UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2002
--------------
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 (IRS Employer
incorporation or organization) Identification No.)
1825 Research Way, Salt Lake City, Utah 84119
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 975-7200
--------------
-----------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act 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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class of Common Stock May 1, 2002
$0.001 par value 10,269,117 shares
CLEARONE COMMUNICATIONS, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 2002 (unaudited) and June 30, 2001............... 3
Consolidated Statements of Income
Three Months Ended March 31, 2002 and
2001 (unaudited)........................................... 4
Consolidated Statements of Income
Nine Months Ended March 31, 2002 and
2001 (unaudited)........................................... 5
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2002 and
2001 (unaudited)........................................... 6
Notes to Consolidated Financial Statements.................... 7
Item 2. Management's Discussion and Analysis of FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................14
Item 3. Qualitative and Quantitative Disclosure about
Market Risk...................................................21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................22
2
PART I - FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CLEARONE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
------------------------------
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................ $ 23,168,321 $ 6,852,243
Accounts receivable, net................................. 14,024,584 7,212,970
Note receivable - current portion........................ 167,459 71,423
Inventory................................................ 5,792,134 4,132,034
Deferred tax assets...................................... 247,402 247,402
Prepaid expenses......................................... 419,466 779,648
------------- -------------
Total current assets................................. 43,819,366 19,295,720
Property and equipment, net................................... 3,992,612 3,696,615
Goodwill, net................................................. 2,897,513 2,633,732
Note receivable - long term portion........................... 1,549,019 1,716,477
Other intangible assets, net.................................. 5,517,448 181,722
Deposits and other assets..................................... 73,301 73,357
------------- -------------
Total assets......................................... $ 57,849,259 $ 27,597,623
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 1,578,877 $ 568,782
Accrued compensation and other benefits.................. 384,089 410,416
Income tax payable....................................... 472,192 421,749
Other accrued expenses................................... 935,963 719,112
Current portion of capital lease obligations............. 60,614 181,827
------------- -------------
Total current liabilities............................ 3,431,735 2,301,886
Capital lease obligations..................................... 15,772 48,227
Deferred tax liability........................................ 746,000 746,000
------------- -------------
Total liabilities.................................... 4,193,507 3,096,113
Shareholders' equity:
Common stock, 50,000,000 shares authorized,
par value $.001, 10,179,039 and
8,617,978 shares issued and outstanding
at March 31, 2002 and June 30, 2001, respectively...... 10,179 8,618
Additional paid-in capital............................... 33,140,847 8,962,699
Retained earnings........................................ 20,504,726 15,530,193
------------- -------------
Total shareholders' equity........................... 53,655,752 24,501,510
------------- -------------
Total liabilities and shareholders' equity........... $ 57,849,259 $ 27,597,623
============= =============
See accompanying notes
3
CLEARONE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
------------------------------------
2002 2001
---- ----
Product sales..................................................... $ 10,184,067 71.9% $ 6,980,329 68.4%
1-800 LETS MEET(R)sales........................................... 3,987,089 28.1% 3,232,004 31.6%
------------- ---- ------------- ----
Total net sales.............................................. 14,171,156 100.0% 10,212,333 100.0%
Cost of goods sold - products..................................... 4,012,172 39.4% 2,630,342 37.7%
Cost of goods sold - 1-800 LETS MEET(R)........................... 1,574,667 39.5% 1,697,645 52.5%
------------- ---- ------------- ----
Total cost of goods sold..................................... 5,586,839 39.4% 4,327,987 42.4%
------------- ---- ------------- ----
Gross profit...................................................... 8,584,317 60.6% 5,884,346 57.6%
Operating expenses:
Marketing and selling........................................ 2,763,581 19.5% 1,932,327 18.9%
General and administrative................................... 1,542,983 10.9% 1,133,525 11.1%
Product development.......................................... 1,122,973 7.9% 720,426 7.1%
------------- ---- ------------- ----
Total operating expenses................................. 5,429,537 38.3% 3,786,278 37.1%
------------- ---- ------------- ----
Operating income......................................... 3,154,780 22.3% 2,098,068 20.5%
Other income (expense):
Interest income.............................................. 135,206 1.0% 100,360 1.0%
Interest expense............................................. (8,370) (0.1)% (9,008) (0.1)%
Other, net................................................... 18,230 0.1% 492 0.0%
Loss on foreign currency transactions........................ (216,436) (1.5)% (22,567) (0.2)%
------------- ---- ------------- ----
Total other income (expense)............................. (71,370) (0.5)% 69,277 0.7%
------------- ---- ------------- ----
Income from continuing operations before income taxes............. 3,083,410 21.8% 2,167,345 21.2%
Provision for income taxes........................................ 1,012,464 7.2% 808,313 7.9%
------------- ---- ------------- ----
Income from continuing operations............................ 2,070,946 14.6% 1,359,032 13.3%
Discontinued operations:
Income from discontinued operations, net of applicable taxes
of $143,953 in 2001.......................................... -- 241,981
------------- -------------
Net income............................................... $ 2,070,946 $ 1,601,013
============= =============
Basic earnings per common share from continuing operations........ $ 0.20 $ 0.16
Diluted earnings per common share from continuing operations...... $ 0.20 $ 0.15
Basic earnings per common share from discontinued operations...... $ 0.00 $ 0.03
Diluted earnings per common share from discontinued operations.... $ 0.00 $ 0.03
Basic earnings per common share................................... $ 0.20 $ 0.19
Diluted earnings per common share................................. $ 0.20 $ 0.18
See accompanying notes
4
CLEARONE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended
March 31,
------------------------------------
2002 2001
---- ----
Product sales..................................................... $ 26,349,104 69.4% $ 21,039,045 72.0%
1-800 LETS MEET(R)sales........................................... 11,624,734 30.6% 8,186,667 28.0%
------------- ---- ------------- ----
Total net sales.............................................. 37,973,838 100.0% 29,225,712 100.0%
Cost of goods sold - products..................................... 10,098,524 38.3% 7,860,535 37.4%
Cost of goods sold - 1-800 LETS MEET(R)........................... 5,127,409 44.1% 4,204,162 51.4%
------------- ---- ------------- ----
Total cost of goods sold..................................... 15,225,933 40.1% 12,064,697 41.3%
------------- ---- ------------- ----
Gross profit...................................................... 22,747,905 59.9% 17,161,015 58.7%
Operating expenses:
Marketing and selling........................................ 7,995,734 21.1% 5,755,899 19.7%
General and administrative................................... 4,101,769 10.8% 3,630,578 12.4%
Product development.......................................... 3,044,497 8.0% 1,760,921 6.0%
------------- ---- ------------- ----
Total operating expenses................................. 15,142,000 39.9% 11,147,398 38.1%
------------- ---- ------------- ----
Operating income......................................... 7,605,905 20.0% 6,013,617 20.6%
Other income (expense):
Interest income.............................................. 313,588 0.8% 278,592 1.0%
Interest expense............................................. (17,985) 0.0% (32,442) (0.1)%
Other, net................................................... 60,867 0.2% 17,950 0.1%
Loss on foreign currency transactions........................ (217,282) (0.6)% (12,017) (0.1)%
------------- ---- ------------- ----
Total other income (expense)............................. 139,188 0.4% 252,083 0.9%
------------- ---- ------------- ----
Income from continuing operations before income taxes............. 7,745,093 20.4% 6,265,700 21.5%
Provision for income taxes........................................ 2,770,560 7.3% 2,360,303 8.1%
------------- ---- ------------- ----
Income from continuing operations............................ 4,974,533 13.1% 3,905,397 13.4%
Discontinued operations:
Income from discontinued operations, net of applicable taxes
of $455,188 in fiscal 2001................................... -- 765,156
------------- -------------
Net income............................................... $ 4,974,533 $ 4,670,553
============= =============
