference shall be deemed to
be to
this Agreement unless otherwise indicated. The headings contained herein
and on
the schedules are for reference purposes only and shall not affect in any
way
the meaning or interpretation of this Agreement or the schedules. Whenever
the
words “include,”“includes” or “including” are used in this Agreement, they shall
be deemed to be followed by the words “without limitation.” Time shall be of the
essence in this Agreement.
(k) Amendments
and Waivers.
No
amendment of any provision of this Agreement shall be valid unless the same
shall be in writing and signed by Buyer and Seller. No waiver by any Party
of
any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent
such
occurrence.
(l) Severability.
Any
term or provision of this Agreement that is invalid or unenforceable in any
situation in any jurisdiction shall not affect the validity or enforceability
of
the
19
remaining
terms and provisions hereof or the validity or enforceability of the offending
term or provision in any other situation or in any other jurisdiction.
(m) Expenses.
Each of
Buyer and Seller will bear its own costs and expenses (including legal fees
and
expenses) incurred in connection with this Agreement and the transactions
contemplated hereby.
12. Construction.
The
Parties have participated jointly in the negotiation and drafting of this
Agreement. In the event an ambiguity or question of intent or interpretation
arises, this Agreement shall be construed as if drafted jointly by the Parties
and no presumption or burden of proof shall arise favoring or disfavoring
any
Party by virtue of the authorship of any of the provisions of this Agreement.
Any reference to any federal, state, local, or foreign statute or law shall
be
deemed also to refer to all rules and regulations promulgated thereunder,
unless
the context requires otherwise. The word “including” shall mean including
without limitation.
(a) Incorporation
of Exhibits and Schedules.
The
Exhibits and Schedules identified in this Agreement are incorporated herein
by
reference and
made a
part of this Agreement.
(b) Bulk
Transfer Laws.
Buyer
agrees to waive compliance by Seller with the requirements of all applicable
laws, if any, relating to bulk transfer laws.
(c) Survival.
All
representations, warranties, covenants and agreements of the Parties hereto
contained in this Agreement and any Schedule or Exhibit hereto shall survive
the
execution and delivery hereof and thereof and consummation of the transactions
provided for herein notwithstanding any investigation heretofore or hereafter
made by or on behalf of the respective Parties hereto.
[SIGNATURE
PAGE FOLLOWS]
20
IN
WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
date
first above written.
|
COMREX
CORPORATION
|
CLEARONE
COMMUNICATIONS, INC.
|
|
By:
/s/ Lynn E. Distler
|
By:
/s/ Randall J. Wichinski
|
|
Name:
Lynn E. Distler
|
Name:
Randall J. Hichinkski
|
|
Title:
President
|
Title:
CFO
|
Exhibit
10.7
JOINT
PROSECUTION AND DEFENSE AGREEMENT
This
Joint Prosecution and Defense Agreement (the "Agreement") is made effective
as
of April 1, 2004, by and between ClearOne Communications, Inc. (“ClearOne”),
Parsons Behle & Latimer (“PB&L”), Edward Dallin Bagley (“Bagley”) and
Burbidge & Mitchell (“B&M”). Each of the foregoing are individually
referred to as a "Party" and sometimes collectively referred to as the "Parties"
throughout this Agreement.
RECITALS
A.
Bagley
is
a director and shareholder of ClearOne.
B.
On
or
about February 6, 2004, Lumbermens Mutual Casualty Company (“Lumbermens”) filed
a Complaint for Declaratory Judgment in the United States District Court for
the
District of Utah against ClearOne, Bagley and certain other current and former
directors of ClearOne entitled Lumbermens
Mutual Casualty Company v. ClearOne Communications, Inc.,
Case
No. 2:04CV0119TC (the “Insurance Litigation”).
C.
On
or
about February 9, 2004, ClearOne and Bagley filed a complaint against National
Union Fire Insurance Company of Pittsburgh, Pennsylvania (“National Union”) and
Lumbermens in the United States District Court for the District of Utah entitled
ClearOne
Communications, Inc., et al. v. National Union Fire Insurance Company, et
al.,
Case
No. 2:04CV0145TS (the “Second Insurance Lawsuit”).
D.
PB&L
has entered an appearance for, and is representing, all defendants in the
Insurance Litigation other than Bagley and Michael A. Pierce. PB&L is
representing ClearOne in the Second Insurance Lawsuit. B&M has entered an
appearance for and is representing Bagley in the Insurance Litigation and the
Second Insurance Lawsuit.
E.
In
the
Insurance Litigation, ClearOne and Bagley have asserted counterclaims against
National Union and Lumbermens. In addition, the Second Insurance Lawsuit has
been consolidated with the Insurance Litigation for all purposes. (For further
reference in this Agreement, the “Insurance Litigation” refers to all claims and
defenses therein, together with the Second Insurance Lawsuit unless otherwise
stated.)
F.
In
the
Insurance Litigation (with the consolidated claims from the Second Insurance
Lawsuit), ClearOne is pursuing claims, inter
alia,
to
recover the policy limits of ceratin policies for directors and officers
insurance issued by National Union and Lumbermens (the “Insurance Policies”) and
Bagley is pursuing related claims, inter
alia,
to
recover losses which he incurred due to National Union’s and Lumbermens’s
refusal to pay the policy limits under the Insurance Policies to ClearOne which
refusals caused ClearOne to enter into a settlement agreement which diluted
his
shareholdings in ClearOne. On the other hand, National Union and
1
Lumbermens
allege in the Insurance Litigation, inter
alia,
that
they have properly rescinded the Insurance Policies due to alleged fraud in
procuring the Insurance Policies.
G.
The
joint
prosecution of the Company’s claims and Bagley’s claims in the Insurance
Litigation, and defense of National Union’s and Lumbermens’ claims in the
Insurance Litigation, is in the best interests of ClearOne and Bagley and will
likely lead to an economy of litigation expenses in the Insurance
Litigation.
H.
Due
to
their prior and current representation of ClearOne and Bagley in litigation
concerning matters which are also the subject of the Insurance Litigation,
PB&L and B&M are familiar with the underlying facts in the Insurance
Litigation and are able to work as co-counsel in the Insurance Litigation.
I.
Through
March 30, 2004, Bagley has paid the attorney’s fees and costs of B&M in
connection with Insurance Litigation. On the other hand, ClearOne has paid
the
attorney’s fees and costs of PB&L in connection with the Insurance
Litigation.
J.
ClearOne,
Bagley, PB&L and B&M now wish (1) to reach certain agreements concerning
the joint prosecution of ClearOne’s and Bagley’s claims in the Insurance
Litigation and joint defense of claims made by National Union and Lumbermens
in
the Insurance Litigation, (2) to allocate certain responsibilities in the
Insurance Litigation, (3) to make certain agreements in order to protect all
applicable privileges, including the attorney/client privilege and work product
doctrine, and (4) to reach certain agreements concerning the payment of
litigation expenses, including attorney’s fees, in the Insurance Litigation.
THEREFORE,
upon the foregoing premises, which are incorporated herein by reference, and
in
consideration of the mutual covenants herein, the Parties agree as
follows:
1. Joint
Prosecution and Representation.
For
purposes of the Insurance Litigation, PB&L and B&M shall jointly
prosecute ClearOne’s and Bagley’s claims in the Insurance Litigation and shall
jointly defend ClearOne and Bagley with respect to claims made by National
Union
and Lumbermens in such litigation. PB&L and B&M shall divide and
allocate duties and responsibilities for pre-trial activities (including
discovery), as well as for trial in a cost efficient manner (but in a manner
which will not impede the effective representation of ClearOne and Bagley).
In
connection with such joint representation, B&M may make formal appearances
for ClearOne and PB&L may make formal appearances for Bagley.
2. Conflicts
of Interest.
There
is a potential for a conflict of interest arising from PB&L’s and B&M’s
joint and concurrent representation of ClearOne and Bagley. In particular,
and
among various potential conflicts, ClearOne and Bagley may have or may develop
adverse positions with respect to the division of any proceeds received by
settlement, or otherwise, from the Insurance Litigation. When any conflicts
of
interests arise between ClearOne and Bagley in connection with the Insurance
Litigation, PB&L and B&M shall undertake to notify ClearOne
2
and
Bagley of the existence of such conflict(s) of interest. In the event of any
such conflicts, PB&L shall represent ClearOne solely with respect to any
conflict and B&M shall represent Bagley solely with respect to such
conflict. Accordingly, ClearOne and Bagley waive any actual or potential
conflict of interest by virtue of the joint representation set forth in Section
1, above.
3. Payment
of Litigation Expenses.
Unless
and until this Agreement is terminated by any of the Parties hereto in
accordance with Section 9, below, ClearOne shall pay all litigation expenses,
including attorney’s fees, of PB&L and B&M in the Insurance
Litigation.
4. Cooperation.
ClearOne and Bagley agree to cooperate with PB&L and B&M in connection
with the Insurance Litigation by (i) making themselves and persons in their
employ and control available to PB&L and B&M for interviews, for
deposition testimony and for trial in the Insurance Litigation and (ii) making
documents within their possession or control available to PB&L and B&M
for purposes of the Insurance Litigation. It is expressly anticipated that
Bagley will have confidential communications with PB&L and that ClearOne and
its officers, directors and employees will have confidential communications
with
B&M; it is the express intent of the Parties that such communications will
be protected by the attorney/client privilege.
5. Joint
Litigation Materials.
The
Parties agree to share Joint Litigation Materials (as defined below) protected
by the attorney-client privilege, the work product doctrine, and all other
applicable privileges, protections, doctrines, or any other immunity otherwise
available, in order to assert mutually common and/or joint claims and defenses
that are or may be asserted in the Insurance Litigation. To further their common
interests, the Parties intend to exchange privileged and work product
information, orally, electronically, and in documents. The Parties intend to
share draft pleadings and memoranda, and other information that may or may
not
include factual analyses, mental impressions, reports of witness interviews,
and
other similar information (collectively, “Joint Litigation Materials”). The
Parties would not exchange any of the other Parties such Joint Litigation
Materials but for their mutual and common interests in the Insurance Litigation,
but for the undertakings in this Agreement and but for the understanding that
by
doing so they do not waive any attorney/client privilege, work product privilege
or any other applicable privilege. The Parties agree that in the exchange of
Joint Litigation Materials among the Parties to this Agreement they shall
continue to protect the confidentiality of the Joint Insurance Materials or
will
not waive any applicable privilege, protection or immunity.
6. Privilege.
The
Joint Litigation Materials which the Parties intend to exchange between and
among the Parties to this Agreement are privileged from disclosure to adverse
or
other third parties as a result of the attorney-client privilege, the
joint-defense privilege, the work product doctrine, and other applicable
privileges or protections. By this Agreement, the Parties state that in the
pursuit of their common interests in of the Insurance Litigation they do not
intend to waive any applicable privileges and they intend to preserve to the
maximum extent permitted by applicable law the attorney-client privilege, the
work-product doctrine and all other privileges or protections which they may
have. The disclosure of Joint Litigation Materials by a receiving
3
Party
does not constitute a waiver of any attorney/client privilege, work product
privilege or any other applicable privilege held by the producing Party.
7. Waiver.
Neither
ClearOne nor Bagley shall have authority to waive any applicable privilege
or
doctrine for conversations, matters or materials exchanged or developed during
the pendency of this Agreement on behalf of the other without the other’s
consent; nor shall any waiver of an applicable privilege or doctrine by the
conduct of any Party be construed to apply to any other Party.
8. Non-Disclosure.
The
Parties shall not disclose any Joint Litigation Materials, and any other
conversations, matters of materials otherwise protected by any applicable
privileges or doctrines, to any third persons (other than those working with
or
on behalf of the Parties for purposes of the Insurance Litigation) without
the
consent of both ClearOne and Bagley. This obligation survives any termination
of
this Agreement pursuant to Section 9, below.
9. Termination.
Any
Party to this Agreement may terminate this Agreement by giving written notice
to
all other Parties. In the event of termination of this Agreement, Bagley hereby
waives any right to preclude PB&L from representing ClearOne in the
Insurance Litigation or in any other matter or dispute (even if adverse to
Bagley) on the grounds of PB&L’s representation of Bagley pursuant to this
Agreement; likewise, ClearOne hereby waives any right to preclude B&M from
representing Bagley in the Insurance Litigation or in any other matter or
dispute (even if adverse to ClearOne) on the grounds of B&M’s representation
of ClearOne pursuant to this Agreement. Notwithstanding any termination of
this
Agreement, all parties shall continue to be bound by this Agreement with regard
to any Joint Litigation Materials and matters protected by the attorney/client
privilege disclosed to the Parties.
10. Severability.
If any
provision of this Agreement is invalidated, the remainder of this Agreement
shall be fully enforceable.
11. Enforcement.
The
Parties agree that a breach of the provisions of this Agreement by a Party
will
cause irreparable harm to the other Parties and therefore agree that injunctive
relief is an appropriate means to enforce this Agreement. The Parties further
agree that this paragraph is not intended to limit the rights or remedies of
the
Parties in the event of a breach of the Agreement.
12. Modification.
This
Agreement may be modified, amended, or supplemented only by a writing signed
by
all Parties to this Agreement.
13. No
Admission.
In the
event of any adversarial action, proceeding or litigation between any of the
Parties, no Joint Litigation Materials, as defined here, that have been
disclosed pursuant to this Agreement, shall be used or construed to constitute
an admission against interest by any Party or to alter or adversely affect
any
rights, claims, defenses or other relations as among any of the Parties. In
any
such adversarial action, proceeding or litigation
4
between
any of the Parties, the Joint Litigation Materials may only be used if such
are
part of the public record of any proceeding or are otherwise discoverable.
14. Substitution
of Counsel.
If
ClearOne or Bagley retains new counsel for the Insurance Litigation other than
PB&L and B&M, the Joint Litigation Materials shall be provided to such
new counsel when and only when new counsel provides written assurance to
ClearOne and Bagley , in a form acceptable to ClearOne and Bagley, that such
new
counsel will protect the confidentiality of the Joint Litigation Materials
and
matters protected by the attorney/client privilege and work product doctrine
in
accordance with the provisions of this Agreement.
15. Headings.
The
headings in this Agreement are intended solely as a convenience and shall not
control or in any way affect the meaning or interpretation of any provision
of
this Agreement.
16. Governing
Law.
This
Agreement shall be governed by the laws of the State of Utah.
|
/s/
Edward Dallin Bagley
_____________________________________
EDWARD
DALLIN BAGLEY
|
CLEARONE
COMMUNICATIONS, INC., a Utah corporation
By:
/s/ Delonie N.
Call
Delonie
N. Call, VP, Human Resources
|
|
BURBIDGE
& MITCHELL
By:
/s/ Jefferson W.
Gross
Jefferson
W. Gross
|
PARSONS
BEHLE & LATIMER
By:
/s/ Raymond
Etcheverry
Raymond
Etcheverry
|
FIRST
AMENDMENT TO JOINT PROSECUTION AND
DEFENSE
AGREEMENT
This
First Amendment to the Joint Prosecution and Defense Agreement (the "Amendment")
is made effective retroactively to April 1, 2004, by and between ClearOne
Communications, Inc. (“ClearOne”), Parsons Behle & Latimer (“PB&L”),
Edward Dallin Bagley (“Bagley”) and Burbidge & Mitchell (“B&M”). Each of
the foregoing are individually referred to as a "Party" and sometimes
collectively referred to as the "Parties" throughout this
Agreement.
RECITALS
A.
Effective
April 1, 2004, ClearOne, Bagley, PB&L and Burbidge & Mitchell entered
into a Joint Prosecution and Defense Agreement (the “JPDA”).
B.
In
order
to resolve an ambiguity in the JPDA, the parties have agreed to enter into
this
Amendment.
1. Amendment.
Section
3 of the JPDA is hereby amended to read in its entirety as follows:
Payment
of Litigation Expenses.
Unless
and until this Agreement is terminated by any of the Parties hereto in
accordance with Section 9, below, ClearOne shall pay all litigation expenses,
including attorney’s fees, of PB&L and B&M in the Insurance Litigation
except for litigation expenses which are solely related to Bagley’s claims in
the Insurance Litigation.
2. Except
as
expressly amended herein, the parties re-affirm the JPDA.
|
/s/
Edward Dallin Bagley
_____________________________________
EDWARD
DALLIN BAGLEY
|
CLEARONE
COMMUNICATIONS, INC., a Utah corporation
By:
/s/ Zee Hakimoglu___________________
Zee
Hakimoglu, Chief Executive Officer
|
|
BURBIDGE
& MITCHELL
By:
/s/ Jefferson W.
Gross
Jefferson
W. Gross
|
PARSONS
BEHLE & LATIMER
By:
/s/ Raymond
Etcheverry
Raymond
Etcheverry
|
Exhibit
10.8
ASSET
PURCHASE
AGREEMENT
THIS
ASSET PURCHASE AGREEMENT (the “Agreement”) dated as of May 6, 2004 (the
“Effective Date”) by and between ClearOne Communications, Inc., a Utah
corporation (“Seller”), and M:SPACE, Inc., a Minnesota corporation
(“Buyer”).
WHEREAS,
Seller operates a division (“Division”) which is engaged in the marketing and
sale of audiovisual integration products and services throughout the United
States and internationally which is partially based in Golden Valley, Minnesota;
and
WHEREAS,
the business of the Division, as conducted only in the United States and not
internationally, is herein referenced as the “Business”; and
WHEREAS,
Seller desires to sell and Buyer desires to purchase certain assets of Seller
(and not the liabilities of Seller, except as herein provided) which are
utilized exclusively or predominantly by the Division in connection with the
Business, and not internationally, all on the terms set forth
herein;
NOW,
THEREFORE, in consideration of the promises and of the mutual covenants and
conditions contained herein, the parties hereby agree as follows:
1. PURCHASE
AND SALE OF ASSETS.
1.1 Generally.
Subject
to the terms of this Agreement, including the qualifications set forth below,
Seller shall sell, transfer, convey and deliver to Buyer, and Buyer shall
purchase from Seller, on and as of the Closing Date, all property and assets
of
Seller, tangible or intangible, owned (not leased) by Seller and used
exclusively or predominantly by the Division in connection with the Business,
but excluding the Excluded Assets, as such term is defined below (the “Assets”),
including but not limited to the following:
(a) All
equipment, demonstration equipment, machinery, computers and other tangible
personal property exclusively or predominantly used in or related to the
Business, owned (not leased) by Seller, including but not limited to those
items
identified in Schedule 1.1(a), but, notwithstanding anything herein to the
contrary, excluding (i) all furniture and fixtures other than the furniture
listed in Schedule 1.1(a), and (b) those items listed as excluded in the
“Notes” column of Schedule 1.1(a).
(b) All
finished goods and work, inventory, materials in final form, work-in-process,
raw materials and supplies owned by Seller and exclusively or predominantly
used
in or related to the Business including but not limited to the items listed
in
Schedule 1.1(b) (the “Inventory”);
(c) The
intellectual property listed in Schedule 1.1(c) (the “Transferred Intellectual
Property”).
(d) All
books, records and datafiles associated with a particular software program,
owned by Seller and, notwithstanding anything to the contrary herein, used
exclusively in the conduct of the Business, including but not limited to the
items listed in Schedule 1.1(d) (the
1
“Business
Books, Records and Datafiles”) although Seller shall be entitled to retain
copies of the same for record keeping purposes;
(e) Seller’s
transferable and assignable non-compete, non-disclosure, confidentiality and
non-solicitation agreements with former employees of Seller, but only with
respect to such employees who worked exclusively for the Division (the
“Non-Compete Contracts”) but only to the extent locatable by Seller using
reasonable diligence;
(f) All
rights of Seller under any warranty or guarantee (collectively, the
“Warranties”) by any manufacturer, supplier or other transferor of the Assets,
and all Licenses and Permits, as such term is defined in Section 7.9, but only
to the extent they are assignable but, with respect to the Warranties, only
to
the extent locatable by Seller using reasonable diligence;
(g) All
rights (but no obligations except the Assumed Liabilities, as such term is
defined in Section 2 below) of Seller under any purchase orders, contracts,
guarantees, license agreements, commitments, and SBC maintenance agreement,
other maintenance agreements commonly known as the “legacy” agreements, or other
agreements, all as specifically listed on Schedule 1.1(g), but notwithstanding
anything herein to the contrary, no other contracts (the “Assigned Contracts”);
(h) All
sales
records, purchase records, customer lists, salespersons’ lists, sales reports,
costs sheets, bills of material, technical information, supplier lists,
advertising and promotional materials, blueprints and specifications, vendor
records and information, and production records relating exclusively to the
Business or the Assets, although Seller shall be entitled to retain and use
copies of these records;
(i) Notwithstanding
anything to the contrary herein, Seller’s rights in and to only those Internet
Web site locations (together with all content, information and data located
on
such websites and all copyrights thereto) and/or Internet domains and telephone
and facsimile numbers identified on Schedule 1.1(h), subject to the
qualifications therein.
The
Assets shall be transferred by Seller to Buyer in accordance with this Agreement
with all required consents of any and all third parties and free and clear
of
all liabilities, obligations, claims, liens, security interests or encumbrances,
except (a) as otherwise provided herein with respect to the Assigned
Contracts and related Assumed Liabilities and (b) that Seller need not
furnish copies of the Non-Compete Contracts, the Business Books, Records and
Data files or Warranties at Closing. Rather, Buyer shall be entitled to request
copies following Closing on an as needed basis, and Seller shall then use
reasonable diligence to locate the same and furnish copies to Buyer. All Assets
are sold in an “as is and with all faults” condition.
1.2 Excluded
Assets.
