UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 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.
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(Exact name of registrant as specified in its charter)
Utah 87-0398877
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1825 Research Way, Salt Lake City, Utah 84119
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (801) 975-7200
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Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of the voting common stock held by
non-affiliates is approximately $109,269,000 at August 30, 2002. This value was
computed at the price of $11.80 at which the stock traded on August 30, 2002
(which date is within 60 days of the filing of this Form 10-K).
The number of shares of ClearOne common stock outstanding as of August
30, 2002 was 11,195,619.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
We are a provider of end-to-end conferencing solutions. Our products and
services enable businesses, employees, customers and partners to communicate
effectively from disparate locations, while decreasing travel time and costs.
We operate in three business segments: products, conferencing services and
business services.
Products
Our products segment primarily manufactures and sells high quality products such
as:
o audio conferencing products;
o videoconferencing products;
o sound reinforcement products; and
o videoconferencing peripherals, such as cameras and furniture.
Conferencing Services
Our conferencing services segment provides:
o full-service conference calling;
o on-demand, reservationless conference calling;
o web conferencing;
o audio and video streaming; and
o customer training and education.
Our single point of contact, 1-800 LETS MEET(R), allows our customers easy and
cost-effective access to our complete breadth of conferencing services.
Business Services
Our business services segment provides customers with a broad range of services
on a local and national basis including:
o technical services such as the design, installation and servicing of
systems; and
o value added services such as proactive field support, training, system
consulting and help desk.
Our conferencing systems are designed for use in board and conference rooms,
lecture halls, classrooms, courtrooms, theaters, museums, churches, professional
broadcast facilities and streaming network facilities. Our major customers
include large technology and telecommunications distributors and major
conferencing services vendors. We sell our products and services through our
direct sales force and a network of independent dealers, distributors,
value-added resellers and retailers. We manufacture most of our
audioconferencing and videoconferencing equipment in-house using modern, modular
assembly workstations that are designed to enhance the efficiency and quality of
the manufacturing process. Our cameras are manufactured through contract
manufacturing facilities. We also build our own custom conferencing furniture.
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We have grown through a combination of strong internal growth and selective
acquisitions. Our net sales from continuing operations have increased from $11.8
million in fiscal 1997 to $54.5 million in fiscal 2002, representing a 35.8%
compound annual growth rate (CAGR). In addition, we have been recognized by FSB:
FORTUNE Small Business magazine as among the top 25 fastest-growing small
companies in America for the past two years and by Forbes magazine in 2001 as
the 11th best small company in America.
Our principal executive offices are located at 1825 Research Way, Salt Lake
City, Utah 84119, and our telephone number at this location is (801) 975-7200.
Our World Wide Web address is www.clearone.com.
We were incorporated in Utah on July 8, 1981 as Gentner Engineering Company. We
went public on March 26, 1985 as a result of a reverse merger with Insular,
Inc., a Utah company. As a result, our name changed to Gentner Communications
Corp. and effective January 1, 2002, we changed our name to ClearOne
Communications, Inc.
Business Strategy
Our goal is to be the best provider of end-to-end conferencing solutions. The
principal components of our strategy to achieve this goal are to:
Continue to increase our share of each conference room installation. We intend
to continue to increase our share of each conference room installation by
expanding our product offerings and by cross-selling our products with our
services. For example, in the last fiscal year, we began shipping our
V-There(TM) videoconferencing products and added video cameras, conferencing
furniture and accessories to our product offerings. Through the E.mergent
acquisition, described below, we gained access to E.mergent's distribution
channels and customer list, which we intend to use to cross-sell our products.
As a result of these efforts, our customers are able to equip a larger portion
of a conference room with our products.
Continue to expand our service offerings. To become a one-stop conferencing
solutions provider, we will continue to increase the range of our service
offerings. In May 2002, we expanded our business services to include the design
and installation of conferencing systems, field support and user training. We
are also expanding the geographical scope of our business services into Canada,
through the OM Video acquisition, described below.
Strengthen our sales and marketing efforts. We will continue to strengthen our
sales and marketing efforts through the proactive sales force that cross-sells
our products and services. The proactive sales force targets an underserved
market of customers who are unaware of the full functionality of our products
and services. The proactive sales force understands the conferencing needs of
these customers, educates them on the products and services we offer and
provides a solution that enables these customers to fully realize the benefits
of their investment in conferencing technology.
Pursue strategic acquisitions and investments. We have and will continue to
selectively pursue acquisitions to expand our product and service offerings, see
"Recent Developments."
Continue to develop new and competitive products. We are committed to offering
high-quality products and will continue to invest in research and development to
enhance existing products and to develop new products that will effectively
compete in the conferencing marketplace.
Recent Developments
Since July 1, 2001, we have completed several significant transactions that we
believe will position our company to compete more effectively in the
conferencing products and services markets.
Ivron Acquisition
On October 3, 2001, we purchased all of the issued and outstanding shares of
Ivron Systems, Ltd., a privately held developer of videoconferencing technology
based in Dublin, Ireland. We believe the Ivron acquisition will help position us
to further develop a competitive suite of videoconferencing products. Under the
terms of the share purchase agreement, as amended in April 2002, we paid cash of
$6.7 million to the stockholders and option holders of Ivron. In addition, we
agreed to pay an earn-out of 109,000 shares of our common stock and $1.0 million
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in cash in fiscal 2003 and fiscal 2004 if certain profits and earnings targets
are met. We incurred $345,000 in transaction costs in connection with the Ivron
acquisition.
Private Placement of Common Stock
On December 11, 2001, we closed a private placement of 1.5 million shares of our
common stock, which was subsequently registered on Form S-3 with the Securities
and Exchange Commission. Net proceeds from the private placement were $23.8
million, after costs and expenses associated with the private placement. The
proceeds were used to pay the cash purchase price of the E.mergent acquisition
and the OM Video acquisition described below, as well as for other corporate
purposes. We also issued warrants to purchase 150,000 shares of our common stock
at $17.00 per share to Wedbush Morgan Securities, Inc., our financial advisor in
the private placement. These warrants vested immediately and are exercisable
over 10 years. Under the terms of the warrants, we may be required to register
the shares of common stock issuable upon the exercise of the warrants, under the
Securities Act of 1933.
E.mergent Acquisition
On May 31, 2002, we completed the acquisition of E.mergent, Inc., whose
headquarters were in Minnesota. Prior to the acquisition, E.mergent primarily
operated in two business segments. The products segment designed, manufactured
and marketed a line of products that supports technologies in the
videoconferencing, audiovisual, identification, education and medical markets.
The services segment, called Acoustic Communications Systems(TM) (ACS), provided
services in the design, installation and support of meeting room technologies.
In connection with the E.mergent acquisition, we paid to the shareholders of
E.mergent cash of $7.3 million cash and 868,691 shares of our common stock. In
addition, E.mergent stock options outstanding on the closing date of the
acquisition were converted to options to purchase 4,158 shares of our common
stock. We incurred transaction costs of $1.1 million in connection with the
E.mergent acquisition, including approximately $470,000 of severance costs.
OM Video Acquisition
On August 27, 2002, we purchased all of the issued and outstanding shares of
Stechyson Electronics Ltd., doing business as OM Video, an audiovisual
integration firm headquartered in Ottawa, Canada. We paid to OM Video's
shareholders approximately $6.6 million in cash and may be required to pay to
them an additional $600,000 as well as an earn-out of $800,000 in the 12 months
following the acquisition. The additional $600,000 payment to OM Video's
shareholders is contingent on the results of our audit of OM Video's financial
statements and an audit by the Canada Customs and Revenue Agency. The OM Video
acquisition complements our focus on providing a total multimedia collaboration
solution by strengthening our business services segment with a greater North
American presence and an expanded technical team to better support our channel
partners.
Sale of Broadcast Telephone Interface Products
On August 27, 2002 we sold a portion of our broadcast telephone interface
products line to Comrex Corp., a privately held corporation based in Devens,
Massachusetts. We will discontinue production of all our broadcast telephone
interface products over the next 12 months.
Industry Overview
We compete in a number of different markets for our products and services,
including:
o the audio conferencing systems market;
o the videoconferencing systems market;
o the conferencing services market; and
o the market for our business services.
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Audio Conferencing Systems Market
Frost & Sullivan, an international marketing consulting company that publishes
market research reports, defines the audio conferencing systems market as the
market for tabletop and installed audio conferencing systems. A tabletop audio
conferencing system consists of products that enable a group of people in a
conference room to speak with clear transmission to an outside caller. A
tabletop unit includes at least a microphone, speaker and keypad. Installed
systems are generally used in larger conference rooms and auditoriums. Installed
systems provide higher quality audio and have more capacity to handle a larger
number of callers.
According to Frost & Sullivan, the revenues for the audio conferencing systems
market were $125.9 million in 2001 and are forecasted to grow to $347.7 million
in 2008 or at a CAGR of 15.6%. One of the principal drivers of this growth is
the availability of upgraded product offerings. Audio conferencing systems now
offer higher quality audio conferencing than speakerphones, are easy to use, and
are able to bridge multiple parties. Another factor that will have a significant
impact on the development of audio conferencing systems is the transition to the
Internet Protocol (IP) network from the traditional public switched telephone
network (PSTN). The IP network will provide for a greater convergence of audio
and data. According to Frost & Sullivan, future revenues and demand growth are
expected to revolve around product and feature advancements in systems that
support IP conference calls. These growth factors are expected to be offset
slightly by direct competition from speakerphones and similar less expensive
products and reduced customer spending given the current economic conditions.
According to Frost & Sullivan, we had the largest share of the installed segment
of the market and the second largest share of the audio conferencing systems
market in calendar 2001, with Polycom being our closest competitor. In 2001, our
market share of the audio conferencing systems market was 22.2%. We were the
leading provider of installed audio conferencing systems in 2001, with 55.4%
market share in 2001.
Videoconferencing Systems Market
Frost & Sullivan defines the videoconferencing systems market as the market for:
(1) group systems that are comprised of stand alone or rack mount codecs
(systems that encode and decode audio or video signals) targeted at
high-end conference room applications;
(2) personal desktop systems that are designed for one-to-one business
communication; and
(3) MPEG (high quality video) codecs that are used in group conference
settings or to facilitate desktop interactive video.
Frost & Sullivan estimates that the videoconferencing systems market will grow
from revenues of $585.3 million in 2001 to $2.53 billion in 2008, or at a CAGR
of 23.2%. According to Frost & Sullivan, most of this market growth will be
generated in the group systems segment of the market, which accounted for 89.4%
of the market's revenues in 2001 and is projected to account for 93.9% of the
market's revenues in 2008. Market growth will be driven primarily by improving
technology as users switch from the Integrated Services Digital Network (ISDN)
to IP networks, declining prices, and higher awareness and use of
videoconferencing systems. In addition, Frost & Sullivan anticipates that there
will be an emerging demand for videoconferencing systems that accommodate
wireless standards and applications in the future.
Conferencing Services Market
International Data Corporation, or IDC, an established provider of industry
analysis and market data, defines the conferencing services market to include:
o audio conferencing;
o videoconferencing;
o newly emerging online services enabling data conferencing; and
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o web-based collaborative conferencing, as well as the delivery of
e-learning solutions.
IDC forecasts that the worldwide conferencing services market will generate
revenues of $14 billion by 2005, representing a CAGR of 38% over the period
between 2000 and 2005. According to IDC, the development of the conferencing
services market will be driven by:
(1) the convergence of audio, video and data conferencing technologies;
(2) the increasing acceptance and use of conferencing as a
time-and-cost-saving business tool;
(3) the availability of spontaneous, reservationless conferencing
services;
(4) the increasing popularity of subscription and premium packaged pricing
for conferencing services; and
(5) the extension of conferencing applications to areas such as customer
relationship management, sales, disaster recovery and wireless instant
messaging.
Business Services
A large portion of the audiovisual systems integration market is composed of
small regional companies with highly focused areas of expertise, that both
resell audio conferencing and videoconferencing equipment, and design,
configure, integrate and install audio conferencing and videoconferencing
systems. We distinguish ourselves from these traditional audiovisual
integrators, as well as larger companies that operate on a national basis, with
the large breadth of our product and service offerings, especially audio, web
and data conferencing services.
Business Segments
We operate in three different reportable segments:
(1) the products segment;
(2) the conferencing services segment; and
(3) the business services segment.
Products Segment
Net revenues from our products segment were $37.2 million in fiscal 2002, $28.2
million in fiscal 2001 and $22.2 million in fiscal 2000.
The products segment consists of sales of audio conferencing and
videoconferencing products as well as videoconferencing peripherals such as
cameras and furniture. In addition to conferencing products, we sell products
into the sound reinforcement and assistive listening systems market. In fiscal
2002, we also sold products into the broadcast market, but in August 2002, we
sold a portion of our broadcast telephone interface product line and will
discontinue production of all our broadcast telephone interface products within
the next 12 months. (See "Recent Developments - Sale of Broadcast Telephone
Interface Products" above.) Through internal growth and strategic acquisitions,
we significantly expanded our product offerings in our core business areas
during the past three years, thereby enabling us to capture a larger share of
each conference room installation. In other words, our customers are able to
equip a larger portion of a conference room with our products.
Our principal products now include:
o audio conferencing systems and accessories;
o videoconferencing systems and accessories;
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o conferencing furniture; and
o sound reinforcement products.
Audio Conferencing Systems and Accessories
We have been developing high-end audio conferencing products since 1991. Our
proprietary Distributed Echo Cancellation(R) technology provides effective echo
cancellation, preventing the creation of additional noise during a conference
call and we have established strong brand recognition for our audio conferencing
products.
Our audio conferencing systems are divided into two broad product lines: (1) the
Audio Perfect(R) product line, and (2) the XAP(TM) product line. We began
shipping our Audio Perfect(R) product line in 1998. Building on our Audio
Perfect(R) technology, we began shipping our XAP(TM) products in June 2001. Our
XAP(TM) product line features the latest advances in technology and
functionality. It has more processing power than our Audio Perfect(R) products
and contains noise cancellation technology in addition to our Distributed Echo
Cancellation(R) technology found in our Audio Perfect(R) product line. The Audio
Perfect(R) product line offers lower-cost products that still allow users to
experience quality sound in a wide variety of conferencing venues.
The XAP(TM) and Audio Perfect(R) products are comprehensive audio control
systems designed to excel in the most demanding acoustical environments and
routing configurations. These products are also used for integrating
high-quality audio with videoconferencing systems. Our conferencing products are
used in such diverse settings as conference rooms, distance learning facilities,
and courtrooms. The table below sets forth a brief description of the principal
products in each of our XAP (TM) and Audio Perfect(R) product lines.
Product: Description:
- --------------------------- -------------------------------------------------
XAP(TM) Products
- ----------------
XAP(TM)800 o our most powerful, feature-rich product
o dramatically reduces noise and echo
o eight microphone inputs
o performs the combined functions of several
audio devices, including a microphone mixer
and equalizer
o suitable for use in large conference venues
XAP(TM)400 o similar functions to the XAP(TM)800, but
with four microphone inputs
o suitable as a stand-alone system for small
to medium-sized conference rooms or as an
addition to a videoconferencing system
XAP(TM)TH2 o telephone interface that routes caller audio
from a single telephone line into the XAP(TM)
800 audio conferencing system to connect
audio conferencing participants via a
telephone line
o up to 16 callers can be added to a
conference by using 16 XAP(TM)TH2s
G-Ware o new software platform for the XAP line that
simplifies setup and configuration of the
sophisticated mixing and processing
functions of the XAP(TM)800
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Product: Description:
- --------------------------- -------------------------------------------------
Audio Perfect(R) Products
- -------------------------
AP800 o performs the combined functions of several
audio devices
o allows easy integration with codecs,
external public announcement systems, sound
reinforcement equipment, VCRs and CD players
AP400 o similar functions to the AP800, but with
four microphone inputs
o suitable as a stand-alone system for small
to medium-sized conference rooms or as an
addition to a videoconferencing system
AP10 o telephone interface that routes caller audio
from a single telephone line into the Audio
Perfect(R) audio conferencing system to
connect audio conferencing participants via
a telephone line
o up to 16 callers can be added to a
conference by using 16 AP10s
AP-Ware(TM) o PC-based software designed to make the Audio
Perfect(R)family of products more user
friendly
o simplifies the setup, configuration and
operation of the Audio Perfect(R) system
In addition, we offer a full range of audio conferencing accessories that
include:
o control panels, to conveniently control the zoning, volume and other
functions of the XAP(TM)800 and XAP(TM) 400;
o the XAP IR Remote Control and the AP IR Remote Control that operate
the XAP(TM) and Audio Perfect(R) products using infra-red
transmissions;
o a variety of microphones; and
o wall mount speakers.
Videoconferencing Systems and Accessories
We expanded our videoconferencing product offerings primarily through strategic
acquisitions. Through the Ivron acquisition in October 2001, we introduced the
V-There(TM) videoconferencing product line. Through the acquisition of E.mergent
in May 2002, we expanded our videoconferencing product offerings to include a
wide selection of cameras and other videoconferencing accessories.
We believe our V-There(TM) series of products have several features that appeal
to existing and potential customers. First, it has robust information sharing
capabilities as compared to systems that only offer such capabilities with an
add-on. Among other functions, this information-sharing feature allows
participants in a videoconference to browse the web as well as share and
exchange documents created in any Microsoft Windows application. In addition,
V-There(TM) systems have dual monitor support, thereby allowing participants to
continue to see each other on one monitor while data appears on a second
monitor. Finally, we can easily combine our V-There(TM) products with our high
quality audio conferencing products to provide our customers with a conferencing
system that has both top quality video and audio performance.
Our videoconferencing accessories consist of several lines of cameras. Our
Professional Document Camera Series features professional, high quality cameras
for videoconferencing applications. Our integrated camera solutions include a
variety of cameras that are used for integrated videoconferencing applications.
For example, the PTZCam(TM) can be used to capture the presenter and may be used
together with the Ceiling DocCam(TM) cameras (installed on ceilings) and the
WallCam(TM) cameras (installed on walls) to view documents during a
videoconference.
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Our other videoconferencing accessories feature camera control and expanded
multimedia capabilities to enable our customers to customize their
videoconferencing systems.
Conferencing Furniture
We offer a wide selection of conferencing furniture for various conference
settings. Our furniture line features audiovisual carts, plasma screen carts and
pedestals, standard and set top videoconferencing carts, document camera carts,
tables, secure cabinets and podiums. In addition, we offer our customers the
option of customizing our furniture or designing their own furniture.
Sound Reinforcement Products
Our sound reinforcement products are designed for sound reinforcement
applications in large venues such as hotels, theaters, convention centers, and
houses of worship.
Broadcast Telephone Interface Products
Our telephone interface product line offered a full selection of products
ranging from simple single-line couplers, which enable users to send and receive
audio over a single telephone line, to computerized multiple-line systems used
in call-in talk-show programs. On August 27, 2002, we sold a portion of our
broadcast telephone interface product line to Comrex Corp., a privately held
broadcast equipment provider. We will discontinue production of all our
broadcast telephone interface products over the next 12 months.