Basic earnings per common share from continuing operations........ $ 0.54 $ 0.45
Diluted earnings per common share from continuing operations...... $ 0.51 $ 0.43
Basic earnings per common share from discontinued operations...... $ 0.00 $ 0.09
Diluted earnings per common share from discontinued operations.... $ 0.00 $ 0.09
Basic earnings per common share................................... $ 0.54 $ 0.54
Diluted earnings per common share................................. $ 0.51 $ 0.52
See accompanying notes
5
CLEARONE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
---------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income from continuing operations....................................... $ 4,974,533 $ 3,905,397
Adjustments to reconcile net income from continuing operations
to net cash (used in) provided by continuing operating activities:
Depreciation and amortization of property and equipment.................. 909,795 771,751
Amortization of goodwill and other intangible assets..................... 581,792 201,471
Provision for bad debts.................................................. 46,423 468,199
Changes in operating assets and liabilities:
Accounts receivable................................................... (6,840,080) (2,380,123)
Inventory............................................................. (1,052,100) (1,403,196)
Income taxes.......................................................... 50,443 1,323,025
Other current assets.................................................. 474,319 129,502
Accounts payable and other accrued expenses........................... 770,888 (417,667)
------------ -------------
Net cash (used in) provided by continuing operating activities.... (83,987) 2,598,359
Cash flows from investing activities:
Purchases of property and equipment......................................... (1,184,063) (1,142,854)
Purchase of business........................................................ (6,505,686) (1,758,085)
Repayment of note receivable................................................ 71,422 --
------------ -------------
Net cash used in investing activities............................. (7,618,327) (2,900,939)
Cash flows from financing activities:
Proceeds from issuance of common stock...................................... 23,843,317 15,095
Exercise of employee stock options.......................................... 389,356 322,329
Repurchase of common stock.................................................. (52,964) --
Principal payments on capital lease obligations............................. (161,317) (188,040)
------------ -------------
Net cash provided by financing activities......................... 24,018,392 149,384
------------ -------------
Net increase (decrease) in cash from continuing operations...................... 16,316,078 (153,196)
Net cash flow from discontinued operations...................................... -- 819,817
Cash at the beginning of the year............................................... 6,852,243 5,374,996
------------ -------------
Cash at the end of the period................................................... $ 23,168,321 $ 6,041,617
============ =============
Supplemental disclosure of cash flow information:
Income taxes paid........................................................... $ (2,718,458) $ (2,230,000)
Interest paid............................................................... $ (17,985) $ (32,442)
Consideration paid in stock for purchase of business........................ $ -- $ 2,000,013
See accompanying notes
6
CLEARONE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
1. Basis of Presentation
Effective January 1, 2002, Gentner Communications Corp. changed its name to
ClearOne Communications, Inc. ClearOne began trading under the symbol CLRO on
March 15, 2002.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information, the instructions to Form 10-Q and Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in complete financial statements have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's 2001 Annual Report on Form 10-K.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS 141
establishes new standards for accounting and reporting requirements for business
combinations and supersedes APB Opinion No. 16, "Business Combinations" and SFAS
No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interest method is now prohibited. The statement applies to any
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001 or later, modifies the criteria for recognizing
intangible assets and expands disclosure requirements. The Company has adopted
this statement in accounting for the acquisition of Ivron Systems, Ltd. (Ivron)
as of October 3, 2001.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, "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. SFAS No. 142 provides guidance for testing goodwill and
intangible assets that will not be amortized for impairment. The amortization
provisions of Statement 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, companies are required to adopt Statement 142 in their
fiscal year beginning after December 15, 2001 (i.e., January 1, 2002 for
calendar year companies). The Company plans to adopt this statement on July 1,
2002 and, as such, the Company is continuing to evaluate the impact of this
statement on its financial statements. Unamortized goodwill was approximately
$2,898,000 as of March 31, 2002, of which $2,493,000 relates to the ClearOne
acquisition which occurred on July 1, 2000 and which will continue to be
amortized until June 30, 2002, and $405,000 relates to Ivron, which is not
amortized in accordance with the provisions of SFAS No. 142. Amortization of
goodwill was approximately $67,600 and $202,800 for the three and nine months
ended March 31, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations and Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that opinion). The Company is required to adopt SFAS No. 144
effective July 1, 2002. The Company is currently evaluating the impact of this
statement on its financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
2. Earnings Per Common Share
The following table sets forth the computation of basic and diluted net income
per share:
Three months ended
March 31,
---------
2002 2001
---- ----
Numerator:
Income from continuing operations.......................................... $ 2,070,946 $ 1,359,032
Income from discontinued operations........................................ -- 241,981
------------ ------------
Net income................................................................. $ 2,070,946 $ 1,601,013
============ ============
Denominator:
Denominator for basic net income per share - weighted average shares....... 10,158,894 8,610,375
Dilutive common stock equivalents using treasury stock method.............. 455,945 436,914
------------ ------------
Denominator for diluted net income per share - weighted average shares..... 10,614,839 9,047,289
============ ============
Basic net income per share:
Continuing operations...................................................... $ 0.20 $ 0.16
Discontinued operations.................................................... 0.00 0.03
------------ ------------
Basic net income per share...................................................... $ 0.20 $ 0.19
============ ============
Diluted net income per share:
Continuing operations...................................................... $ 0.20 $ 0.15
Discontinued operations.................................................... 0.00 0.03
------------ ------------
Diluted net income per share.................................................... $ 0.20 $ 0.18
============ ============
Nine months ended
March 31,
---------
2002 2001
---- ----
Numerator:
Income from continuing operations.......................................... $ 4,974,533 $ 3,905,397
Income from discontinued operations........................................ -- 765,156
------------ ------------
Net income................................................................. $ 4,974,533 $ 4,670,553
============ ============
Denominator:
Denominator for basic net income per share - weighted average shares....... 9,246,512 8,581,738
Dilutive common stock equivalents using treasury stock method.............. 509,397 444,444
------------ ------------
Denominator for diluted net income per share - weighted average shares..... 9,755,909 9,026,182
============ ============
Basic net income per share:
Continuing operations...................................................... $ 0.54 $ 0.45
Discontinued operations.................................................... 0.00 0.09
------------ ------------
Basic net income per share...................................................... $ 0.54 $ 0.54
============ ============
Diluted net income per share:
Continuing operations...................................................... $ 0.51 $ 0.43
Discontinued operations.................................................... 0.00 0.09
------------ ------------
Diluted net income per share.................................................... $ 0.51 $ 0.52
============ ============
3. Comprehensive Income
Comprehensive income for the three-month and nine-month periods ended March 31,
2002 and 2001 was equal to net income.
4. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
5. Inventory
Inventory is summarized as follows:
(Unaudited)
March 31, June 30,
2002 2001
---- ----
Raw Materials $ 3,469,206 $ 2,500,098
Work in progress 551,140 195,149
Finished Goods 1,771,788 1,436,787
------------- -------------
Total inventory $ 5,792,134 $ 4,132,034
============= =============
Total inventory is net of a reserve for obsolete and slow-moving inventory of
$419,000 at March 31, 2002 and $226,000 at June 30, 2001.
6. Stock Options
The following table shows the changes in stock options outstanding.