Notwithstanding anything in this Agreement to the contrary, Seller is not
selling, assigning, transferring or conveying to Buyer any of the following
assets or intangible property interests described in this Section 1.2, which
were first referred to hereinabove as the “Excluded Assets”:
(a) Cash
and
cash equivalents;
(b) All
of
Seller’s minute books, stock transfer journals, tax returns and the corporate
seal of Seller;
2
(c) All
books
and records of Seller except (i) the Business Books, Records and Datafiles,
(ii)
as provided in Sections 1.1(d) with respect to copies being retained by
Seller, and (iii) the items listed in Section 1.1(h), although Seller shall
be
permitted to retain copies of such items;
(d) The
rights of Seller under this Agreement;
(e) The
name
“ClearOne Communications” and all combinations thereof;
(f) All
intellectual property other than the Transferred Intellectual
Property.
(g) All
accounts receivable of Seller, whether or not related to the
Business.
(h) All
prepaid deposits of Seller, whether or not related to the Business.
(i) All
claims of Seller against third parties, known or unknown, asserted or
unasserted, which arise before or after the Closing Date, including claims
for
payment, except claims for payment arising out of Assigned Contracts and for
which Buyer is entitled to payment hereunder by the counterparties thereto,
in
connection with services to be performed by Buyer thereunder following the
Closing Date.
(j) All
of
Seller’s rights to tax refunds, known or unknown, choate or inchoate, whether or
not related to the Business.
(k) All
assets and finished goods relating to the operation of the Division’s
woodshop.
(l) The
Spectrologic Tape Library.
(m) All
furniture and fixtures other than the furniture listed in Schedule
1.1(a).
(n) All
real
and personal property leases.
(o) All
assets of Seller, tangible or intangible, other than the Assets.
2. ASSUMPTION
OF LIABILITIES.
Except
as hereinafter specifically provided, Buyer shall not and does not assume any
liabilities or obligations of Seller. Seller shall be solely liable for its
liabilities and obligations arising from ownership of the Assets, operation
of
the Division and Business and incidents and occurrences prior to the Closing
Date, whether or not reflected in Seller’s books and records and whether or not
such incidents or occurrences first became known following the Effective Date,
except as follows: Subject to the terms and conditions of this Agreement, as
of
the Closing Date, Buyer assumes only the following:
(a) the
liabilities and obligations of Seller arising before or after the Closing Date
and related to the period of time after the Closing Date, but such liabilities
and
3
obligations
must relate to services or obligations to be performed by Buyer as assignee
of
the Assigned Contracts following the Closing Date, which by their terms are
to
be performed following the Closing Date; and
(b) any
liability first asserted after the Closing Date under or in respect of the
Assigned Contracts relating to the period prior to the Closing Date, to the
extent such liability is asserted after a period of two years following the
Closing Date.
(c) any
liability arising out of the use by Buyer of the telephony listed in Schedule
1.1(h) following the Closing.
The
liabilities referred to in subsection (a), (b) and (c) are herein referenced
as
the “Assumed Liabilities.”
3. INSTRUMENTS
OF CONVEYANCE.
At the
Closing, pursuant to the terms and subject to the conditions of this Agreement,
Seller shall:
(a) Execute
and deliver an Assignment and Assumption Agreement in substantially the form
attached hereto as Schedule 3 (“Assignment”), which document shall be without
warranty, except as to title and except as otherwise specifically set forth
herein;
Execute
and deliver such additional instruments of conveyance as may be reasonably
required to transfer the Assets. At the Closing, pursuant to the terms and
subject to the conditions of this Agreement, Buyer shall also execute and
deliver to Seller, the Assignment.
4. CLOSING.
The
Closing with respect to the transactions provided for herein shall take place
at
such place and time as the parties may mutually agree, on (a) the earlier
to occur of (i) a day which is 5 business days after the fulfillment of the
conditions precedent referenced in Sections 13 and 14, or (ii) May 6,
2004, or (b) at such other date as the parties may mutually agree (the
“Closing Date”). Notwithstanding the foregoing, neither party shall be obligated
to close the transactions contemplated by this Agreement unless all conditions
precedent referenced in this Agreement have been satisfied or waived.
5. PURCHASE
PRICE.
The
total purchase price for the Assets and the performance of Seller’s obligations
under this Agreement is Buyer’s assumption of the Assumed
Liabilities.
6. LABOR
AND EMPLOYMENT MATTERS.
Buyer
shall not assume any employment obligations, wage or salary payment obligations,
including without limitation those arising under any pension, profit sharing,
deferred compensation, severance, welfare, sick leave, accrued or earned
vacation, wage or other employee benefit plan, procedure, policy or practice
of
Seller regardless of whether such plan, procedure, policy or practice is
disclosed in this Agreement. Notwithstanding the foregoing, Buyer may make
offers of employment to certain of Seller’s employees, pursuant to terms
determined by Buyer. Seller will furnish to Buyer such information in their
personnel files as Buyer may reasonably request and with respect to which it
is
lawful for Seller to disclose.
7. REPRESENTATIONS
AND WARRANTIES OF SELLER.
Seller
hereby represents and warrants to Buyer that:
4
7.1 Incorporation.
Seller
is a corporation duly incorporated, validly existing and in good standing under
the laws of the State of its incorporation, and has the corporate power to
own
or lease its properties and to carry on the Business as it is now being
conducted.
7.2 Authority
Relative to this Agreement.
The
execution, delivery and performance of this Agreement by Seller, including
without limitation the sale, conveyance, transfer and delivery and other
transactions contemplated herein or hereby: (a) have been or will be, prior
to
Closing, duly and effectively authorized by the Board of Directors of Seller,
with respect to the Assets sold by Seller hereunder; and (b) have been or will
be, prior to Closing, authorized and approved by all of Seller’s shareholders,
if necessary.
7.3 Conflicting
Agreements, Governmental Consents.
Except
as disclosed on Schedule 7.3, the execution, delivery and performance by Seller
of this Agreement and all of the other agreements and instruments to be executed
and delivered pursuant hereto (collectively, the “Transaction Documents”), the
consummation of the transactions contemplated hereby, and the performance or
observance by Seller of any of the terms or conditions hereof or thereof, will
not (with or without notice or lapse of time) (a) conflict with, or result
in a
breach or violation of the terms or conditions of, or constitute a default
under, or result in the creation of any lien on any of the Assets pursuant
to
any award of any arbitrator, or any indenture, contract or agreement,
instrument, order, judgment, decree, statute, law, rule or regulation to which
Seller or any of the Assets is subject, or (b) require any filing or
registration with, or any consent or approval of, any federal, state or local
governmental agency or authority, or (c) contravene, conflict with, or result
in
a violation or breach of any provision of, or give any person or entity the
right to declare a default or exercise any remedy under, or to accelerate the
maturity or performance of, or to cancel, terminate, or modify, any contract
or
other arrangement to which Seller is a party or by which Seller is bound or
to
which any of the Assets is subject (or result in the imposition of any security
interest upon any of such Assets).
7.4 Restrictive
Covenants.
Seller
is not a party to nor are the Assets bound or affected by any agreement or
document containing any covenant limiting the freedom of Seller to compete
in
the Business or which materially or adversely affects the business practices,
operations or conditions of the Business or the continued operation of the
Business after the Closing Date on substantially the same basis and on
substantially the same terms and conditions as the Business is presently carried
on.
7.5 Binding
Obligation.
This
Agreement and the Transaction Documents are, or when delivered will be, legally
valid and binding obligations of Seller, enforceable in accordance with their
respective terms, subject to the qualification that such enforceability may
be
limited by bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditors’ rights generally and by general
equitable principles (regardless of whether such enforceability is considered
in
a proceeding in equity or at law).
7.6 Actions,
Suits, Proceedings.
Except
as disclosed in Schedule 7.6, there are no actions, suits or proceedings pending
or, to the knowledge of Seller, threatened against Seller or any of the Assets
in any court or before any federal, state, municipal or other governmental
agency or before any other private or public tribunal or quasi-tribunal which,
(a) if decided adversely to Seller, would have a material adverse effect upon
the Business or Assets, (b) seek to restrain or prohibit the transactions
contemplated by this Agreement or obtain any damages in connection therewith,
or
(c) in any way call into question the validity of this Agreement or the other
agreements and instruments
5
to
be
executed and delivered by Seller; nor is Seller in default with respect to
any
order of any court or governmental agency entered against it in respect of
the
Business or Assets. Seller has not has received notice, formally or otherwise,
of any judgments, orders, decrees, stipulations, settlement agreements, liens
or
injunctions, relating in any way to the Assets, which have not been wholly
and
completely settled, complied with and discharged.
7.7 No
Material Violations.
Except
as disclosed in Schedule 7.7, Seller is not in violation of any applicable
law,
rule or regulation relating to the Business that would reasonably be expected
to
have a material adverse effect on the Business, and, to the knowledge of Seller,
there are no requests, claims, notices, investigations, demands, administrative
proceedings, hearings or other governmental claims against Seller alleging
the
existence of any such violation that would have a material adverse effect on
the
Business. For purposes of this Agreement, “material adverse effect” means any
change in or effect (i) that is or will be materially adverse to the Business
taken as a whole, or (ii) that will prevent or materially impair Seller’s
ability to consummate the transaction contemplated by this Agreement, provided
that a material adverse effect shall not include changes or effects (a) relating
to economic conditions or financial markets in general, (b) resulting from
the
voluntary termination of employment by employees of Seller between the date
of
this Agreement and the Closing Date or (c) resulting from actions required
to be
taken by the terms of this Agreement.
7.8 Title
to Assets and Absence of Encumbrances.
Except
as noted otherwise in this Agreement or any schedule thereto with respect to
qualifications as to assignability or transferability, (i) Seller owns and
has
good and marketable title to all of the Assets; (ii) the delivery to Buyer
of
the instruments of transfer of ownership contemplated by this Agreement will
vest good and marketable title to the Assets in Buyer, free and clear of any
and
all liabilities (except as otherwise provided in this Agreement with respect
to
Assigned Contracts and the Assumed Liabilities), liens, claims, and encumbrances
of every kind and character whatsoever; and (iii) the Assets include all assets
necessary for the operation of the Business as it has been operated by Seller,
except with respect to contracts which are not being assigned hereunder.
7.9 Licenses
and Permits.
All
material licenses, permits, franchises, approvals and governmental
authorizations (collectively the “Licenses and Permits”) required for Seller in
connection with the operation of the Business, except with respect to
qualifications of Seller to do business as a foreign corporation in states
other
than Utah, as to which Seller makes no warranty, are listed in Schedule 7.9.
Except for the Licenses and Permits, no other such licenses, permits,
franchises, approvals and governmental authorizations (other than qualifications
of Buyer to do business as a foreign corporation in states outside of Minnesota)
are required for the operation of the Business.
8. Labor
and Employment Agreements.
The
Division is not subject to any collective bargaining agreement.
8.1 Environmental
Matters.
Except
as set forth in Schedule 8.1:
(a) Seller
is
conducting and has conducted its Business in compliance with all applicable
Environmental Laws and pursuant to all necessary government
permits;
(b) There
is
no pending litigation and no pending or threatened Environmental Claim by any
person (including, but not limited to, any governmental authority) with respect
to the Business;
6
(c) Seller
has not received any written notification from the United States Environmental
Protection Agency advising Seller of any potential liability under the
Comprehensive Environmental Response, Compensation, and Liability Act
(“CERCLA”), as amended, with respect to the Business;
(d) Throughout
this Agreement, the following terms shall have the meanings set forth
below:
(i) “Environmental
Claim” shall mean any claim or demand, or notice thereof, alleging potential
liability (including, without limitation, liability for investigative costs,
clean-up costs, monitoring costs, governmental response costs, natural resources
damages, property damages, liability for nuisance or damage to property values,
personal injuries or penalties) arising out of, based on or resulting from:
(A)
noncompliance with Environmental Laws by Seller in connection with the
Business.
(ii) “Environmental
Laws” shall mean any federal, state or local statute, regulation, rule,
ordinance or common law pertaining to the protection of human health or the
environment and any applicable orders, judgments, decrees, permits, licenses
or
other authorizations or mandates under such laws.
8.2 Employee
Plans.
(a) After
the
Closing, Seller warrants that Buyer shall not have any responsibility or
liability under any:
(i) employee
benefit plan, as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”), maintained or contributed to by
Seller or any subsidiary for any of its employees, former employees or directors
(or their respective beneficiaries), including without limitation any group
insurance or self-insured health plan, severance pay plan, non-qualified
deferred compensation plan or retirement plan intended to be qualified under
Internal Revenue Code (the “Code”) Section 401(a) (collectively, the "ERISA
Plans");
(ii) trust
fund maintained by Seller or any subsidiary in connection with any such ERISA
Plan;
(iii) "cafeteria
plan" ("125 Plan") maintained by Seller and governed by Code Section 125;
or
(iv) other
plan maintained by Seller providing compensation, benefits or perquisites to
any
employees, former employees or directors (or their respective beneficiaries)
of
Seller or any subsidiary, including without limitation any incentive, bonus,
stock option, restricted stock, vacation pay or sick pay plan.
(b) Seller
represents that Seller and its subsidiaries have timely complied with all of
its
"COBRA" obligations under ERISA Section 602, Code Section 4980B and applicable
state insurance laws, with respect to any group life insurance and health
benefit continuation coverage required to be provided by those of its ERISA
Plans and any 125 Plan that provide such benefits for employees (and their
respective beneficiaries) that are or have been employed in
7
connection
with the Assets being acquired by Buyer hereunder; and Seller warrants that
Seller and its subsidiaries will continue, after the Closing, to comply with
such obligations with respect to any of their employees, former employees or
their respective beneficiaries who are or become entitled to such continuation
coverage, to the extent required by applicable laws.
8.3 Assigned
Contracts.
Seller
and, to the knowledge of Seller, each other party thereto, has substantially
performed all obligations required to be performed under the Assigned Contracts
to date, and are not in default under any Assigned Contract. The Assigned
Contracts are each in full force and effect and, except as set forth in Schedule
8.3(a), are assignable to Buyer without the consent of third parties, and Seller
has not waived or assigned to any other person any of its rights thereunder.
The
Assigned Contracts are complete and accurate or prior to Closing will be
complete and accurate, and complete copies of such contracts including all
amendments or supplements thereto have been or will be delivered to Buyer prior
to Closing. No such contract shall prohibit or limit the ability of Seller
to
engage in any business activity or compete with any person in connection with
the Business and/or other activities of the Buyer. Seller has delivered to
Buyer
three basic forms of maintenance contracts (copies of which are attached as
Schedule 8.3(b), and each of the Assigned Contracts is substantially
identical in form to at least one of such forms of maintenance contracts,
recognizing that each such maintenance contract may vary from one another as
to
details.
8.4 Intellectual
Property Rights.
All
Intellectual Property included in the Assets are solely registered (if at all)
in the name of Seller, of which Seller has all right, title and interest, and
have not been licensed or otherwise been made available by Seller for use by
others except in the ordinary course of Seller’s Business. To Seller’s
knowledge, all such registered intellectual property rights are in full force
and effect. Except as listed elsewhere in this Agreement, Seller does not
license from others the right to use any industrial or intellectual property
rights in the Business. To Seller’s knowledge there has been no unauthorized use
or disclosure or misappropriation of any of its intellectual properties utilized
in connection with the Business, and Seller has taken reasonable steps in its
view, to protect against the unauthorized use or disclosure of its intellectual
property.
8.5 Inventory.
The
Inventory is being sold and transferred hereunder in an “as is, with all faults”
condition, inspected and accepted by Buyer.
8.6 Taxes.
Seller
has paid all taxes, including federal, state and local income, profits,
franchise, sales, use, property, excise, payroll, and other taxes and
assessments (including interest and penalties) relating to or for Seller, the
Assets or the Business, in each case to the extent that such have become due
and
are not being contested in good faith. No claims for additional taxes have
been
asserted against Seller and no audits are pending with respect to any tax
liabilities of Seller.
8.7 Product
Liability.
Except
as set forth in Schedule 8.7, it has no liability (and Seller has no knowledge
of any basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against Seller giving rise
to
any liability) arising out of any injury to individuals or property as a result
of the ownership, possession, or use of any product manufactured, sold, or
delivered by Seller.
8.8 Disclosure.
The
representations and warranties contained in this Section 8 do not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements and information contained in this
Section 8 not misleading.
8
9. REPRESENTATIONS
AND WARRANTIES OF BUYER.
Buyer
hereby represents and warrants to Seller as follows:
9.1 Organization.
Buyer
is a corporation duly incorporated and existing and in good standing under
the
laws of the State of Minnesota and has the corporate power to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby.
9.2 Corporate
Authority.
The
execution and delivery of this Agreement, and the Transaction Documents, and
the
consummation of transactions contemplated hereby or thereby have been duly
authorized by all necessary corporate action and will not violate or conflict
with any agreement or order by which Buyer is bound. This Agreement and the
Transaction Documents are, or when delivered will be, legally, valid and binding
obligations of Buyer, enforceable in accordance with their respective
terms.
9.3 No
Conflict.
Neither
the execution, delivery and performance by Buyer of this Agreement nor the
consummation by it of the transactions contemplated hereby, will:
(a) Result
in
a violation of or default under or give rise to a right of termination,
cancellation or acceleration, with or without the giving of notice or the lapse
of time or both, of any agreement of Buyer;
(b) Adversely
affect Buyer’s ability to perform its obligations hereunder or otherwise
consummate the transactions contemplated hereby;
(c) Result
in
a violation of any statute, rule, regulation, ordinance, code, order, judgment,
writ, injunction, decree or award, which would have a material adverse effect
on
Buyer’s ability to perform its obligations hereunder or to otherwise consummate
the transactions contemplated hereby.
9.4 Absence
of Litigation.
There
are no claims, actions, suits or proceedings (public or private) pending or,
to
Buyer’s knowledge, threatened against or effecting Buyer at law or in equity,
before or by any federal, state, municipal or other governmental or
non-governmental department, commission, board, bureau, agency, court or other
instrumentality, or by any private person or entity that if adversely
determined, would individually or in the aggregate, have an adverse effect
upon
Buyer’s ability to enter into and consummate the transactions contemplated by
this Agreement.
10. NONCOMPETE
AND CONFIDENTIAL INFORMATION.
(a) Noncompetition.
Seller
will not, without the prior written consent of Buyer (which Buyer may withhold
with or without reason) for the period commencing on the Effective Date and
ending three (3) years from such date (the “Noncompete Period”), engage or be
interested, directly or indirectly, whether alone or together with or on behalf
of or through any other person, firm, association, trust, venture or corporation
whether as partner, stockholder, agent, officer, director, employee, technical
adviser, lender, trustee, beneficiary, or otherwise, in any phase of the
“Restricted Business” (as hereinafter defined) in the “Restricted Area” (as
hereinafter defined). Notwithstanding anything to the contrary in this Section
10, Seller shall not be restricted from and shall be entitled to:
9
(i) Purchase
or otherwise acquire up to (but not more than 5% of any class of securities
of
any person engaged in the Restricted Business, so long as such securities are
publicly traded; and
(ii) Be
acquired by, merged, or otherwise consolidated or combined with a business
or
person, a component of which is engaged in the Restricted Business.
(b) Nonsolicitation.
During
the Noncompete Period Seller will not, for itself or any other person or entity,
employ or otherwise engage, or offer to employ or otherwise engage, or solicit
(except as may occur in solicitations of a general nature which are not targeted
towards specific individuals) any person who has been an employee, or sales
representative of the Division or Buyer at any time within the one year period
prior to the date hereof or during the term of the Noncompete Period (the
“Nonsolicitation Time Period”), nor during the Noncompete Period will Seller or
any other person or entity on its behalf, contact or solicit any Restricted
Business in the Restricted Area (as defined herein) from any person or entity
that has been or is a customer or client of Seller or Buyer at any time during
the Nonsolicitation Time Period.
(c) Restricted
Business.
The
term “Restricted Business” means only the design, installation and maintenance
(but not manufacture) of integrated (as such term is described below)
audio/visual systems and integrated telephone conferencing systems for end
users, including the resale of third-party manufactured audio/visual and phone
conferencing systems in connection (and only in connection) with such design,
installation and maintenance services. The term “integrated” refers to the
integration by Buyer of individual products manufactured by two or more
manufacturers unaffiliated with Buyer into audio/visual or telephone
conferencing systems, which are then installed by Buyer for end users.
Notwithstanding the foregoing, the term “Restricted Business” does not include
the design and manufacture by Seller or its contracted manufacturers of
audio/visual and phone conferencing systems (including manufactured products
comprising all or a portion of such systems but which products may themselves
contain components manufactured by third parties), or the design, sale,
installation and maintenance by Seller, its affiliates, dealers, distributors,
manufacturers’ representatives and agents, of such manufactured systems
(including manufactured products comprising all or a portion of such systems
but
which products may themselves contain components manufactured by third parties).
Nor does the term “Restricted Business” include the maintenance by Seller of one
or more “Helpdesks.”
(d) Restricted
Area.
The
term “Restricted Area” means the geographic areas of the United States of
America, not including its territories and possessions.
(e) Engage
or Be Interested, Directly or Indirectly.
The
term “engage or be interested, directly or indirectly,” as used herein, shall
include giving advice or technical or financial assistance, by loan, guarantees,
stock transactions or in any other manner to any person, firm, association,
trust, venture or corporation doing or proposing to undertake such “Restricted
Business” in the area covered by this Agreement.
(f) Injunctive
Relief.