Assistive Listening System Products
Our assistive listening system products enable users to comply with the
Americans with Disabilities Act (ADA) by providing enhanced audio for hearing
impaired people in places such as theaters, houses of worship, schools,
courtrooms, stadiums and arenas. We also offer a line of assistive listening
system products that is designed for non-ADA applications such as language
translation and tour groups, and operate in the non-ADA 216 MHz frequency range.
Warranty and Service
We provide a one-year warranty on our products, which covers both parts and
labor. Under the terms of the warranty, we have the option of repairing or
replacing products found to be defective during the warranty period as long as
customers have followed the proper preventative maintenance procedures. Repairs
necessitated by misuse of the products or that are required outside the warranty
period are not covered by our warranty. We also sell extended warranties for our
XAP(TM), Audio Perfect(R) and GT1524 products, which enable customers to get a
replacement unit within 24 hours. In fiscal 2002, we spent $62,000 to honor our
product warranties.
Conferencing Services Segment
Sales from our conferencing services segment and our business services segment
were $15.8 million in fiscal 2002, $11.7 million in fiscal 2001 and $5.9 million
in fiscal 2000.
Since 1993, we have provided our customers with a complete array of conferencing
services under the brand name Gentner Conference Call(R) (1-800 LETS MEET(R)).
Our services offering is made up of (1) audio conferencing services, where we
connect multiple parties on a conference call; (2) video bridging that is needed
where there are more than two sites participating on a videoconference at the
same time; and (3) data collaboration, which allows documents to be shared over
the Internet.
We provide our audio conferencing services directly using our own operations
center. Operator-assisted conference services are run through our call center in
Utah, and are accessible 24 hours a day, seven days a week. In 1999, we enhanced
our teleconferencing service with the introduction of Instant Access(TM)
Conferencing. Our InstantAccess(TM) reservationless conference calling service
allows our customers to make reliable, clear conference calls from any location,
at any time, without a reservation. To access the service, customers make an
application using our secure, online form. The application is processed within
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one hour, and once the account is activated, customers make calls using a
personal account number and personal identification number on a touch-tone
telephone or through the Internet.
We offer web conferencing services that allow our customers to make
presentations, conduct new product launches, conduct sales training, or convene
focus groups from disparate locations. TheDataPort.com(TM) (powered by WebEx)
allows our customers to share documents, use visual aids and surf the web in an
interactive forum. In July 2001, we added audio and video streaming to our suite
of conferencing services, enabling customers to enhance conference calls with
live and archived audio and video over the Internet. We outsource the video
bridging, data collaboration and audio and video streaming components of our
conferencing services offering.
Business Services Segment
Our business services segment commenced operations on June 1, 2002 with the
acquisition of E.mergent and generated sales of $1.5 million between June 1,
2002 and June 30, 2002.
Prior to the E.mergent acquisition, we were providing timely, interactive
support to customers needing operational or technical assistance with our
products, as well as products manufactured by other technology companies. These
services are provided over the telephone and, if necessary, on site. In
addition, our technical support services team also provides application and
design assistance, customer and dealer training, technical documentation, and a
product rental program to reduce down time during repair of a customer's
product. Our technical support team was strengthened by the addition of
E.mergent's ACS division, which specializes in the design, installation and
support of meeting room technologies.
With the E.mergent acquisition, our business services segment provides customers
with a broad range of services on a local and national basis, including:
o technical services such as the design, installation and servicing of
systems; and
o value added services such as proactive field support, training, system
consulting and help desk.
Our technical support team members, including the ACS members, will continue to
assist our customers and dealer network with service, support and training. Our
technical support team regularly communicates with our sales, engineering and
manufacturing teams to ensure that customer feedback is directed toward
initiating product and service improvements and is incorporated into our future
products and services. We believe technical support service plays a vital role
in building user confidence in our products. We are committed to providing
strong technical service and support to our customers.
Backlog
As of June 30, 2002, our backlog (of orders received but not filled) was
approximately $832,000. As of June 30, 2001, our backlog was approximately $10.5
million, and as of June 30, 2000, our backlog was approximately $1.8 million.
The increase in our backlog between 2000 and 2001 was due to the implementation
of a blanket purchase order program, under which we discounted the list price of
our products for dealers who made large orders. This resulted in a backlog in
2001 that was larger than in prior years. The blanket purchase order program for
our dealers ended June 30, 2002 and as a result our backlog has returned to more
normal levels that reflect work in process.
Marketing and Sales
In fiscal 2002, approximately $31.2 million, or 84%, of our total product sales
were generated in the United States and product sales of approximately $6.0
million were generated outside the United States. We sell our products in over
80 countries worldwide, while our conferencing and business services are
provided to customers in North America. Our primary strategy for foreign
expansion is to establish relationships with dealers or distributors in markets
where we believe there is a growing need for our products and services. Our
wholly owned subsidiary, Gentner Communications EuMEA GmbH, is headquartered in
Nuremberg, Germany. Gentner EuMEA focuses on distribution, technical support,
and training of dealers and customers located in Europe, the Middle East and
northern Africa.
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We believe the E.mergent acquisition will strengthen our marketing and sales
efforts in several ways. First, since E.mergent and ClearOne distributed their
products through different dealer channels prior to our acquisition of
E.mergent, there is now an opportunity to cross-sell both sets of products into
the different sales channels. Second, we may be able to bring our products and
services to E.mergent's customers that currently use other vendors for
conferencing products and services. Third, with E.mergent's ACS division, we
have expanded our technical team to assist our dealers with service, support and
training, which in turn may increase their ability to sell our products and
services. Fourth, we hope to broaden our international distribution and
expertise through E.mergent's experience and distribution channels in
international markets.
Sales of Products
We sell our products through four principal channels: (1) independent dealers;
(2) distributors; (3) resellers; and (4) a direct sales force. In addition, we
also sell our ClearOne(R) conference phone through retail distribution channels
and we regularly participate in communication forums, trade shows, and industry
promotions.
Independent Dealers
Our products are sold by a worldwide network of approximately 400 audio and
visual equipment dealers and integrators (which are also referred to as the
dealers or our dealer network) on a non-exclusive basis. These dealers provide
audio and video solutions to their customers for use in corporate boardrooms,
distance learning facilities, training centers and courtrooms. These solutions,
in turn, may entail the use of our products. We maintain close working ties with
our dealer network and offer dealer education and training for our entire suite
of products and services.
Distributors
Our products are also sold worldwide through five master distributors and dozens
of smaller distributors who buy our products at a discount to list price and
resell them on a non-exclusive basis to current and potential, smaller dealers.
Our distributors are required to provide technical and non-technical support to
smaller dealers for our products. They maintain their own inventory and accounts
receivable.
Resellers
As a result of the E.mergent acquisition, we now have approximately 30 active
master resellers in the education, audiovisual, identification and
videoconferencing markets. These resellers typically buy our products in large
volumes and may bundle our products with other products for resale to our
dealers and end users. Resellers may offer products of several different
companies, including products from our competitors. Our agreements with these
resellers are short term and may be terminated at any time.
Direct Sales Force
Our proactive sales force contacts prospective customers by telephone and makes
field visits.
Retail Distribution Channels
Our ClearOne(R) conference phone is sold through the dealer network described
above and minimally through retail distribution channels such as office
equipment and supply stores and their websites.
Trade Shows and Industry Forums
We regularly attend industry forums and exhibit our products at trade shows to
ensure our products remain highly visible to dealers and to keep abreast of
market trends.
Sales of Conferencing Services
Sales of our conferencing services are generated three different ways. First, a
staff of 15 direct sales people calls on businesses to generate direct sales for
1-800 LETS MEET(R). Second, we have a dedicated sales for that uses agents to
sell our conferencing services. And third, we sell our conferencing services to
resellers. Agents and resellers can either buy the conferencing services
11
wholesale from us and then resell the conferencing services to their customers
with a mark-up in price, or we can provide the service, whereby we invoice the
customers but we pay the agent or reseller a commission.
Sales of Business Services
Our business services are sold by a direct sales force, located throughout the
country. Our business services sales people contact potential customers by
telephone and follow-up with on-site consultations. Our business services sales
people also regularly consult with our technical support team members (see
description of "Business Services Segment," above), to ensure that the most
appropriate conferencing solution is presented to our customers.
Competition
The communications market is characterized by intense competition and rapidly
evolving technology. We have no single competitor for all of our product and
service offerings, but we compete with various companies with respect to
specific products and services. We believe we are the only company that provides
high-end conferencing products together with a full suite of conferencing and
business services. We believe this is a competitive advantage that enables us to
provide an end-to-end solution to any customer who wants to bring geographically
dispersed people together.
Product Market
With respect to our products, we believe the principal factors driving sales
are:
o product design;
o quality and functionality of products;
o establishment of brand name recognition;
o pricing;
o access to and penetration of distribution channels;
o quality of customer support; and
o a significant customer base.
We believe we compete successfully as a result of the high quality of our
products and the strength of our brand.
In the audio conferencing systems market, our competitors include Polycom and
other companies that offer both tabletop and installed systems. According to
Frost & Sullivan, we had the largest share of the installed segment of the
market and the second largest share of the overall conferencing products market
in calendar 2001, with Polycom being the closest competitor. In the
videoconferencing systems market, our primary competitors include Polycom,
Tandberg and Sony. In the conferencing accessories market, our competitors
include Sony, Panasonic, Toshiba, Sharp Electronics, Canon, Elmo, Ken-a-Vision
and Euromex. Our conferencing furniture products compete with the products of
Video Furniture International, Accuwood and Comlink.
We sold a portion of our broadcast telephone interface products line in August
2002 and will discontinue production of all of our broadcast telephone interface
products over the next 12 months. See "Recent Developments - Sale of Broadcast
Telephone Interface Products" above.
Conferencing Services Markets
In the conferencing services market, the competitive factors that drive the
market are price, service quality, reliability, name recognition, value-added
features and available capacity. Our competitors include large telephone
companies such as AT&T, Global Crossing, Sprint and WorldCom, as well as
independent service providers, such as Intercall, ACT, Raindance and Genesys.
12
Although major long distance carriers hold a large share of the conferencing
services market, conferencing is not a primary focus of their business. Excess
long distance line capacity enables long distance carriers to offer discounted
prices to high-volume conferencing customers but they generally charge higher
conferencing prices to smaller and medium volume customers. This creates a
pricing structure that enables us and other independent service providers to
compete on a price-and-service basis for the business of these small and medium
volume customers. Despite this market opportunity, we continue to see
significant pricing pressures in the conferencing services market, which could
adversely affect our gross margins and results of operations.
Business Services Markets
In the business services market, our strategy is to have a strong business
services team that enables us to provide an end-to-end solution to customers. In
order to provide a customer with an end-to-end solution, we need to complement
our product offerings with services that include design and application
assistance, customer training, installation and technical support. We believe
that because of our mix of products, conferencing services and business
services, we do not compete directly with other providers whose principal focus
is providing such business services.
In each of the markets in which we compete, some of our competitors may have
access to greater financial, technical, manufacturing and marketing resources,
and as a result they could respond more quickly or effectively to new
technologies and changes in customer preferences.
Product Development
We are committed to research and development and view our continued investment
in research and development as a key ingredient to our long-term business
success. Our research and development expenditures were $4.1 million in fiscal
2002, $2.5 million in fiscal 2001 and $1.3 million in fiscal 2000.
Our core competencies in research and development include many audio
technologies, including telephone echo cancellation and acoustic echo
cancellation. Our ability to use digital signal processing technology to perform
audio processing operations is also a core competency. Our research and
development efforts are supported by our internal computer aided design team
whose members create electrical schematics, printed circuit board designs,
mechanical designs, and manufacturing documentation. We believe the technology
developed through this interactive process is critical to the performance of our
products. We also believe that ongoing development of our core technological
competencies is vitally important to maintaining and increasing future sales of
our products and to enhancing new and existing products and services.
Manufacturing
We currently manufacture and assemble most of our audio and videoconferencing
products in Utah and our conferencing furniture in Minnesota. Our manufacturing
facilities incorporate modern, modular, assembly work stations and work
accessories that are designed to enhance the efficiency and quality of the
manufacturing process. We anticipate that our current manufacturing equipment
will be utilized for several years. Barring unanticipated demand or capacity
constraints, we believe we have sufficient production capacity to meet increased
demand for our products in fiscal 2003.
We generally purchase our assembly components from distributors. We also buy a
limited amount of components directly from fabricators located near our
manufacturing facilities. Our principal suppliers include Avnet/Marshall,
Arrow/Bell, Future Electronics, Precise Metal Products, and Suntech Circuits.
All of these suppliers are located in the United States, except for Suntech
Circuits, which is located in Taiwan.
Our policy is to establish and maintain a minimum of two vendor sources for each
component. Many of the components utilized by us in our manufacturing process
are bonded by certain distributors and manufacturers, meaning that the component
inventory will be kept "on-site" at vendor stock locations, managed by the
vendors. The component inventory will then be sold to us on an as-required,
when-required basis. We also have a consignment relationship with some of our
suppliers, meaning that the ordered components are placed on our suppliers'
shelves until we require them.
13
Our ALS products, as well as the ClearOne(TM) Conference Phone, are manufactured
by a contract manufacturer in Taiwan. Our videoconferencing cameras are
outsourced for manufacture in Minnesota.
We have made arrangements to outsource our manufacturing and conferencing
services operations, in the event our operations are disrupted by a disaster. We
also carry business interruption loss insurance with coverage of up to $3.5
million.
Telecommunications and Information Systems
In July 2002, we began upgrading our computer system to the Oracle 9i database
and 11i e-business suite of applications, providing full enterprise resource
planning across product and service business units. We have developed an
extensive software back-up system that provides for daily back-ups that are
stored in a fireproof safe, as well as biweekly back-ups stored in an off-site
storage facility.
We are reliant on our telecommunications and information systems network in
order to conduct our day-to-day operations, and a failure of the network for an
extended period of time could adversely affect our ongoing business (see "Risk
Factors"). In addition, we must expand our network to accommodate the growth in
our conferencing services segment. As such, we are developing and establishing
an infrastructure that will accommodate network growth and improve operational
efficiencies. To this end, we have carried out the following initiatives:
o pre-wiring our Utah building to accommodate equipment repair and
installation;
o backing-up power sources to guard against power failure;
o installing redundant equipment and circuit cards for essential
components of the network;
o installing alarm systems and monitoring equipment; and
o locating the servers and audio conferencing bridges in a temperature
controlled network room.
We have also installed redundant teleconferencing bridging equipment that will
enable us to continue to provide our conferencing services in the event of
equipment failure. As an additional precaution, we have established
relationships with other teleconferencing service providers to outsource our
teleconferencing services in the event of equipment failure.
Patent and Proprietary Rights
We believe that our success depends in part on our ability to protect our
proprietary rights. We rely on a combination of patent, copyright, trademark and
trade secret laws and confidentiality procedures to protect our proprietary
rights. The laws of foreign countries may not protect our intellectual property
to the same degree as the laws of the United States.
We require our employees, customers and potential distributors to enter into
confidentiality and non-disclosure agreements before we disclose any
confidential aspect of our technology, services or business. In addition, our
employees are routinely required to assign to us any proprietary information,
inventions or other technology created during the term of their employment with
us. These precautions may not be sufficient to protect us from misappropriation
or infringement of our intellectual property.
Patents
We hold the following patents:
o a U.S. patent pertaining to technology in the Gentner
ClearOne(R) conference phone, that was granted in 2001 and is
effective until 2018; and
o a U.S. patent for the FlexCam that was granted in 1996 and is
effective until 2010.
14
Servicemarks
We hold the following federal registered servicemarks, among others:
o 1-800 LETS MEET(R);
o EXPRESS CONFERENCE(R);
o MEETINGROOMTOOLS.COM(R); and
o MRT(R).
In addition to these servicemarks, we have federal applications pending for the
following servicemarks:
o YOU'RE VIRTUALLY THERE(SM); and
o CLEARONE COMMUNICATIONS AUDIT PROCESS (CAP)(SM).
Trademarks
We hold the following registered trademarks:
o AUDIO PERFECT(R); o "GENTNER(R)" (as both the
name and logo);
o CLEARONE(R); o DOCCAM PRO(R);
o DISTRIBUTED ECHO CANCELLATION(R); o STUDENTCAM(R);
o DISTRIBUTED ECHO CANCELLATION o TEACHCAM(R); and
(D.E.C.)(R);
o GENTNER(R); o VIDEOLABS(R)(both name and
logo).
In addition to these registered trademarks, we have applications pending for the
following trademarks in jurisdictions where we conduct significant business:
o XAP(TM);
o V-THERE(TM); and
o FLEXCAM(TM).
Government Regulation
We design and manufacture our products in accordance with the technical design
standards of the Federal Communications Commission (FCC) Rules Part 15 and Part
68.
Part 15 of the FCC Rules governs radio frequency devices and sets forth the
levels of electromagnetic radiation that may be emitted from a device that is
operated without a license. All of our products that are covered by Part 15 of
the FCC Rules are tested at a FCC approved testing facility to ensure that our
products conform to the requirements of Part 15 of the FCC Rules.
Part 68 of the FCC Rules sets forth standards for telephone equipment that is
intended to be connected to the PSTN used within the United States. All of our
telecommunications products that are intended for use with the PSTN are tested
15
for compliance with Part 68 of the FCC Rules by an independent testing
laboratory and are registered by the FCC.
We also design and manufacture our equipment pursuant to industry product safety
standards. The Canadian Standards Association (CSA), designated as a Nationally
Recognized Testing Laboratory by the Occupational Safety and Health
Administration, tests all of our products and performs quarterly spot audits of
our products to ensure that our products continue to comply with Canadian and
U.S. safety standards.
Several of our products are currently registered for sale in various
international markets including Canada, Mexico, Australia, Japan, South Africa,
England, Denmark and France. We conform to applicable design standards in each
of the foreign countries in which our products are sold.
Financial Information by Geographic Region
See the consolidated financial statements and footnotes for a discussion of
financial revenues by geographic region.
Employees
As of August 30, 2002, we had 311 employees, 306 of who were employed on a
full-time basis. None of our employees are subject to a collective bargaining
agreement.
Risk Factors
Risks Relating to Our Business
We face intense competition in all of the markets for our products and services,
and our operating results will be harmed if we cannot compete effectively
against other companies.
As described in more detail in the section entitled "Competition", the markets
for our audio conferencing and videoconferencing products and services are
characterized by intense competition and pricing pressures and rapid
technological change. We compete with businesses having substantially greater
financial, research and development, manufacturing, marketing, and other
resources. If we are not able to continually design, manufacture, and
successfully introduce new or enhanced products or services that are comparable
or superior to those provided by our competitors and at comparable or better
prices, we could experience pricing pressures and reduced sales, profit margins,
profits, and market share, each of which could materially harm our business.