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Options outstanding as of June 30, 2001............ 1,750,798 $ 8.37
Options granted.................................... 250,000 $ 11.47
Options exercised.................................. (18,000) $ 11.15
Options expired & canceled......................... (25,000) $ 14.00
------------- -------
Options outstanding as of September 30, 2001....... 1,957,798 $ 8.67
Options granted.................................... 52,000 $ 28.20
Options exercised.................................. (25,069) $ 7.56
Options expired & canceled......................... (223,750) $ 14.18
------------- -------
Options outstanding as of December 31, 2001........ 1,760,979 $ 8.43
Options granted.................................... 60,750 $ 15.89
Options exercised.................................. (22,500) $ 2.28
Options expired & canceled......................... (89,101) $ 10.69
------------- -------
Options outstanding as of March 31, 2002........... 1,710,128 $ 8.69
============ =======
7. Segment Reporting
As a result of the Company's April 2001 sale of its remote control product line,
the Company has changed how it evaluates its operations internally, resulting in
a change in its reported segments from those reported in its Forms 10-K and
10-Qs for fiscal 2001. Subsequent to the disposal, the Company operates in two
distinct segments - Products and 1-800 LETS MEET(R). The Products segment
includes products for conferencing; sound reinforcement; broadcast telephone
interface; assistive listening applications; and, technical services related to
the Company's products. The 1-800 LETS MEET(R) segment includes
operator-assisted conferencing; on-demand, reservationless conference calling;
Webconferencing; and, audio and video streaming. Information for the prior years
has been reclassified to conform to this new method of evaluating segments and
to show continuing and discontinued operations.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies included in the
Company's 2001 Annual Report on Form 10-K.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company's reportable 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 distinct
market and distribution channels.
The following table summarizes the segment information:
1-800 LETS Company
Products MEET(R) Totals
-------- ------- ------
Quarter Ended March 31, 2002:
- ----------------------------
Net sales $ 10,184,067 $ 3,987,089 $ 14,171,156
Cost of goods sold 4,012,172 1,574,667 5,586,839
------------ ----------- ------------
Gross profit 6,171,895 2,412,422 8,584,317
Marketing and selling 1,862,725 900,856 2,763,581
General and administrative 940,738 602,245 1,542,983
Product development 1,122,973 - 1,122,973
------------ ----------- ------------
Total operating expenses 3,926,436 1,503,101 5,429,537
Operating income 2,245,459 909,321 3,154,780
Other income (expense) (71,370)
------------
Income from continuing operations
before income taxes 3,083,410
Provision for income taxes (1,012,464)
------------
Net income from continuing operations $ 2,070,946
============
Quarter Ended March 31, 2001:
- ----------------------------
Net sales $ 6,980,329 $ 3,232,004 $ 10,212,333
Cost of goods sold 2,630,342 1,697,645 4,327,987
------------ ----------- ------------
Gross profit 4,349,987 1,534,359 5,884,346
Marketing and selling 1,284,180 648,147 1,932,327
General and administrative 644,122 489,403 1,133,525
Product development 720,426 - 720,426
------------ ----------- ------------
Total operating expenses 2,648,728 1,137,550 3,786,278
Operating income 1,701,260 396,808 2,098,068
Other income 69,277
------------
Income from continuing operations
before income taxes 2,167,345
Provision for income taxes (808,313)
------------
Income from continuing operations 1,359,032
Income from discontinued operations,
net of applicable taxes of $143,953 241,981
------------
Net income $ 1,601,013
============
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
1-800 LETS Company
Products MEET(R) Totals
-------- ------- ------
Year-to-Date At March 31, 2002:
Net sales $ 26,349,104 $ 11,624,734 $ 37,973,838
Cost of goods sold 10,098,524 5,127,409 15,225,933
------------ ------------ ------------
Gross profit 16,250,580 6,497,325 22,747,905
Marketing and selling 5,516,525 2,479,209 7,995,734
General and administrative 2,421,836 1,679,933 4,101,769
Product development 3,044,497 - 3,044,497
------------ ------------ ------------
Total operating expenses 10,982,858 4,159,142 15,142,000
Operating income 5,267,722 2,338,183 7,605,905
Other income 139,188
------------
Income from continuing operations
before income taxes 7,745,093
Provision for income taxes (2,770,560)
------------
Net income from continuing operations $ 4,974,533
============
Year-to-Date At March 31, 2001:
Net sales $ 21,039,045 $ 8,186,667 $ 29,225,712
Cost of goods sold 7,860,535 4,204,162 12,064,697
------------ ------------ ------------
Gross profit 13,178,510 3,982,505 17,161,015
Marketing and selling 3,865,200 1,890,699 5,755,899
General and administrative 2,492,406 1,138,172 3,630,578
Product development 1,760,921 - 1,760,921
------------ ------------ ------------
Total operating expenses 8,118,527 3,028,871 11,147,398
Operating income 5,059,983 953,634 6,013,617
Other income 252,083
------------
Income from continuing operations
before income taxes 6,265,700
Provision for income taxes (2,360,303)
------------
Income from continuing operations 3,905,397
Income from discontinued operations,
net of applicable taxes of $455,188 765,156
------------
Net income $ 4,670,553
============
8. Share Purchase Agreement for Ivron Systems, Ltd.
On October 3, 2001, the Company through its wholly owned subsidiary, Gentner
Ventures, Inc., purchased all of the issued and outstanding shares of Ivron
Systems, Ltd., of Dublin, Ireland ("Ivron"). Ivron was a privately-held
developer of video conferencing technology and equipment. Under the terms of the
original agreement, the shareholders of Ivron received approximately $6,000,000
at closing of the purchase. Further, under that agreement, after June 30, 2002,
each former Ivron shareholder would be entitled to receive approximately .08
shares of ClearOne's common shares for each Ivron share previously held by such
shareholder, provided that certain video product development contingencies were
achieved. That represented approximately 429,000 shares of ClearOne's common
stock. Thereafter, for the Company's completed fiscal years 2003 and 2004, the
former Ivron shareholders would be entitled to share in up to approximately
$17,000,000 of additional cash and stock consideration provided that certain
agreed upon earnings per share targets for the Company were achieved. As part of
11
the purchase, all outstanding options to purchase Ivron shares were cancelled in
consideration for an aggregate cash payment of $650,000, allocated among the
optionees on the basis of the number of options originally held by each such
optionee. In addition, former optionees of Ivron who remain with Ivron are
eligible to participate in a cash bonus program paid by Ivron, but based on the
combined performance of the Company and Ivron in fiscal years 2003 and 2004. The
maximum amount payable under this bonus program is up to approximately
$1,000,000.
The value of the total consideration paid, $6,650,000 in cash, was determined
based on arm's length negotiations between the Company and the Ivron
shareholders, that took into account a number of factors of the business
including historic revenues, operating history, products, intellectual property
and other factors. The Company also incurred approximately $315,000 of direct
acquisition costs.
As of the acquisition date, the Company acquired tangible assets consisting
primarily of accounts receivable, inventory, and property and equipment of
approximately $762,000. The Company assumed liabilities consisting primarily of
trade accounts payable, accrued compensation and other accrued liabilities of
approximately $437,000. The Company also acquired cash of approximately
$459,000.
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 may
not meet the intended product objectives established by the Company in its
original purchase negotiations. Originally, the Company expected to develop a
full line of videoconferencing products, including an installed video codec
product, based on the Ivron V-There(TM) technology platform. Given the results
of its analysis, the Company has now identified an opportunity to collaborate in
the development of a video codec, based on other readily-available technology,
specifically designed for the high-end, installed videoconferencing market, that
combines faster frames-per-second, built-in multipoint conferencing, and the
Company's high-quality audio. The negotiations were based on the results of an
analysis by the Company that although the Ivron platform is well-suited for the
lower- to mid-priced videoconferencing products, it is not as well-suited for an
installed video codec product. These negotiations resulted in an amendment to
the original October 3, 2001 purchase agreement.