In the
event that said covenant not to compete is considered by a court of competent
jurisdiction to be excessive in its duration or in the area to which it applies,
it shall be considered modified and valid for such duration and for such area
as
said court may determine reasonable under the circumstances. In recognition
of
the irreparable harm that a violation of said covenant would cause to Buyer,
Seller agrees that Buyer shall have the right to
10
enforce
this agreement by specific remedies, which shall include, among other things,
temporary restraining orders and temporary and permanent injunctions. In the
event of any such violation, Seller agrees to pay the reasonable attorneys’ fees
incurred by Buyer in pursuing any of its rights with respect to such violation
or violations in addition to the actual damages sustained by Buyer as a result
thereof. In turn, Buyer agrees to pay the reasonable attorneys’ fees incurred by
Seller if Buyer is not the prevailing party in connection with Buyer’s efforts
to enforce this Agreement.
(g) Confidential
Information.
Each
party acknowledges that it has, will or may have access to and become informed
of Confidential Information of the other which is a competitive asset of such
other party. As used herein, “Confidential Information” shall mean information
that is proprietary to a party or proprietary to others and entrusted to a
party, whether or not trade secrets. Confidential Information includes, but
is
not limited to, information relating to business plans and to business as
conducted or anticipated to be conducted by a party and to its past, current
or
anticipated business (including without limitation information relating to
the
Restricted Business). Confidential Information also includes, without
limitation, customer lists and information concerning purchasing, accounting,
marketing, selling, products and services of a party. The Confidential
Information with respect to the Business and the Assets purchased by Buyer
pursuant to the Agreement shall be owned exclusively by Buyer, except to the
extent that such Confidential Information may have other uses in the remainder
of Seller’s business or businesses, whether currently or in the future,
including but not limited to Seller’s international audiovisual integration
business. Each party agrees that it will keep all Confidential Information
owned
exclusively by the other party hereto in strict confidence and to never directly
or indirectly make known, divulge, reveal, furnish, make available, or use
any
such Confidential Information. Notwithstanding the foregoing, a party shall
not
have a duty of confidentiality with respect to any information disclosed by
the
other party which:
(i) The
receiving party can demonstrate was known to it at the time of its disclosure,
and was not acquired either directly or indirectly in breach of any violation
of
secrecy or confidentiality obligations owed to the disclosing party by any
other
party;
(ii) Is
or
becomes publicly known through no wrongful act of the receiving party or any
other third parties;
(iii) Is
received from a third party subsequent to the date of this agreement without
breach of the restriction contained in this Agreement or any agreement between
a
third party and the disclosing party; or
(iv) Is
approved for release by the written authorization of the disclosing party,
or
(v) That
has
been or is independently developed by the receiving party or any other person
as
a matter of record, without reliance on the information provided by the
disclosing party.
11. INDEMNIFICATION
BY THE SELLER
11.1 Generally.
Subject
to the terms of this Section 11, Seller shall indemnify, defend and hold
harmless Buyer and its directors, officers, employees, agents, consultants,
representatives, affiliates, successors, permitted transferees and assigns
(individually a “Buyer
11
Indemnified
Party”; and collectively the “Buyer’s Indemnified Parties”), promptly upon
demand, at any time and from time to time, from, against, and in respect of
any
and all demands, claims, losses, damages, judgments, liabilities, assessments,
suits, actions, proceedings, interest, penalties, and expenses (including,
without limitation, settlement costs and any legal, accounting and other
expenses for investigating or defending any actions or threatened actions or
for
enforcing such rights of indemnity and defense) incurred or suffered by the
Buyer’s Indemnified Parties, in connection with, arising out of or as a result
of each and all of the following:
(a) any
breach of any covenant, obligation, agreement, representation or warranty (but
with respect to any representation or warranty, subject to the limitations
of
Section 17.3) made by Seller in this Agreement or any other document or
instrument delivered by Seller to Buyer or entered into as part of the
transactions contemplated by this Agreement;
(b) any
and
all liabilities and obligations of Seller except for the Assumed Liabilities,
and any and all liabilities and obligations arising from ownership of the
Assets, operation of the Business and incidents and occurrences on or prior
to
the Effective Date, whether or not reflected in its book and records and whether
or not manifest on, after or prior to the Effective Date;
(c) any
environmental liabilities, including but not limited to, clean-up, remediation
and closure liabilities, arising out of, based on or resulting from (i) Seller’s
operation of the Business; or (ii) Seller’s ownership of the Assets prior to the
Closing Date; and
(d) any
and
all liabilities arising out of the lawsuit referenced in Schedule
8.7.
11.2 Non-Waiver,
Non-Exclusive Remedy.
Failure
of the Buyer Indemnified Parties to give reasonably prompt notice of any claim
or claims shall not release, waive or otherwise affect Sellers’ obligations with
respect thereto except to the extent that Seller can demonstrate actual loss
and
prejudice as a result of such failure.
12. INDEMNIFICATION
BY BUYER
12.1 Generally.
Subject
to the terms of this Section 12, Buyer shall indemnify, defend and hold harmless
Seller and its directors, officers, employees, agents, consultants,
representatives, affiliates, successors, permitted transferees and assigns
(individually a “Seller Indemnified Party”; and collectively the “Seller’s
Indemnified Parties”), promptly upon demand, at any time and from time to time,
from, against, and in respect of any and all demands, claims, losses, damages,
judgments, liabilities, assessments, suits, actions, proceedings, interest,
penalties, and expenses (including, without limitation, settlement costs and
any
legal, accounting and other expenses for investigating or defending any actions
or threatened actions or for enforcing such rights of indemnity and defense)
incurred or suffered by the Seller’s Indemnified Parties, in connection with,
arising out of or as a result of each and all of the following:
(a) any
breach of any covenant (including specifically the covenants of Buyer in
Section 16.1), obligation, agreement, representation or warranty (but with
respect to any representation or warranty, subject to the limitations of Section
17.3) made by Buyer in this Agreement or any other document or instrument
delivered by Buyer to Seller or entered into as part of the transactions
contemplated by this Agreement; and
12
(b) any
misrepresentation or omission contained in any document, statement or
certificate furnished by Buyer pursuant to this Agreement or in connection
with
the transactions contemplated by this Agreement.
(c) All
Assumed Liabilities.
12.2 Non-Waiver,
Non-Exclusive Remedy.
Failure
of the Buyer Indemnified Parties to give reasonably prompt notice of any claim
or claims shall not release, waive or otherwise affect Buyer’s obligations with
respect thereto except to the extent that Seller can demonstrate actual loss
and
prejudice as a result of such failure.
12.3 Whenever
any claim arises for indemnification hereunder, the indemnified party (hereafter
the “Indemnified Party”) shall notify the indemnifying party (hereafter the
“Indemnifying Party”) in writing by registered or certified mail promptly after
the Indemnified Party has actual knowledge of the facts constituting the basis
for such claim (the “Notice of Claim”), provided that the failure of the
Indemnified Party to notify the Indemnifying Party shall not invalidate any
claim for indemnification hereunder unless the failure to so notify prejudices
the Indemnifying Party. Such notice must be given in good faith, shall specify
with particularity all facts known to the Indemnified Party giving rise to
such
indemnification right and, if possible, the amount or an estimate of the amount
of the liability arising therefrom.
12.4 Right
to Defend.
If the
facts giving rise to any such claim for indemnification involve any actual
or
threatened claim or demand by any third party against the Indemnified Party
or
any possible claim or demand by the Indemnified Party against any third party,
the Indemnifying Party shall be entitled (without prejudice to the right of
the
Indemnified Party to participate in the determination of such claim or demand
at
its expense through counsel of its own choosing) to defend or prosecute such
claim or demand in the name of the Indemnified Party at the Indemnifying Party’s
expense and through counsel of its own choosing if it gives written notice
of
its intention to do so to the Indemnified Party at any time. Whether or not
the
Indemnifying Party chooses to so defend or prosecute such claim, the parties
shall cooperate in the defense of prosecution thereof and shall furnish such
records, information and testimony and attend such conferences, discovery
proceedings, hearings, trial and appeals as may be reasonably requested in
connection therewith.
12.5 Settlement.
Except
as provided in Section 12.4, (a) neither the Indemnified Party nor the
Indemnifying Party shall make any settlement of any claim that would give rise
to an indemnification claim hereunder without the consent of the Indemnifying
Party, which consent shall not be unreasonably withheld, and (b) if a firm
offer is made to settle a claim and the Indemnifying Party desires to accept
such offer, but the Indemnified Party elects not to agree to such settlement
offer, the Indemnified Party may contest or defend such claim and, in such
event, the total maximum liability of the Indemnifying Party to indemnify or
otherwise reimburse the Indemnified Party in accordance with this Agreement
with
respect to such claim shall be limited to and shall not exceed the amount of
such settlement offer.
12.6 Claim
Reduction.
Any
claim for indemnification under this Article 12 shall be reduced to the
extent of any third party insurance actually received by the Indemnified
Party.
13. CONDITIONS
PRECEDENT TO THE OBLIGATIONS OF SELLER.
The
obligations of Seller to consummate the transactions contemplated hereby are
subject to the satisfaction (or waiver by Seller) on or prior to the Closing
Date of the following conditions precedent:
13
13.1 Representations
and Warranties.
All the
representations and warranties of Buyer set forth herein shall have been true
and correct in all material respects when made and shall be true and correct
in
all material respects on and as of the Closing Date with the same force and
effect as though made on and as of the Closing Date.
13.2 Performance
of Agreements.
Buyer
shall have performed in all material respects all obligations and agreements
and
complied in all material respects with all covenants and conditions set forth
herein which are to be performed by or complied with by or prior to the Closing
Date.
13.3 Prohibition.
There
shall have been no written or oral claims by a third party challenging
consummation of the transactions contemplated by this Agreement and no order
or
preliminary or permanent injunction shall have been entered in any action or
proceeding before any United States federal or state court of competent
jurisdiction or governmental authority (which has jurisdiction over the
enforcement of any applicable laws) making illegal the consummation of any
of
the transactions hereunder.
13.4 Closing
Documents.
The
form and substance of all certificates, instruments and other documents required
to be delivered to Buyer under this Agreement or necessary to affect the
transfer of the Assets and assumption of the Assumed Liabilities, shall have
been executed by Buyer and delivered to Seller on or before the Closing in
the
form attached hereto or in a form otherwise reasonably acceptable to Seller,
including all the documents required by Section 3 hereof.
13.5 Officer
Certificate.
Buyer
shall have furnished to Seller a certificate, dated as of the Closing Date,
signed by an officer of Buyer to the effect that Buyer has fulfilled the
conditions set forth in Sections 13.1 and 13.2 hereof.
13.6 Consents.
All
required Consents shall have been obtained.
14. CONDITIONS
PRECEDENT TO THE OBLIGATIONS OF BUYER.
The
obligations of Buyer to consummate the transactions contemplated hereby are
subject to the satisfaction (or waiver by Buyer ) on or prior to the Closing
Date of the following conditions precedent:
14.1 Representations
and Warranties.
All the
representations and warranties of Seller set forth herein shall have been true
and correct in all material respects when made and shall be true and correct
in
all material respects on and as of the Closing Date with the same force and
effect as though made on and as of the Closing Date.
14.2 Performance
of Agreements.
Seller
shall have performed in all material respects all obligations and agreement
and
complied in all material respects with all covenants and conditions set forth
herein which are to be performed by or complied with by or prior to the Closing
Date.
14.3 Prohibition.
There
shall have been no written or oral claims by a third party challenging
consummation of the transactions contemplated by this Agreement and no order
or
preliminary or permanent injunction shall have been entered in any action or
proceeding before any United States federal or state court of competent
jurisdiction or governmental authority (which has
14
jurisdiction
over the enforcement of any applicable laws) making illegal the consummation
of
any of the transactions hereunder.
14.4 Closing
Documents.
The
form and substance of all certificates, instruments and other documents required
to be delivered to Seller under this Agreement or necessary to affect the
transfer of the Assets and assumption of the Assumed Liabilities, shall have
been executed by Seller and delivered to Buyer on or before the Closing in
the
form attached hereto (including the Assignment of Domain Names and the
Assignment of Marks attached as Exhibits 14.4(a) and 14.4(b) or in a form
otherwise reasonably acceptable to Buyer, including all the documents required
by Section 3 hereof.
14.5 Officer
Certificate.
Seller
shall have furnished to Buyer a certificate, dated as of the Closing Date,
signed by an officer of Seller to the effect that Seller has fulfilled the
conditions set forth in Sections 14.1 and 14.2 hereof.
14.6 Consents.
All
required Consents shall have been obtained.
15. TERMINATION
PRIOR TO THE CLOSING.
15.1 Termination.
This
Agreement may be terminated at any time prior to the Closing as
follows:
(a) By
the
mutual consent of Seller and Buyer.
(b) By
Seller
or Buyer if there shall have been any statute, rule or regulation enacted or
promulgated by any government body or agency which makes the purchase of the
Assets illegal or renders Buyer unable to purchase or Seller unable to transfer
the Assets or any part thereof.
(c) If
any of
the conditions set out in Section 12 and 13 are not satisfied or waived at
or before the Closing Date, this Agreement may be terminated by the Party
entitled to the benefit of such condition upon notice in writing to the other
Party.
(d) If
the
Closing has not occurred on or prior to June 1, 2004, this Agreement may be
terminated by either Party upon giving written notice to the other
Party.
15.2 Rights
Upon Termination.
In the
event of a termination of this Agreement pursuant to this Section 15, the
obligations of the Parties under this Agreement shall be at an end, provided
that any party may also bring an action against the other for damages suffered
where the non-performance or non-fulfillment of the relevant condition is as
a
result of (a) a breach of a covenant, representation or warranty contained
in this Agreement by the other and such party has not used commercially
reasonable efforts to cure such breach prior to the Closing; or (b) a
breach of Section 17.4.
15.3 Effect
of Termination.
In the
event of termination by reason of Section 15.1 and subject to the terms of
Section 15.2, this Agreement shall forthwith become void and of no force
and effect and there shall be no further obligations hereunder on the part
of
the parties except for the obligations set forth in Sections 10(g) and
17.7.
15
16. OTHER
AGREEMENTS.
16.1 Consequences
of Non-Assignability and Service Agreement.
(a) Notwithstanding
anything to the contrary stated in this Agreement, but subject to Subsection
(b)
below, if (i) the sale, assignment, transfer or conveyance of any of the
Assigned Contracts without approval, consent or waiver of another party thereto
would violate, conflict with, result in a breach or termination of, or
constitute a default or event of default under (or an event which with due
notice or lapse of time, or both, would continue a default or event of default
under) the terms of such Assigned Contract or result in the creation of any
security interest on any of the Assets under any such Assigned Contract or
enable another party to such Assigned Contract to terminate the same or impose
a
penalty or additional payment obligations or accelerate any obligation of Seller
or Buyer under any such Assigned Contract, and (ii) all necessary approvals,
consents and waivers of all parties to such Assigned Contract have not been
obtained at or prior to the Closing, then (A) this Agreement shall not
constitute an agreement to assign or assume such Assigned Contract and such
Assigned Contract shall not be assigned to or assumed by Buyer or be included
in
the Assets or the Assumed Liabilities, (B) Seller shall, following the Closing,
use all reasonable efforts to assist Buyer in attempting to obtain such
necessary approvals, consents and waivers, (C) Seller and Buyer shall, following
the Closing, promptly execute all documents necessary to complete the assignment
and assumption of such Assigned Contract if such approvals, consents and waivers
are obtained, and (D) unless and until such approvals, consents and waivers
are
obtained and such assignment and assumption occurs, Seller and Buyer shall
cooperate in entering into any reasonable arrangement designed to obtain for
Buyer all benefits and privileges of such Assigned Contract including the
holding by Seller of such benefits and privileges in trust for Buyer, while
protecting Seller from the obligations of Seller first accruing under such
Assigned Contract after the Closing Date and related to the period of time
after
the Closing Date under such Assigned Contract.
(b) Attached
hereto as Exhibit 16.1 is a service agreement between US Bancorp Piper
Jaffray and Seller. The parties acknowledge that Section 9 thereof
prohibits any assignment of such agreement or the subcontracting of services
to
be rendered by Seller to any other party, without the prior written consent
of
US Bancorp Piper Jaffray, which has not been obtained. Consequently, while
such
agreement is listed in Schedule 1.1(g) as an “Assigned Contract,” its assignment
is subject to the terms of subsection (a) above. Further, Seller shall indemnify
Buyer pursuant to Section 11 hereof against any claim alleged by US Bancorp
Piper Jaffray to have been suffered by it as a consequence of such
subcontracting in violation of the service agreement provided, however, such
indemnity shall not extend to any failure by Buyer to perform in compliance
with
such agreement, with respect to liabilities and obligations arising thereunder
and relating to services or obligations required to be performed under such
agreement following the Closing Date, to the extent Buyer has been allowed
to
perform by US Bancorp Piper Jaffray. Buyer acknowledges that it has been
informed by Seller that Seller has given notice to US Bancorp Piper Jaffray
of
Seller’s intent to terminate the services agreement, as provided
therein.
16.2 Non-compete
Agreements.
With
respect to any non-compete, non-disclosure, confidentiality and non-solicitation
agreements which Seller has executed with former or current employees, both
parties covenant to reasonably cooperate with one another, regardless of which
party retains ownership of any such contract, so as to allow the enforcement
of
the rights therein granted to Seller for the benefit of both Seller and Buyer,
to the extent the same is commercially appropriate.
16
16.3 Telephony.
Promptly following Closing, Buyer shall, with Seller’s cooperation, request that
the providers of the telephony services listed in Schedule 1.1(h) change the
account information relating thereto, such that Buyer is solely liable to such
providers for services rendered following the Closing. If such
request
is denied, then notwithstanding anything to the contrary herein, the telephony
services shall not be transferred to Buyer hereunder.
16.4 Removal.
Buyer
shall have 30 days from the Closing Date to remove at its expense any of the
Assets located at Seller’s leased premises in the Golden Hills Business Park in
Golden Valley Minnesota. Buyer shall be responsible for repairing any damage
caused in connection with its removal of any of the Assets. If they are not
timely removed, Seller shall be entitled to remove such Assets at Buyer’s
expense.
17. MISCELLANEOUS
17.1 Assignment.
Neither
party shall be permitted to assign its rights in this Agreement without the
prior written consent of the other party. The terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto, their successors and permitted assigns, and no person, firm or
corporation other than the parties, their successors and assigns, shall acquire
or have any rights under or by virtue of this Agreement. Notwithstanding the
foregoing, either party shall be permitted to assign this Agreement in
connection with the sale of substantially all of its assets to a single party,
or by operation of law, including by merger.
17.2 Covenant
of Further Assistance.
Notwithstanding any provision herein to the contrary, without further
consideration, the parties shall execute and deliver or make available to one
another such further instruments, documents and/or files as are necessary to
effectuate the terms of this Agreement.
17.3 Survival
of Representations and Warranties.
All
representations and warranties contained herein, and all other written
representations and warranties of Buyer and Seller contained in the instruments
executed in connection with the consummation of the transactions provided for
herein, shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby for a period of three
years.
17.4 Best
Efforts Prior to Closing.
Each of
the parties shall take, or cause to be taken, all other commercially reasonable
actions and do, or cause to be done, all other commercially reasonable things
necessary, proper or advisable to permit the completion of the transactions
contemplated by this Agreement in accordance with the terms hereof and to
satisfy all the condition precedent to Closing, and shall cooperate with each
other in connection therewith, including using all commercially reasonable
efforts to obtain, prior to the Closing Date, any necessary consent to assign
the Assigned Contracts, although Seller shall not be required to pay any amounts
or incur any additional obligations in connection with any request it may make
of any counterparty to the Assigned Contracts, to consent to the assignment
of
such contracts.
17.5 Confidentiality;
Public Announcements.
The
parties shall consult in advance on the timing and content of public
announcements regarding the transactions contemplated under this Agreement,
and
subject to applicable law, rule or regulation, all such public announcements
shall require the consent of the parties, which consent shall not be
unreasonably withheld. Subject to
17
any
applicable law, rule or regulation, no public announcement shall be made
concerning the negotiation or execution of this Agreement without the written
consent of each party, which consent shall not unreasonably
withheld.
17.6 Notices.
All
notices, requests, demand and other communications hereunder shall be in writing
(except as otherwise agreed upon between the parties as set forth in this
Agreement), and shall be given by (i) a nationally recognized express
delivery service which maintains delivery records, (ii) hand delivery, or
(iii) certified or registered mail, postage prepaid, return receipt
requested, to the parties at the following addresses, or at such other addresses
as the parties may designate from time to time by written notice in the above
manner:
|
If
to Seller:
|
ClearOne
Communications, Inc.
1825
Research Way
Salt
Lake City, Utah 84119
Attention:
Chief Executive Officer
Telephone:801-975-7200
Facsimile:801-977-0087
|
|
With
a copy to: (such copy not to constitute notice)
|
Parsons
Behle & Latimer
Attention:
Geoffrey Mangum
One
Utah Center
201
South Main Street, Suite 1800
P.O.
Box 45898
Salt
Lake City, Utah 84145-0898
Telephone:
801-532-1234
Fax:
801-536-6111
|
|
If
to Buyer:
|
M:Space,
Inc.
901
Marquette Ave. Suite 250
Minneapolis,
MN 55402
Attention:
Ryan Heining
|
|
With
a copy to: (such copy not to constitute notice)
|
Maslon
Edelman Borman & Brand, LLP
Attention:
Shawn R. McIntee
90
South 7th
Street
3300
Wells Fargo Center
Minneapolis,
MN 55402
Telephone:
612-672-8200
Fax:
612-672-8397
|
17.7 Expenses.
Except
as provided in this section, each party to this Agreement shall pay its own
costs and expenses (including attorneys’ fee and accountants’ fees) incurred in
connection with the negotiation, execution and performance of this Agreement.