Difficulties in estimating customer demand in our products segment could harm
our profit margins.
Orders from our dealers and resellers are based on demand from end-users.
Prospective end-user demand is difficult to measure. This means that our
revenues in any fiscal quarter could be adversely impacted by low end-user
demand, which could in turn negatively affect orders we receive from resellers.
Our expectations for both short- and long-term future net revenues are based on
our own estimates of future demand. We also determine the amount of our expenses
based on those revenue estimates. If our estimates of sales are not accurate and
we experience unforeseen variability in our revenues and operating results, we
may be unable to adjust our expense levels accordingly and our profit margins
will be adversely affected.
Our profitability may be adversely affected by our continuing dependence on our
distribution channels.
We market our products primarily through a network of dealers and master
distributors. All of our agreements with such dealers and distributors are
non-exclusive, terminable at will by either party and generally short-term.
Furthermore some of our dealers are or may become our competitors in the
business services market and may terminate their dealer agreement with us. We
cannot assure you that any or all such dealers or distributors will continue
their relationship with us. Dealers or distributors cannot easily be replaced
and the loss of revenues and our inability to reduce expenses to compensate for
the loss of revenues could harm our net revenues and profit margins.
16
Although we rely on our distribution channels to sell our products, our dealers
and distributors are not obligated to devote any specified amount of time,
resources or efforts to the marketing of our products or to sell a specified
number of our products. There are no prohibitions on dealers or distributors
offering products that are competitive with our products and most do offer
competitive products. The support of our products by dealers and distributors
may depend on the competitive strength of our products and the price incentives
we offer for their support. If our dealers and distributors are not committed to
our products, our revenues and profit margins will be adversely affected.
We depend on a limited number of suppliers for components and the inability to
obtain sufficient supplies of components could adversely affect our product
sales.
While it is our policy to have a minimum of two vendor sources for components,
certain electronic components used in the manufacture of our products can only
be obtained from a single manufacturer and we are solely dependent upon these
manufacturers to deliver such components to our suppliers so that they can meet
our delivery schedules. We do not have a written commitment from such suppliers
to fulfill our future requirements. While our suppliers maintain an inventory of
such components, we cannot assure you that such components will always be
readily available, available at reasonable prices, available in sufficient
quantities, or delivered in a timely fashion. If such components become
unavailable, it is likely that we will experience delays, which could be
significant, in the production and delivery of our products, unless and until we
can otherwise procure the required component or components at competitive
prices, if at all. We have experienced increased prices on certain of these key
components that have limited availability. The lack of availability of these
components could have a material adverse effect on our ability to sell products
and the increase in prices is likely to harm our profit margins.
Furthermore, 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
products we expect to utilize in the manufacture of our products, are unable to
develop or acquire components in a timely fashion, our ability to achieve
production yields, revenues and net income may be adversely affected.
Product obsolescence could harm demand for our products and could adversely
affect our revenues and our results of operations.
Our industry is subject to rapid and frequent technological innovations that
could render existing technologies in our products obsolete and thereby decrease
market demand for such products. If any of our products become slow-moving or
obsolete and the recorded value of our inventory is greater than its market
value, we will be required to write-down the value of our inventory to its fair
market value, which would adversely affect our results of operations.
Product development delays 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:
o meeting required specifications;
o hiring a sufficient number of developers;
o developing and testing software; and
o achieving necessary manufacturing efficiencies.
The integration of the businesses of E.mergent and Ivron with our pre-existing
business may lead to product delays due to logistics and the creation of new
development teams. We initially experienced product development delays
associated with our V-There videoconferencing products, although these have been
resolved. Once new products reach the market, they may have defects, which could
17
adversely affect market acceptance of these products and our reputation. If we
are not able to manage and minimize such potential difficulties, our business
could be negatively affected.
If we are unable to protect our intellectual property rights or have
insufficient proprietary rights, our business would be materially impaired.
We currently rely primarily on a combination of trade secrets, copyrights,
trademarks, patents and nondisclosure agreements to establish and protect our
proprietary rights in our products. We cannot assure you that others will not
independently develop similar technologies, or duplicate or design around
aspects of our technology. In addition, we cannot assure you that any patent or
registered trademark owned by us will not be invalidated, circumvented or
challenged or that the rights granted thereunder will provide competitive
advantages to us. Litigation may be necessary to enforce our intellectual
property rights. We believe 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.
Our industry is characterized by vigorous protection of intellectual property
rights. Such claims and litigation are expensive and could divert our
management's attention, regardless of their merit. In the event of a claim, we
might be required to license third party technology or redesign our products,
which may not be possible or economically feasible.
We currently hold only a limited number of patents. To the extent that we have
patentable technology that we have not applied to have patented, others may be
able to use such technology or even gain priority over us by patenting such
technology themselves.
We are solely dependent on our network and telecommunications providers for our
conference calling services business and rely on our network for our other
functions.
We rely heavily on our network equipment, telecommunications providers, data and
software to support all of our service functions and also rely on our network,
data and software to manufacture and distribute our products. Our conferencing
services business, which produced 29% of our sales in fiscal 2002, relies solely
on our network equipment for its operation. We cannot guarantee that our back-up
systems and procedures will operate satisfactorily in an emergency or that our
telecommunications provider will continue to provide uninterrupted services. A
failure of our equipment or the services of our telecommunications providers
would adversely affect our sales and could seriously jeopardize our ability to
continue service operations. In particular, should our conference calling
service experience even a short term interruption of our network or our
telecommunication providers experience a short term interruption, 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 presently have agreements with our telecommunications providers, some of
which will expire in late 2003. We cannot guarantee that we can negotiate new
agreements on reasonable terms when these agreements expire. Any expansion of
our network may require new agreements with telecommunications providers. Our
failure to secure agreements on terms and conditions satisfactory to us may
affect the performance or expansion of our network, which may materially harm
our business.
International sales account for a significant portion of our net revenue, and
risks inherent in international sales could harm our business.
International sales represent a significant portion of our total sales from
continuing operations. For example, international sales represented 13% of our
total sales from continuing operations for fiscal 2001 and 11% for fiscal 2002.
We anticipate that the portion of our total revenue from international sales
will continue to increase because of increasing videoconferencing product sales
to the international market and the new sales channels provided to us through
the E.mergent and OM Video acquisitions. Our international business is subject
to the financial and operating risks of conducting business internationally,
including:
o unexpected changes in, or the imposition of, additional legislative or
regulatory requirements;
o fluctuating exchange rates;
o tariffs and other barriers;
18
o difficulties in staffing and managing foreign subsidiary operations;
o export restrictions;
o greater difficulties in accounts receivable collection and longer
payment cycles;
o potentially adverse tax consequences; and
o 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, although its financial
statements are prepared in the Euro. Consolidation of Gentner EuMEA's financial
statements with ours, under United States generally accepted accounting
principles, requires remeasurement of the amounts stated in Gentner EuMEA's
financial statements to U.S. Dollars, which is subject to exchange rate
fluctuations. Furthermore, although our Irish subsidiary, Gentner
Communications, Ltd. (formerly Ivron Systems, Ltd.) prepares its financial
statements in U.S. Dollars, it incurs expenses in the Euro and conversion of
these amounts to U.S. Dollars is subject to exchange rate fluctuations. We
currently do not undertake any hedging activities that might protect against
such risks.
We may not be able to hire and retain highly skilled employees, which could
affect our ability to compete effectively and may cause our revenue and
profitability to decline.
We depend on highly skilled technical personnel to research and develop, market
and service new and existing products. To succeed, we must hire and retain
employees who are highly skilled in the rapidly changing communications and
Internet technologies.
Individuals who have the skills and can perform the services we need to provide
our products and services are scarce. Because the competition for qualified
employees in our industry is intense, hiring and retaining employees with the
skills we need is both time-consuming and expensive. We might not be able to
hire enough skilled employees or retain the employees we do hire. Our inability
to hire and retain employees with the skills we seek could hinder our ability to
sell our existing products, systems, or services or to develop new products,
systems, or services with a consequent adverse effect on our business.
We are dependent upon key employees.
We are substantially dependent upon certain of our employees, including Frances
M. Flood, our President and Chief Executive Officer. The loss of Ms. Flood could
have a material adverse effect on our company. We currently have in place a key
person life insurance policy on the life of Ms. Flood in the amount of $5.0
million.
Our sales depend to a certain extent on government funding and regulation.
In the conferencing market, the revenues generated from sales of our audio
conferencing and videoconferencing products for distance learning and courtroom
facilities are dependent on government funding. In the event government funding
for such initiatives was reduced or became unavailable, our sales would be
negatively impacted. Additionally, many of our products are subject to
governmental regulations. New regulations could significantly adversely impact
sales.
We may have difficulty in collecting outstanding receivables.
We grant credit without requiring collateral to substantially all of our
customers. Due to the current economic slowdown, the risks relating to the
granting of such credit have increased. Although we do monitor and mitigate the
risks associated with our credit policies, we cannot assure you that such
mitigation will be effective. As of June 30, 2002, our outstanding receivables
were $20.3 million, and two customers accounted for more than 20% of those
outstanding receivables. We have experienced losses due to customers failing to
meet their obligations, although these losses have not been significant. Future
losses could be significant and, if incurred, could harm our business and have a
material adverse effect on our operating results and financial condition.
19
Risks Relating to Our Acquisitions
The integration of any acquired businesses involve uncertainty and risk.
Acquisitions and the subsequent integration of two or more businesses involve
risks. Following the acquisition of Ivron in October 2001, the acquisition of
E.mergent in May 2002, and the acquisition of OM Video in August 2002, we have
been and will be dedicating substantial management resources in order to achieve
the anticipated operating efficiencies from integrating the businesses of these
companies with our other operations. We cannot make assurances that any
integration will be accomplished or that the benefits of such integration will
be realized, for reasons that may include:
o disruption of our business;
o lack of experience with the markets in which the acquired businesses
operate;
o lack of revenues to offset the increased expenses associated with the
acquisitions;
o slower than anticipated realization of expected synergies such as
lower costs, or a failure to realize such synergies at all;
o difficulty resolving cultural differences between the companies and
our inexperience in conducting operations that are geographically
dispersed;
o our inability to successfully integrate the acquired technology and
operations into our business and maintain uniform standards, controls,
policies and procedures;
o our inability to continue to market and sell the products of the
acquired businesses;
o our inability to retain key employees of the acquired businesses;
o our inability to retain the previous customers of the acquired
businesses as well as our own. In particular, certain of our customers
have been competitive with E.mergent and, similarly, certain customers
of E.mergent have been competitive with us. Some of these customers
have concerns that the combined companies would result in greater
competition for them; and
o our inability to integrate Ivron, E.mergent and OM Video
simultaneously.
Difficulties in any integration may have a short or potentially long-term
adverse impact on our business, results of operations or financial condition.
Our growth may strain our infrastructure. If we are unable to improve our
infrastructure to support the expansion of our business, our operations and
financial condition could be adversely affected.
We face the risk that our existing systems and processes, including management
resources, operating systems and accounting and financial personnel, may be
inadequate to support our growth. We are currently implementing changes and
enhancements to our existing systems to support the expansion of our business.
We cannot assure you that we will be able to make the necessary changes in our
systems or retain the personnel required to respond to the demands of our
expansion. The implementation of such changes and enhancements to our systems
and the retention of additional personnel will require capital expenditures and
other increased costs that could have a material adverse impact on our operating
results. Failure to implement these systems and secure these resources could
also have a material adverse effect on our operating results.
20
Impairment of the goodwill and other intangible assets of our acquired
businesses could harm our business and results of operations.
The purchase price for the acquisitions of Ivron and E.mergent in fiscal 2002
included, in the aggregate, goodwill valued at approximately $18.1 million and
other intangible assets valued at approximately $7.4 million ($6.9 million after
amortization as of June 30, 2002). Goodwill and other intangible assets
represent a significant portion of our recorded assets. Accounting principles
generally accepted in the United States related to goodwill and other intangible
assets changed with the issuance of the Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), which
became effective for acquisitions completed after July 1, 2001 and became
effective with respect to all prior acquisitions, for example our acquisition of
ClearOne, Inc., as of July 1, 2002.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized, but must be reviewed at least annually for impairment or more
frequently under certain circumstances. Other intangible assets that are deemed
to have finite lives will continue to be amortized over their useful lives but
must be reviewed for impairment when events or changes in circumstances indicate
that the carrying amount of these assets may not be recoverable. Screening for
and assessing whether impairment indicators such as changes to market
conditions, operating fundamentals, competition and general economic conditions
exist involves the exercise of judgment. A charge to operations may occur after
the results of our goodwill impairment tests are known. If impairment is deemed
to exist, we will write down the recorded value of goodwill and other intangible
assets to their fair values, which could result in a full write-off of their
book value. If these write-downs occur, they would adversely affect our
financial condition and results of operations.
Risks Relating to our Company
Existing directors and officers can exert considerable control over us.
Our officers and directors together had beneficial ownership of approximately
21.0% of our common stock (including options that are currently exercisable or
exercisable within 60 days as of August 30, 2002. With this significant holding
in the aggregate, the officers and directors, acting together, could exert
substantial control over us and could delay or prevent a change in control.
Our stock price fluctuates as a result of the conduct of our business and stock
market fluctuations.
The market price of our common stock has experienced significant fluctuations
and may continue to fluctuate significantly. Options in our common stock have
recently begun trading and we expect this to add to the volatility in our common
stock. The market price of our common stock may be significantly affected by a
variety of factors, including:
o statements or changes in opinions, ratings or earnings estimates made
by brokerage firms or industry analysts relating to the market in
which we do business or relating to us specifically;
o disparity between our reported results and the projections of
analysts;
o the announcement of new products or product enhancements by us or our
competitors;
o technological innovations by us or our competitors;
o quarterly variations in our results of operations;
o general market conditions or market conditions specific to technology
industries; and
o domestic and international economic conditions.
In addition, the stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have had a substantial effect on the market
prices for many high technology companies like us. These fluctuations are often
unrelated to the operating performance of the specific companies.
21
ITEM 2. PROPERTIES
Our executive offices, videoconferencing and audio conferencing services, part
of our business services, sales, part of our research and development, and most
of our product manufacturing and warehousing operations are located in a 57,000
square-foot facility located south of Salt Lake City. We lease this facility
under a lease agreement that expires in October 2006. We believe the facility
will be reasonably adequate to meet our needs for the next 12 months.
Our remaining business services, and our conference furniture manufacturing and
warehousing, operations are conducted from two facilities totaling 45,655 square
feet located in Golden Valley, Minnesota. We lease these facilities under lease
agreements that expire in December 2004 and September 2007. We also have sales
offices located in Des Moines, Iowa that we rent on a month-to-month basis, and
in Westmont, Illinois, that we rent pursuant to a lease that expires in July
2004. We believe these facilities will be reasonably adequate to meet our needs
for the next 12 months.
Our wholly owned subsidiary, Gentner Communications EuMEA, GmbH, leases an
office in Nuremberg, Germany, consisting of 191 square meters, under an
agreement that expires in April 2003.
Our wholly owned subsidiary, Gentner Communications Limited, leases an office in
Dublin, Ireland for our remaining research and development operations which
consists of 432 square meters, of which we sublet 129 square meters to a third
party effective July 1, 2002. The lease expires in December 2026, although the
lease agreement contains a provision that allows us to terminate the lease in
December 2006.
ITEM 3. LEGAL PROCEEDINGS
We are from time to time subject to claims and suits arising in the ordinary
course of business. In our opinion, the ultimate resolution of these matters
will not have a material adverse effect on our financial position, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fourth
quarter ended June 30, 2002.
22
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Effective January 1, 2002, we changed our name from Gentner Communications Corp.
to ClearOne Communications, Inc. and on March 15, 2002, our common stock began
trading under the symbol CLRO. Our common stock is traded on the Nasdaq National
Market. The following table sets forth the high and low bid quotations for the
common stock for the last two fiscal years.
2002 High Low
---- ---- ---
First Quarter $ 18.72 $ 9.80
Second Quarter 22.94 15.03
Third Quarter 18.99 12.30
Fourth Quarter 18.80 13.25
2001 High Low
---- ---- ---
First Quarter $ 17.13 $ 12.00
Second Quarter 16.44 8.50
Third Quarter 15.69 9.75
Fourth Quarter 14.30 9.50
The above inter-dealer quotations were obtained from the National Association of
Securities Dealers (NASD), and do not reflect markups, markdowns, or
commissions, and may not represent actual transactions.
As of August 30, 2002, there were approximately 10,500 record holders of our
common stock.
We have not paid a cash dividend on our common stock and do not anticipate doing
so in the foreseeable future. The terms of our line of credit prohibit us from
declaring or paying dividends on our stock. We intend to retain earnings to fund
future capital requirements, growth and product development.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited
Consolidated Financial Statements. The information set forth below is not
necessarily indicative of results of future operations, and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included elsewhere in this Form 10-K.
The presentation of fiscal 1998 financial data has been modified from that shown
in the audited financial statements for that year, in order to reflect results
of continuing and discontinued operations separately.
SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended June 30,
---------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Operating results:
Net sales ................................................... $54,542,686 $39,878,405 $28,118,413 $20,268,102 $15,159,842
Costs and expenses:
Costs of goods sold ....................................... 23,000,119 16,503,062 11,008,323 8,907,754 7,434,240
Marketing and selling ..................................... 10,705,494 7,753,292 6,165,917 4,313,639 3,189,014
General and administrative ................................ 6,051,092 4,648,999 3,132,125 2,544,665 2,470,949
Product development ....................................... 4,052,695 2,502,169 1,270,819 1,194,686 864,278
----------- ----------- ----------- ----------- -----------
Operating income ............................................ 10,733,286 8,470,883 6,541,229 3,307,358 1,201,361
Other income (expense) .................................... 508,931 373,147 179,336 (78,112) (213,707)
----------- ----------- ----------- ----------- -----------
Income from continuing operations before income taxes ....... 11,242,217 8,844,030 6,720,565 3,229,246
987,654
Provision from income taxes ................................. 3,831,465 3,318,845 2,418,823 1,208,900 26,694
----------- ----------- ----------- ----------- -----------
Income from continuing operations ........................... 7,410,752 5,525,185 4,301,742 2,020,346 960,960
Income from discontinued operations, net of applicable taxes -- 737,280 426,591 524,125 443,489
Gain on disposal of business segment, net of applicable taxes -- 1,220,024 -- -- --
----------- ----------- ----------- ----------- -----------
Net income .................................................. $ 7,410,752 $ 7,482,489 $ 4,728,333 $ 2,544,471 $ 1,404,449
=========== =========== =========== =========== ===========
23
Earnings per common share:
Basic earnings from continuing operations ................. $ 0.77 $ 0.64 $ 0.52 $ 0.25 $ 0.13
Diluted earnings from continuing operations ............... $ 0.74 $ 0.61 $ 0.49 $ 0.24 $ 0.12
Basic earnings from discontinued operations ............... $ -- $ 0.23 $ 0.05 $ 0.06 $ 0.05
Diluted earnings from discontinued operations ............. $ -- $ 0.22 $ 0.05 $ 0.06 $ 0.06
Basic earnings ............................................ $ 0.77 $ 0.87 $ 0.57 $ 0.31 $ 0.18
Diluted earnings .......................................... $ 0.74 $ 0.83 $ 0.54 $ 0.30 $ 0.18
Weighted average shares outstanding:
Basic ..................................................... 9,574,758 8,593,510 8,269,941 8,080,536 7,679,985
Diluted ................................................... 10,019,754 9,015,644 8,740,209 8,468,884 7,960,252
Financial data:
Current assets .............................................. $45,269,617 $19,295,720 $14,816,321 $ 9,281,753 $ 5,828,365
Property, plant and equipment, net .......................... 5,769,444 3,696,615 3,050,349 2,125,959 2,320,336
Total assets ................................................ 80,146,693 27,597,623 17,920,531 11,519,414 8,311,740
Long-term debt, net of current maturities ................... -- -- -- -- 402,584
Capital leases, net of current maturities ................... 40,876 48,227 205,530 455,389 752,728
Total stockholders' equity .................................. 71,336,183 24,501,510 14,753,221 8,352,359 5,237,006
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
We are a provider of end-to-end conferencing solutions. Our products and
services enable businesses, employees, customers and partners to communicate
effectively from disparate locations, while decreasing travel time and costs. We
operate in three reportable segments:
o products,
o conferencing services, and
o business services.
