SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 31, 2002
ClearOne Communications, Inc.
----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Utah 17219 87-0398877
------------------ ------------------ --------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
1825 Research Way
Salt Lake City, Utah 84119
------------------------------------------------
(Address of principal executive offices)
(801) 975-7200
-----------------------------------------------------------
(Registrant's telephone number, including area code)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
As previously reported on Form 8-K filed on June 5, 2002 (the "Original
Filing"), on May 31, 2002 ClearOne Communications, Inc. acquired E.mergent, Inc.
by merging its subsidiary, Tundra Acquisition Corporation, with E.mergent, Inc.
The terms and conditions of the acquisition are more fully described in the
Original Filing and in ClearOne Communications' registration statement on Form
S-4 (File No. 333-82242) filed with the Securities and Exchange Commission on
May 7, 2002.
We are amending the Original Filing to present the financial statements
of the business acquired, as set forth in Item 7(a) of this Form 8-K/A.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
(i) Consolidated financial statements of E.mergent, Inc. as of December
31, 2001 and 2000 and for each of the years then ended, including the
report thereon of Deloitte & Touche LLP, independent auditors; and
(ii) Unaudited interim condensed balance sheet of E.mergent, Inc. as of
March 31, 2002 and December 31, 2001 and unaudited condensed
statements of operations for the three months ended March 31, 2002 and
2001.
(b) Pro Forma Financial Information.
(i) Unaudited pro forma condensed combined financial information of
ClearOne to give effect to its acquisitions of Ivron Systems, Ltd. and
E.mergent, Inc. and the December 2001 private placement of ClearOne
common stock.
1
E.MERGENT, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors.................................................3
Balance Sheets as of December 31, 2001 and 2000................................4
Statements of Operations for the Years Ended December 31, 2001 and 2000........5
Statements of Stockholders' Equity for the Years Ended
December 31, 2001 and 2000...................................................6
Statement of Cash Flows for the Years Ended December 31, 2001 and 2000.........7
Notes to Financial Statements..................................................9
2
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
E.mergent, Inc.
Golden Valley, Minnesota
We have audited the accompanying balance sheets of E.mergent, Inc. (the Company)
as of December 31, 2001 and 2000, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of E.mergent, Inc. as of December 31, 2001 and
2000, and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 1, 2002
3
E.MERGENT, INC.
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 807,115 $ 1,230
Accounts receivable -
Trade accounts, less allowance for doubtful accounts of $150,000 in 2001 and 2000 3,299,720 4,947,997
Other receivables 7,091 21,084
Income taxes receivable 5,741
Inventories 3,736,517 4,464,219
Deferred income taxes 425,000 460,000
Prepaid expenses 128,603 128,572
------------ ------------
Total current assets 8,404,046 10,028,843
PROPERTY AND EQUIPMENT:
Office and computer equipment 881,514 780,446
Machinery and equipment 363,408 329,378
Tooling 757,441 758,053
Leasehold improvements 59,100 59,100
------------ ------------
2,061,463 1,926,977
Less accumulated depreciation (1,587,981) (1,302,087)
------------ ------------
Net property and equipment 473,482 624,890
OTHER ASSETS:
Deferred income taxes 75,000
Goodwill, net 999,040 1,130,782
Noncompete, net 598,958 661,458
Patents, net 92,857 121,429
Notes receivable from MedCam 42,000 78,000
Investment in MedCam 150,000 150,000
Other 15,000
------------ ------------
Total other assets 1,957,855 2,156,669
------------ ------------
$ 10,835,383 $ 12,810,402
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,146,811
Accounts payable $ 862,168 2,112,247
Current maturities of long-term debt and capital leases 237,547 194,253
Current maturities of unearned maintenance contracts 764,072 703,073
Customer deposits 150,113 102,064
Accrued liabilities:
Compensation 203,635 244,359
Income taxes payable 188,911
Other 69,439 71,777
Warranty 7,622 81,000
------------ ------------
Total current liabilities 2,483,507 4,655,584
LONG-TERM DEBT AND CAPITAL LEASES, net of current maturities 403,245 654,136
UNEARNED MAINTENANCE CONTRACTS, net of current maturities 300,418 232,488
DEFERRED INCOME TAXES 78,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized, 5,000,000 shares; no shares
issued and outstanding
Common stock, $.01 par value; authorized, 20,000,000 shares; issued
and outstanding, 5,929,280 shares in 2001 and 5,760,440 shares in 2000 59,293 57,604
Additional paid-in capital 7,863,640 7,698,793
Treasury stock (73,386)
Note receivable from officer (121,875)
Accumulated deficit (79,459) (566,203)
------------ ------------
Total stockholders' equity 7,648,213 7,190,194
------------ ------------
$ 10,835,383 $ 12,810,402
============ ============
See notes to financial statements.
4
E.MERGENT, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
NET SALES $ 22,417,149 $ 21,830,372
COST OF SALES 14,322,420 13,767,699
------------ ------------
GROSS PROFIT 8,094,729 8,062,673
OPERATING EXPENSES:
Selling 3,446,311 3,023,696
General and administrative 3,104,752 3,128,010
Research and development 662,719 781,616
------------ ------------
7,213,782 6,933,322
------------ ------------
OPERATING INCOME 880,947 1,129,351
OTHER INCOME (EXPENSE):
Interest income 3,628 5,317
Interest expense (84,831) (156,409)
------------ ------------
(81,203) (151,092)
------------ ------------
INCOME BEFORE INCOME TAXES 799,744 978,259
INCOME TAX EXPENSE (BENEFIT) 313,000 (56,000)
------------ ------------
NET INCOME $ 486,744 $ 1,034,259
============ ============
EARNINGS PER COMMON SHARE - BASIC $ .08 $ .18
============ ============
EARNINGS PER COMMON SHARE - DILUTED $ .08 $ .17
============ ============
See notes to financial statements.
5
E.MERGENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL NOTE
---------------------- PAID-IN TREASURY RECEIVABLE ACCUMULATED
SHARES AMOUNT CAPITAL STOCK FROM OFFICER DEFICIT
---------- --------- ----------- --------- ---------- -----------
BALANCES - DECEMBER 31, 1999 5,675,440 $ 56,754 $ 7,494,437 $(1,600,462)
Net income 1,034,259
Exercise of options 85,000 850 133,156
Tax benefit from exercise of
nonqualified employee stock
options 71,200
---------- --------- ----------- -----------
BALANCES - DECEMBER 31, 2000 5,760,440 57,604 7,698,793 (566,203)
Net income 486,744
Exercise of options 172,090 1,721 153,105
Purchase and retirement of stock (3,250) (32) (6,468)
Purchase of treasury stock $ (73,386)
Advance to officer $ (121,875)
Tax benefit from exercise of
nonqualified employee stock
options 18,210
---------- --------- ----------- --------- ---------- -----------
BALANCES - DECEMBER 31, 2001 5,929,280 $ 59,293 $ 7,863,640 $ (73,386) $ (121,875) $ (79,459)
========== ========= =========== ========= ========== ===========
See notes to financial statements.