Any sales, transfer, stamp or other like taxes applicable to the conveyance
and
transfer to Buyer of the Assets shall be borne and paid by Seller (in all events
whether the foregoing are imposed on Buyer or Seller) to Buyer at Closing.
If
either party makes any payment of any fees or expenses that are to be borne
by
any other party, such other party shall reimburse the party making such payment
on demand.
18
17.8 Risk
of Loss.
The
risk of loss or damage by fire or other casualty to the Assets shall be upon
Seller until the Closing and upon Buyer after the Closing.
17.9 Entire
Agreement.
This
Agreement, including the exhibits and schedules attached to this Agreement,
constitutes the entire agreement and understanding between Seller and Buyer
with
respect to the sale and purchase of the Assets and the other transactions
contemplated by this Agreement. All prior representations, understandings and
agreements between the parties with respect to the purchase and sale of the
Assets and the other transactions contemplated by this Agreement are superseded
by the terms of this Agreement.
17.10 Choice
of Law and Venue.
This
Agreement shall be construed and interpreted in accordance with the laws of
the
State of Minnesota, without regard to its choice of law provisions, as though
all acts and omissions related to this Agreement occurred in the State of
Minnesota. All disputes related to or arising under this Agreement must be
brought in either the United States District Court for the District of Minnesota
or the State of Minnesota’s Fourth Judicial District Court with each party
consenting to the exclusive jurisdiction of such courts and waiving any personal
jurisdiction defenses. Each party hereby (i) waives any objection which it
might
have now or hereafter to the foregoing venue of any such litigation, action
or
proceeding, (ii) irrevocably submits to the exclusive jurisdiction of any such
court set forth above in any such litigation, action or proceeding, and (iii)
waives any claim or defense of inconvenient forum. Each party hereby consents
to
service of process by registered mail, return receipt requested, at such party’s
address set forth in this Agreement (as modified by written notice of a party
from time to time) and expressly waives the benefit of any contrary provision
of
law.
17.11 Injunctive
Relief.
The
parties hereto acknowledge and agree that the other parties would be damaged
irreparably in the event any of the provisions of this Agreement are not
performed substantially in accordance with their specific terms. Accordingly,
each of the parties agrees that the other parties shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically the substantial performance of this
Agreement and the terms and provisions hereof.
17.12 Severability.
The
provisions of this Agreement shall, where possible, be interpreted so as to
sustain their legality and enforceability, and for that purpose the provisions
of this Agreement shall be read as if they cover only the specific situation
to
which they are being applied. The invalidity or unenforceability of any
provision of this Agreement in a specific situation shall not affect the
validity or enforceability of that provision in other situations or of other
provisions of this Agreement.
17.13 Counterparts.
This
Agreement may be executed in counterparts and by facsimile, each of which shall
be considered an original.
17.14 Knowledge
Convention.
Whenever any statement herein or in any schedule, exhibit, certificate or other
document delivered to any party pursuant to this Agreement is made “to Seller’s
or Buyer’s knowledge” or “to the best of Seller’s or Buyer’s knowledge” or words
of similar intent or effect of any party or its representative, such statement
shall be deemed to be made to the actual knowledge of a party’s officers at the
vice president level and above as of the Effective Date.
19
IN
WITNESS WHEREOF, the parties have caused this Agreement to be executed and
delivered by their duly authorized officers as of the date and year first above
written.
ClearOne
Communications, Inc.
/s/
Mike Keough
By Mike
Keough
Its CEO/President
M:SPACE,
Inc.
/s/
Ryan Heining
By
Ryan
Heining
Its President
Exhibit
10.10
STOCK
PURCHASE AGREEMENT
This
Stock Purchase Agreement (this “Agreement”)
is
entered into as of March 4th,
2005,
between 6351352
Canada Inc.,
a Canada
corporation (“Buyer”),
and
Gentner Ventures, Inc., a Utah corporation (“Seller”).
Buyer
and Seller are referred to collectively herein as the “Parties.”
Seller
owns all of the outstanding capital stock of ClearOne Communications of Canada,
Inc., a New Brunswick corporation (“Target”),
and
Target owns all of the outstanding capital stock of Stechyson Electronics Ltd.,
a Canada corporation (“Sub”).
This
Agreement contemplates a transaction in which Buyer will purchase from Seller,
and Seller will sell to Buyer, all of the outstanding capital stock of Target
in
return for the Purchase Price (as hereinafter defined).
Now,
therefore, in consideration of the premises and the mutual promises herein
made,
and in consideration of the representations, warranties, and covenants herein
contained, the Parties agree as follows.
1. Definitions.
“$”
means
United States dollars.
“Adverse
Consequences”
means
all actions, suits, proceedings, hearings, investigations, charges, complaints,
claims, demands, injunctions, judgments, orders, decrees, rulings, damages,
dues, penalties, fines, costs, reasonable amounts paid in settlement,
liabilities, obligations, taxes, liens, losses, expenses, and fees, including
court costs and reasonable attorneys’ fees and expenses, but does not include
special, consequential or punitive damages.
“Affiliate”
has
the
meaning set forth in Rule
12b-2 of the regulations promulgated under the Securities Exchange
Act.
“Business”
means
the business currently carried on by the Target including procurement and sale
of room based audio visual equipment and post sales equipment service and
support.
“Buyer”
has
the
meaning set forth in the preface above.
“Change
of Control Transaction”
means
(A) a transaction in which any person (as that term is used in Rule 13d-5 under
the Securities Exchange Act of 1934) or group (as that term is used in Sections
3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) other than Buyer
becomes the beneficial owner of securities of Sub representing 50% or more
of
the combined voting power of Sub’s then outstanding securities; (B) a merger or
consolidation of Sub with any other corporation, other than (i) a merger or
consolidation which would result in the voting securities of Sub outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the combined voting power of the voting securities
of
Sub or such surviving entity outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to implement a
recapitalization of Sub (or similar transaction) in which no person
1
acquires
more than 50% of the combined voting power of Sub’s then outstanding securities;
or (C) the sale or disposition by Sub of all or substantially all of its
assets.
“Closing”
has
the
meaning set forth in Section
2
below.
“Closing
Amount”
has
the
meaning set forth in Section
2
below.
“Closing
Date”
has
the
meaning set forth in Section
2
below.
“Code”
means
the Internal Revenue Code of 1986, as amended.
“Confidential
Information”
means
any information concerning the businesses and affairs of Target and Sub that
is
not already generally available to the public.
“Determination
Date”
means
December 31, 2004.
“Disclosure
Schedule”
has
the
meaning set forth in Section 4
below.
“Earn
Out Amount”
has
the
meaning set forth in Section
2
below.
“Earn
Out Calculation Period”
has
the
meaning set forth in Section
2
below.
“Earn
Out Period”
has
the
meaning set forth in Section
2
below.
“Environmental,
Health, and Safety Requirements”
shall
mean all Canadian federal, provincial, or local statutes, statutes, regulations,
and ordinances concerning public health and safety, worker health and safety,
and pollution or protection of the environment, including all those relating
to
the presence, use, production, generation, handling, transportation, treatment,
storage, disposal, distribution, labeling, testing, processing, discharge,
release, threatened release, control, or cleanup of any hazardous materials,
substances, or wastes, as such requirements are enacted and in effect on or
prior to the Closing Date.
“Gross
Revenues”
means
the aggregate of all revenue in the ordinary course of the
Business.
“Income
Tax”
means
any federal, provincial, state, local, provincial or foreign income tax measured
by or imposed on net income, including any interest, penalty, or addition
thereto, whether disputed or not.
“Income
Tax Return”
means
any return, declaration, report, claim for refund, or information return or
statement relating to Income Taxes, including any schedule or attachment
thereto.
“Indemnified
Party”
has
the
meaning set forth in Section
8(e)(i)
below.
“Indemnifying
Party” has the meaning set forth in Section
8(e)(i)
below.
2
“Knowledge”
means
actual knowledge without
independent investigation. Knowledge, with respect to a particular fact or
matter, will be imputed to the Seller if any individual who is serving as an
officer of any of Seller, Target, or Sub has Knowledge of such fact
or
matter.
“Lease”
means
that certain real property lease dated August 1, 2000 between Commercial
Property Developments and Sub pertain to premises located in the City of Nepean,
Province of Ontario.
“Lien”
means
any mortgage, pledge, lien, encumbrance, charge, or other security interest,
other than (a) liens for taxes not yet due and payable, (b) purchase money
liens
and liens securing rental payments under capital lease arrangements, and (c)
other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.
“Material
Adverse Effect”
or
“Material
Adverse Change”
means
any effect or change that would be materially adverse to the Business
of
Target and Sub, taken as a whole, or on the ability of any Party to consummate
timely the transactions contemplated hereby; provided that none of the following
shall be deemed to constitute, and none of the following shall be taken into
account in determining whether there has been, a Material Adverse Effect or
Material Adverse Change: (a) any adverse change, event, development, or effect
arising from or relating to (1) general business or economic conditions,
including such conditions related to the Business
of
Target and Sub, (2) national or international political or social conditions,
including the engagement by the United States or Canada in hostilities, whether
or not pursuant to the declaration of a national emergency or war, or the
occurrence of any military or terrorist attack upon Canada or the United States,
or any of its territories, possessions, or diplomatic or consular offices or
upon any military installation, equipment or personnel of the United States
or
Canada, (3) financial, banking, or securities markets (including any disruption
thereof and any decline in the price of any security or any market index),
(4)
changes in Canadian or United States generally accepted accounting principles,
(5) changes in law, rules, regulations, orders, or other binding directives
issued by any governmental entity, or (6) the taking of any action contemplated
by this Agreement and the other agreements contemplated hereby, and
(b)
any
existing
event, occurrence, or circumstance with respect to which Buyer has knowledge
as
of the date hereof, and (c) any adverse
change in or effect on the Business
of
Target and Sub that is cured by Seller before the earlier of (1) the Closing
Date and (2) the date on which this Agreement is terminated pursuant to
Section
9
hereof.
“Note”
has
the
meaning set forth in Section
2(b)(iii).
“Ordinary
Course of Business”
means
the ordinary course of business consistent with past custom and practice
(including with respect to quantity and frequency).
“Party”
has
the
meaning set forth in the preface above.
“Person”
means
an individual, a partnership, a corporation, a limited liability company, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, any other business entity or a governmental entity (or any
department, agency, or political subdivision thereof).
3
“Purchase
Price”
has
the
meaning set forth in Section 2(b)
below.
“Securities
Act”
means
the Securities
Act of
1933,
as amended.
“Securities
Exchange Act”
means
the Securities Exchange Act of 1934, as amended.
“Seller”
has
the
meaning set forth in the preface above.
“Special
Accountants”
has
the
meaning set forth in Section
2(c)(ii)
below.
“Sub”
has
the
meaning set forth in the preface above.
“Subsidiary”
means,
with respect to any Person, any corporation, limited liability company,
partnership, association, or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of stock entitled
(without regard to the occurrence of any contingency) to vote in the election
of
directors, managers, or trustees thereof is at the time owned or controlled,
directly or indirectly, by that Person or one or more of the other Subsidiaries
of that Person or a combination thereof or (ii) if a limited liability company,
partnership, association, or other business entity (other than a corporation),
a
majority of partnership or other similar ownership interest thereof is at the
time owned or controlled, directly or indirectly, by that Person or one or
more
Subsidiaries of that Person or a combination thereof and for this purpose,
a
Person or Persons owns a majority ownership interest in such a business entity
(other than a corporation) if such Person or Persons shall be allocated a
majority of such business entity’s gains or losses or shall be or control any
managing director or general partner of such business entity (other than a
corporation). The term “Subsidiary” shall include all Subsidiaries of such
Subsidiary.
“Target”
has
the
meaning set forth in the preface above.
“Target
Share”
means
any share of the common stock, no par value, of Target.
“Tax”
or
“Taxes”
means
any federal,
provincial, state, local,
provincial or foreign income,
gross receipts, license,
payroll, employment, excise, severance, stamp, occupation, premium, windfall
profits, environmental (including
taxes under Code §59A or a similar provision under Canadian federal tax
legislation),
customs
duties, capital stock, franchise, profits, withholding, social security (or
similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on
minimum, estimated,
or other tax of
any
kind whatsoever, including
any
interest, penalty, or addition thereto, whether disputed or not.
“Tax
Return”
means any
return, declaration, report, claim
for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment
thereof.
“Third
Party Claim”
has
the
meaning set forth in Section
8(e)(i)
below.
4
2. Purchase
and Sale of Target Shares.
(a) Basic
Transaction.
On and
subject to the terms and conditions of this Agreement, Buyer agrees to purchase
from Seller, and Seller agrees to sell to Buyer, all of Seller’s Target Shares
for the consideration specified below in this Section
2.
(b) Purchase
Price.
The
consideration to be paid by Buyer to Seller for Seller’s Target Shares (the
“Purchase Price”) shall be paid by the Buyer in the following
manner:
(i) By
delivery to Seller of a deposit of US$25,000
upon execution of this Agreement;
(ii) By
delivery to the Seller at Closing of US$175,000
in cash
(the “Closing Amount”), payable by wire transfer or delivery of other
immediately available funds.
(iii) By
delivery by the Buyer to the Seller of a secured promissory note in the form
attached hereto as Exhibit A
(the
“Note”), the principal amount of which shall equal to US$1,256,000;
and
(iv) By
payment of the Earn Out Amounts described in Section
2(c)
below.
(c) Earn
Out Amounts.
(i) Earn
Out Periods and Amounts.
For
each consecutive 3-month period (each an “Earn
Out
Calculation Period”) during a period of 5
years
commencing on January 1, 2006 (the “Earn Out Period”), Buyer shall pay to Seller
an earn out amount (“Earn Out Amount”) equal to 4%
of
Sub’s Gross Revenues the first year and 3% of Sub’s Gross Revenues for each year
thereafter that have accrued
for the
same period, and each Earn Out Amount payable hereunder shall be paid by Buyer
to Seller in
United
States dollars within
60
days following the end of any Earn Out Calculation Period, such amount payable
by wire transfer as per instructions provided to Buyer by Seller or its
Affiliate. It
is
understood and agreed that Earn Out Amounts will be initially calculated in
Canadian dollars and such amounts will be converted into United States dollars
at the exchange rate quoted by the Bank of Canada on the last business day
of
each relevant Earn Out Calculation Period.
(ii) Records
and Verification of Earn Out Amounts.
Buyer
shall provide to Seller such accounting and other records as Seller may request
from time to time to verify the computation of Sub’s Gross
Revenues
for any
Earn Out Calculation Period. In the event that Seller disputes the amount of
an
Earn Out Amount for a specific Earn Out Calculation Period, Seller shall
promptly notify Buyer of such dispute. If within 30 days of such notification,
Buyer and Seller are unable to reach agreement with respect to such amount,
the
disputed Earn Out Amount shall be submitted to a mutually agreeable third party
firm of chartered accountants (“Special Accountants”) for determination, whose
determination shall be binding and conclusive upon the parties. If
the
Special
Accountants determine that the disputed Earn Out Amount has
5
been
understated by ten (10%) percent or more, then Buyer shall pay
the
Special Accountant’s fees, costs and expenses and shall promptly remit the
deficiency in the Earn Out Amount to Seller. If the Special Accountants
determine that the disputed Earn Out Amount has not been understated or has
been
understated by less than ten (10%) percent, then Seller shall pay
the
Special Accountant’s fees, costs and expenses, and Buyer shall promptly remit
any deficiency in the Earn Out Amount to Seller.
(iii) Change
of Control Transaction.
In the
event of a Change of Control Transaction before the end of the Earn Out Period,
then Buyer shall provide written notice to Seller prior to the effective date
of
such Change of Control Transaction and shall pay to Seller, within 10 days
following such effective date, a sum equal to the aggregate Earn Out Amounts
that would have been paid in respect of the Earn Out Calculation Periods
remaining in the Earn Out Period. Any Earn Out Amount payable pursuant to this
Section
2(c)(iii) shall be based on Sub’s projected Gross
Revenues
which
shall equal, with respect to each Earn Out Calculation Period, Sub’s average
Gross
Revenues
for the
12-month period prior to the commencement each Earn Out Calculation Period,
plus
a cumulative premium of 10% for each year remaining in the Earn Out Period
at
the time the Change of Control Transaction is concluded.
(iv) Guarantee.
Buyer
agrees that it shall cause Sub to guarantee the obligations of Buyer pursuant
to
this Section 2(c) and the Note (the “Sub” Guarantee”).
(v) Security
Interest.
Buyer
agrees that any Earn Out Amounts payable hereunder and under the Sub Guarantee
shall be secured by the charges on the assets of Buyer and Sub,
respectively.
(d) Closing.
The
closing of the transactions contemplated by this Agreement (the “Closing”) shall
take place at the offices of Parsons Behle & Latimer, in Salt Lake City,
Utah or at such other place as the Parties may agree, commencing at such time
and on such date as Buyer and Seller may mutually determine (the “Closing
Date”); provided, however, that the Closing Date shall be no later than March
4,
2005.
(e) Deliveries
at Closing.
At the
Closing, (i) Seller shall deliver to Buyer the various certificates,
instruments,
and
documents referred to in Section
7(a)
below, (ii) Buyer will deliver to Seller the various certificates, instruments,
and documents referred to in Section
7(b)
below, (iii) Seller will deliver to Buyer one or more stock certificates
representing all of Seller’s Target Shares, endorsed in blank or accompanied by
duly executed stock powers, and (iv) Buyer will deliver to
Seller the
Closing Amount specified in Section
2(b)
above.
3. Representations
and Warranties Concerning Transaction.
(a) Seller’s
Representations and Warranties.
Seller
represents and warrants to Buyer that the statements contained in this
Section
3(a)
are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this
Section
3(a)).
6
(i) Organization
of Seller.
Seller
is duly organized, validly existing, and in good standing under the laws of
the
jurisdiction of its incorporation.
(ii) Authorization
of Transaction.
Seller
has full power and authority (including full corporate or other entity power
and
authority) to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of Seller, enforceable in accordance with its terms and conditions.
Seller
need not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to
consummate the transactions contemplated by this Agreement. The execution,
delivery and performance of this Agreement and all other agreements contemplated
hereby have been duly authorized by Seller.
(iii) Non-contravention.
Neither
the execution and the delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (A) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which Seller
is
subject or, any provision of its charter, bylaws, or other governing documents,
or (B) conflict with, result in a breach of, constitute a default under, result
in the acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which Seller is a party or by
which
it is bound or to which any of its assets is subject.
(iv) Brokers’
Fees.
Seller
has no liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
(v) Target
Shares.
Seller
holds of record and owns beneficially all of the issued and outstanding Target
Shares, free and clear of any encumbrances or restrictions on transfer (other
than any restrictions under the Securities Act and applicable state and
provincial securities laws). Seller is not a party to any option, warrant,
purchase right, or other contract or commitment that could require Seller to
sell, transfer, or otherwise dispose of any capital stock of Target (other
than
this Agreement). Seller is not a party to any voting trust, proxy, or other
agreement or understanding with respect to the voting of any capital stock
of
Target.
(b) Buyer’s
Representations and Warranties.
Buyer
represents and warrants to Seller that the statements contained in this
Section
3(b)
are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this
Section
3(b)).
(i) Accredited
Investor.
Buyer
is purchasing the Target Shares as principal and is an “accredited investor” as
defined in Ontario Securities Commission Rule 45-501.
7
(ii) Organization
of Buyer.
Buyer
is a corporation (or other entity) duly organized, validly existing, and in
good
standing under the laws of the jurisdiction of its incorporation (or other
formation).
(iii) Authorization
of Transaction.
Buyer
has full power and authority (including full corporate or other entity power
and
authority) to execute and deliver this Agreement and to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of Buyer, enforceable in accordance with its terms and conditions.
Buyer
need not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to
consummate the transactions contemplated by this Agreement. The execution,
delivery and performance of this Agreement and all other agreements contemplated
hereby have been duly authorized by Buyer.
(iv) Non-contravention.
Neither
the execution and the delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (A) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which Buyer
is
subject or any provision of its charter, bylaws, or other governing documents
or
(B) conflict with, result in a breach of, constitute a default under, result
in
the acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any agreement, contract, lease,
license, instrument, or other arrangement to which Buyer is a party or by which
it is bound or to which any of its assets is subject.
(v) Brokers’
Fees.
Buyer
has no liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
(vi) Investment.
Buyer
is not acquiring the Target Shares with a view to or for sale in connection
with
any distribution thereof within the meaning of the Securities Act.
4. Representations
and Warranties Concerning Target and Sub.
Seller
represents and warrants to Buyer that the statements contained in this
Section
4
are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this
Section
4),
except as set forth in the disclosure schedule,
delivered
by Seller to Buyer on the date hereof and initialed by the Parties (the
“Disclosure Schedule”).
(a) Organization,
Qualification, and Corporate Power.
Each of
Target and Sub are corporations duly organized, validly existing, and in good
standing under the laws of the jurisdiction of their incorporation. Each of
Target and Sub are duly authorized
to
conduct Business
and are
in good standing under the laws of each jurisdiction where such qualification
is
required,
except
where the lack of such qualification would not have a Material Adverse
Effect.
Each of
Target and Sub have full corporate power and authority to carry on the
businesses in
8
which
they are engaged
and to own and use the properties owned and used by them.
Section
4(a)
of
the Disclosure Schedule lists the directors and officers of Target and
Sub
(b) Capitalization.