Our products segment primarily manufactures and sells high quality audio
conferencing products, videoconferencing products, sound reinforcement products
and videoconferencing peripherals such as cameras and furniture. Through our
single point of contact, 1-800-LETS MEET(R), our conferencing services segment
provides (1) full-service conference calling; (2) on-demand, reservationless
conference calling; (3) web conferencing; and (4) audio and video streaming.
Our business services segment provides our customers with a broad range of
services, both on a local and national basis. These services include technical
services such as the design, installation and servicing of conferencing
systems, and value added services such as proactive field support, training,
conferencing system consulting and 24-hour customer support.
Effective January 1, 2002, we changed our name to ClearOne Communications, Inc.,
and on March 15, 2002 our shares began trading under the symbol CLRO. Our shares
are traded on the Nasdaq National Market.
Acquisitions in Fiscal 2002
E.mergent Acquisition
On May 31, 2002, we completed the acquisition of E.mergent, Inc. whose
headquarters were in Minnesota. In connection with the E.mergent acquisition, we
paid to the shareholders of E.mergent $7.3 million in cash and 868,691 shares of
our common stock. In addition, options for E.mergent stock outstanding at the
time of the E.mergent acquisition were converted to options to purchase 4,158
shares of our common stock. We incurred transaction costs of approximately $1.1
million in connection with the E.mergent acquisition, including approximately
$470,000 of severance costs.
As of the date of the E.mergent acquisition, we acquired tangible assets (not
including cash) of approximately $7.0 million, consisting primarily of accounts
receivable, inventory and property and equipment. We assumed liabilities of
approximately $3.6 million, consisting primarily of trade accounts payable,
accrued compensation and other accrued liabilities.
24
In connection with the E.mergent acquisition and based upon the analysis of an
independent financial consulting firm, we recorded intangible assets related to
certain contracts and developed technology of $1.7 million and goodwill of $17.7
million. The contracts and developed technology will be amortized over their
estimated useful lives as follows:
Amortization Period: Amount to be Amortized:
------------------- ----------------------
1.5 years $392,000
3 years $215,000
15 years $1,060,000
We recorded amortization expense of approximately $34,000 for the contracts and
developed technology for the period from June 1, 2002 to June 30, 2002. In
accordance with SFAS No. 142, no amortization expense has been recorded for
goodwill.
Our acquisition of E.mergent was intended to qualify as a reorganization under
Section 368(a) of the Internal Revenue Code.
Ivron Acquisition
On October 3, 2001, we purchased all of the issued and outstanding shares of
Ivron Systems, Ltd., a privately held developer of videoconferencing technology
based in Dublin, Ireland.
Under the terms of the share purchase agreement, as amended in April 2002, we
paid cash of $6.7 million to the stockholders and option holders of Ivron. In
addition, we agreed to pay an earn-out of 109,000 shares of our common stock and
$1.0 million in cash in fiscal 2003 and fiscal 2004 if certain profits and
earnings targets are met. We incurred transaction costs of $345,000 in
connection with the Ivron acquisition.
As of the date of the Ivron acquisition, we acquired tangible assets (not
including cash) of approximately $762,000, consisting primarily of accounts
receivable, inventory, and property and equipment. We assumed liabilities
consisting primarily of trade accounts payable, accrued compensation and other
accrued liabilities of approximately $438,000. We also acquired cash of
approximately $459,000.
In connection with the Ivron acquisition and based upon the analysis of an
independent financial consulting firm, we recorded intangible assets related to
developed technology of $5.8 million and goodwill of $439,000. The developed
technology will be amortized as follows:
Amortization Period Amount to be Amortized
------------------- ----------------------
3 years $135,000
5 years $1,002,000
15 years $4,643,000
We recorded amortization expense of approximately $518,000 for the developed
technology for the period from October 3, 2001 to June 30, 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 1.5 million shares of our
common stock, which was subsequently registered on Form S-3 with the Securities
and Exchange Commission. Net proceeds from the private placement were $23.8
million, after costs and expenses associated with the private placement. The
proceeds were used to pay the cash purchase price of the E.mergent acquisition
and the OM Video acquisition described below, as well as for other corporate
purposes. We also issued warrants to purchase 150,000 shares of our common stock
at $17.00 per share to Wedbush Morgan Securities, Inc., our financial advisor in
the private placement. These warrants vested immediately, are exercisable over
10 years, and were valued at approximately $1.6 million using the Black Scholes
method.
25
Discontinued Operations
On April 12, 2001, we sold the assets of the remote control portion of our
RFM/Broadcast division to Burk Technology, Inc. Burk agreed to pay up to $3.2
million under the asset purchase agreement, of which $750,000 was paid in cash
at closing. Approximately $1.8 million of the purchase price is secured by a
promissory note issued by Burk to us, that is payable in quarterly installments
over seven years, together with interest at the rate of nine percent per annum.
In addition, beginning in January 2003, Burk has agreed to pay up to $700,000 to
us as commission over the seven year period following closing, if certain base
sales targets are exceeded. As security for its obligations to us under the
promissory note, Burk granted us a subordinate security interest in its personal
property.
Subsequent Events
OM Video Acquisition
On August 27, 2002, we purchased all of the issued and outstanding shares of
Stechyson Electronics Ltd. doing business as OM Video, an audiovisual
integration firm headquartered in Ottawa, Canada. We paid to OM Video's
shareholders approximately $6.6 million in cash and may be required to pay to
them an additional $600,000 as well as an earn-out of $800,000 in the 12 months
following the acquisition. The additional $600,000 payment to OM Video's
shareholders is contingent on the results of our audit of OM Video's financial
statements and an audit by the Canada Customs and Revenue Agency. The $800,000
earn-out is payable if certain performance targets are met.
Sale of Broadcast Telephone Interface Product Line
On August 27, 2002, we sold a portion of our broadcast telephone interface
product line to Comrex Corp., a privately held broadcast equipment provider
located in Devens, Massachusetts. We will discontinue production of all our
broadcast telephone interface products over the next 12 months.
Integration of E.mergent
Since the E.mergent acquisition, we have consolidated E.mergent's corporate
offices into a single Minneapolis facility. We have also integrated the help
desks in Minneapolis and Salt Lake City to better provide our customers with
seamless, uniform services. With respect to the sales of products, we have begun
the cross-selling process by training the sales team from E.mergent on ClearOne
products and conferencing services. We are also selling videoconferencing
peripherals through the traditional ClearOne sales channels. We will be
dedicating significant resources to the integration of E.mergent's sales and
technical services infrastructure so that we can leverage this infrastructure to
grow our company and enhance our position in the expanding business services
market. Because E.mergent was more focused on business services than ClearOne,
we are developing a detailed best practices approach to providing ClearOne
services. While we have begun to take advantage of the cost savings and
cross-selling opportunities resulting from the E.mergent acquisition, we
anticipate that the benefits of the E.mergent acquisition will have a more
significant impact on our results of operations in the latter half of fiscal
2003.
Consolidated Results of Continuing Operations
Year Ended June 30, 2002 Compared to Year Ended June 30, 2001
Sales
Sales from continuing operations for fiscal 2002 increased 36.6% to $54.5
million from $39.9 million in fiscal 2001. Product sales accounted for $37.2
million, or 68.2% of total sales, while service sales accounted for $17.3
million, or 31.8% of total sales. As we implement our strategy of transitioning
to become a solutions provider as opposed to primarily a manufacturer of
technology products, we anticipate that our product sales will represent a
smaller percentage of our total sales. We will continue to develop and
distribute our products, but we anticipate that the growth in our service sales
will be more robust.
26
Product Sales
Product sales grew 31.9% to $37.2 million in fiscal 2002 from $28.2 million in
fiscal 2001. This increase was primarily due to the continued success of our
Audio Perfect(R) product line, the successful introduction of our XAP(TM)
product line in June 2001, and our V-There(TM) videoconferencing products in
March 2002, as well as the expansion of our product line to include video
cameras, conferencing furniture and accessories. In particular, sales generated
from product lines acquired through the acquisitions of Ivron and E.mergent
totaled $5.4 million, accounting for a significant portion of the increase in
our product sales. Our product sales also include sales of our assistive
listening products and of our broadcast telephone interface products line, a
portion of which we sold in August 2002 (see "Subsequent Events - Sale of
Broadcast Telephone Interface Product Line").
Service Sales
Service sales, which include sales from our conferencing services and our
business services segments, grew 47.9% to $17.3 million in fiscal 2002 as
compared to $11.7 million in fiscal 2001.
Conferencing Services Sales
Conferencing services sales increased 35.0% to $15.8 million in fiscal 2002
compared to $11.7 million in fiscal 2001. We attribute the growth in
conferencing services to an increased customer base due, in part, to an expanded
sales force for our conference calling services, an increase in the number of
resellers who sell our services, and an overall increase in market size during
the past year.
While we anticipate the conferencing services market will continue to expand, we
also expect increased competition in the market to result in additional price
pressure on our conferencing services. As a result, while we may see increased
use of our conferencing services, we do not expect such increased use to
translate into a proportional increase in sales. Nevertheless, for fiscal 2003,
we anticipate that our conferencing services sales will continue to grow.
Business Services Sales
Our business services segment commenced operations on June 1, 2002 with the
acquisition of E.mergent, and generated sales of $1.5 million between June 1,
2002 and June 30, 2002. Although our business services segment is our newest
operating segment, we anticipate that our recent acquisitions will enable us to
establish a significant position in the business services market. We also
believe that sales of our business services will grow at a faster rate than our
product sales and will represent a larger portion of our total sales in fiscal
2003 as compared to fiscal 2002.
Gross Profit Margin
Our gross profit margin from continuing operations was 57.8% in fiscal 2002
compared to 58.6% in fiscal 2001. The decrease in gross margins is the result of
three factors. First, our conferencing services segment and business services
segment have lower margins than our products segment, although we expect margins
will increase as we expand the range of our service offerings and as the sales
generated by the conferencing services and business services segments increase.
Second, our gross margins decreased as a result of our blanket purchase order
program, under which we discounted the list price of our products for dealers
who made large orders. This program was terminated in June 2002. Third, our
videoconferencing product margins are lower than the margins for our audio
conferencing products, due to strong competition in this market. We expect our
gross profit margin for products to decrease if videoconferencing products
contribute a larger share of our total product sales. In addition, as our sales
mix transitions from a high product concentration to include a larger portion of
business services and conferencing services, our blended gross profit margin
will decrease.
Operating Expenses
Our operating expenses increased 39.6% to $20.8 million in fiscal 2002 from
$14.9 million in fiscal 2001.
Marketing and Selling Expenses
Marketing and selling expenses in fiscal 2002 were $10.7 million compared to
$7.8 million in fiscal 2001. As a percentage of sales, marketing and selling
expenses increased slightly to 19.6% in fiscal 2002 from 19.4% in fiscal
27
2001. The year-over-year increase in marketing and selling expenses is primarily
due to (1) increased sales, (2) expenses associated with our transition to the
ClearOne name from Gentner, and (3) our efforts to increase momentum in the
markets for our new products, conferencing services and business services. As
our sales continue to increase, we expect selling expenses to continue to
increase.
Product Development Expenses
Product development expenses increased 64.0% to $4.1 million in fiscal 2002,
compared to $2.5 million in fiscal 2001. As a percentage of sales, product
development expenses increased to 7.4% in fiscal 2002 from 6.3% in fiscal 2001.
The increase in product development expenses is due to increased salaries and
expenses associated with additional personnel, development costs associated with
new product development, and amortization expense associated with technology
acquired from Ivron and E.mergent. We do not anticipate our product development
expenses, as a percentage of sales, to increase significantly in the future.
General and Administrative Expenses
General and administrative expenses increased 32.6% to $6.1 million in fiscal
2002, compared to $4.6 million in fiscal 2001. As a percentage of sales, general
and administrative expenses decreased to 11.1% in fiscal 2002, compared to 11.7%
in fiscal 2001. We attribute the increase in the amount of our fiscal 2002
general and administrative expenses to costs associated with the hiring of
additional personnel to support our increased sales volume.
Other Income (Expense)
Interest income increased 12.6% to $447,000 in fiscal 2002 as compared to
$397,000 in fiscal 2001. This increase was due to the increase in cash and cash
equivalents following a private placement of 1.5 million shares of our common
stock on December 11, 2001.
In fiscal 2002 our interest expense decreased 44.7% to $23,000 from fiscal 2001
because some of our capital leases matured.
During fiscal 2002, income tax expense for continuing operations was calculated
at a combined federal and state effective tax rate of approximately 34.1%,
resulting in an income tax expense of $3.8 million. In fiscal 2001, our
effective tax rate was 37.5%, and our income tax expense for continuing
operations was $3.3 million. The decrease in our effective income tax rate is
due in part to the recognition of various tax planning opportunities and certain
tax-advantaged investments that we have utilized with respect to the proceeds
received from our December 2001 private placement of common stock. Since we
withdrew cash from these tax-advantaged investments to pay for the E.mergent
acquisition and the OM Video acquisition, the amount of the tax benefits
associated with these investments will decrease; therefore, our tax rate may
rise in the future.
Net Income
Net income from continuing operations in fiscal 2002 increased to $7.4 million,
or 34.5%, compared to net income from continuing operations of $5.5 million in
fiscal 2001. We attribute the increased income to the increase in sales offset
by increases in expenses as described above.
Year Ended June 30, 2001 Compared to Year Ended June 30, 2000
Sales
Sales from continuing operations for fiscal 2001 increased 42.0% to $39.9
million from $28.1 million in fiscal 2000. At the end of fiscal 2001, we
operated in two reportable segments: products and conferencing services. The
dollar increase in sales between fiscal 2000 and fiscal 2001 is split evenly
between product sales and service sales.
Product Sales
Product sales grew 27.0% in fiscal 2001 to $28.2 million from $22.2 million in
fiscal 2000. This increase was mainly due to the continued success of our Audio
Perfect(R) product line, as well as the introduction of new products
28
such as the PSR1212 and the XAP(TM) 800. Our sales have increased as our product
line has expanded. In the second quarter of fiscal 2001, we began shipping the
PSR1212, a digital matrix mixer for the sound reinforcement marketplace and in
the fourth quarter of fiscal 2001, we introduced the XAP(TM) 800. Product sales
also include our broadcast telephone interface products and our assistive
listening products.
Service Sales
The conferencing services segment, which is also known as 1-800 LETS MEET(R),
experienced sales growth of 98.3% in fiscal 2001 as compared to fiscal 2000.
Service sales were $11.7 million in fiscal 2001 as compared to $5.9 million in
fiscal 2000. We attribute the growth in sales to an increased customer base due,
in part, to an expansion of sales force for our conference calling services, an
increase in the number of resellers selling our services, and an overall
increase in market size during fiscal 2001.
Gross Profit Margin
Our gross profit margin from continuing operations was 58.6% in fiscal 2001
compared to 60.8% in fiscal 2000. The decrease in gross margins is the result of
three factors. First, we implemented a blanket purchase order program in the
third quarter of fiscal 2001, under which we increased the discounts on the list
price of our products for dealers who made large orders. Second, the cost of the
raw materials components of our manufacturing increased during the first half of
fiscal 2001, although these costs decreased in the latter half of fiscal 2001.
Third, our services segment had a higher cost-of-goods rate.
Operating Expenses
Our continuing operating expenses increased 40.6% to $14.9 million in fiscal
2001 compared to $10.6 million in fiscal 2000.
Marketing and Selling Expenses
Marketing and selling expenses in fiscal 2001 were $7.8 million as compared to
$6.2 million in fiscal 2000. As a percentage of sales, marketing and selling
expenses decreased to 19.4% in fiscal 2001 compared to 21.9% in fiscal 2000. The
year-over-year increase in marketing and selling expenses was primarily due to
higher commission expenses resulting from increased sales. Another factor
contributing to the increase was the shelving expenses we incurred in relation
to the retail marketing of our ClearOne Conference phone.
Product Development Expenses
Product development expenses increased 92.3% to $2.5 million in fiscal 2001
compared to $1.3 million in fiscal 2000. As a percentage of sales, product
development expenses increased 6.3% in fiscal 2001 from 4.5% in fiscal 2000. The
increase in product development expenses is due to increased salaries and
expenses associated with additional personnel and development costs associated
with new product development.
General and Administrative Expenses
General and administrative expenses increased 48.4% to $4.6 million in fiscal
2001 compared to $3.1 million in fiscal 2000. General and administrative
expenses were 11.7% of sales in fiscal 2001, compared to 11.1% in fiscal 2000.
The increase in expenses was primarily due to a one-time bad debt write off of
approximately $400,000 with respect to a single customer who filed for
bankruptcy protection during the second quarter of fiscal 2001. Our increased
expenses were also due to costs incurred to establish our Woburn, Massachusetts
office, and the amortization expense associated with the goodwill acquired in
the ClearOne, Inc. asset purchase.
Other Income (Expense)
Interest income increased 68.1% in fiscal 2001 as compared to fiscal 2000, due
to the increase in cash and cash equivalents.
Interest expense decreased to $43,000 or by 35.1%, between fiscal 2001 and
fiscal 2000 because some of our capital leases matured in fiscal 2000.
29
During fiscal 2001, income tax expense for continuing operations was calculated
at a combined federal and state effective tax rate of approximately 37.5%,
resulting in an income tax expense of $3.3 million. In fiscal 2000 our effective
tax rate was 36.0%, and the income tax expense for continuing operations was
$2.4 million.