6
E.MERGENT, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 486,744 $ 1,034,259
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Depreciation 367,109 393,155
Amortization 222,814 223,580
Provision for losses on accounts receivable 50,000
Loss on sale of assets 25,124
Deferred income taxes (118,000) (162,000)
Change in operating assets and liabilities:
Accounts receivable - trade 1,648,277 (2,103,502)
Other receivables 13,993 1,030
Income taxes receivable/payable 212,862 (4,541)
Inventories 727,702 (874,691)
Prepaid expenses (31) (57,319)
Other assets 15,000 (15,000)
Accounts payable (1,250,079) 665,317
Customer deposits 48,049 79,816
Accrued liabilities (116,440) (185,935)
Unearned maintenance contracts 128,929 306,661
------------ ------------
Net cash provided by (used in) operating activities 2,412,053 (649,170)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in MedCam (150,000)
Capital expenditures (240,825) (193,345)
Proceeds from sale of assets 8,981
Cash receipts for collection of notes receivable 36,000 30,000
Proceeds from maturities of certificates of deposit 158,000
------------ ------------
Net cash used in investing activities (204,825) (146,364)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 32,951 134,006
(Payments on) proceeds from line of credit, net (1,146,811) 476,206
Payments of long-term debt (207,597) (25,883)
Payments of noncompete obligation (750,000)
Proceeds from long-term debt 750,000
Repurchase of common stock (79,886)
------------ ------------
Net cash (used in) provided by financing activities (1,401,343) 584,329
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 805,885 (211,205)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,230 212,435
------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 807,115 $ 1,230
============ ============
See notes to financial statements.
7
E.MERGENT, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest $ 92,327 $ 147,672
============ ============
Cash paid during the year for taxes $ 218,138 $ 105,453
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Note receivable to exercise nonqualified stock options $ 121,875
Tax benefit from exercise of nonqualified stock options 18,210 $ 71,200
Note receivable for assets sold 108,000
Note payable forgiven 10,000
Note payable for noncompete agreement 750,000
See notes to financial statements.
8
E.MERGENT, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - E.mergent, Inc. (the Company) is a provider of
products and services for visual communication solutions. The Company
sells its products and services through a global network of resellers
and original equipment manufacturers.
The Company extends credit in the normal course of business to its
customers who are generally companies in the videoconferencing, audio
visual, medical, educational, and technology industries. The Company
performs credit evaluations of its customers' financial condition and
generally requires no collateral.
USE OF ESTIMATES - The presentation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The Company's estimates consist principally of reserves for
uncollectible accounts receivable, lower of cost or market inventory
adjustments, product warranty, and the valuation of deferred tax assets.
FINANCIAL INSTRUMENTS - The fair value of the Company's accounts
receivable, accounts payable, accrued expenses, line of credit and notes
payable approximate their carrying value due to their short-term nature.
The fair value of the Company's long-term debt approximates carrying
value due to its variable interest rate.
REVENUE RECOGNITION - The Company recognizes revenue from product sales
at the time of product shipment or at the completion of installation if
customer acceptance is required. The Company transfers the risks and
rewards of the products, including title, at this time.
The Company recognizes revenue on maintenance contracts ratably over the
life of the contract.
Shipping and handling costs are recorded as sales, and the offsetting
expense is recorded in cost of sales.
CASH AND CASH EQUIVALENTS - For purposes of the statement of cash flows,
the Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.
INVENTORIES - Materials, work-in-process, and finished goods are stated
at the lower of moving average cost or market.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is computed over estimated useful lives using principally
the straight-line method. Maintenance and repairs are charged to
operations, and additions or improvements are capitalized. Items of
property sold, retired, or otherwise disposed of are removed from the
assets and accumulated depreciation accounts and any gains or loss on
disposal are reflected in operations; major improvements and betterments
are capitalized. The present values of capital lease obligations are
classified as long-term debt and the related assets are included in
machinery and equipment. Amortization of machinery and equipment under
capital leases is included in depreciation expense.
AMORTIZATION OF LNTANGIBLE ASSETS - Patents are being amortized using
the straight-line method over seven years. Noncompete agreements are
being amortized using the straight-line method over the 12-year life of
the
9
agreement. Goodwill, representing the excess cost over net book value of
acquired companies, is amortized using the straight-line method over 10
years.
RECOVERABILITY OF LONG-LIVED ASSETS - The Company reviews its long-lived
assets periodically to determine potential impairment by comparing the
carrying value of the assets with expected net cash flows expected to be
provided by operating activities of the business or related products.
Should the sum of the expected future net cash flows be less than the
carrying value, the Company would determine whether an impairment loss
should be recognized. An impairment loss would be measured by comparing
the amount by which the carrying value exceeds the fair value of the
asset based on the discounted cash flows expected to be generated by the
asset. At December 31, 2001 and 2000, no impairment loss provision is
required or recorded in the financial statements.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
charged to operations when incurred.
INCOME TAXES - Deferred income tax assets and liabilities are determined
based on the differences between the financial statement and tax bases
of assets and liabilities using tax rates in effect when the differences
are expected to reverse. Income tax expense is the tax payable for the
period and the change during the period in deferred income tax assets
and liabilities.
EARNINGS PER COMMON SHARE - Basic net income per common share is based
on the weighted average number of common shares outstanding during each
year. Diluted net income per common share takes into effect the dilutive
effect of potential common shares outstanding. The Company's only
potential common shares outstanding are stock options and stock
warrants, which resulted in a dilutive effect of 176,694 and 395,638
shares in 2001 and 2000, respectively. The total number of anti-dilutive
stock options and warrants was 151,000 and 87,000 as of December 31,
2001 and 2000, respectively. The Company calculates the dilutive effect
of outstanding options using the treasury stock method. The following
data show the amounts used in computing the weighted average number of
shares of dilutive potential common stock at December 31:
2001 2000
Weighted average number of shares used
in basic earnings per share 5,844,860 5,741,330
Effect of dilutive stock options 176,694 395,638
----------- -----------
6,021,554 6,136,968
=========== ===========
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - On January 1, 2001, the
Company adopted Statement of Financial Accounting Standards (SFAS) No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING Activities, as
amended by SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS
AND CERTAIN HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging
activities. It requires that all derivatives, including those embedded
in other contracts, be recognized as either assets or liabilities and
that those financial instruments be measured at fair value. The
accounting for changes in the fair value of derivatives depends on their
intended use and designation. Management has reviewed the requirements
of SFAS No. 133 and has determined that they have no freestanding or
embedded derivatives. All contracts that contain provisions meeting the
definition of a derivative also meet the requirements of, and have been
designated as, normal purchases or sales. The Company's policy is to not
use freestanding derivatives and to not enter into contracts with terms
that cannot be designated as normal purchases or sales.
FOREIGN CURRENCY TRANSLATION - The functional currency is the U.S.
dollar for each foreign country in which the Company operates. The
Company's foreign offices act as distributors for the Company's
products and services rather than as stand-alone entities.
RECLASSIFICATIONS - Certain amounts in the 2000 financial statements
have been reclassified to conform to the 2001 financial statement
presentation. These reclassifications had no effect on net income or
stockholders' equity as previously reported.
10
2. ACQUISITIONS AND DISPOSITIONS
MEDCAM TECHNOLOGY, INC. - In February 2000, the Company sold certain
assets acquired in 1998 as part of the Video Dynamics, Inc. (VDI)
acquisition in exchange for $108,000 payable over three years. In
addition, the remaining related employment agreements were terminated
along with a $10,000 note payable.