The
entire authorized capital stock of Target consists of an unlimited number of
Target Shares, of which 100 Target Shares are issued and outstanding. All of
the
issued and outstanding Target Shares are owned by Seller, have been duly
authorized, are validly issued, and are fully paid, and non-assessable. There
are no outstanding or authorized options or rights that could require Target
to
issue, sell, or otherwise cause to become outstanding any of its capital stock.
There are no outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to Target. The authorized capital,
as well as the issued and outstanding shares of Sub (the “Sub Shares”), are as
set out in Schedule 1 hereto. All of the Sub Shares are
owned
by Target, have been duly authorized, are validly issued, and are fully paid,
and non-assessable. There are no outstanding or authorized options or rights
that could require Sub to issue, sell, or otherwise cause to become outstanding
any of its capital stock. There are no outstanding or authorized stock
appreciation, phantom stock, profit participation, or similar rights with
respect to Sub
(c) Non-contravention.
To the
Knowledge of the Seller, neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
violate any contract,
constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling, charge,
or other restriction of any government,
governmental agency, party , or court to which Target and Sub are subject or
any
provision of the articles
or
bylaws of Target and Sub,
except
where the violation would not have a Material Adverse Effect.
To the
Knowledge of Seller,
neither
Target nor Sub needs to give any notice to, make any filing with, or obtain
any
authorization, consent, or
approval of any
government, governmental agency or party in order for the Parties to consummate
the transactions contemplated by this Agreement,
except
where the failure to give notice, to file, or to obtain any authorization,
consent, or approval would not have a Material Adverse Effect
(d) Brokers’
Fees.
Neither
Target nor Sub has any liability or obligation to pay any fees or commissions
to
any broker, finder, or agent with respect to the transactions contemplated
by
this Agreement.
(e) Title
to Tangible Assets.
Target
and Sub have good
title
to, or a valid leasehold interest in, the material
tangible
assets they use regularly
in
the
conduct of their Business.
(f) Subsidiaries.
Target
has no Subsidiaries other than Sub. Neither Target nor Sub owns or has any
right
to acquire, directly or indirectly, any outstanding capital stock of, or other
equity interests in, any Person.
(g) Tax
Matters.
Target
and Sub have filed all Income Tax, sales tax, employment and payroll related
tax
that they were required to file, and have paid all Taxes shown thereon as owing,
except where the failure to file Income Tax Returns or to pay Income Taxes
would
not have a Material Adverse Effect.
9
(h) Litigation.
Section
4(h)
of the
Disclosure Schedule sets forth each instance in which Target or Sub (i) is
subject to any outstanding injunction, judgment, order, decree, ruling, or
charge or (ii) is a party to any action, suit, proceeding, hearing, or
investigation of, in, or before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction,
except
where the injunction, judgment, order, decree, ruling, action, suit, proceeding,
hearing, or investigation would not have a Material Adverse Effect.
(i) Environmental,
Health, and Safety Matters.
To the
Knowledge
of Seller, Target and Sub are in compliance with Environmental, Health, and
Safety Requirements, except for such non-compliance as would not have a Material
Adverse Effect.
(j) Disclaimer
of Other Representations and Warranties.
Except
as expressly set forth in Section 3 and this Section 4, Seller makes no
representation or warranty, express or implied, at law or in equity, in respect
of Target or Sub or any of their respective assets, liabilities or operations,
including with respect to merchantability or fitness for any particular purpose,
and any such other representations or warranties are hereby expressly
disclaimed. Buyer hereby acknowledges and agrees that, except to the extent
specifically set forth in Section 3 and this Section 4, Buyer is purchasing
the
Target Shares on an “as-is, where-is” basis.
5. Pre-Closing
Covenants.
The
Parties agree as follows with respect to the period between the execution of
this Agreement and the Closing.
(a) General.
Each of
the Parties will use his, her, or its reasonable best efforts to take all action
and to do all things necessary in order to consummate and make effective the
transactions contemplated by this Agreement (including satisfaction, but not
waiver, of the Closing conditions set forth in Section
7
below).
(b) Notices
and Consents.
Each of
the Parties will (and Seller will cause Target and Sub to) give any notices
to,
make any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental agencies
required in connection with the matters referred to in Section
3(a)(ii),
Section
3(b)(ii)
and Section
4(d)
above.
(c) Operation
of Business.
Seller
will not cause or permit Target or Sub to engage in any practice, take any
action, or enter into any transaction outside the Ordinary Course of
Business.
(d) Notice
of Developments.
(i) Seller
shall
notify
Buyer of
any
development causing a breach of any of the representations and warranties in
Section
4
above.
Unless Buyer has the right to terminate this Agreement pursuant to Section
9(a)(ii)
below by reason of the development and exercises that right within the period
of
5 business days referred to in Section
9(a)(ii)
below, the written notice pursuant to this Section
5(d)(i)
will be deemed to have amended the Disclosure Schedule, to have qualified the
representations and warranties contained in §4 above, and to have
10
cured
any
misrepresentation or breach of warranty that otherwise might have existed
hereunder by reason of the development.
(ii) Each
Party will give prompt written notice to the others of any material adverse
development causing a breach of any of his or its own representations and
warranties in §3 above. No disclosure by any Party pursuant to this Section
5(d)(ii),
however, shall be deemed to amend or supplement the Disclosure Schedule or
to
prevent or cure any misrepresentation or breach of warranty.
(e) Treatment
of Confidential Information.
Irrespective of any terms and conditions of any nondisclosure agreement entered
into between Buyer and Seller or its Affiliate, Buyer will treat and hold as
such any Confidential Information it receives from any of Seller, Target or
Sub
in the course of any due diligence review conducted by it in anticipation of
the
transactions contemplated by this Agreement, will not use any of the
Confidential Information except in connection with this Agreement, and if this
Agreement is terminated for any reason whatsoever, will return to Seller, Target
and Sub all tangible embodiments (and all copies) of the Confidential
Information which are in its possession.
6. Post-Closing
Matters.
(a) General.
In case
at any time after the Closing any further action is necessary to carry out
the
purposes of this Agreement, including the specific matters referred to in
Section
6(b)-(d)
and any Canadian tax matters, each of the Parties will take such further action
(including the execution and delivery of such further instruments and documents)
as any other Party reasonably may request, all at the sole cost and expense
of
the requesting Party (unless the requesting Party is entitled to indemnification
therefor under Section
8
below).
(b) Security
Filings.
Buyer
agrees to execute, and cause Sub to execute, and cooperate with Seller in filing
any and all appropriate documentation to secure financing statements and all
other forms and documentation Seller deems necessary to create, preserve,
perfect or otherwise protect the security interests created in connection with
Buyer’s obligations pursuant to the Note and under §2(c), and Sub’s obligations
under the Sub Guarantee, which documentation shall be in form acceptable to
Seller, in Seller’s sole and absolute discretion..
(c) Name
Change of Target.
Buyer
agrees to cause Target to change its name immediately following Closing, to
cease use of the name “ClearOne” or any logos, trade-marks or derivatives
thereof in the representation or conduct of its business and to file articles
of
amendment and such other documentation as is necessary to effect such name
change with the Director under the Business
Corporations Act
(New
Brunswick), and to register such name change with the Canada Revenue Agency
and
all other appropriate Canadian government entities.
(d) Non-Compete.
For a
period of three years, the Seller shall not, either directly or indirectly
as a
stockholder, investor or partner (i) participate in the Business except as
a
manufacturing reseller. This paragraph does not prevent seller from selling
its
products through normal distributor and reseller relationships nor does it
prevent seller from performing post sales
11
equipment
service and support or to provide maintenance contracts directly or through
those distributor and reseller relationships.
7. Conditions
to Obligation to Close.
(a) Conditions
to Buyer’s Obligation.
Buyer’s
obligation to consummate the transactions to be performed by it in connection
with the Closing is subject to satisfaction of the following
conditions:
(i) the
representations and warranties set forth in Section
3(a)
and
Section
4
above
shall be true and correct in all material respects at and as of the Closing
Date, except to the extent that such representations and warranties are
qualified by terms such as “material” and “Material Adverse Effect,” in which
case such representations and warranties shall be true and correct in all
respects at and as of the Closing Date;
(ii) Seller
shall have performed and complied with all of its covenants hereunder in all
material respects through the Closing, except to the extent that such covenants
are qualified by terms such as “material” and “Material Adverse Effect,” in
which case Seller shall have performed and complied with all of such covenants
in all respects through the Closing;
(iii) there
shall not be any injunction, judgment, order, decree, ruling, or charge in
effect preventing consummation of any of the transactions contemplated by this
Agreement;
(iv) Seller
shall have delivered to Buyer a certificate to the effect that each of the
conditions specified above in Section
7(a)(i)-(iii)
is satisfied in all respects;
(v) the
Parties, Target, and Sub shall have received any authorizations, consents
and
approvals of governments and governmental agencies referred to in Section
3(a)(ii),
Section
3(b)(ii),
and Section
4(c)
above;
(vi) all
actions to be taken by Seller in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments,
and other documents required to effect the transactions contemplated hereby,
including resignations of current directors and officers of Target and Sub,
will
be reasonably satisfactory in form and substance to Buyer.
Buyer
may
waive any condition specified in this Section
7(a)
if
it executes a writing so stating at or prior to the Closing.
(b) Conditions
to Seller’s Obligation.
Seller’s obligation to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the following
conditions:
(i) the
representations and warranties set forth in Section
3(b)
above shall be true and correct in all material respects at and as of the
Closing Date, except to the extent
12
that
such
representations and warranties are qualified by terms such as “material” and
“Material Adverse Effect,” in which case such representations and warranties
shall be true and correct in all respects at and as of the Closing
Date;
(ii) Buyer
shall have performed and complied with all of its covenants hereunder in all
material respects through the Closing, except to the extent that such covenants
are qualified by terms such as “material” and “Material Adverse Effect,” in
which case Buyer shall have performed and complied with all of such covenants
in
all respects through the Closing;
(iii) there
shall not be any injunction, judgment, order, decree, ruling, or charge in
effect preventing consummation of any of the transactions contemplated by this
Agreement;
(iv) Buyer
shall have delivered to Seller a certificate to the effect that each of the
conditions specified above in Section
7(b)(i)-(iii)
is satisfied in all respects;
(v) the
Parties, Target, and Sub shall have received any authorizations, consents,
and
approvals of governments and governmental agencies referred to in Section
3(a)(ii),
Section
3(b)(ii),
and Section
4(c)
above; and
(vi) all
actions to be taken by Buyer in connection with consummation of the transactions
contemplated hereby and all certificates, opinions, instruments, and other
documents required to effect the transactions contemplated hereby, including
any
documents referred to in Section
6(b) and
(c), will be reasonably satisfactory in form and substance to
Seller.
Seller
may waive any condition specified in this Section
7(b)
if
it executes a writing so stating at or prior to the Closing.
8. Remedies
for Breaches of This Agreement.
(a) Survival
of Representations and Warranties.
The
representations and warranties of Seller contained in Section
4
above
shall survive the Closing hereunder for a
period
of six (6) months All
of
the representations and warranties of the Parties contained in Section
3
above
shall survive the Closing (unless the damaged Party knew or had reason to know
of any misrepresentation or breach of warranty at the time of Closing) and
continue in full force and effect thereafter, subject to any applicable statutes
of limitations.
(b) Indemnification
Provisions for Buyer’s Benefit.
(i) In
the
event Seller breaches its representations, warranties, and covenants contained
herein, and,
provided that Buyer makes a written claim for indemnification against Seller
pursuant to Section
8(e)
below
within the survival period (if there is an applicable survival period pursuant
to Section
8(a)
above), then Seller shall indemnify Buyer,
Target
and Sub
from and
against any Adverse Consequences Buyer,
Target
and Sub
shall
suffer (but
13
excluding
any Adverse Consequences Buyer,
Target
and Sub
shall
suffer after the end of any applicable survival period) caused by the breach.
(ii) Notwithstanding
the foregoing, (A) Seller shall not have any obligation to indemnify Buyer
from
and against any Adverse Consequences caused by the breach of any representation
or warranty or covenant of Seller contained in this Agreement until Buyer has
suffered Adverse Consequences by reason of all such breaches in excess of a
$10,000 aggregate deductible, and (B) the maximum aggregate amount of Adverse
Consequences caused by the breach of any representation or warranty of Seller
contained in this Agreement for which Seller shall have any obligation hereunder
to indemnify Buyer shall be the amount of the Purchase Price (after which point
Seller will have no obligation to indemnify Buyer from and against further
such
Adverse Consequences).
(c) Indemnification
Provisions for Seller’s Benefit.
In the
event Buyer breaches any of its representations, warranties, and covenants
contained herein, and provided that any Seller makes a written claim for
indemnification against Buyer pursuant to Section
8(e)
below
within the survival period (if there is an applicable survival period pursuant
to Section
8(a)
above), then Buyer shall indemnify each Seller from and against the entirety
of
any Adverse Consequences suffered (but excluding any Adverse Consequences
suffered after the end of any applicable survival period) caused by the
breach.
(d) Matters
Involving Third Parties.
(i) If
any
third party shall notify any Party (the “Indemnified Party”) with respect to any
matter (a “Third Party Claim”) which may give rise to a claim for
indemnification against any other Party (the “Indemnifying Party”) under this
Section
8,
then
the Indemnified Party shall promptly (and in any event within five business
days
after receiving notice of the Third Party Claim) notify each Indemnifying Party
thereof in writing.
(ii) Any
Indemnifying Party will have the right at any time to assume and thereafter
conduct the defense of the Third Party Claim with counsel of his or its choice
reasonably satisfactory to the Indemnified Party; provided however, that the
Indemnifying Party will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim without the prior written
consent of the Indemnified Party (not to be withheld unreasonably) unless the
judgment or proposed settlement involves only the payment of money damages
and
does not impose an injunction or other equitable relief upon the Indemnified
Party.
(iii) Unless
and until an Indemnifying Party assumes the defense of the Third Party Claim
as
provided in Section
8(d)(ii)
above, however, the Indemnified Party may defend against the Third Party Claim
in any manner he, she, or it reasonably may deem appropriate.
(iv) In
no
event will the Indemnified Party consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of each of the Indemnifying Parties.
14
(e) Determination
of Adverse Consequences.
All
indemnification payments under this §8 shall be paid by the Indemnifying Party
net of any Tax benefits and insurance coverage that may be available to the
Indemnified Party.
(f)Exclusive
Remedy.
Buyer
and Seller acknowledge and agree that the foregoing indemnification provisions
in this §8 shall be the exclusive remedy of Buyer and Seller with respect to
Target, Sub, and the transactions contemplated by this Agreement.
Without
limiting the generality of the foregoing, Buyer
acknowledges and agrees that it shall not have any remedy after the Closing
for
any breach of the representations and warranties in §4 above.
9. Termination.
(a) Termination
of Agreement.
Buyer
and Seller may terminate this Agreement as provided below:
(i) Buyer
and
Seller may terminate this Agreement by mutual written consent at any time prior
to the Closing;
(ii) Buyer
may
terminate this Agreement by giving written notice to Seller at any time prior
to
the Closing in the event:
(A)
Seller has within the previous
5 business days given Buyer any notice pursuant to Section
5(d)(i)
above
and (B) the development that is the subject of the notice has had a Material
Adverse Effect
(iii) Buyer
may
terminate this Agreement by giving written notice to Seller at any time prior
to
the Closing (A) in the event Seller has breached any material representation,
warranty, or covenant contained in this Agreement (other than the
representations and warranties in Section
4
above)
in any material respect, Buyer has notified Seller of the breach, and the breach
has continued without cure for a period of 30 days after the notice of
breach
(iv) Seller
may terminate this Agreement by giving written notice to Buyer (A) at any time
prior to the Closing in the event Buyer has breached any material
representation, warranty, or covenant contained in this Agreement in any
material respect, Seller has notified Buyer in
writing of
the
breach, and the breach has continued without cure for a period of 30 days,
or
(B) at Closing in the event any of the conditions contained in Section
7(b)
have not been or are not satisfied.
(b) Effect
of Termination.
If any
Party terminates this Agreement pursuant to Section
9(a)
above, all rights and obligations of the Parties hereunder shall terminate
without any liability of any Party to any other Party (except for any liability
of any Party then in breach); provided, however, that the confidentiality
provisions contained in Section
5(e)
above shall survive termination.
15
10. Miscellaneous.
(a) Press
Releases and Public Announcements.
No
Party shall issue any press release or make any public announcement relating
to
the subject matter of this Agreement prior to the Closing without the prior
written approval the other Party; provided, however, that any Party may make
any
public disclosure it believes in good faith is required by applicable law or
any
listing or trading agreement concerning its publicly-traded securities (in
which
case the disclosing Party will use its reasonable best efforts to advise the
other Parties prior to making the disclosure).
(b) No
Third-Party Beneficiaries.
This
Agreement shall not confer any rights or remedies upon any Person other than
the
Parties and their respective successors and permitted assigns.
(c) Entire
Agreement.
This
Agreement (including the documents referred to herein) constitutes the entire
agreement among the Parties and supersedes any prior understandings, agreements,
or representations by or among the Parties, written or oral, to the extent
they
relate in any way to the subject matter hereof.
(d) Succession
and Assignment.
This
Agreement shall be binding upon and inure to the benefit of the Parties named
herein and their respective successors and permitted assigns. No Party may
assign either this Agreement or any of his, her, or its rights, interests,
or
obligations hereunder without the prior written approval of the other Party
hereto; provided, however, that Buyer may (i) upon written notice of same to
Seller, assign any or all of its rights and interests hereunder to one or more
of its Affiliates and (ii) designate one or more of its Affiliates to perform
its obligations hereunder (in any or all of which cases Buyer nonetheless shall
remain responsible for the performance of all of its obligations
hereunder).
(e) Counterparts.
This
Agreement may be executed in one or more counterparts (including by means of
facsimile), each of which shall be deemed an original but all of which together
will constitute one and the same instrument.
(f) Headings.
The
Section
headings
contained in this Agreement are inserted for convenience only and shall not
affect in any way the meaning or interpretation of this Agreement.
(g) Notices.
All
notices, requests, demands, claims, and other communications hereunder will
be
in writing. Any notice, request, demand, claim, or other communication hereunder
shall be deemed duly given (i) when delivered personally to the recipient,
(ii)
one business day after being sent to the recipient by reputable overnight
courier service (charges prepaid), (iii) one business day after being sent
to
the recipient by facsimile transmission or electronic mail, or (iv) four
business days after being mailed to the recipient by certified or registered
mail, return receipt requested and postage prepaid, and addressed to the
intended recipient as set forth below:
16
|
If to Seller:
|
Copy
to:
|
|
Gentner
Ventures, Inc.
|
Geoffrey W. Mangum, Esq. |
| c/o ClearOne Communications, Inc. | Parsons Behle & Latimer |
| 1825 Research Way | 1800 - 201 South Main Street |
| Salt Lake City, Utah 84119 | Salt Lake City, Utah 84111 |
| Fax: (801) 977-0087 | Fax: (801) 536-6111 |
| Attn: Chief Financial Officer | |
| If to Buyer: | Copy to: |
|
6351352 Canada Inc.
|
|
| c/oWilliam Douglas | Alfred Apps |
| Suite PH2-55 Elm Drive West | Suite 4200-66 Wellington Street West |
| Mississauga, Ontario, Canada L5B 323 | Box 20, Toronto, Ontario, Canada M5K 1N6 |
Any
Party
may change the address to which notices, requests, demands, claims, and other
communications hereunder are to be delivered by giving the other Parties notice
in the manner herein set forth.
(h) Governing
Law.
This
Agreement shall be governed by and construed in
accordance with the laws of the State
of
Utah, including those laws governing conflicts of law. Except as specifically
provided in § 2(b)(ii) herein, any dispute, disagreement or difference arising
in connection with this Agreement or any breach thereof, which cannot be settled
between the parties hereto by mutual negotiation in good faith, shall be settled
by arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The arbitration shall take place in the State
of Utah
(i) Amendments
and Waivers.
No
amendment of any provision of this Agreement shall be valid unless the same
shall be in writing and signed by Buyer and Seller. No waiver by any Party
of
any provision of this Agreement or any default, misrepresentation, or breach
of
warranty or covenant hereunder, whether intentional or not, shall be valid
unless the same shall be in writing and signed by the Party making such waiver,
nor shall such waiver be deemed to extend to any prior or subsequent default,
misrepresentation, or breach of warranty or covenant hereunder or affect in
any
way any rights arising by virtue of any prior or subsequent such
occurrence.
(j) Severability.
Any
term or provision of this Agreement that is invalid or unenforceable in any
situation in any jurisdiction shall not affect the validity or enforceability
of
the remaining terms and provisions hereof or the validity or enforceability
of
the offending term or provision in any other situation or in any other
jurisdiction.
(k) Expenses.
Each
of Buyer, Seller, Target, and Sub will bear his, her, or its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby.
Without
limiting the generality of the foregoing, all transfer, documentary, sales,
use,
stamp, registration and other such Taxes, and all conveyance fees, recording
charges and other fees and charges (including any penalties and interest)
incurred in connection with the consummation of the transactions contemplated
by
this
17
Agreement
shall be paid by Buyer when due, and Buyer shall, at its own expense, file
all
necessary Tax Returns and other documentation with respect to all such Taxes,
fees and charges, and, if required by applicable law, the Parties will, and
will
cause their Affiliates to, join in the execution of any such Tax Returns and
other documentation.
(l) Construction.
Any
reference to any federal, provincial state, local, or foreign statute or law
shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. The word “ including” shall
mean including without limitation.