Net Income
Net income from continuing operations for fiscal 2001 was $5.5 million, an
increase of 27.9% compared to net income from continuing operations of $4.3
million in fiscal 2000. We attribute our income growth to increased sales, which
were offset by increases in our expenses as described above.
Liquidity and Capital Resources
Sources of Funds
Our cash and cash equivalents at June 30, 2002 totaled approximately $14.2
million, which represents an increase of $7.3 million from $6.9 million at June
30, 2001. Our cash and cash equivalents were derived from a combination of net
cash provided by continuing operating activities, proceeds from a note
receivable in connection with the sale of our RFM/Broadcast division to Burk,
net proceeds from the issuance of common stock in our private placement
offering, net proceeds from the exercise of employee stock options, and draws
from our revolving credit facility.
Based upon continuing operations, net cash provided by operating activities was
$105,000 in fiscal 2002, down from $3.7 million in fiscal 2001. The decrease in
net cash provided from continuing operating activities is primarily due to the
increase of our accounts receivable from $7.2 million in fiscal 2001 to $20.3
million in fiscal 2002. A number of factors have contributed to this increase in
accounts receivables. The closing of the E.mergent acquisition on May 31, 2002
resulted in an increase of more than $4.2 million of outstanding receivables at
the end of fiscal 2002. Accounts receivable also increased as a result of
product shipments made late in the fourth quarter and the larger volume of
product sold to distributors for resale to smaller dealers. During fiscal 2002,
our distributors were extended longer payment terms than we had previously
extended to our independent dealers and resellers. Our days-sales-outstanding
(DSOs) are approximately 90 days. Based on our experience with our customers, we
do not believe there is any significant concern with the collectability of our
accounts receivable. We expect our DSOs to decrease in fiscal 2003, as sales of
our services contribute to a larger percentage of our total sales.
Our accounts payable and accrued expenses as of June 30, 2002 have increased as
a result of the assumption of E.mergent's accounts payable and our increased
sales. Of the $2.5 million increase in accounts payable as compared to fiscal
2001, we attribute approximately $1.6 million directly to expenses associated
with E.mergent and $900,000 to our sales growth in fiscal 2002. The increase of
$360,000 in accrued expenses (other than accrued compensation and other
benefits) over fiscal 2001 is primarily due to additional operating expenses
associated with E.mergent.
Cash provided by financing activities was $24.3 million, and was attributable
primarily to a private placement of our common stock in December 2001, which
provided net proceeds of approximately $23.8 million, after costs and expenses.
Additionally, cash provided by financing activities included approximately $1.0
million received through the exercise of employee stock options.
We have a revolving credit facility for $5.0 million, which is secured by our
accounts receivable and inventory. The interest rate on the revolving credit
facility is variable. The borrowing rate was 4.5% as of June 30, 2002. While we
had a balance of $196,000 as of June 30, 2002, no balance was owing under the
line of credit as of September 10, 2002. The revolving credit facility will
expire on December 22, 2002 and we plan to renew it at that time. The terms of
the revolving credit facility require us to maintain certain financial ratios
and restrict our ability to modify our basic business activities, transfer
assets or create additional indebtedness. We were not in compliance with the
tangible net worth ratio by a difference of 0.3% as of June 30, 2002, however we
have obtained a waiver from the lender under the revolving credit facility. We
have also obtained a waiver from the lender to divest non-core businesses if
certain conditions are met.
On July 27, 2002, we filed a Form S-3 registration statement with the SEC that
registers the sale of up to $100.0 million of our securities in the form of
equity, debt or combinations thereof. While we currently have no specific plan
to offer any securities, an effective shelf registration statement will enable
us to act quickly to take advantage of favorable market conditions. Under the
shelf registration statement, we could offer securities up to an aggregate
offering price of $100.0 million.
30
Contingent Sources of Funds
Beginning in January 2003, Burk has agreed to pay up to $700,000 in commissions
to us over the seven year period following the April 2001 closing of the sale of
the remote control portion of our RFM/Broadcast division, if certain base sales
targets are exceeded. (See "Discontinued Operations" above.)
Uses of Funds
In fiscal 2002, our primary uses of funds were as follows:
o to acquire Ivron and E.mergent for a total cash purchase price of
$14.4 million;
o to fund capital expenditures, including upgrading our real-time
computer system to Oracle, for a total capital expenditures cost of
approximately $2.7 million; and
o to repay approximately $700,000 in capital lease obligations and
long-term debt obligations assumed in connection with the E.mergent
acquisition.
Pending Uses of Funds
We have no off-balance-sheet financing arrangements with related parties and no
unconsolidated subsidiaries. Contractual obligations related to our capital
leases and operating leases are summarized below.
Payments Due by Period
--------------------------------------------------------------------
One year Two to Four to After
Contractual Obligations Total or less Three Years Five Years Five Years
----------- ----------- ----------- ----------- -----------
Capital Leases.................... $ 111,583 $ 66,855 $ 42,284 $ 2,444 $ --
Operating Leases.................. 5,269,827 1,834,099 2,379,770 1,055,958 --
----------- ----------- ----------- ----------- -----------
Total Contractual.................
Cash Obligations............... $ 5,381,410 $ 1,900,954 $ 2,422,054 $ 1,058,402 $ --
=========== =========== =========== =========== ===========
Contingent Uses of Funds
Pursuant to the acquisition of Ivron, an earn-out of up to $1.0 million in cash
is payable to Ivron's former shareholders and options holders in fiscal 2003 and
fiscal 2004 if certain profit and earnings targets are met.
(See "Acquisitions in Fiscal 2002 - Ivron Acquisition" above.)
In connection with the OM Video acquisition, an additional $600,000 and an
earn-out of $800,000 may be payable to the shareholders of OM Video 12 months
after closing, if certain conditions and performance targets are met.
(See "Subsequent Events - OM Video Acquisition" above.)
We believe that our working capital, bank line of credit and cash flows from
operating activities will be sufficient to satisfy our operating and capital
expenditure requirements for continuing operations for the next 12 months. In
the longer term, or if we experience a decline in sales, or in the event of
other unforeseen circumstances, 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. We cannot assure you that additional financing will
be available or, if available, will be on terms favorable to us.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions and select accounting policies that affect the presentation of
our financial condition, changes in financial condition or our results of
operations. Our estimates relate to matters that are uncertain at the time the
estimate is made. These estimates are based on our historical experience and on
various assumptions that we believe to be reasonable under the circumstances,
31
given the available information at the time of the estimate, the results of
which form the basis for the judgments we made. Actual results could differ from
these estimates under different assumptions and conditions.
We believe the following critical accounting policies affect our most
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Stock-Based Compensation
We account for stock option grants to employees, officers and directors using
the intrinsic value-based method prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, we
record no compensation expense relating to these options because at the time of
the grant of these stock options, the exercise price of the options equals the
market value of the underlying stock. The alternative is to measure the fair
value of the options at the time of the grant, using a method defined in the
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation". While the Financial Accounting Standards Board (FASB)
encourages the adoption of SFAS No. 123, we are permitted to continue to measure
compensation expense for stock-based plans using APB Opinion No. 25. If we had
adopted SFAS No. 123, our net income for fiscal 2002 would have been $4.4
million instead of $7.4 million. A more detailed discussion of this accounting
policy is provided in Note 12 to our Consolidated Financial Statements.
Revenue Recognition - Maintenance Agreements
Revenue from product sales is typically recognized at the time product is
shipped. Generally, the Company transfers the risks and rewards of the products,
including title, at this time. Revenue from conferencing services sales is
recognized at the time the service is rendered. Revenue from business service
sales is generally recognized at the completion of installation if customer
acceptance is required. If the customer acceptance is not required, revenue from
business services sales is recognized when it is both realized and earned. The
acquisition of E.mergent added unearned revenue to the balance sheet in fiscal
2002. Unearned revenue is derived solely from the sale of maintenance contracts
for integrated systems installations. These contracts are usually for a period
of 12, 24, or 36 months and cover all costs of repair and, in some cases,
replacement of defective parts as well as on-site troubleshooting. The revenue
from a maintenance contract is deferred and recognized ratably over the full
period covered by the contract. Expenses related to the contracts are expensed
as incurred. As of June 30, 2002, the amount of revenue to be recognized over
the next 12 months was $607,000 and thereafter $277,000
Obsolete & Slow-Moving Inventory Reserves
We account for our inventory on a first-in-first-out (FIFO) basis, and make
appropriate reserves on a quarterly basis to write-down the value of inventory
to the lower of cost or net realizable value.
In order to determine what, if any, inventory needs to be written down and the
actual reserve amount required, we perform an analysis of obsolete and
slow-moving inventory at least two times per year. In general, we write down our
excess and obsolete inventory by an amount that is equal to the difference
between the cost of the inventory and its estimated market value if market value
is less than cost, based upon assumptions about future product life-cycles,
product demand and market conditions. Those items that are found to have a
supply in excess of demand are considered to be slow-moving or obsolete and the
appropriate reserve is made to write-down the value of that inventory to its
realizable value.
Accounts Receivable - Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting
from our customers' failure to make required payments. The amount of the
allowance is based on our historical experience and involves a review of account
aging, our customers' financial condition or general economic conditions. We
believe that our allowance for doubtful accounts is adequate.
Reserve for Product Returns
We maintain a reserve for product returns based on the historical product
return-to-sales ratio. The amount of the reserve is calculated and may be
adjusted on a quarterly basis.
32
Goodwill--Recoverability
As more fully discussed in Note 1 to the Consolidated Financial Statements, we
have recorded the goodwill and other intangible assets that have been acquired
through our acquisitions of ClearOne in July 2000, Ivron in October 2001, and
E.mergent in May 2002. In July 2001, FASB issued SFAS No. 141, "Business
Combinations", which establishes new standards for accounting and reporting
requirements for business combinations, and SFAS No. 142, "Goodwill and Other
Intangible Assets", which broadens the criteria for recording intangible assets
other than goodwill. In effect, as a result of SFAS No. 141 and SFAS No. 142,
the goodwill that was recorded in our acquisitions of Ivron and E.mergent was
not subject to amortization. Further, as of July 1, 2002, the goodwill that was
previously recorded with respect to the acquisition of ClearOne is no longer
subject to amortization. Instead, SFAS No. 142 sets forth methods to
periodically evaluate the goodwill that will not be amortized for impairment. We
are working with our financial consultants to establish the appropriate methods
to properly evaluate the recoverability of the goodwill and to measure for
possible impairment. This evaluation involves significant management judgment
and is based on various analyses, including cash flow and profitability
projections. If such methods should indicate that the value of the goodwill has
been impaired, then we will record a charge to operations to recognize the
impairment of our goodwill. We do not believe that there are any indications
that goodwill is impaired as of June 30, 2002.
Deferred Tax Assets and Liabilities
We provide for income taxes based on the asset and liability method required by
SFAS No. 109, "Accounting for Income Taxes". Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, as well as net
operating loss and credit carryforwards. As of June 30, 2002, we had deferred
tax assets of approximately $1.3 million, and deferred tax liabilities of
approximately $1.5 million, for a net deferred tax liability of approximately
$164,000. Our deferred tax asset of $1.3 million are attributable to differences
between the financial statement and tax treatment of certain allowances and
reserves with respect to our current assets that are not currently deductible
for income tax purposes. Approximately $500,000 of our deferred tax liability
relates to the taxable gain that has been deferred until we receive principal
payments on the note issued by Burk. (See "Discontinued Operations" above.) The
balance of the deferred tax liability relates to differences between the
financial statement basis and tax basis of depreciable fixed assets and certain
intangible assets that are either amortizable or non-amortizable for financial
statement or tax purposes, as well as the timing for recognition of the gain on
assets sold to Burk.
In connection with the E.mergent and Ivron acquisitions, we may be able to take
advantage of certain tax net operating loss and credit carryforwards from which
we could derive significant tax benefits. However, the tax rules regarding such
tax benefits arising from an acquisition are complicated and very restrictive,
and the availability of these tax benefits to us is not certain. As a result, we
have reduced to zero, the deferred tax asset of approximately $508,000 with
respect to the acquired tax carryforwards that would otherwise be recorded. This
reduction is done by recording a valuation allowance against the deferred tax
asset of the same amount. The need to record a valuation allowance is evaluated
each quarter, and if we determine that we will realize all or part of the
deferred tax asset in the future, an adjustment to the deferred tax asset will
be made. Because these carryforwards were obtained as a result of acquisitions,
a similar adjustment will be recorded to goodwill. Additional detail concerning
the specific types of deferred tax assets and liabilities that we have recorded
is shown in Note 11 to the Consolidated Financial Statements.
New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
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 occurring on or after July 1, 2001, modifies the criteria
for recognizing intangible assets and expands disclosure requirements. We have
adopted this statement in accounting for the Ivron and E.mergent acquisitions.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which we adopted effective July 1, 2002. Under SFAS No. 142, goodwill
and intangible assets with indefinite lives are no longer amortized, but must be
reviewed for impairment at least annually or more frequently under certain
33
circumstances. Other intangibleassets that are deemed to have finite lives will
continue to be amortized over their useful lives but must be reviewed for
impairment when events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. This goodwill and other
intangible assets represent a significant portion of our recorded assets. If
impairment is deemed to exist, we will write down the recorded value of goodwill
and other intangible assets to their fair values. As of June 30, 2002, we had
unamortized goodwill of approximately $20.6 million, of which $2.5 million
relates to the acquisition of ClearOne, Inc. and was amortized up to June 30,
2002, and of which $439,000 relates to the Ivron acquisition and $17.7 million
relates to the E.mergent acquisition. Through June 30, 2002, we amortized
$190,000 annually of ClearOne goodwill.
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, and are currently evaluating the impact of this statement on our
financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF issue No.
94-3, a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. A fundamental conclusion reached by the FASB in SFAS
No. 146 is that an entity's commitment to a plan, by itself, does not create an
obligation that meets the definition of a liability. Therefore, SFAS No. 146
eliminates the definition and requirements for recognition of exit costs in EITF
issue No. 94-3. SFAS No. 146 also establishes that fair value is the objective
for initial measurement of the liability. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, but early
adoption is encouraged. We are currently evaluating the impact of SFAS No. 146
on our financial Statements.
ITEM 7A. Qualitative and Quantitative Disclosures About Market Risk
Market risk represents the risk of changes in the value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates, foreign exchange rates and equity prices. Changes in these factors could
cause fluctuations in the results of our operations and cash flows. In the
ordinary course of business, we are exposed to foreign currency and interest
rate risks. These risks primarily relate to the sale of products and services to
foreign customers and changes in interest rates on our capital leases.
We currently have limited market risk sensitive instruments related to interest
rates. Our capital lease obligations totaled approximately $101,000 at June 30,
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. Although we had a balance of approximately $196,000 on our line of credit
as of June 30, 2002, such balance was repaid in July 2002 and no balance is
outstanding as of September 10, 2002. As such, we do not have significant market
interest rate risk. We have not undertaken any additional actions to cover
market interest rate market risk and are not a party to any other interest rate
market risk management activities. A hypothetical 10% change in market interest
rates over the next year would not impact our earnings or cash flows as the
interest rates on the majority of the capital leases are fixed.
We do not purchase or hold any derivative financial instruments for trading
purposes.
Although our subsidiaries enter into transactions in currencies other than their
functional currency, foreign currency exposures arising from these transactions
are not material to us. The greatest foreign currency exposure arises from the
remeasurement of our net equity investment in our subsidiaries to U.S. dollars.
The primary currency to which we are exposed is the Euro. The fair value of our
net foreign investments would not be materially affected by a 10% adverse change
in foreign currency exchange rates from June 30, 2002 levels.
34
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
------------------------------------------
Page
----
Report of Independent Auditors......................................... 36
Consolidated Balance Sheets as of June 30, 2002 and 2001............... 37
Consolidated Statements of Income for fiscal years ended
June 30, 2002, 2001, and 2000........................................ 38
Consolidated Statements of Cash Flows for fiscal years ended
June 30, 2002, 2001, and 2000........................................ 39
Consolidated Statements of Shareholders' Equity for fiscal
years ended June 30, 2002, 2001, and 2000............................ 40
Notes to Consolidated Financial Statements............................. 41
35
Report of Independent Auditors
The Board of Directors and Shareholders CLEARONE COMMUNICATIONS, INC.