The amendment, which was finalized on April 8, 2002, eliminates the earn-out
that the Ivron shareholders would have been entitled to receive after June 30,
2002 for approximately 429,000 shares and the $17 million earn-out in subsequent
years. Instead, upon meeting certain gross profit targets for the "V-There",
"Vu-Link" set top videoconferencing products, technologies, and variants and
sub-elements thereof (including licensed products), the former Ivron
shareholders may share in an earn-out of up to 109,000 shares of common stock of
the Company, issuable in four installments, on a quarterly basis, through July
15, 2003. Therefore, with the amendment, the total purchase price will now
include the original $6,650,000 in cash paid in October of 2001, the revised
earn-out of up to 109,000 shares, and the original bonus to be paid in 2003 and
2004 of up to $1 million for the former option holders of Ivron, based on
meeting certain performance targets.
Based on the modified purchase price determined under the terms of the
amendment, the Company has recorded intangible assets of $5,780,000 related to
developed technology and goodwill of $405,000. The useful lives and amounts of
the amortizable developed technology are 3 years for $135,000, 5 years for
$1,002,000, and 15 years for $4,643,000. Amortization expense of approximately
$379,000 has been recorded for the developed technology for the period from
October 3, 2001 to March 31, 2002. In accordance with SFAS No. 142, no
amortization expense has been recorded for goodwill.
The operations of Ivron are included in the statement of income for the period
from October 3, 2001 to March 31, 2002. The following pro forma combined
financial information reflects operations as if the acquisition of Ivron had
occurred as of July 1, 2000. The pro forma combined financial information is
presented for illustrative purposes only, does not purport to be indicative of
the Company's results of operations as of the date hereof, and is not indicative
necessarily of what the Company's actual results of operations would have been
had the acquisition been consummated on such date.
Three months ended
March 31,
---------
2002 2001
---- ----
Net sales from continuing operations........................... $ 14,171,156 $ 10,265,278
============ ============
Net income from continuing operations.......................... $ 2,070,946 $ 696,965
============ ============
Net income per share - basic from continuing operations........ $ 0.20 $ 0.08
Net income per share - dilutive from continuing operations..... $ 0.20 $ 0.08
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Nine months ended
March 31,
---------
2002 2001
---- ----
Net sales from continuing operations........................... $ 38,020,401 $ 29,780,657
============ ============
Net income from continuing operations.......................... $ 3,273,666 $ 1,586,328
============ ============
Net income per share - basic from continuing operations........ $ 0.35 $ 0.18
Net income per share - dilutive from continuing operations..... $ 0.34 $ 0.18
9. Stock Repurchase Program
During April 2001, the Company announced that its board of directors had
approved a stock repurchase program to purchase up to 500,000 shares of the
Company's common stock over the next six months on the open market or in private
transactions. During the fourth quarter of fiscal year 2001, the Company
repurchased 15,300 shares on the open market. During fiscal year 2002, the
Company repurchased 5,000 shares on the open market. All repurchased shares were
retired. The stock repurchase program expired in October 2001.
10. Private Placement
On December 11, 2001, the Company closed a private placement, which was
subsequently registered on Form S-3 with the Securities and Exchange Commission,
of 1,500,000 shares of common stock. Gross proceeds from the private placement
were $25,500,000, before costs and expenses associated with this transaction
which totaled approximately $1,664,000.
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 were valued at
approximately $1,556,000 using the Black Scholes method.
11. Definitive Merger Agreement to Acquire E.mergent
On January 21, 2002, the Company signed a definitive merger agreement to acquire
E.mergent, Inc. (Nasdaq: EMRT), a provider of video conferencing products and
related services. Under the terms of the agreement, E.mergent will merge into a
subsidiary of the Company. The Company will pay $7.3 million in cash and will
issue, or reserve for issuance upon the exercise of assumed stock options,
873,000 shares of the Company's common stock in exchange for all of E.mergent's
fully diluted equity, including all outstanding E.mergent stock options to be
assumed by the Company in connection with the merger. The actual amount of cash
and the Company's shares exchanged for each outstanding E.mergent share will
depend on the number of E.mergent shares and stock options outstanding at the
time of the merger. The transaction will be accounted for as a purchase.
Completion is subject to approval by E.mergent's stockholders and other closing
conditions.
Additional information about the proposed merger is available in the Company's
Form 8-K, filed with the Securities and Exchange Commission on February 6, 2002,
and the registration statement on Form S-4, which has been filed to register the
ClearOne common stock shares to be issued in the merger. Our registration
statements, Amendment 3 to Form S-4, was declared effective by the Securities
and Exchange Commission on May 7, 2002. The Company presently anticipates that,
if all conditions to the merger are satisfied, the merger may be completed
shortly after the E.mergent stockholder meeting, which is scheduled for May 31,
2002.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Effective January 1, 2002, we changed our name to ClearOne Communications, Inc.
We began trading under the symbol CLRO on March 15, 2002.
We develop, manufacture, market and distribute products and services for the
conferencing equipment, conferencing services, and broadcast markets. In the
fourth quarter of fiscal year 2001, we changed our reportable operating segments
to reflect how we evaluate our operating performance and allocate resources.
Prior to the fourth quarter of fiscal year 2001, our reportable segments
included RFM/Broadcast, Conferencing Products, Conferencing Services and Other.
On April 12, 2001, we sold the assets of the remote control portion of the
RFM/Broadcast division. Subsequent to this disposal, we report two segments -
Products and 1-800 LETS MEET(R). In the Products segment, we have applied our
core digital technology to the development of products for conferencing, sound
reinforcement, assistive listening and broadcast applications. During fiscal
2001, we introduced the PSR1212, the XAP(TM) 800, the ClearOne(R) conference
phone, and the VRC2500. As a result of our acquisition of Ivron Systems, Ltd.
("Ivron") on October 2001, we introduced the VuLink during the second quarter of
fiscal 2002. These new products contributed to a 45.9% increase in product-based
revenues in the third quarter of 2002 compared to the third quarter of fiscal
2001 and a 25.2% increase for the nine-month period ended March 31, 2002
compared to the nine-month period ended March 31, 2001. In the 1-800 LETS
MEET(R) segment, we provide operator-assisted conferencing; on-demand,
reservationless conference calling; Webconferencing; and audio and video
streaming. We focus on increasing sales in this segment by adding to our direct
sales force, and by engaging new resellers and new private label accounts. These
efforts contributed to a 23.4% increase in service-based revenues in the third
quarter of fiscal 2002 compared to the third quarter of fiscal 2001 and a 42.0%
increase for the nine-month period ended March 31, 2002 compared to the
nine-month period ended March 31, 2001. The 1-800 LETS MEET(R) segment includes
revenues and expenses from the conferencing service bureau called 1-800 LETS
MEET(R) as well as other private label business conducted by us.
Modified Purchase Agreement for Ivron Systems, Ltd.
As we previously announced, on October 3, 2001, we purchased all of the issued
and outstanding shares of Ivron. Ivron was, at the time of the purchase, a
privately-held developer of video conferencing technology and equipment with
executive offices in Dublin, Ireland. As a result of the acquisition, we
acquired a product already being sold by Ivron, the VuLink video conferencing
product and we anticipated that this acquisition would help position us to
develop a full-line of competitive video products including an installed video
codec product, based on the Ivron technology platform; enhance audio sales; and,
successfully enter the video conferencing market.
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 may not meet the
intended product objectives established in our original purchase negotiations.
Given the results of our analysis, we have now identified an opportunity to
collaborate in the development of a video codec, based on other
readily-available technology, specifically designed for the high-end, installed
videoconferencing market, that combines faster frames-per-second, built-in
multipoint conferencing, and our high-quality audio. The negotiations were based
on the results of an analysis by us that although the Ivron platform is
well-suited for the lower- to mid-priced videoconferencing products, it is not
as well-suited for an installed video codec product. These negotiations resulted
in an amendment to the original October 3, 2001 purchase agreement.