As part of the agreement, the Company executed a $150,000 note payable
over 12 months to MedCam Technology, Inc. (MedCam), a new company
started by the VDI founders, in exchange for a perpetual option to buy
20% of MedCam for $1. In addition, a three-year reseller agreement was
executed with MedCam, which entitles the Company to a 5% royalty on
sales of the MedCam Pro and MedCam Pro Plus products. The Company
accounts for its investment in MedCam using the cost method of
accounting.
3. INVENTORIES
Inventories consisted of the following at December 31:
2001 2000
Raw materials $ 1,972,910 $ 1,695,726
Work-in-process 481,465 515,884
Finished goods, including demonstration units 1,282,142 2,252,609
----------- -----------
$ 3,736,517 $ 4,464,219
=========== ===========
4. NONCOMPETE OBLIGATION
At December 31, 1999, the Company had a $750,000 obligation, which was
due and paid in full in April 2000, to a shareholder for a twelve-year
noncompete agreement. The shareholder had the option to defer payment in
whole or in part for up to twelve one-year periods. Interest was to
begin accruing on this obligation upon the shareholder's first deferral
at the Company's short-term cost of borrowing. As the obligation was
paid in April 2000, no interest was due under terms of the agreement.
5. LINE OF CREDIT
At December 31, 2001, the Company has available a $2,750,000 bank
revolving note, secured by substantially all assets, that expires April
30, 2002. Interest is computed on actual days elapsed at an annual rate
equal to the prime rate as quoted by THE WALL STREET JOURNAL. The note
is payable on demand. The terms of the note require the Company to
maintain certain financial ratios. The Company was in compliance with
all financial covenants as of December 31, 2001. The amount outstanding
under the note was $0 and $1,146,811 at December 31, 2001 and 2000,
respectively.
6. LONG-TERM DEBT
Long-term debt consists of the following:
2001 2000
Capital lease obligations, at implicit rates
from 3% to 9%, payable in installments to
2004 $ 71,931 $ 98,389
Note payable to bank, monthly payments of
$19,202 through August 2004, interest at the
prime rate (4.75% at December 31, 2001),
secured by substantially all assets 568,861 750,000
----------- -----------
640,792 848,389
Less amounts due within one year 237,547 194,253
----------- -----------
$ 403,245 $ 654,136
=========== ===========
11
Scheduled maturities of long-term debt are as follows at December 31,
2001:
2002 $ 237,547
2003 245,562
2004 157,683
-----------
$ 640,792
===========
7. LEASE OBLIGATIONS
The Company leases various items of equipment and vehicles over terms of
three to five years. Equipment and vehicle leases expire at varying
dates over the next three years. The Company also leases office and
warehouse facilities in Minnesota, Illinois, Nebraska, and Iowa; the
leases expire from September 2002 to July 2004 and one is
month-to-month. The Company is obligated to pay costs of property taxes
and operating costs under the terms of the office and warehouse leases.
Property and equipment includes the following amounts for capital leases
at December 31:
2001 2000
Machinery and equipment $ 163,085 $ 163,085
Vehicles 13,500 13,500
Accumulated depreciation (153,209) (107,956)
----------- -----------
$ 23,376 $ 68,629
=========== ===========
At December 31, 2001, the Company had the following minimum commitments
for payments of rentals under leases, which at inception had a
noncancelable term of more than one year:
Operating Capital
Leases Leases
2002 $ 210,683 $ 34,621
2003 42,028 30,126
2004 23,583 15,063
----------- -----------
Total lease commitments $ 276,294 79,810
===========
Less amount representing interest (7,879)
-----------
Present value of minimum lease payments
(included in long-term debt) $ 71,931
===========
Rental expense for operating leases totaled $415,120 and $444,081 in
2001 and 2000, respectively.
8. STOCKHOLDERS' EQUITY
The Board of Directors has authorized the redemption of up to 1,200,000
shares of the Company's Common Stock. During 2001, 50,317 shares at a
cost of $73,386 were redeemed and recorded as treasury stock.
The Company had outstanding warrants to issue 7,273 shares common stock
at $0.69 per share that expired in November 2000.
The Board of Directors has not yet established rights and preferences
for the Company's preferred stock.
12
9. STOCK-BASED COMPENSATION
The Company has a qualified incentive stock option plan, whereby options
to purchase shares of the Company's Common Stock are granted at a price
not less than the fair market value of the stock at the date of grant.
Each option expires no later than ten years from the date of grant. If
options are granted to persons owning more than ten percent of the
voting stock of the Company, the plan provides that the exercise price
shall not be less than 110% of the fair market value per share at the
date of grant, and will expire no later than five years from the date of
grant. In 2001 and 2000, the plan had authorized 575,000 options for the
purchase of common stock.
The Company has a nonqualified incentive stock option plan for outside
directors and nonemployees, with 500,000 authorized options to purchase
the Company's stock. The plan is substantially the same as the plan
discussed above. However, the exercise price may be lower than, greater
than, or equal to the stock price at the date of issuance.
A summary of the Company's stock option plans as of December 31, 2001
and 2000 and changes during the years ended on those dates is listed
below:
2001 2000
----------------------------- ----------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
----------- ---------------- ---------- ----------------
Outstanding at beginning of year 732,750 $ 1.27 663,000 $ 0.84
Granted 114,000 1.67 155,750 3.25
Exercised (172,090) .85 (85,000) 1.58
Forfeited (66,660) 3.52 (1,000) 0.69
---------- ----------
Outstanding at end of year 608,000 $ 1.60 732,750 $ 1.27
========== ==========
Options exercisable at year-end 557,860 607,750
========== ==========
The following table summarizes information about fixed stock options
outstanding at December 31, 2001:
Weighted-Average
Exercise Price Weighted-Average
Range of Number Options ---------------------------- Remaining
Exercise Prices Outstanding Exercisable Outstanding Exercisable Contractual Life
--------------- ----------- ----------- ----------- ----------- ----------------
$0.81 - $1.00 198,500 198,500 $ 0.95 $ 0.95 5.80 years
1.01 - 2.00 258,500 215,860 1.39 1.38 2.32 years
2.01 - 3.00 99,000 99,000 1.66 1.66 1.62 years
3.01 - 4.26 52,000 44,500 3.60 3.64 1.13 years
------------- --------- ---------
$0.81 - $4.26 608,000 557,860 3.24 years
============= ========= ========= ===========
The Company has chosen to account for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25. If
compensation cost would have been recognized in accordance with SFAS No.
123, net income and earnings per share would have been reduced as
follows:
13
2001 2000
Net income:
As reported $ 486,744 $ 1,034,259
=========== ============
Pro forma $ 348,399 $ 721,259
=========== ============
Basic earnings per common share:
As reported $ .08 $ .18
=========== ============
Pro forma $ .06 $ .13
=========== ============
Diluted earnings per common share:
As reported $ .08 $ .17
=========== ============
Pro forma $ .06 $ .12
=========== ============
The weighted average fair value as defined by SFAS No. 123 of options
granted in 2001 and 2000 was estimated to be $1.22 and $2.41,
respectively, on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions
used for grants in 2001 and 2000, respectively: dividend yield of 0% for
all years; expected volatility of 114% and 118%; risk-free interest
rates of 4.6% and 6.3%, and expected lives from three to 10 years.