We have audited the accompanying consolidated balance sheets of ClearOne
Communications, Inc. (formerly Gentner Communications Corporation) as of June
30, 2002 and 2001, and the related consolidated statements of income, cash
flows, and shareholders' equity for each of the three years in the period ended
June 30, 2002. 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. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ClearOne
Communications, Inc. at June 30, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2002, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Salt Lake City, Utah
August 9, 2002, except note 20
as to which the date is August 27, 2002
36
CLEARONE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
-------------------------
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents .................................. $14,248,502 $ 6,852,243
Accounts receivable, less allowances of $1,213,000 in 2002
and $436,000 in 2001 ................................... 20,316,730 7,212,970
Note receivable - current portion .......................... 195,598 71,423
Inventory .................................................. 8,605,550 4,132,034
Deferred tax assets ........................................ 1,293,281 247,402
Prepaid expenses ........................................... 609,956 779,648
----------- -----------
Total current assets ................................... 45,269,617 19,295,720
Property and equipment, net ..................................... 5,769,444 3,696,615
Goodwill, net ................................................... 20,552,832 2,633,732
Note receivable - long term portion ............................. 1,490,028 1,716,477
Other intangible assets, net .................................... 6,991,410 181,722
Deposits and other assets ....................................... 73,362 73,357
----------- -----------
Total assets ........................................... $80,146,693 $27,597,623
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit .................................................. $ 196,386 $ --
Accounts payable ................................................ 3,053,819 568,782
Accrued compensation and other benefits ......................... 801,243 410,416
Income tax payable .............................................. 820,729 421,749
Accrued severance ............................................... 416,240 --
Other accrued expenses .......................................... 1,079,111 719,112
Unearned maintenance revenue - current portion .................. 607,076 --
Current portion of capital lease obligations .................... 60,443 181,827
----------- -----------
Total current liabilities .............................. 7,035,047 2,301,886
Capital lease obligations ....................................... 40,876 48,227
Unearned maintenance revenue .................................... 276,825 --
Deferred tax liabilities ........................................ 1,457,762 746,000
----------- -----------
Total liabilities ...................................... 8,810,510 3,096,113
Commitments and contingencies
Shareholders' equity:
Common stock, 50,000,000 shares authorized, par value $.001,
11,178,392 and 8,617,978 shares issued and outstanding at
June 30, 2002 and 2001, respectively ..................... 11,178 8,618
Additional paid-in capital ................................. 48,384,060 8,962,699
Retained earnings .......................................... 22,940,945 15,530,193
----------- -----------
Total shareholders' equity ............................. 71,336,183 24,501,510
----------- -----------
Total liabilities and shareholders' equity ............. $80,146,693 $27,597,623
=========== ===========
See accompanying notes
37
CLEARONE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30,
-------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Product sales............................... $ 37,215,161 68.2% $ 28,189,612 70.7% $ 22,226,504 79.0%
Service sales............................... 17,327,525 31.8% 11,688,793 29.3% 5,891,909 21.0%
------------- ---- ------------- ---- ------------- ----
Total net sales........................ 54,542,686 100.0% 39,878,405 100.0% 28,118,413 100.0%
Cost of goods sold - products............... 15,057,167 40.5% 10,633,956 37.7% 8,033,867 36.1%
Cost of goods sold - services............... 7,942,952 45.8% 5,869,106 50.2% 2,974,456 50.5%
------------- ---- ------------- ---- ------------- ----
Total cost of goods sold............... 23,000,119 42.2% 16,503,062 41.4% 11,008,323 39.2%
------------- ---- ------------- ---- ------------- ----
Gross profit................................ 31,542,567 57.8% 23,375,343 58.6% 17,110,090 60.8%
Operating expenses:
Marketing and selling.................. 10,705,494 19.6% 7,753,292 19.4% 6,165,917 21.9%
General and administrative............. 6,051,092 11.1% 4,648,999 11.7% 3,132,125 11.1%
Product development.................... 4,052,695 7.4% 2,502,169 6.3% 1,270,819 4.5%
------------- ---- ------------- ---- ------------- ----
Total operating expenses........... 20,809,281 38.1% 14,904,460 37.4% 10,568,861 37.5%
------------- ---- ------------- ---- ------------- ----
Operating income................... 10,733,286 19.7% 8,470,883 21.2% 6,541,229 23.3%
Other income (expense):
Interest income........................ 446,548 0.8% 397,438 1.0% 236,387 0.8%
Interest expense....................... (23,494) (0.0)% (42,517) (0.1)% (65,554) (0.2)%
Other, net............................. 74,979 0.1% 53,768 0.1% 8,503 0.0%
Gain (loss) on foreign currency
transactions......................... 10,898 0.0% (35,542) (0.1)% -- 0.0%
------------- ---- ------------- ---- ------------- ----
Total other income................. 508,931 0.9% 373,147 0.9% 179,336 0.6%
------------- ---- ------------- ---- ------------- ----
Income from continuing operations
before income taxes.................... 11,242,217 20.6% 8,844,030 22.1% 6,720,565 23.9%
Provision for income taxes.................. 3,831,465 7.0% 3,318,845 8.3% 2,418,823 8.6%
------------- ---- ------------- ---- ------------- ----
Income from continuing operations...... 7,410,752 13.6% 5,525,185 13.8% 4,301,742 15.3%
Discontinued operations:
Income from discontinued operations, net of
income taxes ($0 in 2002, $438,605
in 2001 and $253,778 in 2000).......... -- 737,280 426,591
Gain on disposal of business segment, net
of income taxes ($725,788 in 2001)..... -- 1,220,024 --
------------- ------------- -------------
Net income.................................. $ 7,410,752 $ 7,482,489 $ 4,728,333
============= ============= =============
Basic earnings per common share from
continuing operations.................. $ 0.77 $ 0.64 $ 0.52
Diluted earnings per common share from
continuing operations.................. $ 0.74 $ 0.61 $ 0.49
Basic earnings per common share from
discontinued operations................ $ -- $ 0.23 $ 0.05
Diluted earnings per common shares from
discontinued operations................ $ -- $ 0.22 $ 0.05
Basic earnings per common share............. $ 0.77 $ 0.87 $ 0.57
Diluted earnings per common share........... $ 0.74 $ 0.83 $ 0.54
See accompanying notes
38
CLEARONE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,
--------------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Income from continuing operations ........................ $ 7,410,752 $ 5,525,185 $ 4,301,742
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operating activities:
Depreciation and amortization of property and
equipment ........................................... 1,172,019 1,044,878 751,202
Amortization of other assets .......................... 822,035 269,068 19,467
Deferred income taxes ................................. (263,885) (81,402) (33,000)
Provision for bad debts ............................... 215,927 575,909 74,863
Provision for obsolete inventory ...................... 527,800 370,938 168,586
Gain on investments ................................... -- (4,442) (7,771)
Tax benefits from stock option exercises allocated to
contributed capital ................................ 181,787 117,084 1,287,000
Changes in operating assets and liabilities:
Accounts receivable ................................ (11,128,003) (3,635,202) (1,986,246)
Inventory .......................................... (930,185) (724,939) (792,367)
Income taxes ....................................... 378,449 1,194,873 (1,216,999)
Other assets ....................................... 394,749 (110,239) (535,303)
Unearned maintenance ............................... (15,282) -- --
Accounts payable and other accrued expenses ........ 1,338,930 (833,324) 448,011
------------ ------------ ------------
Net cash provided by continuing operating
activities ................................... 105,093 3,708,387 2,479,185
Cash flows from investing activities:
Purchases of property and equipment ...................... (2,748,268) (1,356,275) (1,684,200)
Purchase of businesses ................................... (14,424,583) (1,758,085) --
Proceeds from note receivable ............................ 129,274 -- --
------------ ------------ ------------
Net cash used in investing activities .......... (17,043,577) (3,114,360) (1,684,200)
Cash flows from financing activities:
Net proceeds from issuance of common stock ............... 23,848,016 15,095 30,274
Exercise of employee stock options ....................... 1,020,513 324,989 355,255
Repurchase of common stock ............................... (52,964) (191,381) --
Proceeds from line of credit ............................. 196,386 -- --
Principal payments on capital lease obligations .......... (193,696) (252,841) (215,854)
Principal payments on line of credit ..................... (483,512) -- --
------------ ------------ ------------
Net cash provided by (used in) financing
activities .................................. 24,334,743 (104,138) 169,675
------------ ------------ ------------
Net increase in cash from continuing operations .............. 7,396,259 489,889 964,660
Net cash flow from discontinued operations ................... -- 987,358 488,153
Cash at the beginning of the year ............................ 6,852,243 5,374,996 3,922,183
------------ ------------ ------------
Cash at the end of the year .................................. $ 14,248,502 $ 6,852,243 $ 5,374,996
============ ============ ============
Supplemental disclosure of cash flow information:
Property and equipment financed by capital leases ........ $ -- $ 27,507 $ --
Income taxes paid, net ................................... $ (3,529,427) $ (2,575,481) $ (2,635,601)
Interest paid ............................................ $ (23,494) $ (42,517) $ (65,554)
Consideration paid in stock for purchase of business ..... $(14,426,569) $ (2,000,013) $ --
See accompanying notes
39
CLEARONE COMMUNICATIONS, INC.
CONSOLDIATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Total
------------ Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- ------
Balances at June 30, 1999 .......... 8,129,691 $ 8,130 $ 5,024,858 $ 3,319,371 $ 8,352,359
Exercise of employee stock
options ..................... 296,000 296 354,959 -- 355,255
Issuance of common stock under
employee stock purchase plan 1,454 1 30,273 -- 30,274
Tax benefits from stock option
exercises allocated to
contributed capital ......... -- -- 1,287,000 -- 1,287,000
Net income .................... -- -- -- 4,728,333 4,728,333
---------- --------- ------------ ------------ ------------
Balances at June 30, 2000 .......... 8,427,145 8,427 6,697,090 8,047,704 14,753,221
Exercise of employee stock
options ..................... 75,125 75 324,914 -- 324,989
Issuance of common stock under
employee stock purchase plan 1,137 1 15,094 -- 15,095
Tax benefits from stock option
exercises allocated to
contributed capital ......... -- -- 117,084 -- 117,084
Consideration paid in stock for
the purchase of business .... 129,871 130 1,999,883 -- 2,000,013
Repurchase and retirement of
common stock by the Company . (15,300) (15) (191,366) -- (191,381)
Net income .................... -- -- -- 7,482,489 7,482,489
Balances at June 30, 2001 .......... 8,617,978 8,618 8,962,699 15,530,193 24,501,510
Exercise of employee stock
options ..................... 195,999 196 1,020,317 -- 1,020,513
Issuance of common stock under
employee stock purchase plan 724 1 12,901 -- 12,902
Tax benefits from stock option
exercises allocated to
contributed capital ......... -- -- 181,787 -- 181,787
Issuance of common stock in
private placement ........... 1,500,000 1,500 23,833,614 -- 23,835,114
Consideration paid in stock for
the purchase of business .... 868,691 868 14,425,701 -- 14,426,569
Repurchase and retirement of
common stock by the Company . (5,000) (5) (52,959) -- (52,964)
Net income .................... -- -- -- 7,410,752 7,410,752
---------- --------- ------------ ------------ ------------
Balances at June 30, 2002 .......... 11,178,392 $ 11,178 $ 48,384,060 $ 22,940,945 $ 71,336,183
========== ========= ============ ============ ============
See accompanying notes
40
CLEARONE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
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.
ClearOne Communications, Inc. (the "Company") is a provider of end-to-end
conferencing solutions. The Company operates in three business segments:
products, conferencing services and business services. The Company designs,
manufactures and sells high quality audio and videoconferencing products,
provides conference calling services, and provides a broad range of technical
and value-added services, including design and installation of systems, training
and system consulting. The Company provides products and services domestically
and internationally. The Company generally grants credit without requiring
collateral to its customers within these markets.
During October 2000, the Company established Gentner Communications EuMEA GmbH,
a wholly owned subsidiary headquartered in Nuremberg, Germany. The subsidiary
began operations during December 2000. Gentner EuMEA focuses on distribution,
technical support, and training in Europe, the Middle East and northern Africa.
On October 3, 2001, the Company purchased all of the outstanding shares of Ivron
Systems, Ltd. (Ivron), a wholly owned subsidiary headquartered in Dublin,
Ireland, now known as Gentner Communications Limited. The subsidiary focuses on
research and the further development of videoconferencing products. See Note 16.
On May 31, 2002, the Company acquired and merged with E.mergent, Inc.
(E.mergent). E.mergent focuses on manufacturing and sales of videoconferencing
equipment and business services including design, installation and support of
meeting room technologies. See Note 16.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany transactions have been eliminated in
consolidation.
Summary of Significant Accounting Policies
Cash Equivalents - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Inventory - Inventories are stated at the lower of cost (first-in, first-out) or
market.
Shipping and Handling Costs - Shipping and handling costs are expensed as
incurred and included in cost of sales.
Revenue Recognition - Revenue from product sales is typically recognized at the
time product is shipped. Generally, the Company transfers the risks and rewards
of the products, including title, at this time. Revenue from conference service
sales is recognized at the time the service is rendered. Revenue from business
services sales is generally recognized at the completion of installation if
customer acceptance is required. If the customer acceptance is not required,
revenue from business services sales is recognized when it is both realized and
earned. Revenue from maintenance contracts is recognized ratably over the life
of the contract. The Company records reserves for sales returns and
uncollectible accounts, at the time the product is shipped or service is
rendered. Historically, the Company's estimate of sales returns and
uncollectible accounts has not materially varied from actual results.
The Company offers rebates to certain of its distributors based upon the volume
of product purchased by such distributors. In accordance with Emerging Issues
Task Force (EITF) Issue No. 00-22, "Accounting for Points and Certain Other
Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
or Services to Be Delivered in the Future," such rebates are recorded as a
reduction of revenue.
Foreign Currency - The functional currency of the Company's foreign subsidiaries
is the U.S. dollar. Accordingly, the results of operations of the Company's
foreign subsidiaries, which are recorded by the subsidiaries in Euro, are
41
remeasured into the U.S. dollar using average exchange rates during the year,
while the assets, liabilities and equity accounts are remeasured using period
end exchange rates and historical rates, as appropriate. The impact of this
remeasurement is recorded in earnings.
Property and Equipment - Property and equipment are stated at cost. Costs
associated with internally developed software are capitalized in accordance with
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Depreciation and amortization are
provided over the estimated useful lives of the respective assets using the
straight-line method. Repairs and maintenance costs are expensed as incurred.
Long-Lived Assets - The Company regularly evaluates the carrying amounts of
long-lived assets, including goodwill and other intangible assets, as well as
the related amortization periods, to determine whether adjustments to these
amounts or to the useful lives are required based on current circumstances or
events. The evaluation, which involves significant management judgment, is based
on various analyses including cash flow and profitability projections. To the
extent such projections indicate that future undiscounted cash flows are not
sufficient to recover the carrying amounts of the related long-lived assets, the
carrying amount of the underlying assets will be reduced, with the reduction
charged to expense, so that the carrying amount is equal to fair value, which is
primarily determined based upon future discounted cash flows. No impairment of
the Company's long-lived assets has been indicated to date.
Goodwill - The Company amortized goodwill related to the ClearOne, Inc.
acquisition from the acquisition date of July 1, 2000 to June 30, 2002. As of
July 1, 2002, the Company will adopt Statement of Financial Accounting Standard
(SFAS) No. 142, "Goodwill and Other Intangible Assets" and the ClearOne, Inc.
goodwill will no longer be amortized. Unamortized goodwill was approximately
$20,553,000 as of June 30, 2002, of which $2,446,000 relates to the ClearOne,
Inc. acquisition and was amortized through June 30, 2002, and $439,000 relates
to Ivron and $17,668,000 relates to E.mergent, which are not amortized in
accordance with the provisions of SFAS No. 142. Amortization of ClearOne
goodwill was approximately $188,000 for each of the years ended June 30, 2002
and 2001.
Other Intangible Assets - Other intangible assets consist principally of value
assigned to patents, purchased technology, non-compete agreements and certain
other intangible assets. The Company amortizes purchased technology and other
intangible assets on a straight-line basis over periods ranging from one and
one-half to fifteen years. Accumulated amortization on other intangible assets
was $961,073 and $327,038 at June 30, 2002 and 2001, respectively. The Company
performs an evaluation of other assets on a periodic basis to determine that the
recorded costs are not in excess of their net realizable value.
Earnings per Share - The following table sets forth the computation of basic and
diluted net income per share:
Year Ended June 30,
-------------------------------------------
2002 2001 2000
---- ---- ----
Numerator:
Income from continuing operations................ $ 7,410,752 $ 5,525,185 $ 4,301,742
Income from discontinued operations.............. - 737,280 426,591
Gain on disposal of business segment............. - 1,220,024 -
------------ ------------ ------------
Net income....................................... $ 7,410,752 $ 7,482,489 $ 4,728,333
============ ============ ============
Denominator for basic net income per
share - weighted average shares:.................... 9,574,758 8,593,510 8,269,941
Dilutive common stock equivalents using treasury
stock method:....................................... 444,996 422,134 470,268
------------ ------------ ------------
Denominator for diluted net income per share -
weighted average shares:........................... 10,019,754 9,015,644 8,740,209
Basic net income per share:
Continuing operations............................ $ 0.77 $ 0.64 $ 0.52
Discontinued operations.......................... - 0.23 0.05
------------ ------------ ------------
Basic net income per share............................ $ 0.77 $ 0.87 $ 0.57
=========== ========== ===========
42
Diluted net income per share:
Continuing operations............................ $ 0.74 $ 0.61 $ 0.49
Discontinued operations.......................... - 0.22 0.05
------------ ------------ ------------
Diluted net income per share.......................... $ 0.74 $ 0.83 $ 0.54
=========== ========== ===========
Options to purchase 67,750, 663,250 and 523,500 shares of common stock were
outstanding as of June 30, 2002, 2001 and 2000, respectively, but were not
included in the computation of diluted earnings per share as the effect would be
antidilutive. Warrants to purchase 150,000 shares of common stock were
outstanding as of June 30, 2002, but were not included in the computation of
diluted earnings per share as the effect would be antidilutive.
Research and Product Development Costs - Research and product development costs
are expensed as incurred.
Income Taxes - The Company provides for income taxes based on the asset and
liability method required by SFAS No. 109, "Accounting for Income Taxes." Under
the asset and liability method, deferred tax assets and deferred tax liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and tax credit
carryforwards. Deferred tax assets and deferred tax liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and deferred tax liabilities of a change in tax
rates is recognized in operations in the period during which the rule with
respect to the change in tax rate is enacted.
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.
Stock-Based Compensation - SFAS No. 123, "Accounting for Stock-Based
Compensation," defines a fair value-based method of accounting for and measuring
compensation expense related to stock-based compensation plans and encourages
adoption of the standard. However, SFAS No. 123 allows entities to continue to
measure compensation expense for stock-based plans using the intrinsic
value-based method prescribed by Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees". The Company has elected to
continue to account for stock-based compensation plans using the provisions of
APB Opinion No. 25. Pro forma footnote disclosure of net income has been made as
if the fair value based method of accounting defined in the Statement had been
applied.
Advertising Expenses - Advertising costs are expensed as incurred. Advertising
expense for fiscal years 2002, 2001 and 2000 totaled $497,000, $357,700 and
$186,400, respectively.
New Accounting Pronouncements - In July 2001, the Financial Accounting Standards
Board issued SFAS No. 141, "Business Combinations." SFAS No. 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 acquisitions of Ivron as of October 3, 2001, and E.mergent as
of May 31, 2002.
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 SFAS No. 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 SFAS No. 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. See "Goodwill" above.
43
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.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS
No. 146 addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies EITF issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of an entity's commitment
to an exit plan. A fundamental conclusion reached by the FASB in SFAS No. 146 is
that an entity's commitment to a plan, by itself, does not create an obligation
that meets the definition of a liability. Therefore, SFAS No. 146 eliminates the
definition and requirements for recognition of exit costs in EITF No. 94-3. SFAS
No. 146 also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with early adoption
encouraged. The Company is currently evaluating the impact of SFAS No. 146 on
its financial statements.
Reclassification - Certain amounts reported in prior year financial statements
have been reclassified to conform with current year presentations.
2. Discontinued Operations
On April 12, 2001, the Company sold the assets of the remote control portion of
the RFM/Broadcast division to Burk Technology, Inc. of Littleton, MA ("Burk").
Burk is a privately held developer and manufacturer of broadcast facility
control systems products. The Company retained the accounts payable of the
remote control portion of the RFM/Broadcast division. Burk assumed obligations
for (i) unfilled customer orders, and (ii) satisfying warranty obligations to
both existing customers of the Company, and for inventory sold to Burk.
The assets of the remote control portion of the RFM/Broadcast division were sold
to Burk for up to $3.2 million, including $750,000 in cash at closing, and $1.75
million in the form of a seven-year promissory note, with interest at the rate
of nine percent per annum. The promissory note is 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, the Company has 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. The Company
retained remote control related inventory in the amount of $70,000 and zero
liabilities at June 30, 2001. The Company 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:
Year Ended June 30,
-------------------------------------------
2002 2001 2000
---- ---- ----
Net sales............................................ $ - $ 2,369,054 $ 2,753,529
Cost of goods sold................................... - 806,581 924,488
Marketing and selling................................ - 281,852 597,835
Product development.................................. - 104,736 550,837
------------- ------------ ------------
Income before income taxes........................... - 1,175,885 680,369
Provision for income taxes........................... - (438,605) (253,778)
Gain on disposal of business segment, net of taxes... - 1,220,024 -
------------- ------------ ------------
Net income from discontinued operations.............. $ - $ 1,957,304 $ 426,591
============= ============ ============
44
Basic earnings per share from
discontinued operations............................ $ - $ 0.23 $ 0.05
Diluted earnings per share from
discontinued operations............................ $ - $ 0.23 $ 0.05
3. Comprehensive Income
The Company had no components of "Other Comprehensive Income" as defined by SFAS
No. 130. Therefore, comprehensive income for the years ended June 30, 2002,
2001, and 2000 was equal to net income.