The amendment, which was finalized on April 8, 2002, eliminates the earn-out
that the Ivron shareholders would have been entitled to receive after June 30,
2002 for approximately 429,000 shares and the $17 million earn-out in subsequent
years. Instead, upon meeting certain gross profit targets for the "V-There",
"Vu-Link" set top videoconferencing products, technologies, and variants and
sub-elements thereof (including licensed products), the former Ivron
Shareholders may share in an earn-out of up to 109,000 shares of our common
stock, issuable in four installments, on a quarterly basis, through July 15,
2003. Therefore, with the amendment, the total purchase price will now include
the original $6.7 million in cash paid in October of 2001, the revised earn-out
of up to 109,000 shares, and the original bonus to be paid in 2003 and 2004 of
up to $1 million for the former option holders of Ivron, based on certain
performance targets.
As of the acquisition date, we acquired tangible assets consisting primarily of
accounts receivable, inventory, and property and equipment of approximately
$762,000. We assumed liabilities consisting primarily of trade accounts payable,
accrued compensation and other accrued liabilities of approximately $437,000. We
also acquired cash of approximately $459,000.
14
Based on the modified purchase price determined under the terms of the
amendment, we have recorded intangible assets of $5,780,000 related to developed
technology and goodwill of $405,000. These allocations were based upon the final
analysis by the independent financial consulting firm. The useful lives and
amounts of the amortizable developed technology are 3 years for $135,000, 5
years for $1,002,000, and 15 years for $4,643,000. Amortization expense of
approximately $379,000 has been recorded for the developed technology for the
period from October 3, 2001 to March 31, 2002. In accordance with SFAS No. 142,
no amortization expense has been recorded for goodwill.
Private Placement
On December 11, 2001, we closed a private placement of 1,500,000 shares of
common stock. Gross proceeds from the private placement were $25,500,000, before
costs and expenses associated with this transaction which totaled approximately
$1,664,000. We also filed a Form S-3 registration statement with the Securities
and Exchange Commission to allow the public resale of such shares. We plan to
use the proceeds from the private placement for general corporate purposes, the
funding of the proposed merger with E.mergent, Inc. described below, and the
funding of other future acquisitions in furtherance of our strategy of
considering suitable acquisitions to grow and diversify our business. 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 were valued at
approximately $1,556,000 using the Black Scholes method. See "Definitive Merger
Agreement to Acquire E.mergent".
Discontinued Operations
On April 12, 2001, we sold the assets of the remote control portion of the
RFM/Broadcast division to Burk Technology, Inc. of Littleton, MA ("Burk") for
$3.2 million, including $750,000 in cash at closing, and $1.75 million in the
form of a seven (7) year promissory note, with interest at the rate of nine
percent (9%), secured by a subordinate security interest in the personal
property of Burk. The gain associated with the note receivable is recognizable
for book purposes but not for tax purposes until cash is received. As such, we
have established a deferred tax liability for $511,000 in connection with this
deferred gain. In addition, up to $700,000 more is payable by Burk as a
commission over a period of up to seven years. The commission is based upon
future net sales of Burk over base sales established within the agreement. This
amount will be recognized as received. We realized a gain on the sale of
$1,220,024, net of applicable income taxes of $725,788.
Summary operating results of the discontinued operations are as follows:
Quarter Ended March 31,
--------------------------------
2002 2001
---- ----
Net sales................................................... $ - $ 731,358
Cost of goods sold.......................................... - 255,617
Marketing and selling....................................... - 66,418
Product development......................................... - 23,389
------------ ------------
Income from discontinued operations before income taxes..... - 385,934
Provision for income taxes.................................. - (143,953)
------------ ------------
Income from discontinued operations......................... $ - $ 241,981
============ ============
Basic earnings per share from discontinued operations....... $ 0.00 $ 0.03
Diluted earnings per share from discontinued operations..... $ 0.00 $ 0.03
Year-to-Date Ended March 31,
--------------------------------
2002 2001
---- ----
Net sales................................................... $ - $ 2,359,185
Cost of goods sold.......................................... - 798,126
Marketing and selling....................................... - 238,177
Product development......................................... - 102,538
------------ ------------
Income from discontinued operations before income taxes..... - 1,220,344
Provision for income taxes.................................. - (455,188)
------------ ------------
Income from discontinued operations......................... $ - $ 765,156
============ ============
Basic earnings per share from discontinued operations....... $ 0.00 $ 0.09
Diluted earnings per share from discontinued operations..... $ 0.00 $ 0.09
15
Consolidated Results of Continuing Operations
Sales from continuing operations in the third quarter of fiscal 2002 increased
38.8% to $14,171,156 from $10,212,333 in the third quarter of fiscal 2001. Sales
from continuing operations for the nine-month period ended March 31, 2002
increased 29.9% to $37,973,838 from $29,225,712 for the nine-month period ended
March 31, 2001.
Product revenues grew 45.9% in the third quarter of fiscal 2002 to $10,184,067
from $6,980,329 in the third quarter of fiscal 2001. Product revenues increased
25.2% for the first nine months of fiscal 2002 to $26,349,104 from $21,039,045
for the first nine months of fiscal 2001. This increase was mainly due to
continued success of the Audio Perfect(R) product line, as well as the
introduction of new products, including the PSR1212, the XAP(TM) 800, the
XAP(TM) 400, the VuLink and the V There. The Audio Perfect(R) product line began
shipping in April of 1998 with the AP800, and also includes the AP10, the AP400,
AP Tools, the AP IR Remote, and the APV200-IP. During the second quarter of
fiscal 2001, we began shipping the PSR1212, a digital matrix mixer for the sound
reinforcement marketplace. During the fourth quarter of fiscal 2001, we
introduced our next generation audio product--the XAP(TM) 800. Sales of these
products have continued strongly into fiscal 2002. Examples of typical
applications using our products are corporate conference rooms, distance
learning rooms, and courtrooms. We have realized more of the revenue associated
with such applications as a result of this expanded product line. Product
revenues also include telephone interface products, which are used to connect
telephone line audio to broadcast audio equipment, and assistive listening
products, which provide enhanced audio for people with hearing difficulties.
The 1-800 LETS MEET(R) segment experienced sales growth of 23.4% in the third
quarter of fiscal 2002 as compared to the third quarter of fiscal 2001. Revenues
were $3,987,089 for the three-month period ended March 31, 2002 as compared to
$3,232,004 for the three-month period ended March 2001. Revenues increased 42.0%
for the first three quarters of fiscal 2002 to $11,624,734 from $8,186,667 for
the first three quarters of fiscal 2001. We attributed the growth in sales in
this segment to an increased customer base due in part to an increase in sales
staff for marketing conference calling services, an increase in resellers
selling our services, and an overall increase in market size during the past
year. Our conference calling services are being marketed not only to corporate
clients but also to telephone service providers for resale.
Our gross profit margin from continuing operations was 60.6% in the third
quarter of fiscal 2002 compared to 57.6% in the third quarter of fiscal 2001.
Our gross profit margin from continuing operations was 59.9% for the nine-month
period ended March 31, 2002 compared to 58.7% for the nine-month period ended
March 31, 2001. The increase in gross profit margins was driven by an increase
in 1-800 LETS MEET(R) segment gross margins. 1-800 LETS MEET(R) segment margins
increased as a result of effective price negotiations for lower network charges.
Our operating expenses increased 43.4% comparing the third quarter of fiscal
2002 to the third quarter of fiscal 2001. Continuing operations expenses for the
third quarter of fiscal 2002 were $5,429,537, as compared to $3,786,278 for the
third quarter of fiscal 2001. Continuing operations expenses increased 35.8% for
the nine-month period ended March 31, 2002 to $15,142,000 from $11,147,398 for
the nine-month period ended March 31, 2001.