10. INCOME TAXES
Income tax expense (benefit) consists of the following components:
2001 2000
Current $ 431,000 $ 106,000
Deferred (118,000) (162,000)
----------- -----------
$ 313,000 $ (56,000)
=========== ===========
The reconciliation of income taxes computed at the U.S. federal
statutory rate to income tax expense (benefit) recorded in the financial
statements is as follows:
2001 2000
Federal statutory income tax rate 35.0% 35.0%
Rate differential (1.0) (1.0)
Tax credits (6.3)
State tax rate, net of federal benefit 6.0 4.0
Permanent differences 5.4 4.7
Valuation allowance (52.4)
Other items, net 4.0
------- -------
Effective tax rate 39.1% (5.7)%
======= =======
14
The total deferred tax assets and liabilities included in the net
deferred tax asset are as follows:
2001 2000
Current:
Unearned maintenance contracts $ 240,000 $ 207,000
Inventory valuations 78,000 116,000
Bad debt reserves 60,000 60,000
Vacation accruals 36,000 35,000
Other 11,000 42,000
----------- -----------
425,000 460,000
Noncurrent:
Depreciation and amortization 33,000 (78,000)
R&D credit carryforward 42,000
----------- -----------
75,000 (78,000)
----------- -----------
Net deferred tax asset $ 500,000 $ 382,000
=========== ===========
The net decrease in the valuation allowance was $512,000 in 2000.
11. COMMITMENTS AND CONTINGENCIES
In 2000, the Company executed a three-year employment agreement with an
officer totaling approximately $144,000 and $120,000 in 2001 and 2000,
respectively.
In 1999, the Company executed a three-year employment agreement with an
officer totaling approximately $135,000 in 2001 and 2000.
At December 31, 2001 and 2000, the Company had purchase commitments with
suppliers of approximately $523,000 and $426,000, respectively.
12. EMPLOYEE BENEFIT PLAN
Effective October 1, 1998, the Company adopted the E.mergent, Inc.
Employee Stock Purchase Plan (the Plan). All full-time employees are
eligible to participate in the Plan, effective upon their date of hire.
The Plan allows eligible employees to purchase shares of common stock
through the open market on a quarterly basis at the lesser of 85% of the
fair market value on the beginning or ending dates of the period, with
the remaining 15% paid for by the Company. A total of 34,526 and 33,233
shares was purchased by the Plan during 2001 and 2000, respectively.
The Company sponsors a discretionary 401(k) profit sharing plan and
trust, covering employees who are over 18 years of age and have
completed 30 days of service. The Company contributed $0 and $19,156 to
the plan in 2001 and 2000, respectively.
13. INFORMATION CONCERNING INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
The Company classifies its businesses into two segments: Products
Division (VideoLabs), which designs, manufactures, and markets
collaboration-based peripherals; and Services Division (Acoustic
Communication Systems) which specializes in the design, installation,
support, and service of multimedia systems.
At December 31, 2001, the Company had four customers who accounted for
approximately $767,000 of the outstanding trade accounts receivable
balance. At December 31, 2000, the Company had four customers who
accounted for approximately $925,000 of the outstanding trade accounts
receivable balance.
15
During 2001 and 2000, the Company had total sales outside the United
States of approximately $2,506,000 and $2,397,000, respectively. Of
these amounts, approximately $1,942,000 and $2,047,000, respectively,
were sales to customers in Europe; approximately $165,000 and $152,000,
respectively, were sales to customers in the Asia/Pacific region; and
approximately $399,000 and $199,000, respectively, were sales to
customers in South America.
In 2001 and 2000, the Company had a supplier from which it made
purchases of approximately $3,206,000 and $1,627,000, respectively.
Although no long-term supply contract exists, the Company believes there
are alternative suppliers of this raw material.
Information concerning the Company's operations by segment is presented
below. Note that management does not assign asset balances or specific
property plant and equipment items to the two segments. Depreciation
expense is allocated to the segments.
Services
Division
Products (Acoustic
Division Communication
(VideoLabs) Systems) Corporate Consolidated
------------- -------------- ------------- --------------
Year Ended December 31, 2001:
Sales $ 9,452,885 $ 12,964,264 $ 22,417,149
Cost of sales 5,816,825 8,505,595 14,322,420
------------- -------------- --------------
Gross profit 3,636,060 4,458,669 8,094,729
Operating expenses 2,334,703 3,092,223 $ 1,786,856 7,213,782
------------- -------------- ------------- --------------
Operating income (loss) $ 1,301,357 $ 1,366,446 $ (1,786,856) $ 880,947
============= ============== ============= ==============
Depreciation and amortization $ 28,571 $ 89,894 $ 471,458 $ 589,923
============= ============== ============= ==============
Year Ended December 31, 2000:
Sales $ 10,636,087 $ 11,194,285 $ 21,830,372
Cost of sales 6,344,225 7,423,474 13,767,699
------------- -------------- --------------
Gross profit 4,291,862 3,770,811 8,062,673
Operating expenses 2,130,236 2,802,374 $ 2,000,712 6,933,322
------------- -------------- ------------- --------------
Operating income (loss) $ 2,161,626 $ 968,437 $ (2,000,712) $ 1,129,351
============= ============== ============= ==============
Depreciation and amortization $ 29,340 $ 73,104 $ 514,291 $ 616,735
============= ============== ============= ==============
14. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND
OTHER INTANGIBLE ASSETS. SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations
after June 30, 2001. SFAS No. 142 establishes new standards for
accounting for goodwill and intangible assets and is effective for the
Company on January 1, 2002. Management has not determined the impact
that SFAS No. 142 will have upon adoption.
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS No.
143 applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of a long-lived asset, except
for certain obligations of lessees. SFAS No. 143 amends SFAS No. 19,
FINANCIAL ACCOUNTING AND REPORTING BY OIL AND GAS PRODUCING COMPANIES.
SFAS No. 143 is effective for the Company on January 1, 2003. Management
is currently assessing what impact, if any, SFAS No. 143 will have on
the Company's financial position or results of operations.
16
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS 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 Accounting Principles
Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS - 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). SFAS No. 144 also amends Accounting Research Bulletin No. 51,
CONSOLIDATED FINANCIAL STATEMENTS, to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. SFAS No. 144 was effective for the Company on January 1,
2002. The Company does not expect SFAS No. 144 to have a material effect
on the Company's financial position or results of operations.
15. SUBSEQUENT EVENT
On January 21, 2002, the Company signed a merger agreement with ClearOne
Communications, Inc. (formerly Gentner Communications Corporation)
(ClearOne) for total consideration of $7,300,000 in cash and 873,000
ClearOne shares. In the merger, each share of company common stock will
be exchanged for a fraction of a share of ClearOne Common Stock and a
fixed amount of cash, calculated at completion of the merger. Under the
merger agreement, the Company will become a wholly owned subsidiary of
ClearOne. Following regulatory and shareholder approval, the merger is
expected to be completed in April 2002.