4. Significant Customers
For the periods ended June 30, 2002, 2001, and 2000, the Company did not have
sales to any customer that equaled or exceeded ten percent of net revenue.
However, as of June 30, 2002, two customers each account for greater than 10% of
outstanding accounts receivables.
5. Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable and
payable, the Company's line of credit and accrued liabilities all approximate
fair value due to the short-term maturities of these assets and liabilities. The
carrying values of virtually all long-term notes payable and capital leases also
approximate fair value because applicable interest rates either fluctuate based
on market conditions or approximate the Company's current borrowing rate.
The fair value of the note receivable as of June 30, 2002 and 2001 was
approximately $1,428,300 and $1,787,900, respectively, using the Company's
current borrowing interest rate.
6. Inventory
Inventory is summarized as follows:
June 30,
--------------------------
2002 2001
---- ----
Raw materials................................... $ 4,134,540 $ 2,500,098
Work in progress................................ 737,228 195,149
Finished goods.................................. 3,733,782 1,436,787
----------- -----------
Total inventory............................ $ 8,605,550 $ 4,132,034
=========== ===========
The Company recorded a reserve for obsolete and slow-moving inventory of
$809,000 and $226,000 at June 30, 2002 and 2001, respectively.
7. Property and Equipment
Major classifications of property and equipment and estimated useful lives are
as follows:
June 30,
--------------------------
2002 2001
---- ----
Office furniture and equipment - 5 to 10 years...... $ 7,106,689 $ 4,541,371
Manufacturing and test equipment - 5 to 10 years.... 2,620,268 2,304,680
Telephone bridging equipment - 10 years............. 1,007,227 857,450
Vehicles - 3 to 5 years............................. 9,140 -
----------- -----------
10,743,324 7,703,501
Accumulated depreciation and amortization........... (4,973,880) (4,006,886)
----------- -----------
Net property and equipment...................... $ 5,769,444 $ 3,696,615
=========== ===========
45
8. Line of Credit
The Company maintains a $5.0 million revolving line of credit (balance of
$196,386 and $0 at June 30, 2002 and 2001, respectively) with a commercial bank.
The revolving line of credit expires December 22, 2002 and the Company expects
to renew beyond that date. The line of credit is secured by the Company's
accounts receivable and inventory. The interest rate on the line of credit is a
variable interest rate (250 basis points over the London Interbank Offered Rate
(LIBOR) or prime less 0.25%, whichever the Company chooses). The borrowing rate
was 4.50% as of June 30, 2002. The weighted average interest rate for the years
ended June 30, 2002, 2001 and 2000, respectively, was 5.17%, 8.14% and 7.58%.
The terms of the line of credit prohibit the payment of dividends and require
the Company to maintain other defined financial ratios and restrictive
covenants. No compensating balance arrangements are required. At the time of the
E.mergent acquisition, E.mergent had a line of credit with a balance of
$483,512. This line of credit balance was paid in June 2002 and the line of
credit expired June 30, 2002.
9. Leases
The Company has entered into capital leases with finance companies to finance
the purchase of certain furniture and equipment. Property and equipment under
capital leases are as follows:
June 30,
--------------------------
2002 2001
---- ----
Office furniture and equipment...................... $ 916,041 $ 936,819
Manufacturing and test equipment.................... 470,786 478,598
Telephone bridging equipment........................ 284,296 284,296
----------- -----------
1,671,123 1,699,713
Accumulated depreciation and amortization........... (1,138,186) (1,018,919)
----------- -----------
Net property and equipment under capital leases. $ 532,937 $ 680,794
=========== ===========
Amortization expense for assets recorded under capital leases is included with
depreciation expense.
Future minimum lease payments under capital leases and noncancelable operating
leases with initial terms of one year or more are as follows:
Capital Operating
For years ending June 30:
2003............................................ $ 66,855 $ 1,834,099
2004............................................ 34,950 1,340,588
2005............................................ 7,334 1,039,182
2006............................................ 2,444 835,789
2007............................................ -- 220,169
----------- -----------
Total minimum lease payments................. 111,583 $ 5,269,827
===========
Less use taxes...................................... (3,334)
-----------
Net minimum lease payments................... 108,249
Less amount representing interest................... (6,930)
-----------
Present value of net minimum lease payments.. 101,319
Less current portion................................ (60,443)
-----------
Capital lease obligation..................... $ 40,876
===========
Certain operating leases contain rent escalation clauses based on the consumer
price index. Rental expense, which was composed of minimum rentals under
operating lease obligations, was $1,469,278, $1,052,293 and $664,026 for the
years ended June 30, 2002, 2001 and 2000, respectively. The Company's operating
lease on its Salt Lake City, Utah facility, which expires 2006, provides for
renewal options extending the terms for an additional ten years. Rates charged
would be at prevailing market rates at the time of renewal.
46
10. Royalty Agreements
The Company was a general partner in two limited partnerships, Gentner Research
Ltd. ("GRL") and Gentner Research II, Ltd. ("GR2L"), both related parties. GRL
sold the proprietary interest in a remote control product line to the Company in
exchange for royalty agreements in 1987 and 1988. Royalty expense under the
agreements with GRL for the years ended June 30, 2001 and 2000, was $3,600 and
$16,000, respectively. GRL was dissolved on February 20, 2001 after consent to
dissolution and liquidation was received by a majority of the partners of GRL.
The product line, which incorporated the proprietary interest, was deemed no
longer integral to the product segment of the Company's business.
In fiscal 1997, GR2L sold the proprietary interest in a new remote control
product to the Company in exchange for a royalty agreement. Royalty expense for
sales of remote control product under this agreement with GR2L for the years
ended June 30, 2001 and 2000 was $90,793 and $106,084, respectively. The Company
paid $178,516 to GR2L in 2001, representing GR2L's royalty on the gain on the
sale of the remote control product line. This amount is included in the
determination of gain on disposal of business segment in the statement of income
for the year ended June 30, 2001.
11. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
2002 2001
---- ----
Deferred tax liabilities:
Deferred tax gain on disposal of discontinued operations $ 488,000 $ 511,000
Tax over book depreciation of fixed assets ............. 380,000 278,000
Tax over book amortization of intangibles .............. 589,762 --
Total deferred tax liabilities ............................. 1,457,762 789,000
----------- -----------
Deferred tax assets:
Book over tax amortization of intangibles .............. -- 43,000
Accounts receivable and other related reserves ......... 303,000 110,000
Inventory reserves ..................................... 396,000 49,000
Unearned maintenance and other deferred revenue ........ 347,000 --
Net operating loss carryforward ........................ 349,104 --
Research and development credit carryforward ........... 158,586 --
Other accruals ......................................... 247,281 88,402
----------- -----------
Total deferred tax assets .................................. 1,800,971 290,402
Total valuation allowance .............................. (507,690) --
----------- -----------
Net deferred tax assets ................................ 1,293,281 290,402
----------- -----------
Net deferred tax liabilities ........................ $ (164,481) $ (498,598)
=========== ===========
The net operating loss carryforward and the research and development credit
carryforward reflect estimates of the carryforwards that were generated by
E.mergent and Ivron prior to the acquisitions. The Company is entitled to
utilize these carryforwards subject to certain limitations. However, due to
uncertainties regarding the amount of carryforwards (based on final tax returns)
and realizability of these carryforwards, the Company established a valuation
allowance as part of its purchase price allocation. In accordance with SFAS No.
109 any subsequent adjustments to deferred taxes as reflected in the respective
purchase price allocations and the related valuation allowance will be recorded
to goodwill. The net operating loss carryforwards and research and development
credits expire in 2022.
The classification of these deferred tax assets and liabilities on the balance
sheets as of June 30 are as follows:
2002 2001
---- ----
Net current deferred tax assets............................. $ 1,293,281 $ 247,402
Net non-current deferred tax liabilities.................... 1,457,762 746,000
Net deferred tax liabilities................................ $ (164,481) $ (498,598)
47
Income taxes on income from continuing operations for the years ending June 30
consist of the following:
2002 2001 2000
---- ---- ----
Current:
Federal ..................................... $ 3,321,710 $ 2,771,400 $ 998,220
State ....................................... 570,018 444,080 166,603
Foreign ..................................... 21,835 67,683 --
Tax benefits allocated to contributed capital 181,787 117,084 1,287,000
----------- ----------- -----------
Total current ................................... 4,095,350 3,400,247 2,451,823
Deferred:
Federal ..................................... (227,359) (69,000) (30,000)
State ....................................... (37,928) (11,000) (3,000)
Foreign ..................................... 1,402 (1,402) --
----------- ----------- -----------
Total deferred .................................. (263,885) (81,402) (33,000)
----------- ----------- -----------
$ 3,831,465 $ 3,318,845 $ 2,418,823
=========== =========== ===========
The reconciliation of the consolidated provision for income taxes to amounts
determined by applying the prevailing U.S. federal statutory tax rates to
pre-tax income from continuing operations is as follows for the year ended June
30:
2002 2001 2000
---- ---- ----
Tax at federal statutory rate ............................ 34.0% 34.0% 34.0%
Increase (reduction) in computed tax rate resulting from:
State income taxes, net of federal effect ................ 3.1 3.3 3.3
Nondeductible entertainment expenses and life insurance
premiums .......................................... 0.1 0.1 0.3
Extraterritorial income deductions ....................... (2.1) -- --
Other .................................................... (1.0) 0.1 (1.6)
---- ---- ----
34.1% 37.5% 36.0%
==== ==== ====
12. Stock Options
The Company's 1990 Incentive Plan ("1990 Plan") has shares of common stock
available for issuance to employees and directors. Provisions of the 1990 Plan
include the granting of stock options. Generally, stock options vest over a
five-year period at 10%, 15%, 20%, 25% and 30% per year. Certain other stock
options vest in full after eight years (2004). Under the 1990 Plan at June 30,
2002, there were 271,548 options outstanding. The Company also has a 1998 Stock
Option Plan ("1998 Plan"). Provisions of the 1998 Plan include the granting of
stock options. Certain options granted through December 1999 will cliff vest
after 9.75 years. However, such vesting may be accelerated if earnings per share
goals through 2003 are met. Options granted subsequent to December 1999 will
cliff vest after six years. However, such vesting may be accelerated if earnings
per share goals through 2005 are met. Under the 1998 Plan, there are 2,500,000
shares available. The 1998 Plan expires June 10, 2008, or when all the shares
available under the plan have been issued if this occurs earlier. Information
for fiscal years 2000 through 2002 with respect to the plans is as follows:
Weighted
Number of Average
Stock Options Shares Exercise Price
- ------------- ------ --------------
Outstanding at June 30, 1999................. 1,408,048 $ 1.94
Options granted......................... 744,500 13.57
Options expired and canceled............ (348,000) 5.43
Options exercised....................... (296,000) 1.22
----------
48
Outstanding at June 30, 2000................. 1,508,548 12.89
Options granted......................... 500,500 12.73
Options expired and canceled............ (183,125) 10.81
Options exercised....................... (75,125) 4.33
----------
Outstanding at June 30, 2001................. 1,750,798 8.37
Options granted......................... 366,908 13.24
Options expired and canceled............ (402,751) 13.04
Options exercised....................... (195,999) 5.21
----------
Outstanding at June 30, 2002................. 1,518,956 $ 8.71
=========
The following table summarizes information about stock options outstanding at
June 30, 2002 under the 1990 Plan and the 1998 Plan:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Options Average Weighted Options Average
Exercise Outstanding at Contractual Average Exercisable at Exercise
Price Range June 30, 2002 Remaining Life Exercise Price June 30, 2002 Price
----------- ------------- -------------- -------------- ------------- -----
$0.00 to $2.04 271,548 2.0 years $0.78 259,548 $0.78
$2.05 to $4.08 341,100 6.0 years $2.71 175,100 $2.67
$6.14 to $8.18 3,081 9.9 years $7.15 3,081 $7.15
$8.18 to $10.22 17,756 7.3 years $9.67 6,006 $9.65
$10.23 to $12.26 354,000 8.9 years $11.41 15,800 $11.39
$12.27 to $14.31 262,721 7.5 years $13.60 90,371 $13.70
$14.32 to $16.35 201,000 7.9 years $15.25 40,197 $15.25
$16.36 to $18.40 35,750 9.6 years $17.15 0 $0.00
$18.41 to $20.45 32,000 8.0 years $19.27 125 $19.63
---------- ----------
Total 1,518,956 590,228
========== ==========
There were 1,376,893 options available for future grant at June 30, 2002.
However, 334,925 of the options available are from the 1990 Plan, which under
the terms of the 1998 Plan are no longer issuable. The following are the options
exercisable at the corresponding weighted average exercise price at June 30,
2002, 2001 and 2000, respectively: 590,228 at $4.72, 730,669 at $5.38, and
304,798 at $1.45.
Of the 2,500,000 shares available for issuance under the 1998 Plan, 1,700,000
shares were registered with the Securities and Exchange Commission on May 12,
1999. The remaining 800,000 shares were approved for issuance by the Company's
shareholders on November 14, 2001 and will be registered with the Securities and
Exchange Commission in the near future.
The Company applies Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
option plans. No compensation expense has been recognized for options granted
under the stock option plans because the exercise price of the options equals
the market price of the underlying stock on the date of the grant. If
compensation expense for the Company's stock-based compensation plan had been
determined consistent with SFAS 123 "Accounting and Disclosure of Stock-based
Compensation," the Company's net income and diluted earnings per share would
have been the pro forma amount indicated below:
Fiscal Year Fiscal Year Fiscal Year
2002 2001 2000
---- ---- ----
Net Income
As Reported $7,410,752 $7,482,489 $ 4,728,333
diluted earnings per share $ 0.74 $ 0.83 $ 0.54
Pro Forma $4,415,727 $4,879,869 $ 1,788,567
diluted earnings per share $ 0.44 $ 0.54 $ 0.22
49
The pro forma results above are not likely to be representative of the effects
of applying SFAS No. 123 on reported net income for future years as these
amounts only reflect the expense from three years.
The weighted average fair value as defined by SFAS No. 123 of each option
granted in fiscal 2002, 2001 and 2000 is estimated as $13.24, $12.73 and $8.83,
respectively, on the date of grant using the Black-Scholes model with the
following weighted average assumptions for fiscal 2002, 2001 and 2002,
respectively: expected dividend yield, 0% for each year; risk-free interest
rate, 3.25%, 4.85% and 6.1%; expected price volatility, 81.83%, 82.75% and
62.60%; and expected life of options, 5.54, 6.25 and 6 years.
13. International Sales
The Company provides products to the international professional communications
market. These products are designed, manufactured, distributed from, and
serviced at the Company's facilities in Salt Lake City, Utah. During October
2000, Gentner established Gentner Communications EuMEA GmbH, a wholly owned
subsidiary that began operations during December 2000. Gentner EuMEA focuses on
distribution, technical support and training to Europe, the Middle East and
northern Africa. The Company also uses either master distributors or
international dealers to facilitate its international sales. Currently, the
Company's products are distributed to at least 80 different countries.
The Company ships products to unaffiliated distributors in worldwide markets. In
fiscal 2002, 2001 and 2000, such international sales were $5,976,700, $5,100,100
and $3,512,600, respectively, and accounted for 11%, 13% and 12% of total sales
from continuing operations. During those years, the Company shipped the
following amounts to the following areas:
Fiscal Year Fiscal Year Fiscal Year
2002 2001 2000
---- ---- ----
Canada.................. $ 669,400 $ 1,221,500 $ 1,040,600
EuMEA................... 2,613,100 2,063,200 1,120,900
Asia.................... 659,000 884,100 718,600
Latin America........... 261,300 199,600 118,800
Australia............... 1,389,500 349,200 225,900
Other Areas............. 384,400 382,500 287,800
14. Retirement Savings and Profit Sharing Plan
The Company has a 401(k) retirement savings and profit sharing plan to which it
makes discretionary matching contributions, as authorized by the Board of
Directors. All full-time employees who are at least 21 years of age and have a
minimum of six months of service with the Company at the plan date are eligible
to participate in the plan. Matching contributions, if made, are based upon
amounts participating employees contribute to the plan. The Company's retirement
plan contribution expense for the 2002, 2001 and 2000 fiscal years totaled
$72,000, $66,000 and $96,000, respectively.
15. Segment Reporting
As a result of the E.mergent acquisition, the Company has changed how it
evaluates its operations internally, resulting in a change in the Company's
reported segments from the Form 10-K for fiscal year 2001. Subsequent to the
E.mergent acquisition, the Company operates in three different segments -
products, conferencing services, and business services. The products segment
includes products for audio conferencing products, videoconferencing products,
sound reinforcement products, broadcast telephone interface products and
assistive listening system products. The conferencing services segment includes
full-service conference calling; on-demand, reservationless conference calling;
Web conferencing; audio and video streaming; and, customer training and
education. The business services segment provides services in the United States,
including technical services such as design, installation and services of
systems, and value added services such as proactive field support, training,
system consulting and help desk. Because the change in reportable segments is a
result of the E.mergent acquisition and the Business Services segment only
includes sales generated by E.mergent, information for previous periods did not
have to be restated.
50
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
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 market and
distribution channel.