(m) Incorporation
of Exhibits, Annexes, and Schedules.
The
Exhibits, Annexes, and Schedules identified in this Agreement are incorporated
herein by reference and made a part hereof.
(n) Governing
Language.
This
Agreement has been negotiated and executed by the Parties in English. In the
event any translation of this Agreement is prepared for convenience or any
other
purpose, the provisions of the English version shall prevail.
[SIGNATURE
PAGE FOLLOWS]
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*
IN
WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
date
first above written.
|
6351352
CANADA INC.
|
GENTNER
VENTURES, INC.
|
|
By:
/s/ William Douglas
|
By:
/s/ Donald E Frederick
|
|
Title:
Vice President
|
Title:
Vice President
|
19
Exhibit
10.13
SETTLEMENT
AGREEMENT AND RELEASE
This
Settlement Agreement and Release (this “Agreement") is made and entered into as
of the 27th
day of
February 2004, between Gregory L. Rand (“Employee”) and ClearOne Communications
Corporation (“ClearOne”), who shall be referred to as the “Parties”, or
individually as a “Party”.
DEFINITIONS
1. The
term
“Employee” shall mean Employee and his or her heirs, assigns, and legal
representatives.
2. The
phrase "ClearOne Released Parties" shall mean ClearOne and any and all business
units, committees, groups, and their present, former or future parents,
affiliates, subsidiaries, employees, agents, directors, owners, officers,
attorneys, successors, predecessors, and assigns.
3. The
"Released Claims" shall mean any type or manner of suits, claims, demands,
allegations, charges, damages, or causes of action whatsoever in law or in
equity under federal, state, municipal or local statute, law, ordinance,
regulation, constitution, or common law, whether known or unknown, which
Employee has ever had or now has against the ClearOne Released Parties. This
includes but is not limited to any action for costs, interest or attorney's
fees, which arise in whole or in part from Employee's employment relationship
with ClearOne, from the ending of that relationship, and from any other conduct
by or dealings of any kind between Employee and the ClearOne Released Parties,
which occurred prior to the execution of this Agreement. This also includes
but
is not limited to any and all claims, rights, demands, allegations and causes
of
action for alleged wrongful discharge, breach of alleged employment contract,
breach of the covenant of good faith and fair dealing, termination in violation
of public policy, intentional or negligent infliction of emotional distress,
fraud, misrepresentation, defamation, interference with prospective economic
advantage, failure to pay wages due or other monies owed, failure to pay
pension
benefits, conversion, breach of duty, interference with existing economic
relations, punitive damages, retaliation, discrimination on the basis of
age in
violation of the Age Discrimination and Employment Act of 1967, as amended
("ADEA"), harassment or discrimination on the basis of sex, race, color,
citizenship, religion, age, national origin, or disability, or other protected
classification under the federal, state, municipal or local laws of employment,
including those arising under the common law, and any alleged violation of
the
Employee Retirement Income Security Act of 1974 ("ERISA"), the Fair Labor
Standards Act ("FLSA"), the Occupational Safety and Health Act ("OSHA"),
and any
other law.
RECITALS
A. WHEREAS,
the Parties desire to settle and compromise the Released Claims and to enter
into this Agreement.
437423v1
1
COVENANTS
NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of
which are hereby acknowledged, and in consideration of the mutual covenants
set
forth in this Agreement, the Parties agree as follows:
1. Employee’s
employment with ClearOne shall end effective February 27, 2004. Employee
is not
entitled to receive any further compensation or benefits from ClearOne after
this date.
2. Notwithstanding
the provisions of section 1, above, after his or her execution of this Agreement
and in accordance with the terms of this Agreement, beginning after the
effective date of termination of Employee’s employment, ClearOne will make total
payment to Employee in the amount of $75,000.00 paid in increments according
to
the normal payroll schedule. Regular payroll and tax withholdings and deductions
shall be applied and shall reduce this gross amount accordingly. In addition,
25,000 ClearOne stock options shall vest on February 27, 2004. Employee
acknowledges that this sum constitutes consideration for Employee’s execution
and adherence to the provisions of this Agreement. Employee understands and
agrees that he or she would not receive the amounts specified herein except
for
his or her execution of this Agreement and the fulfillment of the promises
contained herein. The ClearOne Released Parties make no representations
whatsoever to Employee concerning the taxable status of the payment of the
settlement amount. Employee assumes full and sole responsibility for any
tax
consequences related to the settlement amount. Employee understands and agrees
to indemnify and hold harmless the ClearOne Released Parties from any taxes,
assessments, withholding obligations, penalties or interest payments that
they
may incur at any time by reason of demand, suit or proceeding brought against
them for any taxes or assessments or withholdings arising out of the payment
of
the settlement amount. Employee acknowledges he or she has been fully
compensated by the terms of this Agreement for releasing the Released
Claims.
3. Employee
shall not pursue, or authorize anyone on his or her behalf to pursue, the
Released Claims in any way in any court. Employee represents that he or she
has
not filed and there is not pending with any governmental agency or any state
or
federal court, any other claims, complaints, charges, or lawsuits of any
kind
against the ClearOne Released Parties. Employee agrees that he or she will
not
make any filings with any court at any time hereafter for any matter, claim
or
incident, known or unknown, which occurred or arose out of occurrences on
or
prior to the date of this Agreement; provided, however, this shall not limit
the
Parties from filing a lawsuit for the sole purpose of enforcing their rights
under this Agreement. Each of the Parties shall bear their own costs and
attorneys' fees in this dispute.
437423v1
2
4.
Employee hereby waives, releases, remises and discharges each and every one
of
the ClearOne Released Parties from liability with respect to the Released
Claims. Employee acknowledges that he or she understands he or she is prohibited
from any further relief on the Released Claims. Employee hereby promises
and
covenants never to institute any suit or action at law or in equity against
the
ClearOne Released Parties regarding or relating to the Released Claims.
Specifically and without limitation, Employee understands and agrees that
he or
she is waiving and forever discharging the ClearOne Released Parties from
any
and all claims, causes of action or complaints he or she may have or have
ever
had, which have or may have arisen prior to the execution of this
Agreement.
5. Employee
represents and warrants that he or she is the sole owner of the Released
Claims,
that the Released Claims have not been assigned, transferred, or disposed
of in
fact, by operation of law or in any manner whatsoever, and that he or she
has
the full right and power to grant, execute and deliver the full and complete
releases, undertakings, and agreements herein contained.
6. Employee
agrees that the existence and terms of this Agreement shall be and remain
confidential. Employee acknowledges that this confidentiality provision is
an
essential element of the consideration he provides to ClearOne for entering
into
this Agreement. Therefore, Employee agrees not to discuss or describe any
information concerning ClearOne, the circumstances of the ending of Employee's
employment with ClearOne or the existence of the terms of this Agreement
to
anyone, except as required by law or permitted herein.
7. Employee
reaffirms and agrees to observe and abide by the terms of the Confidentiality
and Invention Assignment Agreement (“Confidentiality Agreement”) he or she
signed with ClearOne. Employee certifies and represents that he or she has
fully
complied with all terms of the Confidentiality Agreement to date and has
returned to ClearOne all records or documents or other property of ClearOne
within his or her possession. Employee understands that his or her receipt
of
the consideration provided under this Agreement is expressly conditioned
on
Employee’s compliance with the obligations in this paragraph.
8. Employee
agrees not to disparage, orally or in writing, ClearOne,
its
officers, employees, management, operations, products, designs, or any other
aspects of ClearOne’s
affairs to any third person or entity.
9. Employee
agrees that for one year following Employee’s separation from employment with
ClearOne,
Employee shall not, directly or indirectly, in any capacity (including but
not
limited to, as an individual, a sole proprietor, a member of a partnership,
a
stockholder, investor, officer, or director of a corporation, an employee,
agent, associate, or consultant of any person, firm or corporation or other
entity) hire any person from, attempt to hire any person from, or solicit,
induce, persuade, or otherwise cause any person to leave his or her employment
with ClearOne.
437423v1
3
10.
Employee
agrees that for one year following Employee’s separation from employment with
ClearOne,
Employee shall not, directly or indirectly, in any capacity, solicit the
business of any customer of ClearOne
except
on behalf of ClearOne,
or
attempt to induce any customer of ClearOne
to cease
or reduce its business with ClearOne;
provided that following Employee’s separation from employment with Company he or
she may solicit a customer of ClearOne
to
purchase goods or services that do not compete directly or indirectly with
those
then offered by ClearOne.
11. Any
breach of Employee’s obligations under this Agreement shall, in addition to all
other remedies available to ClearOne,
result
in the immediate release of ClearOne
from any
obligations it has to provide further payments under this Agreement. In
addition, ClearOne
may
pursue such additional legal or equitable remedies as may be available to
it.
12. This
Agreement does not constitute and shall not be construed as an admission
by
ClearOne
of any
breach of any alleged agreements or duties, or of any wrongdoing toward Employee
or any other person, including any alleged breach of contract or violation
of
any federal, state, or local law, regulation, or ordinance. ClearOne
specifically disclaims any liability to Employee for wrongdoing of any kind.
13. The
Parties agree that this Agreement may be used in evidence in a subsequent
proceeding in which any of the Parties alleges a breach of this
Agreement.
14. The
parties shall attempt in good faith to resolve any dispute arising out of
or
relating to this Agreement by negotiation. The parties recognize that
irreparable injury to ClearOne
will
result from a material breach of this Agreement, and that monetary damages
will
be inadequate to rectify such injury. Accordingly, notwithstanding anything
to
the contrary, ClearOne
shall be
entitled to one or more preliminary or permanent orders: (i) restraining
or
enjoining any act which would constitute a material breach of this Agreement,
and (ii) compelling the performance of any obligation which, if not performed,
would constitute a material breach of this Agreement, and to attorney’s fees in
connection with any such action
15. Employee
affirms he or she is not relying on any representations or statements made
by
the ClearOne
Released
Parties which are not specifically included in this Agreement.
Employee
acknowledges he or she has been informed in writing by this Agreement that
he or
she has the right to consult with legal counsel regarding this release and
confirms Employee has consulted with counsel to the extent desired concerning
the meaning and consequences of this Agreement.
16. This
Agreement constitutes the entire agreement between the Parties with relation
to
the subject matter hereof. Any prior negotiations or correspondence relating
to
the subject matter hereof shall be deemed to have merged into this Agreement
and
to the extent inconsistent herewith shall be deemed to be of no force or
effect.
17. This
Agreement may be executed in any number of counterparts, each of which when
executed and delivered shall be an original, but all of such counterparts
shall
constitute one and the same instrument.
437423v1
4
18. This
Agreement shall be interpreted and enforced in accordance with the laws of
the
State of Utah, and/or when applicable, of the United States. By entering
into
this Agreement, the Parties submit themselves and their principals individually
to personal jurisdiction in the courts in the State of Utah and agree that
Utah
is the only appropriate venue for any action brought to interpret or enforce
any
provision of this Agreement, or which may otherwise arise under or relate
to the
subject matter of this Agreement.
19. The
provisions of this Agreement are severable, and if any part of it is found
to be
unenforceable, the other parts and/or paragraphs shall remain fully valid
and
enforceable. Should any provisions of this Agreement be determined by any
court
or administrative body to be invalid, the validity of the remaining provisions
is not affected thereby and the invalidated part shall be deemed not a part
of
this Agreement. Any court or administrative body shall construe and interpret
this Agreement as enforceable to the full extent available under applicable
law.
This Agreement shall survive the termination of any arrangements contained
in
it.
20. Employee
acknowledges and understands this is a legal contract and that he or she
signs
this Agreement knowingly, freely and voluntarily and has not been threatened,
coerced or intimidated into making the same. Employee acknowledges that he
or
she has had ample and reasonable time to consider this Agreement and the
effects
and import of it and that he or she has fully dwelt on it in his or her mind
and
has had such counsel and advice, legal or otherwise, as Employee desires
in
order to make this Agreement. EMPLOYEE, BY SIGNING THIS AGREEMENT, ACKNOWLEDGES
IT CONTAINS A RELEASE OF KNOWN AND UNKNOWN CLAIMS. Employee has read and
fully
considered this Agreement and understands and desires to enter into it. The
terms of this agreement were derived through mutual compromise and are fully
understood. Employee
acknowledges that he or she has been offered at least twenty one (21) days
to
consider the impact of this Agreement and its release of his or her rights
to
bring suit against the ClearOne Released Parties and after due consideration
has
decided to enter into this Agreement at this time. Employee further understands
that he or she may revoke this Agreement for a period of up to seven (7)
days
following signature and execution of the same. This Agreement shall not become
effective or enforceable until the revocation period has expired. Any revocation
within this period must be signed and submitted in writing to the undersigned
representative of ClearOne and must state, "I hereby revoke my acceptance
of the
Agreement." Employee understands that if he or she revokes this Agreement,
he or
she is not entitled to receive the consideration provided by this
Agreement.
437423v1
5
Employee
has until Monday, March 15, 2004 to accept terms and conditions by signing
below. If Employee does not accept such terms and conditions by such date,
this
offer shall expire at that
time.
IN
WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first
set forth above.
EMPLOYEE
/s/
Gregory L. Rand
____________________
CLEARONE
COMMUNICATIONS CORP.
/s/
Delonie N. Call _________________________
DeLonie
N. Call
Vice
President, Human Resources
Exhibit
10.14
SETTLEMENT
AGREEMENT AND RELEASE
This
Settlement Agreement and Release (this “Agreement") is made and entered into as
of the 6th day of April 2004, between George E. Claffey (“Employee”) and
ClearOne Communications Corporation (“ClearOne”), who shall be referred to as
the “Parties”, or individually as a “Party”.
DEFINITIONS
1. The
term
“Employee” shall mean Employee and his or her heirs, assigns, and legal
representatives.
2. The
phrase "ClearOne Released Parties" shall mean ClearOne and any and all business
units, committees, groups, and their present, former or future parents,
affiliates, subsidiaries, employees, agents, directors, owners, officers,
attorneys, successors, predecessors, and assigns.
3. The
"Released Claims" shall mean any type or manner of suits, claims, demands,
allegations, charges, damages, or causes of action whatsoever in law or in
equity under federal, state, municipal or local statute, law, ordinance,
regulation, constitution, or common law, whether known or unknown, which
Employee has ever had or now has against the ClearOne Released Parties. This
includes but is not limited to any action for costs, interest or attorney's
fees, which arise in whole or in part from Employee's employment relationship
with ClearOne, from the ending of that relationship, and from any other conduct
by or dealings of any kind between Employee and the ClearOne Released Parties,
which occurred prior to the execution of this Agreement. This also includes
but
is not limited to any and all claims, rights, demands, allegations and causes
of
action for alleged wrongful discharge, breach of alleged employment contract,
breach of the covenant of good faith and fair dealing, termination in violation
of public policy, intentional or negligent infliction of emotional distress,
fraud, misrepresentation, defamation, interference with prospective economic
advantage, failure to pay wages due or other monies owed, failure to pay pension
benefits, conversion, breach of duty, interference with existing economic
relations, punitive damages, retaliation, discrimination on the basis of age
in
violation of the Age Discrimination and Employment Act of 1967, as amended
("ADEA"), harassment or discrimination on the basis of sex, race, color,
citizenship, religion, age, national origin, or disability, or other protected
classification under the federal, state, municipal or local laws of employment,
including those arising under the common law, and any alleged violation of
the
Employee Retirement Income Security Act of 1974 ("ERISA"), the Fair Labor
Standards Act ("FLSA"), the Occupational Safety and Health Act ("OSHA"), and
any
other law.
RECITALS
A. WHEREAS,
the Parties desire to settle and compromise the Released Claims and to enter
into this Agreement.
437423v1
1
COVENANTS
NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of
which are hereby acknowledged, and in consideration of the mutual covenants
set
forth in this Agreement, the Parties agree as follows:
1. Employee’s
employment with ClearOne shall end effective April 6, 2004. Employee is not
entitled to receive any further compensation or benefits from ClearOne after
this date.
2. Notwithstanding
the provisions of section 1, above, after his or her execution of this Agreement
and in accordance with the terms of this Agreement, beginning after the
effective date of termination of Employee’s employment, ClearOne will make total
payment to Employee in the amount of $61,192.49 paid in increments according
to
the normal payroll schedule. Regular payroll and tax withholdings and deductions
shall be applied and shall reduce this gross amount accordingly. Employee
acknowledges that this sum constitutes consideration for Employee’s execution
and adherence to the provisions of this Agreement. Employee understands and
agrees that he or she would not receive the amounts specified herein except
for
his or her execution of this Agreement and the fulfillment of the promises
contained herein. The ClearOne Released Parties make no representations
whatsoever to Employee concerning the taxable status of the payment of the
settlement amount. Employee assumes full and sole responsibility for any tax
consequences related to the settlement amount. Employee understands and agrees
to indemnify and hold harmless the ClearOne Released Parties from any taxes,
assessments, withholding obligations, penalties or interest payments that they
may incur at any time by reason of demand, suit or proceeding brought against
them for any taxes or assessments or withholdings arising out of the payment
of
the settlement amount. Employee acknowledges he or she has been fully
compensated by the terms of this Agreement for releasing the Released
Claims.
3. Employee
shall not pursue, or authorize anyone on his or her behalf to pursue, the
Released Claims in any way in any court. Employee represents that he or she
has
not filed and there is not pending with any governmental agency or any state
or
federal court, any other claims, complaints, charges, or lawsuits of any kind
against the ClearOne Released Parties. Employee agrees that he or she will
not
make any filings with any court at any time hereafter for any matter, claim
or
incident, known or unknown, which occurred or arose out of occurrences on or
prior to the date of this Agreement; provided, however, this shall not limit
the
Parties from filing a lawsuit for the sole purpose of enforcing their rights
under this Agreement. Each of the Parties shall bear their own costs and
attorneys' fees in this dispute.
437423v1
2
4. Employee
hereby waives, releases, remises and discharges each and every one of the
ClearOne Released Parties from liability with respect to the Released Claims.
Employee acknowledges that he or she understands he or she is prohibited from
any further relief on the Released Claims. Employee hereby promises and
covenants never to institute any suit or action at law or in equity against
the
ClearOne Released Parties regarding or relating to the Released Claims.
Specifically and without limitation, Employee understands and agrees that he
or
she is waiving and forever discharging the ClearOne Released Parties from any
and all claims, causes of action or complaints he or she may have or have ever
had, which have or may have arisen prior to the execution of this
Agreement.
5. Employee
represents and warrants that he or she is the sole owner of the Released Claims,
that the Released Claims have not been assigned, transferred, or disposed of
in
fact, by operation of law or in any manner whatsoever, and that he or she has
the full right and power to grant, execute and deliver the full and complete
releases, undertakings, and agreements herein contained.
6. Employee
agrees that the existence and terms of this Agreement shall be and remain
confidential. Employee acknowledges that this confidentiality provision is
an
essential element of the consideration he provides to ClearOne for entering
into
this Agreement. Therefore, Employee agrees not to discuss or describe any
information concerning ClearOne, the circumstances of the ending of Employee's
employment with ClearOne or the existence of the terms of this Agreement to
anyone, except as required by law or permitted herein.
7. Employee
reaffirms and agrees to observe and abide by the terms of the Confidentiality
and Invention Assignment Agreement (“Confidentiality Agreement”) he or she
signed with ClearOne. Employee certifies and represents that he or she has
fully
complied with all terms of the Confidentiality Agreement to date and has
returned to ClearOne all records or documents or other property of ClearOne
within his or her possession. Employee understands that his or her receipt
of
the consideration provided under this Agreement is expressly conditioned on
Employee’s compliance with the obligations in this paragraph.
8. Employee
agrees not to disparage, orally or in writing, ClearOne, its officers,
employees, management, operations, products, designs, or any other aspects
of
ClearOne’s affairs to any third person or entity.
9. Employee
agrees that for one year following Employee’s separation from employment with
ClearOne, Employee shall not, directly or indirectly, in any capacity (including
but not limited to, as an individual, a sole proprietor, a member of a
partnership, a stockholder, investor, officer, or director of a corporation,
an
employee, agent, associate, or consultant of any person, firm or corporation
or
other entity) hire any person from, attempt to hire any person from, or solicit,
induce, persuade, or otherwise cause any person to leave his or her employment
with ClearOne.
437423v1
3
10.
Employee
agrees that for one year following Employee’s separation from employment with
ClearOne, Employee shall not, directly or indirectly, in any capacity, solicit
the business of any customer of ClearOne except on behalf of ClearOne, or
attempt to induce any customer of ClearOne to cease or reduce its business
with
ClearOne; provided that following Employee’s separation from employment with
Company he or she may solicit a customer of ClearOne to purchase goods or
services that do not compete directly or indirectly with those then offered
by
ClearOne.
11. Employee
will be available to ClearOne on a consulting basis, up to 160 hours, ending
no
later than August 31, 2004. Hours and location of work will be scheduled by
mutual agreement. ClearOne will reimburse employee for approved, related
business expenses.
12. Any
breach of Employee’s obligations under this Agreement shall, in addition to all
other remedies available to ClearOne, result in the immediate release of
ClearOne from any obligations it has to provide further payments under this
Agreement. In addition, ClearOne may pursue such additional legal or equitable
remedies as may be available to it.
13. This
Agreement does not constitute and shall not be construed as an admission by
ClearOne of any breach of any alleged agreements or duties, or of any wrongdoing
toward Employee or any other person, including any alleged breach of contract
or
violation of any federal, state, or local law, regulation, or ordinance.
ClearOne specifically disclaims any liability to Employee for wrongdoing of
any
kind.