17
Interim Financial Statements
of E.mergent, Inc.
18
E.MERGENT, INC.
INTERIM CONDENSED BALANCE SHEETS - UNAUDITED
MARCH 31, DECEMBER 31,
ASSETS 2002 2001
Current assets
Cash and cash equivalents ........................................................ $ 1,505,128 $ 807,115
Accounts receivable, less allowance for doubtful accounts of $150,000 on March 31,
2002 and $150,000 on December 31, 2001 ......................................... 3,143,675 3,299,720
Other receivables ................................................................ 8,538 7,091
Inventories (Note 4) ............................................................. 3,605,419 3,736,517
Deferred income taxes ............................................................ 425,000 425,000
Prepaid expenses ................................................................. 151,469 128,603
------------ ------------
Total current assets ........................................................... 8,839,229 8,404,046
Property and equipment
Office and computer equipment .................................................... 891,079 881,514
Machinery and equipment .......................................................... 368,402 363,408
Tooling .......................................................................... 792,301 757,441
Leasehold improvements ........................................................... 64,228 59,100
------------ ------------
Total equipment .................................................................. 2,116,010 2,061,463
Less accumulated depreciation ................................................ (1,672,779) (1,587,981)
------------ ------------
Net property and equipment ................................................... 443,231 473,482
Other assets
Deferred income taxes ............................................................ 75,000 75,000
Goodwill, net .................................................................... 999,040 999,040
Noncompete, net .................................................................. 583,333 598,958
Patents, net ..................................................................... 85,714 92,857
Notes receivable from Medcam ..................................................... 33,000 42,000
Investment in Medcam ............................................................. 150,000 150,000
------------ ------------
Total other assets ........................................................... 1,926,087 1,957,855
Total assets ................................................................. $ 11,208,547 $ 10,835,383
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................................. $ 1,547,912 $ 862,168
Bank line of credit (Note 3) ..................................................... 0 0
Current maturities of unearned maintenance contracts ............................. 687,858 764,072
Current maturities of long-term debt and capital leases .......................... 237,547 237,547
Customer deposits and other liabilities .......................................... 147,936 150,113
Accrued compensation ............................................................. 292,156 203,635
Income taxes payable ............................................................. 20,531 188,911
Other ............................................................................ 13,682 77,061
------------ ------------
Total current liabilities ...................................................... 2,947,622 2,483,507
Long-term debt and capital leases, net of current maturities ........................ 339,668 403,245
Unearned maintenance contracts, net of current maturities ........................... 319,063 300,418
Stockholders' equity
Common stock, $.01 par value; Authorized 20,000,000 shares issued and outstanding,
5,931,280 shares at March 31, 2002 and 5,929,280 shares at December 31, 2001 ..... 59,313 59,293
Additional paid in capital ....................................................... 7,866,750 7,863,640
Treasury stock ................................................................... (73,386) (73,386)
Note receivable from officer ..................................................... (121,875) (121,875)
Accumulated deficit .............................................................. (128,608) (79,459)
------------ ------------
Total stockholders' equity ..................................................... 7,602,194 7,648,213
------------ ------------
Total liabilities and stockholders' equity ................................... $ 11,208,547 $ 10,835,383
============ ============
19
INTERIM CONDENSED STATEMENTS OF OPERATIONS - UNAUDITED
THREE MONTHS ENDED
-------------------
MARCH 31
2002 2001
----------- -----------
Sales ...................................... $ 5,209,041 $ 4,923,661
Cost of goods sold ......................... 3,375,720 3,132,874
----------- -----------
Gross profit ............................... 1,833,321 1,790,787
Selling, general and administrative expenses 1,919,061 1,848,562
----------- -----------
Operating loss ............................. (85,740) (57,775)
Other expense, net ......................... (3,084) (42,260)
Income tax benefit ......................... 39,675 40,000
----------- -----------
Net loss ................................... $ (49,149) $ (60,035)
=========== ===========
Basic loss per common share ................ ($ 0.01) ($ 0.01)
Weighted average shares outstanding ........ 5,930,280 5,774,378
Diluted loss per common share .............. ($ 0.01) ($ 0.01)
Diluted shares outstanding ................. 5,930,280 5,774,378
INTERIM CONDENSED STATEMENTS OF CASH FLOWS - UNAUDITED
THREE MONTHS ENDED
MARCH 31
--------
2002 2001
----------- -----------
Cash flows from operations:
Net cash from operations ...................... $ 813,007 $ 332,508
Cash flows from investing:
Capital expenditures .......................... (54,547) (22,610)
----------- -----------
Net cash used for investing ................... (54,547) (22,610)
Cash flows from financing:
Issuance of common stock and warrants ......... 3,130 11,500
Borrowings on bank line of credit, net ........ (270,000)
Payments on note payable and capital leases .. (63,577) (46,128)
Repurchase of common stock and warrants ....... (6,500)
----------- -----------
Net cash used for financing ................. (60,447) (311,128)
----------- -----------
Net increase (decrease) in cash and cash equivalents 698,013 (1,230)
Cash and cash equivalents at beginning of period ... 807,115 1,230
----------- -----------
Cash and cash equivalents at end of period ......... $ 1,505,128 $ 0
=========== ===========
20
FOOTNOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed balance sheets as of March 31, 2002, the condensed
statements of operations and cash flows for the three-month periods ended March
31, 2002 and 2001 have been prepared by E.mergent, Inc. (for the purposes of
Notes 1 to 6 below,"are" or the "Company") without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and
cash flows at March 31, 2002 and 2001 have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested these condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's December 31, 2001 Form 10KSB. The
results of operations for the periods ended March 31, 2002 and 2001 are not
necessarily indicative of the operating results for the entire year.
NOTE 2. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. This statement requires that goodwill and intangible assets
deemed to have an indefinite life not be amortized. Instead of amortizing
goodwill and intangible assets deemed to have an indefinite life, the statement
requires a test for impairment to be performed annually, or immediately if
conditions indicate that such an impairment could exist. We adopted the
provisions of SFAS No. 142 effective January 1, 2002, and as a result, will no
longer record goodwill amortization of approximately $132,000 per year. We are
currently in the process of completing the first step of the initial goodwill
impairment test required by SFAS No. 142 and will complete this assessment in
the second quarter of 2002.
The following table provides the comparable effects of the adoption of
SFAS No. 142 for the quarters ended March 31, 2002 and March 31, 2001.
THREE MONTHS ENDING
MARCH 31,
2002 2001
---------- ----------
Reported net loss ........................ $ (49,149) $ (60,035)
Add back goodwill amortization............ 33,000
---------- ----------
Adjusted net loss ........................ $ (49,149) $ (27,035)
========== ==========
Reported loss per share - basic .......... $ (0.01) $ (0.01)
Goodwill amortization
---------- ----------
Adjusted net loss per share - basic ...... $ (0.01) $ (0.01)
========== ==========
Reported loss per share - diluted ........ $ (0.01) $ (0.01)
Goodwill amortization
---------- ----------
Adjusted net loss per share - diluted .... $ (0.01) $ (0.01)
========== ==========
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development, and/or the
21
normal operation of a long-lived asset, except for certain obligations of
lessees. SFAS No. 143 amends SFAS No. 19, FINANCIAL ACCOUNTING AND REPORTING BY
OIL AND GAS PRODUCING COMPANIES. SFAS No. 143 is effective for the Company on
January 1, 2003. Management is currently assessing what impact, if any, SFAS No.