Marketing and selling expenses for the third quarter of fiscal 2002 were
$2,763,581 as compared to $1,932,327 for the third quarter of fiscal 2001. As a
percentage of revenues, marketing and selling expenses increased to 19.5% for
the third quarter of fiscal 2002, compared to 18.9% for the third quarter of
fiscal 2001. Marketing and selling expenses for the first nine months of fiscal
2002 were $7,995,734 as compared to $5,755,899 for the first nine months of
fiscal 2001. As a percentage of revenues, marketing and selling expenses
increased to 21.1% for the nine-month period ended March 31, 2002, compared to
19.7% for the nine-month period ended March 31, 2001. The year-over-year
increase in marketing and selling expenses was primarily due to our commitment
to increase resources for marketing and selling to increase momentum for our new
products and 1-800 LETS MEET(R) calling services.
Product development expenses increased 55.9% when comparing the third quarter of
fiscal 2002 to the third quarter of fiscal 2001. Product development expenses
for the third quarter of fiscal 2002 were $1,122,973, as compared to $720,426
for the third quarter of fiscal 2001. As a percentage of revenues, product
development expenses increased to 7.9% for the third quarter of fiscal 2002 up
from 7.1% for the third quarter of fiscal 2001. Product development expenses
increased 72.9% when comparing the first nine months of fiscal 2002 to the first
nine months of fiscal 2001. Product development expenses for the nine-month
period ended March 31, 2002 were $3,044,497, as compared to $1,760,921 for the
nine-month period ended March 31, 2001. As a percentage of revenues, product
development expenses increased to 8.0% for the first three quarters of fiscal
2002 up from 6.0% for the first three quarters of fiscal 2001. The increase in
product development expenses is due to increased salaries associated with
additional personnel and development costs for new product development. The
increase is also due to the additional engineers acquired in the Ivron purchase
along with amortization expense associated with Ivron technology.
16
General and administrative expenses increased 36.1% for the third quarter of
fiscal 2002 as compared to the third quarter of fiscal 2001. Expenses for the
third quarter of fiscal 2002 were $1,542,983 as compared to $1,133,525 for the
third quarter of fiscal 2001. General and administrative expenses were 10.9% of
revenues for the third quarter of fiscal 2002, compared to 11.1% for the third
quarter of fiscal 2001. General and administrative expenses increased 13.0% for
the nine-month period ended March 31, 2002 as compared to the nine-month period
ended March 31, 2001. Expenses for the first three quarters of fiscal 2002 were
$4,101,769 as compared to $3,630,578 for the first three quarters of fiscal
2001. General and administrative expenses were 10.8% of revenues for the first
three quarters of fiscal 2002, compared to 12.4% for the first three quarters of
fiscal 2001. The increase in dollars was largely attributable to the costs
incurred in hiring additional personnel to support increased sales volume and
the infrastructure costs associated with the hiring of such new personnel.
Interest income increased 34.7% for the third quarter of fiscal 2002 as compared
to the third quarter of fiscal 2001. Interest income increased 12.6% for the
nine-month period ended March 31, 2002, compared to the same period ended March
31, 2001. These increases are due to the increase in cash and cash equivalents
following a private placement of 1,500,000 shares of common stock which closed
on December 11, 2001.
Interest expense decreased 7.1% when comparing the third quarter of fiscal 2002
to the third quarter of fiscal 2001. Interest expense decreased 44.6% when
comparing the nine-month period ended March 31, 2002 to the nine-month period
ended March 31, 2001. Such decreases are due to the maturing of certain of our
capital leases.
During the third quarter of fiscal 2002, income tax expense for continuing
operations was calculated at a combined federal and state effective tax rate of
approximately 32.8%, resulting in an income tax expense of $1,012,464. This
compares to the third quarter of fiscal 2001, where the effective tax rate was
37.3%, and the income tax expense for continuing operations was $808,313. There
are several reasons for this decrease in our income tax rate, including the
recognition of various tax planning opportunities, and certain tax-advantaged
investments that we have utilized for the cash that was received from our
private placement. Since the amount of cash invested in these tax-advantaged
investments will be decreasing over the near term with our use of cash in the
pending acquisition of E.mergent, the tax benefits associated with these
investments will similarly decrease; therefore, the tax rate might increase in
future periods. For the nine-month period ended March 31, 2002, income tax
expense for continuing operations was calculated at a combined federal and state
effective tax rate of approximately 35.8%, resulting in an income tax expense of
$2,770,560. This compares to the nine-month period ended March 31, 2001, where
the effective tax rate was 37.7%, and the income tax expense for continuing
operations was $2,360,303.
Net income from continuing operations for the third quarter of fiscal 2002 was
$2,070,946, or an increase of 52.4%, compared to net income from continuing
operations of $1,359,032 for the third quarter of fiscal 2001. Net income from
continuing operations for the nine-month period ended March 31, 2002 was
$4,974,533, or an increase of 27.4%, compared to net income from continuing
operations of $3,905,397 for the same period ended March 31, 2001. These results
are due to increased revenues offset by increases in expenses as described
above.
Financial Condition and Liquidity
We have cash and cash equivalents of $23.2 million on March 31, 2002, which
represents an increase of $16.3 million compared to cash and cash equivalents of
$6.9 million on June 30, 2001. Based upon continuing operations, net operating
activities used cash of $0.2 million in the first nine months of fiscal 2002.
The decrease in cash flow from operating activities from the prior year to the
current year is a result of the increase in accounts receivable. The increase in
accounts receivable is due to shipments late in the third quarter and the
addition of 15 new dealers. We expect this increase to be temporary. Net
investing activities used cash of $7.5 million primarily due to the purchase of
Ivron on October 3, 2001. Net financing activities provided cash of $24.0
million, primarily due to proceeds from a private placement of 1,500,000 shares
of common stock that closed December 11, 2001.
We have an available revolving line of credit of $5.0 million, which is secured
by our accounts receivable and inventory. The interest rate on the line of
credit is variable (250 basis points over the London Interbank Offered Rate
(LIBOR) or prime less 0.25 percent, whichever we choose). The borrowing rate was
5.0% on March 31, 2002. There was no outstanding balance on March 31, 2002. The
line of credit was renewed as of December 22, 2001 and will expire on December
22, 2002. Borrowings under the line of credit are subject to certain financial
and operating covenants. We were in compliance with these covenants on March 31,
2002.
During April 2001, we announced that our board of directors had approved a stock
repurchase program to purchase up to 500,000 shares of our common stock over the
following six months. These purchases were to be discretionary on the part of
management and were to be made on the open market or in private transactions. In
the third quarter of fiscal 2002, we did not repurchase any shares. Prior to
that time, we had repurchased and retired 20,300 shares. The stock repurchase
program expired in October, 2001.
17
We believe that our working capital, bank line of credit and cash flows from
operating activities will be sufficient to meet our operating and capital
expenditure requirements for continuing operations for the next twelve months.
In the longer term, or if we experience a decline in revenue, or in the event of
other unforeseen events, we may require additional funds and may seek to raise
such funds through public or private equity or debt financing, bank lines of
credit, or other sources. No assurance can be given that additional financing
will be available or, if available, will be on terms favorable to us.
Definitive Merger Agreement to Acquire E.mergent
On January 21, 2002, we signed a definitive merger agreement to acquire
E.mergent, Inc. (Nasdaq: EMRT), a provider of video conferencing products and
related services. Under the terms of the agreement, E.mergent will merge into a
subsidiary of ours. We will pay $7.3 million in cash and will issue, or reserve
for issuance upon the exercise of assumed stock options, 873,000 shares of our
common stock in exchange for all of E.mergent's fully diluted equity, including
all outstanding E.mergent stock options to be assumed by us in connection with
the merger. The actual amount of cash and our shares exchanged for each
outstanding E.mergent share will depend on the number of E.mergent shares and
stock options outstanding at the time of the merger. The transaction will be
accounted for as a purchase. Completion is subject to approval by E.mergent's
stockholders and other closing conditions.