14. The
Parties agree that this Agreement may be used in evidence in a subsequent
proceeding in which any of the Parties alleges a breach of this
Agreement.
15. The
parties shall attempt in good faith to resolve any dispute arising out of or
relating to this Agreement by negotiation. The parties recognize that
irreparable injury to ClearOne will result from a material breach of this
Agreement, and that monetary damages will be inadequate to rectify such injury.
Accordingly, notwithstanding anything to the contrary, ClearOne shall be
entitled to one or more preliminary or permanent orders: (i) restraining or
enjoining any act which would constitute a material breach of this Agreement,
and (ii) compelling the performance of any obligation which, if not performed,
would constitute a material breach of this Agreement, and to attorney’s fees in
connection with any such action
16. Employee
affirms he or she is not relying on any representations or statements made
by
the ClearOne Released Parties which are not specifically included in this
Agreement. Employee acknowledges he or she has been informed in writing by
this
Agreement that he or she has the right to consult with legal counsel regarding
this release and confirms Employee has consulted with counsel to the extent
desired concerning the meaning and consequences of this Agreement.
17. This
Agreement constitutes the entire agreement between the Parties with relation
to
the subject matter hereof. Any prior negotiations or correspondence relating
to
the subject matter hereof shall be deemed to have merged into this Agreement
and
to the extent inconsistent herewith shall be deemed to be of no force or
effect.
437423v1
4
18. This
Agreement may be executed in any number of counterparts, each of which when
executed and delivered shall be an original, but all of such counterparts shall
constitute one and the same instrument.
19. This
Agreement shall be interpreted and enforced in accordance with the laws of
the
State of Utah, and/or when applicable, of the United States. By entering into
this Agreement, the Parties submit themselves and their principals individually
to personal jurisdiction in the courts in the State of Utah and agree that
Utah
is the only appropriate venue for any action brought to interpret or enforce
any
provision of this Agreement, or which may otherwise arise under or relate to
the
subject matter of this Agreement.
20. The
provisions of this Agreement are severable, and if any part of it is found
to be
unenforceable, the other parts and/or paragraphs shall remain fully valid and
enforceable. Should any provisions of this Agreement be determined by any court
or administrative body to be invalid, the validity of the remaining provisions
is not affected thereby and the invalidated part shall be deemed not a part
of
this Agreement. Any court or administrative body shall construe and interpret
this Agreement as enforceable to the full extent available under applicable
law.
This Agreement shall survive the termination of any arrangements contained
in
it.
21. Employee
acknowledges and understands this is a legal contract and that he or she signs
this Agreement knowingly, freely and voluntarily and has not been threatened,
coerced or intimidated into making the same. Employee acknowledges that he
or
she has had ample and reasonable time to consider this Agreement and the effects
and import of it and that he or she has fully dwelt on it in his or her mind
and
has had such counsel and advice, legal or otherwise, as Employee desires in
order to make this Agreement. EMPLOYEE, BY SIGNING THIS AGREEMENT, ACKNOWLEDGES
IT CONTAINS A RELEASE OF KNOWN AND UNKNOWN CLAIMS. Employee has read and fully
considered this Agreement and understands and desires to enter into it. The
terms of this agreement were derived through mutual compromise and are fully
understood. Employee acknowledges that he or she has been offered at least
twenty one (21) days to consider the impact of this Agreement and its release
of
his or her rights to bring suit against the ClearOne Released Parties and after
due consideration has decided to enter into this Agreement at this time.
Employee further understands that he or she may revoke this Agreement for a
period of up to seven (7) days following signature and execution of the same.
This Agreement shall not become effective or enforceable until the revocation
period has expired. Any revocation within this period must be signed and
submitted in writing to the undersigned representative of ClearOne and must
state, "I hereby revoke my acceptance of the Agreement." Employee understands
that if he or she revokes this Agreement, he or she is not entitled to receive
the consideration provided by this Agreement.
437423v1
5
Employee
has until Wednesday, April 28, 2004 to accept terms and conditions by signing
below. If Employee does not accept such terms and conditions by such date,
this
offer shall expire at that
time.
IN
WITNESS WHEREOF, the Parties have executed this Agreement as of the date first
set forth above.
EMPLOYEE
/s/
George E.
Claffey
CLEARONE
COMMUNICATIONS CORP.
/s/
DeLonie N. Call ____________________
DeLonie
N. Call
Vice
President, Human Resources
Exhibit
10.15
SETTLEMENT
AGREEMENT AND RELEASE
This
Settlement Agreement and Release (this “Agreement") is made and entered into as
of the 16th day of June 2004, between Michael Keough (“Employee”) and ClearOne
Communications Corporation (“ClearOne”), who shall be referred to as the
“Parties”, or individually as a “Party”.
DEFINITIONS
1. The
term
“Employee” shall mean Employee and his or her heirs, assigns, and legal
representatives.
2. The
phrase "ClearOne Released Parties" shall mean ClearOne and any and all business
units, committees, groups, and their present, former or future parents,
affiliates, subsidiaries, employees, agents, directors, owners, officers,
attorneys, successors, predecessors, and assigns.
3. The
"Released Claims" shall mean any type or manner of suits, claims, demands,
allegations, charges, damages, or causes of action whatsoever in law or in
equity under federal, state, municipal or local statute, law, ordinance,
regulation, constitution, or common law, whether known or unknown, which
Employee has ever had or now has against the ClearOne Released Parties. This
includes but is not limited to any action for costs, interest or attorney's
fees, which arise in whole or in part from Employee's employment relationship
with ClearOne, from the ending of that relationship, and from any other conduct
by or dealings of any kind between Employee and the ClearOne Released Parties,
which occurred prior to the execution of this Agreement. This also includes
but
is not limited to any and all claims, rights, demands, allegations and causes
of
action for alleged wrongful discharge, breach of alleged employment contract,
breach of the covenant of good faith and fair dealing, termination in violation
of public policy, intentional or negligent infliction of emotional distress,
fraud, misrepresentation, defamation, interference with prospective economic
advantage, failure to pay wages due or other monies owed, failure to pay pension
benefits, conversion, breach of duty, interference with existing economic
relations, punitive damages, retaliation, discrimination on the basis of age
in
violation of the Age Discrimination and Employment Act of 1967, as amended
("ADEA"), negligent
employment, negligent supervision, claims under Title VII of the Civil Rights
Act of 1964, harassment
or discrimination on the basis of sex, race, color, citizenship, religion,
age,
national origin, or disability, or other protected classification under the
federal, state, municipal or local laws of employment, including those arising
under the common law, and any alleged violation of the Employee Retirement
Income Security Act of 1974 ("ERISA"), the Fair Labor Standards Act ("FLSA"),
the Occupational Safety and Health Act ("OSHA"), and any other law.
RECITALS
A. WHEREAS,
the Parties desire to settle and compromise the Released Claims and to enter
into this Agreement.
437423v1
1
COVENANTS
NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of
which are hereby acknowledged, and in consideration of the mutual covenants
set
forth in this Agreement, the Parties agree as follows:
1. Employee’s
employment with ClearOne shall end effective June 16, 2004. Employee is not
entitled to receive any further compensation or benefits from ClearOne after
this date.
2. Notwithstanding
the provisions of section 1, above, after his or her execution of this Agreement
and in accordance with the terms of this Agreement, beginning after the
effective date of termination of Employee’s employment, ClearOne will make total
payment to Employee in the amount of $46,154.00 paid in increments according
to
the normal payroll schedule. Regular payroll and tax withholdings and deductions
shall be applied and shall reduce this gross amount accordingly. Employee
acknowledges that this sum constitutes consideration for Employee’s execution
and adherence to the provisions of this Agreement. Employee understands and
agrees that he or she would not receive the amounts specified herein except
for
his or her execution of this Agreement and the fulfillment of the promises
contained herein. The ClearOne Released Parties make no representations
whatsoever to Employee concerning the taxable status of the payment of the
settlement amount. Employee assumes full and sole responsibility for any tax
consequences related to the settlement amount. Employee understands and agrees
to indemnify and hold harmless the ClearOne Released Parties from any taxes,
assessments, withholding obligations, penalties or interest payments that they
may incur at any time by reason of demand, suit or proceeding brought against
them for any taxes or assessments or withholdings arising out of the payment
of
the settlement amount. Employee acknowledges he or she has been fully
compensated by the terms of this Agreement for releasing the Released
Claims.
3. Employee
shall not pursue, or authorize anyone on his or her behalf to pursue, the
Released Claims in any way in any court. Employee represents that he or she
has
not filed and there is not pending with any governmental agency or any state
or
federal court, any other claims, complaints, charges, or lawsuits of any kind
against the ClearOne Released Parties. Employee agrees that he or she will
not
make any filings with any court at any time hereafter for any matter, claim
or
incident, known or unknown, which occurred or arose out of occurrences on or
prior to the date of this Agreement; provided, however, this shall not limit
the
Parties from filing a lawsuit for the sole purpose of enforcing their rights
under this Agreement. Each of the Parties shall bear their own costs and
attorneys' fees in this dispute.
437423v1
2
4. Employee
hereby waives, releases, remises and discharges each and every one of the
ClearOne Released Parties from liability with respect to the Released Claims.
Employee acknowledges that he or she understands he or she is prohibited from
any further relief on the Released Claims. Employee hereby promises and
covenants never to institute any suit or action at law or in equity against
the
ClearOne Released Parties regarding or relating to the Released Claims.
Specifically and without limitation, Employee understands and agrees that he
or
she is waiving and forever discharging the ClearOne Released Parties from any
and all claims, causes of action or complaints he or she may have or have ever
had, which have or may have arisen prior to the execution of this
Agreement.
5. Employee
represents and warrants that he or she is the sole owner of the Released Claims,
that the Released Claims have not been assigned, transferred, or disposed of
in
fact, by operation of law or in any manner whatsoever, and that he or she has
the full right and power to grant, execute and deliver the full and complete
releases, undertakings, and agreements herein contained.
6. Employee
agrees that the existence and terms of this Agreement shall be and remain
confidential. Employee acknowledges that this confidentiality provision is
an
essential element of the consideration he provides to ClearOne for entering
into
this Agreement. Therefore, Employee agrees not to discuss or describe any
information concerning ClearOne, the circumstances of the ending of Employee's
employment with ClearOne or the existence of the terms of this Agreement to
anyone, except as required by law or permitted herein.
7. Employee
reaffirms and agrees to observe and abide by the terms of the Confidentiality
and Invention Assignment Agreement (“Confidentiality Agreement”) he or she
signed with ClearOne. Employee certifies and represents that he or she has
fully
complied with all terms of the Confidentiality Agreement to date and has
returned to ClearOne all records or documents or other property of ClearOne
within his or her possession. Employee understands that his or her receipt
of
the consideration provided under this Agreement is expressly conditioned on
Employee’s compliance with the obligations in this paragraph.
8. Employee
agrees not to disparage, orally or in writing, ClearOne, its officers,
employees, management, operations, products, designs, or any other aspects
of
ClearOne’s affairs to any third person or entity.
9. Employee
agrees that for one year following Employee’s separation from employment with
ClearOne, Employee shall not, directly or indirectly, in any capacity (including
but not limited to, as an individual, a sole proprietor, a member of a
partnership, a stockholder, investor, officer, or director of a corporation,
an
employee, agent, associate, or consultant of any person, firm or corporation
or
other entity) hire any person from, attempt to hire any person from, or solicit,
induce, persuade, or otherwise cause any person to leave his or her employment
with ClearOne.
437423v1
3
10.
Employee
agrees that for one year following Employee’s separation from employment with
ClearOne, Employee shall not, directly or indirectly, in any capacity, solicit
the business of any customer of ClearOne except on behalf of ClearOne, or
attempt to induce any customer of ClearOne to cease or reduce its business
with
ClearOne; provided that following Employee’s separation from employment with
Company he or she may solicit a customer of ClearOne to purchase goods or
services that do not compete directly or indirectly with those then offered
by
ClearOne.
11. Any
breach of Employee’s obligations under this Agreement shall, in addition to all
other remedies available to ClearOne, result in the immediate release of
ClearOne from any obligations it has to provide further payments under this
Agreement. In addition, ClearOne may pursue such additional legal or equitable
remedies as may be available to it.
12. This
Agreement does not constitute and shall not be construed as an admission by
ClearOne of any breach of any alleged agreements or duties, or of any wrongdoing
toward Employee or any other person, including any alleged breach of contract
or
violation of any federal, state, or local law, regulation, or ordinance.
ClearOne specifically disclaims any liability to Employee for wrongdoing of
any
kind.
13. The
Parties agree that this Agreement may be used in evidence in a subsequent
proceeding in which any of the Parties alleges a breach of this
Agreement.
14. The
parties shall attempt in good faith to resolve any dispute arising out of or
relating to this Agreement by negotiation. The parties recognize that
irreparable injury to ClearOne will result from a material breach of this
Agreement, and that monetary damages will be inadequate to rectify such injury.
Accordingly, notwithstanding anything to the contrary, ClearOne shall be
entitled to one or more preliminary or permanent orders: (i) restraining or
enjoining any act which would constitute a material breach of this Agreement,
and (ii) compelling the performance of any obligation which, if not performed,
would constitute a material breach of this Agreement, and to attorney’s fees in
connection with any such action
15. Employee
affirms he or she is not relying on any representations or statements made
by
the ClearOne Released Parties which are not specifically included in this
Agreement. Employee acknowledges he or she has been informed in writing by
this
Agreement that he or she has the right to consult with legal counsel regarding
this release and confirms Employee has consulted with counsel to the extent
desired concerning the meaning and consequences of this Agreement.
16. This
Agreement constitutes the entire agreement between the Parties with relation
to
the subject matter hereof. Any prior negotiations or correspondence relating
to
the subject matter hereof shall be deemed to have merged into this Agreement
and
to the extent inconsistent herewith shall be deemed to be of no force or
effect.
17. This
Agreement may be executed in any number of counterparts, each of which when
executed and delivered shall be an original, but all of such counterparts shall
constitute one and the same instrument.
437423v1
4
18. This
Agreement shall be interpreted and enforced in accordance with the laws of
the
State of Utah, and/or when applicable, of the United States. By entering into
this Agreement, the Parties submit themselves and their principals individually
to personal jurisdiction in the courts in the State of Utah and agree that
Utah
is the only appropriate venue for any action brought to interpret or enforce
any
provision of this Agreement, or which may otherwise arise under or relate to
the
subject matter of this Agreement.
19. The
provisions of this Agreement are severable, and if any part of it is found
to be
unenforceable, the other parts and/or paragraphs shall remain fully valid and
enforceable. Should any provisions of this Agreement be determined by any court
or administrative body to be invalid, the validity of the remaining provisions
is not affected thereby and the invalidated part shall be deemed not a part
of
this Agreement. Any court or administrative body shall construe and interpret
this Agreement as enforceable to the full extent available under applicable
law.
This Agreement shall survive the termination of any arrangements contained
in
it.
20. Employee
acknowledges and understands this is a legal contract and that he or she signs
this Agreement knowingly, freely and voluntarily and has not been threatened,
coerced or intimidated into making the same. Employee acknowledges that he
or
she has had ample and reasonable time to consider this Agreement and the effects
and import of it and that he or she has fully dwelt on it in his or her mind
and
has had such counsel and advice, legal or otherwise, as Employee desires in
order to make this Agreement. EMPLOYEE, BY SIGNING THIS AGREEMENT, ACKNOWLEDGES
IT CONTAINS A RELEASE OF KNOWN AND UNKNOWN CLAIMS. Employee has read and fully
considered this Agreement and understands and desires to enter into it. The
terms of this agreement were derived through mutual compromise and are fully
understood. Employee acknowledges that he or she has been offered at least
twenty one (21) days to consider the impact of this Agreement and its release
of
his or her rights to bring suit against the ClearOne Released Parties and after
due consideration has decided to enter into this Agreement at this time.
Employee further understands that he or she may revoke this Agreement for a
period of up to seven (7) days following signature and execution of the same.
This Agreement shall not become effective or enforceable until the revocation
period has expired. Any revocation within this period must be signed and
submitted in writing to the undersigned representative of ClearOne and must
state, "I hereby revoke my acceptance of the Agreement." Employee understands
that if he or she revokes this Agreement, he or she is not entitled to receive
the consideration provided by this Agreement.
437423v1
5
Employee
has until Thursday, July 8, 2004 to accept terms and conditions by signing
below. If Employee does not accept such terms and conditions by such date,
this
offer shall expire at that
time.
IN
WITNESS WHEREOF, the Parties have executed this Agreement as of the date first
set forth above.
EMPLOYEE
/s/
Michael
Keough______________________
CLEARONE
COMMUNICATIONS CORP.
/s/
DeLonie N. Call _________________
DeLonie
N. Call
Vice
President, Human Resources
Exhibit
10.16
SETTLEMENT
AGREEMENT AND RELEASE
This
Settlement Agreement and Release (this “Agreement") is made and entered into as
of the 15th
day of
July, 2004, between Angelina Beitia (“Employee”) and ClearOne Communications
Corporation (“ClearOne”), who shall be referred to as the “Parties”, or
individually as a “Party”.
DEFINITIONS
1. The
term
“Employee” shall mean Employee and his or her heirs, assigns, and legal
representatives.
2. The
phrase "ClearOne Released Parties" shall mean ClearOne and any and all business
units, committees, groups, and their present, former or future parents,
affiliates, subsidiaries, employees, agents, directors, owners, officers,
attorneys, successors, predecessors, and assigns.
3. The
"Released Claims" shall mean any type or manner of suits, claims, demands,
allegations, charges, damages, or causes of action whatsoever in law or in
equity under federal, state, municipal or local statute, law, ordinance,
regulation, constitution, or common law, whether known or unknown, which
Employee has ever had or now has against the ClearOne Released Parties. This
includes but is not limited to any action for costs, interest or attorney's
fees, which arise in whole or in part from Employee's employment relationship
with ClearOne, from the ending of that relationship, and from any other conduct
by or dealings of any kind between Employee and the ClearOne Released Parties,
which occurred prior to the execution of this Agreement. This also includes
but
is not limited to any and all claims, rights, demands, allegations and causes
of
action for alleged wrongful discharge, breach of alleged employment contract,
breach of the covenant of good faith and fair dealing, termination in violation
of public policy, intentional or negligent infliction of emotional distress,
fraud, misrepresentation, defamation, interference with prospective economic
advantage, failure to pay wages due or other monies owed, failure to pay pension
benefits, conversion, breach of duty, interference with existing economic
relations, punitive damages, retaliation, discrimination on the basis of age
in
violation of the Age Discrimination and Employment Act of 1967, as amended
("ADEA"), negligent
employment, negligent supervision, claims under Title VII of the Civil Rights
Act of 1964, harassment
or discrimination on the basis of sex, race, color, citizenship, religion,
age,
national origin, or disability, or other protected classification under the
federal, state, municipal or local laws of employment, including those arising
under the common law, and any alleged violation of the Employee Retirement
Income Security Act of 1974 ("ERISA"), the Fair Labor Standards Act ("FLSA"),
the Occupational Safety and Health Act ("OSHA"), and any other law.
RECITALS
A. WHEREAS,
the Parties desire to settle and compromise the Released Claims and to enter
into this Agreement.
437423v1
1
COVENANTS
NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of
which are hereby acknowledged, and in consideration of the mutual covenants
set
forth in this Agreement, the Parties agree as follows:
1. Employee’s
employment with ClearOne shall end effective June 30, 2004. Employee is not
entitled to receive any further compensation or benefits from ClearOne after
this date.
2. Notwithstanding
the provisions of section 1, above, after his or her execution of this Agreement
and in accordance with the terms of this Agreement, beginning after the
effective date of termination of Employee’s employment, ClearOne will make total
payment to Employee in the amount of $100,000.00. Regular payroll and tax
withholdings and deductions shall be applied and shall reduce this gross amount
accordingly. Employee acknowledges that this sum constitutes consideration
for
Employee’s execution and adherence to the provisions of this Agreement. Employee
understands and agrees that he or she would not receive the amounts specified
herein except for his or her execution of this Agreement and the fulfillment
of
the promises contained herein. The ClearOne Released Parties make no
representations whatsoever to Employee concerning the taxable status of the
payment of the settlement amount. Employee assumes full and sole responsibility
for any tax consequences related to the settlement amount. Employee understands
and agrees to indemnify and hold harmless the ClearOne Released Parties from
any
taxes, assessments, withholding obligations, penalties or interest payments
that
they may incur at any time by reason of demand, suit or proceeding brought
against them for any taxes or assessments or withholdings arising out of the
payment of the settlement amount. Employee acknowledges he or she has been
fully
compensated by the terms of this Agreement for releasing the Released
Claims.
3. (a)
ClearOne Communications shall indemnify
and defend Angelina Beitia (“Indemnitee”) to the fullest extent permitted by the
Utah Revised Business Corporation Act (as the same exists on the date hereof)
if
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that Indemnitee
is or was an officer, employee or agent of the Company or a subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while
an
officer, employee or agent or by reason of the fact that Indemnitee is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including reasonable attorneys' fees), judgments, fines and
amounts paid in settlement (if such settlement is approved in advance by the
Company, which approval shall not be unreasonably withheld) actually and
reasonably incurred by Indemnitee in connection with such action, suit or
proceeding. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo
contendere or
its
equivalent, shall not, of itself, create a presumption (i) that Indemnitee
did
not act in good faith and in a manner which Indemnitee reasonably believed
to be
in the best interests of the Company, or (ii) with respect to any criminal
action, suit or proceeding, that Indemnitee had reasonable cause to believe
that
Indemnitee's conduct was unlawful.