143 will have on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 144 was effective for the
Company on January 1, 2002. The Company does not expect SFAS No. 144 to have a
material effect on the Company's financial position or results of operations.
NOTE 3. INCOME PER COMMON SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per common share is similar to the computation of basic
earnings per share, except that the denominator is increased for the assumed
exercise of dilutive options using the treasury stock method. Stock options and
warrants of 295,350 for 2002 and 222,252 for 2001 were not used in the
calculation because their impact would have been anti-dilutive due to the net
loss incurred for those periods. The components of the earnings per share are as
follows:
THREE MONTHS ENDING
MARCH 31,
2002 2001
--------- ----------
Weighted average common shares outstanding for
Basic earnings per share 5,930,280 5,774,378
Effect of dilutive securities:
Stock Options and Warrants -- --
--------- ----------
Shares used in diluted earnings per share 5,930,280 5,774,378
========= =========
NOTE 4. LINE OF CREDIT
At March 31, 2002, the Company has available a $2,750,000 bank
revolving note, secured by substantially all assets, that expires June 30, 2002.
Interest is computed on actual days elapsed, at an annual rate equal to the
prime rate as quoted by THE WALL STREET JOURNAL. At March 31, 2002 the interest
rate was 4.75%. The note is payable on demand. The terms of the note require the
Company to maintain certain financial ratios. The Company was in compliance with
all covenants as of March 31, 2002. The Company did not have any borrowings on
March 31, 2002.
NOTE 5. INVENTORY
Inventories consisted of the following on: MARCH 31, 2002 DECEMBER 31, 2001
Materials $1,374,548 $1,972,910
Work-in-process 406,308 481,465
Finished goods, including demonstration units 1,824,563 1,282,142
---------- ----------
$3,605,419 $3,736,517
========== ==========
22
NOTE 6. SEGMENT INFORMATION
The Company classifies its businesses into two segments: Products
Division (VideoLabs), which designs, manufactures, and markets
collaboration-based peripherals; and Services Division (ACS), which specializes
in the design, installation, support, and service of multimedia systems.
Information concerning the Company's operations by segment is presented
below.
Products Services
Division Division Corporate Consolidated
------------ ------------- ------------- --------------
THREE MONTHS ENDED MARCH 31, 2002:
Sales $ 2,879,661 $ 2,329,380 $ 5,209,041
Cost of sales 1,802,021 1,573,699 3,375,720
------------ ------------- --------------
Gross profit 1,077,640 755,681 1,833,321
Operating expenses 534,959 712,346 $ 671,756 1,919,061
------------ ------------- ------------- --------------
Operating income (loss) $ 542,681 $ 43,335 $ (671,756) $ (85,740)
============ ============= ============= ===============
Depreciation and amortization $ 7,143 $ 20,911 $ 79,511 $ 107,565
============ ============= ============= ==============
THREE MONTHS ENDED MARCH 31, 2001:
Sales $ 2,197,031 $ 2,726,630 $ 4,923,661
Cost of sales 1,426,159 1,706,715 3,132,874
------------ ------------- --------------
Gross profit 770,872 1,019,915 1,790,787
Operating expenses 614,551 785,890 $ 448,121 1,848,562
------------ ------------- ------------- --------------
Operating income (loss) $ 156,321 $ 234,025 $ (448,121) $ (57,775)
============ ============= ============= ===============
Depreciation and amortization $ 7,143 $ 19,915 $ 121,271 $ 148,329
============ ============= ============= ==============
23
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION OF CLEARONE
The following unaudited pro forma condensed combined financial
information gives effect to the acquisitions of Ivron Systems, Ltd. and
E.mergent by ClearOne and the December 2001 private placement of ClearOne common
stock. Effective October 3, 2001, ClearOne, through a wholly owned subsidiary,
acquired the shares of Ivron Systems for a combination of cash and stock. An
amendment to the share purchase agreement dated October 3, 2001 was finalized
April 8, 2002. Because the terms of the amendment had been negotiated as of
March 31, 2002, the effects of such amendment were included in ClearOne's
financial statements as of March 31, 2002. Effective December 11, 2001, ClearOne
issued 1,500,000 shares of common stock under a private placement that were
subsequently registered on Form S-3 with the Securities and Exchange Commission.
The only impact of this stock offering on the pro forma statements of operations
is the inclusion of 1,500,000 shares in the calculation of the weighted average
shares outstanding. On January 21, 2002, ClearOne entered into a definitive
agreement to acquire the stock of E.mergent for a combination of cash and stock.
The E.mergent acquisition was completed on May 31, 2002. Both the Ivron Systems
and E.mergent acquisitions have been accounted for under the purchase method of
accounting. The unaudited pro forma condensed combined statements of operations
for the year ended June 30, 2001 and the nine months ended March 31, 2002 have
been prepared as if each transaction occurred on July 1, 2000. The pro forma
condensed combined balance sheet as of March 31, 2002 has been prepared as if
the E.mergent acquisition occurred on March 31, 2002. Because the financial
results of Ivron Systems and the private placement are included in ClearOne's
historical financial statements as of March 31, 2002, no adjustments have been
made to the pro forma balance sheet related to these transactions. Please see
the notes to these pro forma combined condensed statements regarding certain
assumptions utilized in the preparation of these statements. ClearOne's fiscal
year ends on June 30 while the fiscal years of Ivron Systems and E.mergent
historically ended on December 31. Accordingly, ClearOne has combined its
historical results from continuing operations for the year ended June 30, 2001
with the unaudited financial results of Ivron Systems and E.mergent for the
twelve months ended June 30, 2001, comprising the last six months of operations
of Ivron Systems and E.mergent for the year ended December 31, 2000 and the
first six months of operations of Ivron Systems and E.mergent for the year ended
December 31, 2001. The unaudited pro forma condensed combined statement of
operations presented for the nine months ended March 31, 2002 includes the
historical unaudited financial results from continuing operations of ClearOne
and E.mergent for the nine months ended March 31, 2002. The historical unaudited
financial results from continuing operations of Ivron Systems are included from
July 1, 2000 to October 2, 2001, with the results from October 3, 2001 to March
31, 2002 already consolidated in ClearOne's operating results.
Unaudited pro forma condensed combined financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the transactions occurred on the dates indicated above, nor is it
necessarily indicative of future financial position or results of operations.
These unaudited pro forma condensed combined financial statements are based on
the respective historical financial statements of ClearOne, Ivron Systems and
E.mergent and do not incorporate, nor do they assume, any benefits from cost
savings or synergies of operations of the combined company. The unaudited pro
forma condensed combined financial information should be read together with
ClearOne's historical financial statements and those of Ivron Systems and
E.mergent, including the related notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of ClearOne, all of
which are included in filings that have been previously filed with the
Securities and Exchange Commission.
The pro forma financial statements include adjustments, which are based
upon the final determination of the identifiable intangible assets acquired from
E.mergent and certain other management estimates, to reflect the allocation of
the purchase consideration to the acquired assets and liabilities of E.mergent.