Additional information about the proposed merger is available in our Form 8-K,
filed with the Securities and Exchange Commission on February 6, 2002, and our
registration statement, filed as Amendment 3 to Form S-4, which the Securities
and Exchange Commission declared effective on May 7, 2002. E.mergent has mailed
a proxy statement/prospectus to its shareholders. E.mergent will hold a
shareholders meeting on May 31, 2002 for the purpose of voting on the proposed
merger. We presently anticipate that, if all conditions to completion of the
merger are met including approval by the E.mergent shareholders, the merger will
be completed soon after such approval.
Factors that May Affect Future Results
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED.
FORWARD-LOOKING STATEMENTS RELATE TO OUR FUTURE PLANS, OBJECTIVES, EXPECTATIONS,
AND INTENTIONS. THESE STATEMENTS MAY BE RECOGNIZED BY THE USE OF WORDS SUCH AS
"BELIEVES," "EXPECTS," "MAY," "WILL," "INTENDS," "PLANS," "SHOULD," "SEEKS,"
"ANTICIPATES," AND SIMILAR EXPRESSIONS. IN PARTICULAR, STATEMENTS REGARDING OUR
MARKETS AND MARKET SHARE, DEMAND FOR OUR PRODUCTS AND SERVICES, FCC ACTIONS,
MANUFACTURING CAPACITY AND COMPONENT AVAILABILITY, AND THE DEVELOPMENT AND
INTRODUCTION OF NEW PRODUCTS AND SERVICES ARE FORWARD-LOOKING STATEMENTS AND
SUBJECT TO MATERIAL RISKS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF THE FACTORS SET FORTH
BELOW AND THE MATTERS SET FORTH IN THE REPORT GENERALLY. WE CAUTION THE READER,
HOWEVER, THAT THIS LIST OF FACTORS MAY NOT BE EXHAUSTIVE, PARTICULARLY WITH
RESPECT TO FUTURE FACTORS. ANY FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND, AS SUCH, SPEAK ONLY AS
OF THE DATE MADE. WE UNDERTAKE NO RESPONSIBILITY TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES
AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
We face intense competition in the audio and videoconferencing industries, and
our operating results will be harmed if we cannot compete effectively against
other companies.
The markets for our products and services are highly competitive. These markets
include our traditional dealer channel, the market for our conferencing
services, and our retail channel. We compete with businesses having
substantially greater financial, research and development, manufacturing,
marketing, and other resources. We expect our competitors to continue to improve
the performance of their current products or services, to reduce their current
products or service sales prices, and to introduce new products or services that
may offer greater performance and improved pricing. To remain competitive, we
are required to devote substantial resources to maintaining product and services
offerings that include current technology and advanced features, but it is
possible these efforts will not be sufficient to keep pace with competitors'
efforts to improve their technology and product features. 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 other
companies, we could experience pricing pressures and reduced sales, margin,
profits, and market share, each of which could materially harm our business.
18
Difficulties in estimating customer demand in our product segment could harm our
profit margins.
Orders from our resellers are based on demand from end-users. Prospective
end-user demand is difficult to measure. This means that any period could be
adversely impacted by low end-user demand, which could in turn negatively affect
orders we receive from resellers. Our expectations for both short- and long-term
future net revenues are based on our own estimates of future demand as well as
backlog based on our blanket purchase order program in which certain dealers
commit to purchase specified quantities of products over a twelve-month period.
We also base expense levels on those revenue estimates. If our estimates of
sales are not accurate and we experience unforeseen variability in our revenues
and operating results, it will hamper our ability to manage expense levels
accordingly, thereby adversely affecting profit margins.
Our profitability may be adversely affected by our continuing dependence on our
distribution channel.
We market our products primarily through a network of dealers and master
distributors. All of our agreements regarding such dealers and distributors are
non-exclusive and terminable at will by either party. We cannot be assured that
any or all such dealers or distributors will continue to offer our products.
Price discounts to our distribution channel are based on performance. However,
there are no obligations on the part of such dealers and distributors to provide
any specified level of support to our products or to devote any specified time,
resources or efforts to the marketing of our products. There are no prohibitions
on dealers or distributors offering products that are competitive with our
products. Most dealers do offer competitive products. We reserve the right to
maintain house accounts, which are for products sold directly to customers. The
loss of dealers or distributors could have a material adverse effect on our
business.
Our reseller customer contracts are typically short-term and early terminations
of our contracts may cause our revenues to decline and harm our profit margins.
We do not typically enter into long-term contracts with our reseller customers,
and we cannot be certain as to future order levels from our reseller customers.
When we do enter into a long-term contract, the contract is generally terminable
at the convenience of the customer. In the event of an early or unanticipated
termination by one of our larger reseller customers, it is unlikely that we will
be able to rapidly replace that revenue source or rapidly reduce our expense
levels to compensate for such loss of revenues, both of which would harm our net
revenues and profit margins.
Service interruptions could negatively affect revenues from our conference
calling services business.
We rely heavily on our network equipment, telecommunications providers, data,
and software to support all of our functions. Our conference calling services
business, which produced 29.3% of our revenues during our last fiscal year,
relies 100 percent on our network equipment for our revenues. We cannot
guarantee that our back-up systems and procedures will operate satisfactorily in
an emergency. Should we experience such a material failure of our equipment or
the services of our telecommunications providers, it would substantially affect
revenues and could seriously jeopardize our ability to continue operations. In
particular, should our conference calling service experience even a short term
interruption of our network or telecommunication providers, our ongoing
customers may choose a different provider, and our reputation may be damaged,
reducing our ability to retain current customers and attract new customers.
We depend on a limited number of suppliers for components and the inability to
obtain sufficient components could adversely affect our product sales.
Certain electronic components used in connection with our products can only be
obtained from single manufacturers and we are dependent upon the ability of
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. Our suppliers maintain an
inventory of such components, but there can be no assurance that such components
will always be readily available, available at reasonable prices, available in
sufficient quantities, or deliverable in a timely fashion. If such key
components become unavailable, it is likely that we will experience delays,
which could be significant, in production and delivery of our products unless
and until we can otherwise procure the required component or components at
competitive prices, if at all. The lack of availability of these components
could have a materially adverse effect on our ability to sell products.
We have experienced long component lead times in the past, but we are
experiencing improved lead times on many products. Even though we have purchased
more of these "longer-lead-time" parts to ensure continued delivery of products,
reduction in these inventories has tracked with the reduction of lead times.
Suppliers of some of these components are currently or 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
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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 development delays could harm our competitive position and reduce our
revenues.
We may experience technical difficulties and delays with the development and
introduction of new products. The products developed by us involve sophisticated
and complicated components and 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, discovery of software bugs, and achieving
necessary manufacturing efficiencies. We have experienced product development
delays associated with our video conferencing products. If we are not able to
manage and minimize such potential difficulties, our sales could be negatively
affected.
Delays in the distribution process could have an adverse effect on our sales.
Our sales are dependent in part on our ability to provide prompt, accurate, and
complete services to customers on a timely and competitive basis. Delays in
distribution in our day-to-day operations or material increases in costs of
procuring and delivering products could have an adverse effect on our ability to
generate revenues from product sales. Any failure of our computer operating
systems, the Internet or our telephone system could adversely affect our ability
to receive and process customers' orders and ship products on a timely basis.
Strikes, termination of air travel, or other service interruptions affecting
Federal Express Corporation, United Parcel Service of America, Inc., or other
common carriers used by us to receive necessary components or other materials or
to ship our products also could impair our ability to deliver products on a
timely and cost-effective basis. Such failures would likely negatively affect
our sales and net revenues.
If we are unable to protect our intellectual property rights, our competitive
position could be harmed or we could be required to incur expenses to enforce
our rights.