437423v1
2
(b)
The
Company shall, to the fullest extent permitted by the Utah Revised Business
Corporation Act (as the same exists on the date hereof) advance all reasonable
expenses incurred by Indemnitee in connection with the investigation, defense,
settlement or appeal of any civil or criminal action, suit or proceeding
referenced in subsection (a). Indemnitee hereby undertakes to repay such amounts
advanced only if, and to the extent that, it shall ultimately be determined
that
Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advances to be made hereunder shall be paid by the Company to
Indemnitee within thirty (30) days following delivery of a written request
therefor by Indemnitee to the Company.
(c)
Indemnitee shall, as a condition precedent to her right to be indemnified or
be
advanced expenses under this Agreement, give the Company notice in writing
as
soon as practicable of any claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at
the
address for its principal executive offices (or such other address as the
Company shall designate in writing to Indemnitee). In addition, Indemnitee
shall
give the Company such information and cooperation as it may reasonably require
and as shall be within Indemnitee's power.
(d)
If,
at the time of the receipt of a notice of a claim pursuant to subsection 3(b)
of
this Agreement, the Company has director and officer liability insurance in
effect, the Company shall give prompt notice of the commencement of such action,
suit or proceeding to the insurers in accordance with the procedures set forth
in the respective policies. The Company shall thereafter take all necessary
or
desirable action to cause such insurers to pay, on behalf of the Indemnitee,
all
amounts payable as a result of such action, suit or proceeding in accordance
with the terms of such policies.
4. Employee
shall not pursue, or authorize anyone on his or her behalf to pursue, the
Released Claims in any way in any court. Employee represents that he or she
has
not filed and there is not pending with any governmental agency or any state
or
federal court, any other claims, complaints, charges, or lawsuits of any kind
against the ClearOne Released Parties. Employee agrees that he or she will
not
make any filings with any court at any time hereafter for any matter, claim
or
incident, known or unknown, which occurred or arose out of occurrences on or
prior to the date of this Agreement; provided, however, this shall not limit
the
Parties from filing a lawsuit for the sole purpose of enforcing their rights
under this Agreement. Each of the Parties shall bear their own costs and
attorneys' fees in this dispute.
437423v1
3
5.
Employee hereby waives, releases, remises and discharges each and every one
of
the ClearOne Released Parties from liability with respect to the Released
Claims. Employee acknowledges that he or she understands he or she is prohibited
from any further relief on the Released Claims. Employee hereby promises and
covenants never to institute any suit or action at law or in equity against
the
ClearOne Released Parties regarding or relating to the Released Claims.
Specifically and without limitation, Employee understands and agrees that he
or
she is waiving and forever discharging the ClearOne Released Parties from any
and all claims, causes of action or complaints he or she may have or have ever
had, which have or may have arisen prior to the execution of this
Agreement.
6. Employee
represents and warrants that he or she is the sole owner of the Released Claims,
that the Released Claims have not been assigned, transferred, or disposed of
in
fact, by operation of law or in any manner whatsoever, and that he or she has
the full right and power to grant, execute and deliver the full and complete
releases, undertakings, and agreements herein contained.
7. Employee
agrees that the existence and terms of this Agreement shall be and remain
confidential. Employee acknowledges that this confidentiality provision is
an
essential element of the consideration he provides to ClearOne for entering
into
this Agreement. Therefore, Employee agrees not to discuss or describe any
information concerning ClearOne, the circumstances of the ending of Employee's
employment with ClearOne or the existence of the terms of this Agreement to
anyone, except as required by law or permitted herein.
8. Employee
reaffirms and agrees to observe and abide by the terms of the Confidentiality
and Invention Assignment Agreement (“Confidentiality Agreement”) he or she
signed with ClearOne. Employee certifies and represents that he or she has
fully
complied with all terms of the Confidentiality Agreement to date and has
returned to ClearOne all records or documents or other property of ClearOne
within his or her possession. Employee understands that his or her receipt
of
the consideration provided under this Agreement is expressly conditioned on
Employee’s compliance with the obligations in this paragraph.
9. Employee
agrees to forfeit all rights and claims to ClearOne stock options granted at
any
time prior to June 30, 2004.
10. Employee
agrees not to disparage, orally or in writing, ClearOne, its officers,
employees, management, operations, products, designs, or any other aspects
of
ClearOne’s affairs to any third person or entity.
11. Employee
agrees that for one year following Employee’s separation from employment with
ClearOne, Employee shall not, directly or indirectly, in any capacity (including
but not limited to, as an individual, a sole proprietor, a member of a
partnership, a stockholder, investor, officer, or director of a corporation,
an
employee, agent, associate, or consultant of any person, firm or corporation
or
other entity) hire any person from, attempt to hire any person from, or solicit,
induce, persuade, or otherwise cause any person to leave his or her employment
with ClearOne.
437423v1
4
12.
Employee
agrees that for one year following Employee’s separation from employment with
ClearOne, Employee shall not, directly or indirectly, in any capacity, solicit
the business of any customer of ClearOne except on behalf of ClearOne, or
attempt to induce any customer of ClearOne to cease or reduce its business
with
ClearOne; provided that following Employee’s separation from employment with
Company he or she may solicit a customer of ClearOne to purchase goods or
services that do not compete directly or indirectly with those then offered
by
ClearOne.
13. Any
breach of Employee’s obligations under this Agreement shall, in addition to all
other remedies available to ClearOne, result in the immediate release of
ClearOne from any obligations it has to provide further payments under this
Agreement. In addition, ClearOne may pursue such additional legal or equitable
remedies as may be available to it.
14. This
Agreement does not constitute and shall not be construed as an admission by
ClearOne of any breach of any alleged agreements or duties, or of any wrongdoing
toward Employee or any other person, including any alleged breach of contract
or
violation of any federal, state, or local law, regulation, or ordinance.
ClearOne specifically disclaims any liability to Employee for wrongdoing of
any
kind.
15. The
Parties agree that this Agreement may be used in evidence in a subsequent
proceeding in which any of the Parties alleges a breach of this
Agreement.
16. The
parties shall attempt in good faith to resolve any dispute arising out of or
relating to this Agreement by negotiation. The parties recognize that
irreparable injury to ClearOne will result from a material breach of this
Agreement, and that monetary damages will be inadequate to rectify such injury.
Accordingly, notwithstanding anything to the contrary, ClearOne shall be
entitled to one or more preliminary or permanent orders: (i) restraining or
enjoining any act which would constitute a material breach of this Agreement,
and (ii) compelling the performance of any obligation which, if not performed,
would constitute a material breach of this Agreement, and to attorney’s fees in
connection with any such action
17. Employee
affirms he or she is not relying on any representations or statements made
by
the ClearOne Released Parties which are not specifically included in this
Agreement. Employee acknowledges he or she has been informed in writing by
this
Agreement that he or she has the right to consult with legal counsel regarding
this release and confirms Employee has consulted with counsel to the extent
desired concerning the meaning and consequences of this Agreement.
18. This
Agreement constitutes the entire agreement between the Parties with relation
to
the subject matter hereof. Any prior negotiations or correspondence relating
to
the subject matter hereof shall be deemed to have merged into this Agreement
and
to the extent inconsistent herewith shall be deemed to be of no force or
effect.
19. This
Agreement may be executed in any number of counterparts, each of which when
executed and delivered shall be an original, but all of such counterparts shall
constitute one and the same instrument.
437423v1
5
20. This
Agreement shall be interpreted and enforced in accordance with the laws of
the
State of Utah, and/or when applicable, of the United States. By entering into
this Agreement, the Parties submit themselves and their principals individually
to personal jurisdiction in the courts in the State of Utah and agree that
Utah
is the only appropriate venue for any action brought to interpret or enforce
any
provision of this Agreement, or which may otherwise arise under or relate to
the
subject matter of this Agreement.
21. The
provisions of this Agreement are severable, and if any part of it is found
to be
unenforceable, the other parts and/or paragraphs shall remain fully valid and
enforceable. Should any provisions of this Agreement be determined by any court
or administrative body to be invalid, the validity of the remaining provisions
is not affected thereby and the invalidated part shall be deemed not a part
of
this Agreement. Any court or administrative body shall construe and interpret
this Agreement as enforceable to the full extent available under applicable
law.
This Agreement shall survive the termination of any arrangements contained
in
it.
22. Employee
acknowledges and understands this is a legal contract and that he or she signs
this Agreement knowingly, freely and voluntarily and has not been threatened,
coerced or intimidated into making the same. Employee acknowledges that he
or
she has had ample and reasonable time to consider this Agreement and the effects
and import of it and that he or she has fully dwelt on it in his or her mind
and
has had such counsel and advice, legal or otherwise, as Employee desires in
order to make this Agreement. EMPLOYEE, BY SIGNING THIS AGREEMENT, ACKNOWLEDGES
IT CONTAINS A RELEASE OF KNOWN AND UNKNOWN CLAIMS. Employee has read and fully
considered this Agreement and understands and desires to enter into it. The
terms of this agreement were derived through mutual compromise and are fully
understood. Employee acknowledges that he or she has been offered at least
twenty one (21) days to consider the impact of this Agreement and its release
of
his or her rights to bring suit against the ClearOne Released Parties and after
due consideration has decided to enter into this Agreement at this time.
Employee further understands that he or she may revoke this Agreement for a
period of up to seven (7) days following signature and execution of the same.
This Agreement shall not become effective or enforceable until the revocation
period has expired. Any revocation within this period must be signed and
submitted in writing to the undersigned representative of ClearOne and must
state, "I hereby revoke my acceptance of the Agreement." Employee understands
that if he or she revokes this Agreement, he or she is not entitled to receive
the consideration provided by this Agreement.
437423v1
6
Employee
has until Thursday, August 5, 2004 to accept terms and conditions by signing
below. If Employee does not accept such terms and conditions by such date,
this
offer shall expire at that
time.
IN
WITNESS WHEREOF, the Parties have executed this Agreement as of the date first
set forth above.
EMPLOYEE
/s/
Angelina
Beitia
CLEARONE
COMMUNICATIONS CORP.
/s/
DeLonie N.
Call
DeLonie
N. Call
Vice
President, Human Resources
Exhibit
14.1
CLEARONE
COMMUNICATIONS, INC.
CODE
OF ETHICS FOR DIRECTORS, OFFICERS AND EMPLOYEES
ClearOne
Communications, Inc. (the “Company”) has policies and procedures applicable to
all directors, officers and employees of the Company (the “Policies and
Procedures”). In addition to the Policies and Procedures, the Company has
adopted the following Code of Ethics that applies to all directors, officers
and
employees of the Company:
| 1. |
The
directors, officers and employees are responsible for full, fair,
accurate, timely and understandable disclosure in the periodic reports
required to be filed by the Company with the SEC. It is the responsibility
of all directors, officers and employees to promptly bring to the
attention of the Board of Directors any material information of which
they
may become aware that affects the disclosures made by the Company
in its
public filings.
|
| 2. |
The
directors, officers and employees shall promptly bring to the attention
of
the Board of Directors any information they may have concerning (a)
significant deficiencies in the design or operation of internal controls
which could adversely affect the Company’s ability to record, process,
summarize and report financial data or (b) any fraud, whether or
not
material, that involves management or other employees who have a
significant role in the Company’s financial reporting, disclosures or
internal controls.
|
| 3. |
The
directors, officers and employees shall promptly bring to the attention
of
the CEO and to the Board of Directors any information they may have
concerning any violation of the Policies and Procedures, including
any
actual or apparent conflicts of interest between personal and professional
relationships, involving any management or other employees who have
a
significant role in the Company’s financial reporting, disclosures or
internal controls.
|
| 4. |
The
directors, officers and employees shall promptly bring to the attention
of
the CEO and to the Board of Directors any information they may have
concerning evidence of a material violation of the securities or
other
laws, rules or regulations applicable to the Company and the operation
of
its business, by the Company or any agent thereof, or of violation
of the
Policies and Procedures or of this Code of
Ethics.
|
| 5. |
The
Board of Directors shall determine, or designate appropriate persons
to
determine, appropriate actions to be taken in the event of violations
of
the Policies and Procedures or of this Code of Ethics by the directors,
officers or employees of the Company. Such actions shall be reasonably
designed to deter wrongdoing and to promote accountability for adherence
to the Policies and Procedures and to these additional procedures,
and
shall include written notices to the individual involved that the
Board
has determined that there has been a violation, censure by the Board,
demotion or re-assignment of the individual involved, suspension
with or
without pay or benefits (as determined by the Board) and termination
of
the individual’s employment. In determining what action is appropriate in
a particular case, the Board of Directors or such designee shall
take into
account all relevant information, including the nature and severity
of the
violation, whether the violation was a single occurrence or repeated
occurrences, whether the violation appears to have been intentional
or
inadvertent, whether the individual in question had been advised
prior to
the violation as to the proper course of action and whether or not
the
individual in question had committed other violations in the past.
|
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(s) 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(s) 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:
August 18, 2005
|
/s/
Zeynep Hakimoglu
|
|
Zeynep
Hakimoglu
|
|
|
President
and Chief Executive Officer
|
EXHIBIT
31.2
CERTIFICATION
I,
Donald
Frederick, 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(s) 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(s) 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:
August 18, 2005
|
/s/
Donald Frederick
|
|
Donald
Frederick
|
|
|
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, 2003,
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:
August 18, 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,
Donald
Frederick, 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, 2003,
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:
August 18, 2005
|
/s/
Donald Frederick
|
|
Donald
Frederick
|
|
|
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.
Exhibit
99.1
CLEARONE
COMMUNICATIONS, INC. BOARD OF DIRECTORS
AUDIT
COMMITTEE CHARTER
| I. |
Purpose
and Authority
|
The
Audit
Committee (the "Committee") of the Board of Directors (the "Board") of ClearOne
Communications, Inc. ("ClearOne"):
(a) assists
the Board in fulfilling its responsibilities for general oversight of: (1)
ClearOne's financial reporting processes and the audit of ClearOne's financial
statements, including the integrity of ClearOne's financial statements, (2)
ClearOne's compliance with legal and regulatory requirements, (3) the
independent auditors' qualifications and independence, (4) the performance
of
ClearOne's independent auditors, and (5) risk assessment and risk
management;
(b) prepares
the report required by the proxy rules of the Securities and Exchange Commission
(the "SEC") to be included in ClearOne's annual proxy statement;
and
(c) has
the
additional duties and responsibilities set forth in Section IV
below.
The
Committee has the authority to obtain advice and assistance from outside legal,
accounting or other advisors as the Committee deems necessary to carry out
its
duties, and the Committee shall receive appropriate funding, as determined
by
the Committee, from ClearOne for payment of compensation to the outside legal,
accounting or other advisors employed by the Committee.
| II. |
Membership
|
The
Committee shall consist of at least three directors, each of whom shall meet
the
independence and experience requirements of the applicable stock exchange
listing standards, as determined by the Board. In particular, the Chairman
of
the Audit Committee shall have accounting or related financial management
experience. In addition, no Committee member may have participated in the
preparation of the financial statements of ClearOne or any of ClearOne's current
subsidiaries at any time during the past three years. The members of the Audit
Committee shall be appointed by the Board.
| III. |
Meeting
and Procedures
|
The
Committee shall convene at least six times each year, with additional meetings
called as the Committee deems appropriate. The Committee Chair is responsible
for the agenda, including input from management, staff and other Committee
and
Board members as appropriate. A majority of the Committee members shall be
present to constitute a quorum for the transaction of the Committee's business.
The Committee shall meet regularly in separate executive sessions and also
in
private sessions with management and the independent auditors to facilitate
full
communication. The Committee shall be given open access to the Chairman of
the
Board, ClearOne executives and independent auditors, as well as ClearOne’s
books, records, facilities and other personnel.
| IV. |
Duties
and Responsibilities
|
The
Committee shall:
| 1. |
Review
and reassess annually the adequacy of this charter and submit the
charter
for approval of the full Board. The Committee also shall conduct
an annual
self valuation of the Committee's performance and
processes.
|
| 2. |
Appoint,
evaluate and compensate the independent auditors, which shall report
directly to the Committee, and oversee the rotation of the independent
auditors' lead audit and concurring partners at least once every
five
years and the rotation of other audit partners at least once every
seven
years, with applicable time-out periods, in accordance with SEC
regulations. The Committee shall determine whether to retain or,
if
appropriate, terminate the independent auditors. The Committee is
responsible for recommending the independent auditors for approval
by the
stockholders, if appropriate.
|
| 3. |
Review
and approve in advance the scope of the fiscal year's independent
audit
and the audit fee, establish policies for the independent auditors'
activities and any fees beyond the core audit, approve in advance
all
non-audit services to be performed by the independent auditors that
are
not otherwise prohibited by law and associated fees, and monitor
the usage
and fees paid to the independent auditors. The Committee may delegate
to
the Chair of the Committee the authority, with agreed limits, to
pre-approve non-audit services not prohibited by law to be performed
by
the independent auditors. The Chair shall report any decisions to
pre-approve such services to the full Committee at its next
meeting.
|
| 4. |
Review
and discuss with the independent auditors their annual written statement
delineating all relationships or services between the independent
auditors
and ClearOne, or any other relationships or services that may impact
their
objectivity and independence.
|
| 5. |
Set
clear hiring policies for employees or former employees of the independent
auditors, and monitor compliance with such
policies.
|
| 6. |
Review
with management and the independent
auditors:
|
| (a) |
ClearOne's
annual audited and quarterly financial statements, including ClearOne's
disclosures in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," prior to being
published;
|
| (b) |
the
results of the independent auditors' audit and the independent auditors'
opinion on the annual financial
statements;
|
| (c) |
the
independent auditors' judgments on the quality, not just the
acceptability, and consistent application of ClearOne's accounting
principles, the reasonableness of significant judgments, clarity
of
disclosures and underlying estimates in the financial
statements;
|
| (d) |
changes
in accounting principles or application thereof, significant judgment
areas, significant and complex transactions and off-balance sheet
structures, if any; and
|
| (e) |
any
disagreements between management and the independent auditors, about
matters that individually or in the aggregate could be significant
to
ClearOne's financial statements or the independent auditors' report,
and
any serious difficulties the independent auditors encountered in
dealing
with management related to the performance of the
audit.
|
| 7. |
Recommend
to the Board whether the audited financial statements should be included
in ClearOne's Annual Report on Form 10-K, before the report is
released.
|
| 8. |
Prepare
the report required by the rules of the SEC to be included in the
Company’s annual proxy statement.
|
| 9. |
Discuss
earnings press releases, as well as corporate disclosure policies
with
respect to financial information and earnings guidance provided to
analysts and ratings agencies.
|
| 10. |
At
least annually, obtain from and review a report by the independent
auditors describing (a) the independent auditors' internal quality
control
procedures, and (b) any material issues raised by the most recent
internal
quality-control review, or peer review, or by any governmental or
professional inquiry or investigation within the preceding five years
regarding any audit performed by the independent auditors, and any
steps
taken to deal with any such issues.
|
| 11. |
Review
the adequacy and effectiveness of ClearOne's disclosure controls
and
procedures.
|
| 12. |
Review
the adequacy and effectiveness of ClearOne's internal controls, including
any significant deficiencies in such controls and significant changes
or
material weaknesses in such controls reported by the independent
auditors
or management, and any fraud, whether or not material, that involves
management or other ClearOne employees who have a significant role
in such
controls.
|
| 13. |
Review
the adequacy and effectiveness of ClearOne's information security
policies
and the internal controls regarding information
security.
|
| 14. |
Review
with management the results of its review of compliance with applicable
laws and regulations and ClearOne's Standards of Business Conduct,
and
review with management the results of its review of compliance with
applicable listing standards.
|
| 15. |
Assure
that procedures are established for the receipt, retention and treatment
of complaints on accounting, internal accounting controls or auditing
matters, as well as for confidential, anonymous submissions by ClearOne's
employees of concerns regarding questionable accounting or auditing
matters and compliance with the Standards of Business
Conduct.
|
| 16. |
Receive
and, if appropriate, respond to attorneys' reports of evidence of
material
violations of securities laws and breaches of fiduciary duty and
similar
violations of U.S. or state law.
|
| 17. |
Review
significant risks or exposures relating to litigation and other
proceedings and regulatory matters that may have a significant impact
on
ClearOne's financial statements.
|
| 18. |
Review
the results of significant investigations, examinations or reviews
performed by regulatory authorities and management's
response.
|
| 19. |
Review
and approve all "related party transactions," as defined in applicable
SEC
rules.
|
| 20. |
Obtain
reports from management and the independent auditor that ClearOne’s
subsidiary/foreign affiliated entities are in conformity with applicable
legal requirements and ClearOne’s Code of Conduct, including disclosures
of insider and affiliated party
transactions.
|
| 21. |
Conduct
or authorize investigations into any matters within the Committee's
scope
of responsibilities.
|
| 22. |
Meet
at least quarterly with the chief financial officer and the independent
auditor in separate executive
sessions.
|
| 23. |
Consider
such other matters regarding ClearOne's financial affairs, its controls,
and the independent audit of ClearOne as the Committee, in its discretion,
may determine to be advisable.
|
| 24. |
Report
regularly to the Board with respect to the Committee's
activities.
|
While
the
Audit Committee has the responsibilities and powers set forth in this Charter,
it is not the duty of the Audit Committee to plan or conduct audits or to
determine that the Company’s financial statements are complete and accurate and
are in accordance with generally accepted accounting principles. This is the
responsibility of management and the independent auditor. Nor is it the duty
of
the Audit Committee to conduct investigations, to resolve disagreements, if
any,
between management and the independent auditor or to assure compliance with
laws
and regulations and ClearOne’s Code of Conduct.