Management does not expect that further adjustments to the purchase price
allocation, if any, will be material.
24
Unaudited Pro Forma Financial Information
Pro Forma Condensed Combined Balance Sheet
As of March 31, 2002
(in 000's)
Pro Forma
Adjustments
ClearOne E.mergent for E.mergent Pro Forma
(Historical) (Historical) Acquisition Combined
-------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $23,168 $ 1,505 $ (9,297) D $15,376
Accounts receivable, net 14,025 3,144 17,169
Note receivable - current portion 167 167
Inventory 5,792 3,605 9,397
Deferred taxes 247 425 672
Other current assets 420 160 580
------------------------------------------ --------------
Total current assets 43,819 8,839 (9,297) 43,361
Property and equipment, net 3,993 443 4,436
Goodwill, net 2,898 999 (999) A
16,897 E 19,795
Note receivable, long-term portion 1,549 33 1,582
Other intangible assets, net 5,517 669 (669) A
1,667 E 7,184
Deposits and other assets 73 225 (150) F 148
------------------------------------------ --------------
Total assets $57,849 $11,208 $ 7,449 $76,506
========================================== ==============
LIABILITIES AND SHAREHOLDERS'EQUITY
Current liabilities
Accounts payable $ 1,579 $ 1,548 $3,127
Accrued expenses 1,791 473 2,264
Current portion of unearned
maintenance contracts 688 688
Current portion of capital lease
and long-term debt obligations 61 238 299
------------------------------------------ --------------
Total current liabilities 3,431 2,947 6,378
Unearned maintenance contracts 319 319
Long-term debt and capital lease
obligations 16 340 356
Deferred tax liability 746 $ 625 M 1,371
------------------------------------------ --------------
Total liabilities 4,193 3,606 625 8,424
Shareholders' equity
Common stock 10 59 (59) H
9 J 19
Additional paid in capital 33,141 7,867 (7,867) H
14,370 J
47 G 47,558
Treasury stock (73) 73 I
Note receivable from shareholder (122) 122 L
Retained earnings (accumulated
deficit) 20,505 (129) 129 H 20,505
------------------------------------------ --------------
Total shareholders' equity 53,656 7,602 6,824 68,082
------------------------------------------ --------------
Total liabilities and
shareholders' equity $57,849 $11,208 $ 7,449 $76,506
========================================== ==============
See accompanying notes to unaudited pro forma
condensed combined financial statements.
25
Unaudited Pro Forma Condensed Combined Statements of Operations
For the nine months ended March 31, 2002
(in 000's)
Pro Forma
Pro Forma Pro Forma Pro Forma Combined
Adjustments Combined Adjustments for Ivron
for Ivron for Ivron for Systems and
ClearOne Ivron Systems Systems Systems E.mergent E.mergent E.mergent
(Historical) (Historical) Acquisition Acquisition (Historical) Acquisition Acquisitions
---------------------------------------------------------------------------------------------------
Net sales $37,974 $ 47 $ 38,021 $17,055 $ 55,076
Cost of goods sold 15,226 343 15,569 10,963 26,532
---------------------------------------- --------------------------------------- -------------
Gross profit (loss) 22,748 (296) 22,452 6,092 28,544
Operating expenses
Marketing and selling 7,996 304 8,300 2,376 10,676
General and
administrative 4,102 695 $ (46) A 4,751 2,490 $ (112) A
303 B 7,432
Research and product
development 3,044 116 139 B 3,299 504 3,803
---------------------------------------- --------------------------------------- -------------
Total operating
expenses 15,142 1,115 93 16,350 5,370 191 21,911
---------------------------------------- --------------------------------------- -------------
Operating income
(loss) 7,606 (1,411) (93) 6,102 722 (191) 6,633
Other income (expense) 139 (126) 13 (21) (8)
---------------------------------------- --------------------------------------- -------------
Income (loss) from
continuing
operations before
income taxes 7,745 (1,537) (93) 6,115 701 (191) 6,625
Provision (benefit)
for income taxes 2,771 (35) C 2,736 269 (71) C 2,934
---------------------------------------- --------------------------------------- -------------
Income (loss) from
continuing operations $ 4,974 $(1,537) $ (58) $ 3,379 $ 432 $ (120) $ 3,691
======================================== ======================================= =============
Basic earnings per
common share $ 0.54 $ 0.34
Diluted earnings per
common share $ 0.51 $ 0.32
Weighted average shares
outstanding:
Basic 9,247 11,005
Diluted 9,756 11,462
See accompanying notes to unaudited pro forma
condensed combined financial statements.
26
Unaudited Pro Forma Condensed Combined Statements of Operations
For the fiscal year ended June 30, 2001
(in `000s)
Pro Forma
Pro Forma Pro Forma Pro Forma Combined
Adjustments Combined Adjustments for Ivron
for Ivron for Ivron for Systems and
ClearOne Ivron Systems Systems Systems E.mergent E.mergent E.mergent
(Historical) (Historical) Acquisition Acquisition (Historical) Acquisition Acquisitions
---------------------------------------------------------------------------------------------------
Net sales $ 39,878 $ 608 $ 40,486 $ 22,503 $ (188) K $ 62,801
Cost of goods sold 16,503 798 17,301 14,270 (188) K 31,383
---------------------------------------- --------------------------------------- -------------
Gross profit (loss) 23,375 (190) 23,185 8,233 31,418
Operating expenses
Marketing and selling 7,753 1,588 9,341 3,449 12,790
General and
administrative 4,649 555 $ (182) A 5,022 3,276 (224) A
404 B 8,478
Research and product
development 2,502 732 555 B 3,789 689 4,478
---------------------------------------- --------------------------------------- -------------
Total operating
expenses 14,904 2,875 373 18,152 7,414 180 25,746
---------------------------------------- --------------------------------------- -------------
Operating income
(loss) 8,471 (3,065) (373) 5,033 819 (180) 5,672
Other income (expense) 373 373 (151) 222
---------------------------------------- --------------------------------------- -------------
Income (loss) from
continuing operations
before income taxes 8,844 (3,065) (373) 5,406 668 (180) 5,894
Provision (benefit)
for income taxes 3,319 (139) C 3,180 (70) (67) C 3,043
---------------------------------------- --------------------------------------- -------------
Income (loss) from
continuing operations $ 5,525 $(3,065) $ (234) $ 2,226 $ 738 $ (113) $ 2,851
======================================== ======================================= =============
Basic earnings per
common share $ 0.64 $ 0.26
Diluted earnings per
common share $ 0.61 $ 0.25
Weighted average shares
outstanding:
Basic 8,594 10,960
Diluted 9,016 11,383
See accompanying notes to unaudited pro forma
condensed combined financial statements.
27
Notes to Unaudited Pro Forma Condensed Combined Financial Information
NOTE 1.
On October 3, 2001, ClearOne executed a share purchase agreement, as amended on
April 8, 2002, with the shareholders of Ivron Systems. ClearOne paid cash of
$6,000,000 for all of the issued and outstanding shares of Ivron Systems, cash
of $650,000 for all outstanding options to purchase common shares of Ivron
Systems, and incurred acquisition costs of $274,000 in the transaction.