We currently rely primarily on a combination of trade secrets, copyrights,
trademarks, and nondisclosure agreements to establish and protect our
proprietary rights in our products. We cannot assure that others will not
independently develop similar technologies, or duplicate or design around
aspects of our technology. We believe that 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. Such claims could divert our management's attention and be
expensive, 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.
Existing directors and officers can exert considerable control over us.
Our officers and directors together had beneficial ownership of approximately
21.5% of our common stock (including options that are currently exercisable or
exercisable within sixty (60) days) as of May 1, 2002. Assuming our officers'
and directors' actual beneficial ownership remained unchanged until completion
of the merger with E.mergent, together they would have beneficial ownership of
approximately 19.8% of our common stock after the merger. This significant
holding in the aggregate places the officers and directors in a position, when
acting together, to have substantial control over us and could delay or prevent
a change in control.
International sales are accounting for a portion of our net revenue, and risks
inherent in international sales could harm our business.
International sales represent a significant portion of our total revenue from
continuing operations. For example, international sales represented 10% of our
total sales for the third quarter of fiscal 2002 and 13% for the third quarter
of fiscal 2001. International sales represented 10% of our total sales for the
nine-month period ended March 31, 2002 and 12% for the nine-month period ended
March 31, 2001. Our international business is subject to the financial and
operating risks of conducting business internationally, including: unexpected
changes in, or imposition of, 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 and
Gentner EuMEA transacts business in U.S. Dollars, however, its financial
statements are prepared in the Euro, according to German accounting principles.
Although conversion to the Euro has eliminated currency exchange rate risk for
transactions between the member countries, consolidation of Gentner EuMEA's
financial statements with ours, under United States generally accepted
accounting principles, requires remeasurement to U.S. Dollars, which is subject
to exchange rate risks. We currently do not undertake any hedging activities
that might protect against such risks.
20
The continued integration of our subsidiaries and the integration of any
additional acquired businesses involve uncertainty and risk.
Following the acquisition of Ivron in October 2001, we have dedicated
substantial management resources in order to achieve the anticipated operating
efficiencies from integrating Ivron with us. The merger with E.mergent will
result in additional demands on management resources that could prolong or
adversely affect the successful integration of Ivron. In addition, we intend to
pursue acquisition opportunities in the future. The integration of such acquired
businesses could require substantial management resources. There can be no
assurance that any such integration will be accomplished without having a short
or potentially long-term adverse impact on our business, results of operations
or financial condition or that the benefits expected from any such integration
will be fully realized.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS 141
establishes new standards for accounting and reporting requirements for business
combinations and supersedes APB Opinion No. 16, "Business Combinations" and SFAS
No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interest method is now prohibited. The statement applies to any
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001 or later, modifies the criteria for recognizing
intangible assets and expands disclosure requirements. We have adopted this
statement in accounting for the acquisition of Ivron Systems, Ltd. as of October
3, 2001.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, "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. SFAS No. 142 provides guidance for testing goodwill and
intangible assets that will not be amortized for impairment. The amortization
provisions of Statement 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, companies are required to adopt Statement 142 in their
fiscal year beginning after December 15, 2001 (i.e., January 1, 2002 for
calendar year companies). Early adoption is permitted for companies with fiscal
years beginning after March 15, 2001 provided that their first quarter financial
statements have not been issued. We plan to adopt this statement on July 1, 2002
and, as such, we are continuing to evaluate the impact of this statement on our
financial statements. Unamortized goodwill was approximately $2,898,000 as of
March 31, 2002, of which $2,493,000 relates to the ClearOne acquisition which
occurred on July 1, 2000 and which will continue to be amortized until June 30,
2002, and $405,000 relates to Ivron, which is not amortized in accordance with
the provisions of SFAS No. 142. Amortization of goodwill was approximately
$67,600 and $202,800 for the three and nine months ended March 31, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations and Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that opinion). We are required to adopt SFAS No. 144 effective July
1, 2002. We are currently evaluating the impact of this statement on our
financial statements.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in 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 capital leases.
We currently have limited market risk sensitive instruments related to interest
rates. Our capital lease obligations total $76,000 at March 31, 2002. We do not
have significant exposure to changing interest rates on these capital leases
because interest rates for the majority of the capital leases are fixed. We have
not undertaken any additional actions to cover interest rate market risk and are
not a party to any other interest rate market risk management activities. A
hypothetical 10 percent change in market interest rates over the next year would
not impact our earnings or cash flows as the interest rates on the majority of
the capital leases are fixed.
We do not purchase or hold any derivative financial instruments for trading
purposes.
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Share Purchase Agreement dated October 3, 2001, among Gentner
Communications Corporation, Gentner Ventures, Inc. and the
Shareholders of Ivron Systems, Ltd. (incorporated by reference
from the Company's Current Report on Form 8-K filed October 18,
2001)
2.2 Agreement and Plan of Merger dated January 21, 2002 between
ClearOne Communications, Inc., its wholly-owned subsidiary,
Tundra Acquisitions Corporation, and E.mergent, Inc. and the
Voting Agreement dated January 21, 2002, between ClearOne
Communications, Inc., Tundra Acquisitions Corporation and Robin
Sheeley, James W. Hansen, Richard F. Craven and Jill Larson
(incorporated be reference from the Company's Current Report on
Form 8-K filed February 6, 2002)
2.3 Amendment to the Share Purchase Agreement dated April 8, 2002
between ClearOne Communications, Inc. and the shareholders of
Ivron Systems, Ltd. (incorporated by reference from the Company's
Current Report on Form 8-K filed April 10, 2002)
3.1 1 Articles of Incorporation and all amendments thereto through
March 1, 1988. (Page 10) (incorporated by reference from the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1989)
3.2 1 Amendment to Articles of Incorporation, dated July 1, 1991. (Page
65) (incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1991)
3.3 1 Bylaws, as amended on August 24, 1993. (Page 16) (incorporated by
reference from the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1993)
3.4 1 Amendment to Articles of Incorporation, dated December 12, 2001
(incorporated by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended December 31, 2001)
4.1 Form of Stock Purchase Agreement for private placement
transaction (incorporated by reference from the Company's
registration statement on Form S-3 filed November 23, 2001)
1 Denotes exhibits specifically incorporated into this Form 10-Q by
reference, pursuant to Regulation S-K, Item 10. These documents are located
under File No. 0-17219 and are located at the Securities and Exchange
Commission, Public Reference Branch, 450 South 5th St., N.W., Washington,
DC 20549.
(b) Reports on Form 8-K
------------------------
A report on Form 8-K was filed February 1, 2002, to announce ClearOne
Communications, Inc.'s financial results for the fiscal quarter ended December
31, 2001.
A report on Form 8-K was filed February 6, 2002, to announce the acquisition of
E.mergent, Inc. The report included (1) the Agreement and Plan of Merger dated
as of January 21, 2002 between ClearOne Communications, Inc., its wholly-owned
subsidiary, Tundra Acquisitions Corporation, and E.mergent, Inc.; and (2) the
Voting Agreement dated as of January 21, 2002, between ClearOne Communications,
Inc., Tundra Acquisitions Corporation and Robin Sheeley, James W. Hansen,
Richard F. Craven and Jill Larson.
A report on Form 8-K was filed March 21, 2002, to announce the appointment of
Andrew S. Fellows as its Vice President of Services.
A report on Form 8-K was filed April 10, 2002, to announce the Amendment to the
Share Purchase Agreement between ClearOne Communications, Inc. and the
shareholders of Ivron Systems, Ltd. dated April 8, 2002.
A report on Form 8-K was filed April 23, 2002, to announce ClearOne
Communications, Inc.'s financial results for the fiscal quarter ended March 31,
2002.
22
SIGNATURES
Pursuant to the requirements of the Securities and 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.
/s/ Randall J. Wichinski
---------------------------------------------
Randall J. Wichinski
Chief Financial Officer and Vice President
Date: May 15 2002
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