Additional consideration may be issued to Ivron Systems' shareholders if certain
contingencies related to future earnings targets as defined in the share
purchase agreement are met. The following is a summary of the purchase price
allocation using the October 3, 2001 balance sheet of Ivron Systems (in 000's):
Cash $ 460
Accounts receivable 132
Inventory 608
Fixed assets 21
Goodwill and other intangible assets 6,144
Accounts payable (175)
Accrued expenses (266)
------------
Total $6,924
============
On January 21, 2002, ClearOne entered into a definitive agreement to
acquire E.mergent. This acquisition was completed on May 31, 2002. Under the
terms of the agreement, ClearOne acquired all of the issued and outstanding
stock of E.mergent; thereby acquiring title to all assets and assuming all
liabilities of E.mergent. As consideration in the transaction, ClearOne paid
cash of $7,300,000 and issued 873,000 shares of its common stock, less the
aggregate number of shares of common stock allocated to E.mergent's outstanding
stock options assumed by ClearOne in the merger because, in accordance with the
agreement and plan of merger, the 873,000 shares of ClearOne common stock were
allocated first to E.mergent stock options being assumed by ClearOne.
Outstanding E.mergent stock options were converted to options to purchase 4,158
shares of ClearOne's common stock at the ratio specified in the agreement and
plan of merger. The value of the stock consideration paid to E.mergent
shareholders used in determining the purchase price for accounting purposes was
based on ClearOne's average closing price two days prior to and two days
subsequent to January 21, 2002 (the announcement date for the acquisition) of
$16.55. Additionally, ClearOne incurred transaction costs of approximately
$1,071,000 in connection with the acquisition. This includes approximately
$418,000 for severance payments to terminating E.mergent executives and
approximately $51,000 of anticipated severance payments to other terminating
E.mergent employees, as well as approximately $602,000 related to professional
advisory, legal and accounting fees. E.mergent incurred transaction related
costs of approximately $926,000. These costs have been reflected as a reduction
of E.mergent's cash balance as of March 31, 2002. The following is a summary of
the purchase price allocation using the March 31, 2002 balance sheet of
E.mergent (in 000's):
Cash $ 579
Accounts receivable 3,144
Inventory 3,605
Fixed assets 443
Other assets 693
Goodwill 16,897
Other intangible assets 1,667
Accounts payable (1,548)
Accrued expenses and customer deposits (473)
Unearned maintenance contracts (1,007)
Other liabilities (625)
Capital leases and long-term debt (578)
------------
Total $ 22,797
============
The purchase price was determined as follows:
Cash paid to E.mergent shareholders $ 7,300
Value of ClearOne common stock issued to
E.mergent shareholders (868,842
shares x $16.55) 14,379
Fair value of ClearOne options issued
to E.mergent option holders,
determined using the Black-Scholes model 47
Acquisition costs to be paid by
ClearOne 1,071
------------
Total purchase price $ 22,797
============
NOTE 2.
The unaudited pro forma condensed combined balance sheet includes the
adjustments necessary to give effect to the E.mergent acquisition as if it had
occurred on March 31, 2002 as noted above. The unaudited pro forma condensed
combined statements of operations include the adjustments necessary to give
effect to the Ivron Systems and E.mergent acquisitions and the private placement
as if they had occurred on July 1, 2000. Adjustments included in the pro forma
condensed combined financial statements are summarized as follows:
28
(A) Elimination of E.mergent and Ivron historical goodwill and other
intangibles (and the related amortization) that were revalued as part of
the purchase price allocation.
(B) Values were assigned to intangible assets related to the Ivron Systems
acquisition as follows: developed technology - $5,780,000; goodwill -
$439,000. These allocations are based upon a final report from an
independent financial consulting firm. The developed technology was
determined to have useful lives as follows, with the resulting impact on
amortization expense:
Amortization for the
Value of Useful Nine months ended Fiscal Year ended
Technology Life March 31, 2002 June 30, 2001
----------------------------------------------------------------------
$ 135,000 3 $ 11,250 $ 45,000
1,002,000 5 50,100 200,400
4,643,000 15 77,383 309,533
------------------- --------------------------------------
$ 5,780,000 $138,733(i) $ 554,933
=================== ======================================
(i) Reflects the amortization expense from July 1, 2001 to
October 2, 2001, the period prior to the acquisition of Ivron Systems by
ClearOne.
Values were assigned to intangible assets related to the E.mergent acquisition
as follows: customer contracts, non-compete agreements and patents - $1,667,000;
goodwill (based upon E.mergent's March 31, 2002 balance sheet) - $16,897,000.
These allocations are based upon a final report from an independent financial
consulting firm. The contracts, non-compete agreements and patents were
determined to have useful lives as follows, with the resulting impact on
amortization expense:
Amortization for the
Nine months Fiscal Year
Useful ended ended
Intangibles Value Life March 31, 2002 June 30, 2001
------------------------------------------------------------------------
Contracts $ 392,000 1.5 $ 196,000 $ 261,333
Non-compete 215,000 3 53,750 71,667
Patents 1,060,000 15 53,000 70,667
---------------- ------------------------------
$ 1,667,000 $ 302,750 $ 403,667
================ ==============================
(C) The tax impact of tax-deductible amortization adjustments, as calculated
using ClearOne's blended statutory rate of 37.3%.
(D) Cash consideration to be paid to former E.mergent shareholders of
$7,300,000 plus ClearOne and E.mergent transaction costs of $1,997,000.
(E) Amount represents goodwill of $16,897,000 including capitalized acquisition
costs of approximately $1,071,000 and identifiable intangible assets of
$1,667,000. Such allocations were based upon a report issued to the Company
by an independent financial consulting firm.
(F) Represents the elimination of an investment that was deemed to have no
future value to ClearOne.
(G) Represents the fair value, as determined in accordance with FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--An Interpretation of APB Opinion 25, of the vested options to
purchase ClearOne common stock that were issued in exchange for vested
options to purchase E.mergent common stock in conjunction with the
agreement and plan of merger. The weighted average fair value of the
ClearOne options is approximately $11.36, using the Black-Scholes method,
as determined using the following assumptions: volatility of 62%, weighted
average expected life of the options of approximately 2 years, dividend
yield of 0%, and risk-free interest rate of 4.38%.
(H) Elimination of E.mergent's historical equity.
(I) In accordance with the agreement and plan of merger, the treasury stock
held by E.mergent, which consisted of 50,317 shares, was distributed to
E.mergent employees immediately prior to the consummation of the merger.
(J) Reflects the value of the shares of ClearOne common stock issued to holders
of E.mergent common stock as follows: (868,842 shares x $16.55 per share).
The per share price is based on ClearOne's average closing price two days
prior to and two days subsequent to January 21, 2002 (the announcement date
for the acquisition).
(K) Elimination of sales and related cost of sales between ClearOne and
E.mergent.
(L) Represents the elimination of a shareholder note from a former E.mergent
executive that was repaid upon consummation of the merger.
29
(M) Adjustment to record deferred tax liabilities on the recorded value of
E.mergent's identifiable intangible assets.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 14, 2002 CLEARONE COMMUNICATIONS, INC.
By: /s/ RANDALL J. WICHINSKI
------------------------
Randall J. Wichinski
Chief Financial Officer
31