The following table summarizes the segment information:
Conferencing Business
Products Services Services Totals
-------- -------- -------- ------
Year Ended June 30, 2002:
- ------------------------
Net sales................................... $37,215,161 $15,828,427 $1,499,098 $ 54,542,686
Cost of goods sold.......................... 15,057,167 6,964,917 978,035 23,000,119
----------- ----------- ---------- ------------
Gross profit................................ 22,157,994 8,863,510 521,063 31,542,567
Marketing and selling....................... 7,037,982 3,541,960 125,552 10,705,494
General and administrative.................. 3,589,559 2,345,763 115,770 6,051,092
Product development......................... 4,020,035 - 32,660 4,052,695
----------- ----------- ---------- ------------
Total operating expenses.................... 14,647,576 5,887,723 273,982 20,809,281
Operating income............................ 7,510,418 2,975,787 247,081 10,733,286
Other income (expense)...................... 508,931
------------
Income from continuing operations
before income taxes..................... 11,242,217
Provision for income taxes.................. (3,831,465)
------------
Net income from continuing operations....... $ 7,410,752
============
Conferencing Business
Products Services Services Totals
-------- -------- -------- ------
Year Ended June 30, 2001:
- ------------------------
Net sales................................... $28,189,612 $11,688,793 $ 39,878,405
Cost of goods sold.......................... 10,633,956 5,869,106 16,503,062
----------- ----------- ------------
Gross profit................................ 17,555,656 5,819,687 23,375,343
Marketing and selling....................... 5,302,634 2,450,658 7,753,292
General and administrative.................. 3,081,686 1,567,313 4,648,999
Product development......................... 2,502,169 - 2,502,169
----------- ----------- ------------
Total operating expenses.................... 10,886,489 4,017,971 14,904,460
Operating income............................ 6,669,167 1,801,716 8,470,883
Other income (expense)...................... 373,147
------------
Income from continuing operations
before income taxes..................... 8,844,030
Provision for income taxes.................. (3,318,845)
------------
Income from continuing operations........... 5,525,185
Income from discontinued operations,
net of applicable taxes of $438,065...... 737,280
Gain on disposal of business segment,
net of applicable taxes of $725,788...... 1,220,024
------------
Net income.................................. $ 7,482,489
============
51
Conferencing Business
Products Services Services Totals
-------- -------- -------- ------
Year Ended June 30, 2000:
- ------------------------
Net sales................................... $22,226,504 $ 5,891,909 $ 28,118,413
Cost of goods sold.......................... 8,033,867 2,974,456 11,008,323
----------- ----------- ------------
Gross profit................................ 14,192,637 2,917,453 17,110,090
Marketing and selling....................... 4,432,756 1,733,161 6,165,917
General and administrative.................. 2,173,294 958,831 3,132,125
Product development......................... 1,270,819 - 1,270,819
----------- ----------- ------------
Total operating expenses.................... 7,876,869 2,691,991 10,568,861
Operating income............................ 6,315,768 225,461 6,541,229
Other income (expense) ..................... 179,336
------------
Income from continuing operations
before income taxes...................... 6,720,565
Provision for income taxes.................. (2,418,823)
------------
Income from continuing operations........... 4,301,742
Income from discontinued operations,
net of applicable taxes of $253,778...... 426,591
------------
Net income.................................. $ 4,728,333
============
16. Acquisitions
ClearOne, Inc.
In May 2000, the Company entered into an agreement to purchase substantially all
of the assets of ClearOne, Inc. ("ClearOne") for $3.4 million plus approximately
$300,000 in inventory, with a combination of cash and restricted stock. Under
the terms of the agreement, the Company issued 129,871 shares of common stock
valued at $15.40 and cash of $1,758,085. Goodwill resulting from the difference
between the purchase price plus acquisition costs and the net assets acquired,
including a non-compete agreement of $240,000, totaled approximately $2.8
million and is being amortized on a straight-line basis over fifteen years.
ClearOne was a privately held developer and manufacturer of multimedia group
communications products. On July 5, 2000, the acquisition was consummated and
was accounted for under the purchase method of accounting. Operations since that
date are included in the consolidated statements of income for the years ended
June 30, 2001 and 2002.
Ivron Systems, Ltd.
On October 3, 2001, the Company purchased all of the issued and outstanding
shares of Ivron Systems, Ltd., of Dublin, Ireland ("Ivron"). Ivron was a
privately held developer of videoconferencing 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 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.
52
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 $345,000 of direct
acquisition costs.
As of the acquisition date, the Company acquired tangible assets consisting
primarily of accounts receivable ($132,000), inventory ($608,000), and property
and equipment ($22,000). The Company assumed liabilities consisting primarily of
trade accounts payable ($174,000), and accrued compensation and other accrued
liabilities ($264,000). 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 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 in subsequent
years for approximately 429,000 shares and the $17.0 million. 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 includes 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 $1.0 million for the former
option holders of Ivron, based on the videoconferencing products meeting certain
performance targets. Any additional consideration will be recorded as additional
goodwill at the time of issuance. As of June 30, 2002, none of the earn-out had
been earned.
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 $439,000. The useful lives and amounts of
the amortizable developed technology, as determined in conjunction with an
independent financial consulting firm, are 3 years for $135,000, 5 years for
$1,002,000, and 15 years for $4,643,000. Amortization expense of approximately
$518,000 has been recorded for the developed technology for the period from
October 3, 2001 to June 30, 2002. In accordance with SFAS No. 142, no
amortization expense has been recorded for goodwill. Because the Company
executed the necessary tax election, Ivron's goodwill is expected to be
deductible for tax purposes.
E.mergent, Inc.
On May 31, 2002, the Company completed its acquisition of E.mergent, Inc. (the
"Merger"). The Merger occurred pursuant to the terms of an Agreement and Plan of
Merger dated January 21, 2002.
As a result of the Merger, each share of E.mergent's common stock that was
outstanding at the effective time of the Merger was converted into the right to
receive $1.1667 in cash and 0.138858 of a share of the Company's common stock.
The Company issued 868,691 shares of its common stock to former E.mergent
stockholders. The shares of the Company's common stock issued in connection with
the Merger were registered under the Securities Act of 1933 pursuant to a
Registration Statement on Form S-4 (File No. 333-82242). This registration
statement was declared effective on May 7, 2002.
In addition to the shares of the Company's common stock issued in connection
with the Merger, the Company assumed all options to purchase E.mergent common
stock that were outstanding at the effective time of the Merger. These options
were converted into the right to acquire shares of the Company's common stock in
53
the future. The aggregate number of shares issuable upon the exercise of each
stock option, and the exercise price of each stock option, were determined using
an option exchange ratio of approximately 0.2054. The Company has reserved a
total of 4,158 shares of common stock issuable upon exercise of these
outstanding options. A value of approximately $50,000 was assigned to these
options using the Black Scholes method.
The value of the total consideration paid was determined based on arm's length
negotiations between the Company and E.mergent, that took into account a number
of factors of the business, including historic revenues, operating history,
products, intellectual property and other factors. Total consideration paid
included $7.3 million in cash plus 868,691 shares of common stock valued at
$16.55 per share (as determined based upon the average closing price of the
Company's common stock two days before and after the merger announcement date).
The Company also incurred approximately $1.1 million of direct acquisition
costs, including severance costs of approximately $470,000. Such severance costs
related to the termination of four E.mergent executives and seven other
E.mergent employees as a result of duplication of positions upon consummation of
the acquisition. In June 2002, $54,000 was paid to such individuals. As of June
30, 2002, approximately $416,000 remained outstanding and is classified as
accrued severance on the accompanying balance sheet. The remaining balance is
expected to be paid in fiscal 2003.
As of the acquisition date, the Company acquired tangible assets consisting
primarily of accounts receivable ($2,223,000), inventory ($3,463,000), property
and equipment ($475,000) and other assets ($887,000) (not including cash). The
Company assumed liabilities consisting primarily of trade accounts payable
($1,284,000), line of credit ($484,000), unearned maintenance ($899,000),
accrued compensation (other than severance) and other accrued liabilities
($938,000). The Company also acquired cash of approximately $67,700.
Based upon the analysis of an independent financial consulting firm, the Company
has recorded intangible assets of $1,667,000 related to certain contracts and
developed technology and goodwill of $17,668,000. The amounts and useful lives
of the amortizable intangible assets are as follows: certain contracts having a
value of $392,000 for 1.5 years and $215,000 for three years; and patents having
a value of $1,060,000 for 15 years. Amortization expense of approximately
$34,000 has been recorded for the contracts and developed technology for the
period from June 1, 2002 to June 30, 2002. In accordance with SFAS No. 142, no
amortization expense has been recorded for goodwill. Such goodwill will not be
deductible for tax purposes.
The Company's acquisition of E.mergent was intended to qualify as a
reorganization under Section 368(a) of the Internal Revenue Code.
The operations of Ivron are included in the statement of income for the period
from October 3, 2001 to June 30, 2002. The operations of E.mergent are included
in the statement of income for the period from June 1, 2002 to June 30, 2002.
The following pro forma combined financial information reflects operations as if
the acquisitions of Ivron and E.mergent 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 acquisitions been
consummated on such dates.
June 30,
--------
2002 2001
---- ----
Net sales from continuing operations........................ $ 74,035,538 $ 62,989,680
=========== ============
Income from continuing operations........................... $ 5,219,021 $ 2,766,939
=========== ===========
Income per share - basic from continuing operations......... $ 0.55 $ 0.32
Income per share - dilutive from continuing operations...... $ 0.52 $ 0.31
17. 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.
54
18. Private Placement
On December 11, 2001, the Company closed a private placement of 1,500,000 shares
of common stock, which was subsequently registered on Form S-3 with the
Securities and Exchange Commission. Gross proceeds from the private placement
were $25,500,000, before costs and expenses associated with this transaction,
which totaled approximately $1,665,000.
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 vested immediately
and were valued at approximately $1,556,000 using the Black Scholes method. The
warrants are exercisable over ten years and expire on December 11, 2011.
19. Quarterly Results of Operations (Unaudited)
A summary of unaudited quarterly results of operations:
Fiscal 2002 Quarters Ended
--------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
-------- ------- ------- -------
Net sales..................................................... $11,220,383 $12,582,298 $14,171,156 $16,568,849
Cost of goods sold............................................ (4,581,977) (5,057,117) (5,586,839) (7,774,186)
Operating expenses............................................ (4,501,045) (5,211,418) (5,429,537) (5,667,281)
Other income and expenses..................................... 144,926 65,633 (71,370) 369,742
----------- ---------- ----------- -----------
Income from continuing operations before income taxes......... 2,282,287 2,379,396 3,083,410 3,497,124
Provision for income taxes.................................... (870,581) (887,515) (1,012,464) (1,060,905)
----------- ---------- ----------- -----------
Income from continuing operations............................. $ 1,411,706 $ 1,491,881 $ 2,070,946 $ 2,436,219
=========== =========== =========== ===========
Basic earnings per share from continuing operations........... $ 0.16 $ 0.17 $ 0.20 $ 0.24
=========== =========== =========== ===========
Diluted earnings per share from continuing operations......... $ 0.16 $ 0.16 $ 0.20 $ 0.22
=========== =========== =========== ===========
Fiscal 2001 Quarters Ended
--------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
-------- ------- ------- -------
Net sales..................................................... $ 9,332,996 $ 9,680,383 $10,212,333 $10,652,693
Cost of goods sold............................................ (3,765,553) (3,971,158) (4,327,987) (4,438,364)
Operating expenses............................................ (3,488,055) (3,873,064) (3,786,278) (3,757,063)
Other income and expenses..................................... 64,079 118,727 69,277 121,064
----------- ---------- ----------- -----------
Income from continuing operations before income taxes......... 2,143,467 1,954,888 2,167,345 2,578,330
Provision for income taxes.................................... (799,513) (752,477) (808,313) (958,542)
----------- ---------- ----------- -----------
Income from continuing operations............................. 1,343,954 1,202,411 1,359,032 1,619,788
Income (loss) from discontinued operations.................... 185,724 337,451 241,981 (27,876)
Gain on disposal of business segment.......................... - - - 1,220,024
----------- ---------- ----------- -----------
Net income.................................................... $ 1,529,678 $ 1,539,862 $ 1,601,013 $ 2,811,936
=========== =========== ============ ===========
Basic earnings per share:
Continuing operations.................................... $ 0.16 $ 0.14 $ 0.16 $ 0.19
Discontinued operations.................................. 0.02 0.04 0.03 0.14
----------- ----------- ----------- -----------
Basic earnings per share................................. $ 0.18 $ 0.18 $ 0.19 $ 0.33
=========== =========== ============ ===========
Diluted earnings per share:
Continuing operations.................................... $ 0.15 $ 0.13 $ 0.15 $ 0.18
Discontinued operations.................................. 0.02 0.04 0.03 0.13
----------- ----------- ----------- -----------
Diluted earnings per share............................... $ 0.17 $ 0.17 $ 0.18 $ 0.31
=========== =========== ============ ===========
55
20. Subsequent Events
OM Video
On August 27, 2002, the Company purchased all of the issued and outstanding
shares of Stechyson Electronics Ltd. doing business as OM Video. OM Video is an
audiovisual integration firm headquartered in Ottawa, Ontario, Canada. Under the
terms of the agreement, the shareholders of OM Video received approximately $6.6
million in cash. An additional $600,000 may be paid to the former shareholders
within the next 12 months pending completion of certain conditions.
Additionally, based on certain performance targets, the former shareholders of
OM Video are entitled to an earn-out bonus of up to $800,000, over the next
twelve months.
The value of the total consideration to be paid, $6,600,000 in cash plus the
additional holdback and earn-out amounts, was determined based on arm's length
negotiations between the Company and the OM Video shareholders, that took into
account a number of factors of the business including historic revenues,
operating history, products, intellectual property and other factors.
Sale of Broadcast Telephone Interface Product Line
On August 27, 2002, the Company sold a portion of its broadcast telephone
interface product line to Comrex Corp., a privately held broadcast equipment
provider located in Devens, Massachusetts for $1.3 million. Comrex also
purchased inventory held by ClearOne at the time of the transaction. The
broadcast telephone interface product line consists of ClearOne's digital hybrid
products, which include the DH20, DH22 and DH30. Under the terms of the
agreement, Comrex will obtain a perpetual license to use the Company's
technology related to these products. Comrex will provide technical support for
all digital hybrid products and will assume all manufacturing, marketing and
selling of the digital hybrid line. In addition, the Company will continue to
manufacture the TS-612 product line exclusively for distribution by Comrex under
an OEM agreement for a period of up to twelve months, at which time the Company
will discontinue its manufacture of all broadcast telephone interface products.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None exist.
56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
Directors
The following individuals are directors of ClearOne as of September 10, 2002:
Director
Name Age Principal Occupation Since
---- --- -------------------- -----
Edward Dallin Bagley 64 Attorney 1994
Brad R. Baldwin 47 Attorney and Commercial Real 1988
Estate Agent
Frances M. Flood 46 Chairman of our Board of 1998
Directors, our Chief Executive
Officer and President
Michael A. Peirce 60 Chairman of the Board and CEO 2001
of Mentec International
Harry Spielberg 51 Director of Cosentini 2001
Information Technologies'
Audiovisual Group
Randall J. Wichinski 49 Our Chief Financial Officer 1999
David Wiener 44 President and CEO of SoundTube 2000
Entertainment, Inc.
Edward Dallin Bagley joined us as a director in April 1994. Mr. Bagley also
served as a director from April 1987 to July 1991. Mr. Bagley currently serves
as a director of Tunex International, NESCO, Inc., and Buyers Online.com. Mr.
Bagley has been licensed to practice law in Utah since 1965 and holds a juris
doctorate degree from the University of Utah College of Law.
Brad R. Baldwin joined us as a director in 1988. He is an attorney licensed to
practice in Utah. Mr. Baldwin is engaged in the commercial real estate business
with Colliers Commerce CRG in Salt Lake City. From October 1, 1994 to January
30, 2000, Mr. Baldwin served as president and chief executive officer of Bank
One, Utah, a commercial bank headquartered in Salt Lake City, Utah. Mr. Baldwin
holds a juris doctorate degree from the University of Washington.
Frances M. Flood became one of our Directors in June of 1998. Ms. Flood first
joined us in October 1996 as vice-president of sales and marketing and was named
president in December 1997, chief executive officer in June 1998 and chairman of
the board in November 2000. Prior to joining us, Ms. Flood was area director of
sales and marketing for Ernst & Young, LLP, an international accounting and
consulting firm. Ms. Flood has over 25 years experience in sales, marketing,
change management, international business and finance. She is currently a
director of Nevada Chemicals. She holds a bachelor of science/bachelor of arts
degree in banking and finance from Thomas Edison State College.
Michael A. Peirce joined us as a director in October 2001. He founded and was an
executive officer and shareholder of Ivron Systems, Ltd., which we acquired in
October 2001 (See "Recent Developments - Ivron Acquisition" above). Since 1994,
Mr. Peirce has been chairman of Parthus Technologies Inc., an integrated circuit
57
design company. He also serves as chairman of AEP Ltd., an encryption technology
company and as chairman of the board and chief executive officer of Mentec
International, an IT systems integration company. Mr. Peirce also currently
serves as a member of the Technical Advisory Board of the Irish Stock Exchange.
Mr. Peirce received his bachelor's (Honors B.A.I.), master's and doctorate
degrees in engineering from Trinity College in Dublin, Ireland.
Harry Spielberg joined us as a director in January 2001. Since January 1996, Mr.
Spielberg has been the director of Cosentini Information Technologies'
Audiovisual Group, a division of the consulting engineering firm, Cosentini
Associates. Prior to 1996, Mr. Spielberg served as vice president, Engineering
for Media Facilities Corp. and Barsky & Associates. Mr. Spielberg received a
bachelor's degree in psychology from the State University of New York.
Randall J. Wichinski joined us as a director in June 1999. He has also served as
our chief financial officer since August 2001. Prior to joining us, Mr.
Wichinski served as the senior tax officer of Ohio National Financial Services.
From 1983 to 1999, Mr. Wichinski was employed at Ernst & Young LLP, an
international accounting and consulting firm, and served as a tax partner for
ten years. He received a bachelor's degree in accounting in 1977 and a master's
degree in business administration in 1982 from the University of
Wisconsin-Madison.
David Wiener joined us as a director in January 2000. Mr. Wiener has served as
President and chief executive officer of SoundTube Entertainment, Inc., a
manufacturer of innovative commercial and consumer audio speakers, since 1995.
SoundTube Entertainment is a division of David Wiener Ventures, a product,
fashion, and image development company founded by Mr. Wiener in 1982. Mr. Wiener
received his bachelor's degree in engineering, aerodynamics and art from
Hampshire College in Amherst, Massachusetts.
Director Compensation and Committees
All of our directors serve until their successors are elected and have qualified
to serve as directors. We pay each director who is not our employee $650 per
month for his services to us as a director. Directors who are also employed by
us do not receive compensation for their services as directors.
Our board of directors has two committees: the audit and compensation
committees. The audit committee is currently composed of Edward Dallin Bagley,
Brad R. Baldwin, Harry Spielberg and David Wiener. The compensation committee is
currently composed of Edward Dallin Bagley, Brad R. Baldwin, Michael A. Peirce,
Harry Spielberg and David Wiener.
The audit committee is authorized to:
(1) review our auditors' proposals regarding the conduct of annual audits
and quarterly reviews,
(2) recommend the engagement or discharge of our auditors,
(3) review recommendations of our auditors concerning accounting
principles and the adequacy of our internal controls and accounting
procedures and practices,
(4) review the scope of the annual audit and quarterly reviews,
(5) approve or disapprove each professional service or type of service
other than standard auditing services to be provided by our auditors,
and
(6) review and discuss the audited financial statements with the auditors.
The compensation committee makes recommendations to the Board of Directors
regarding remuneration of our executive officers and directors and administers
the incentive plans for our directors, officers and key employees.
Meetings of the Board of Directors and Committees
The board of directors held nine meetings during fiscal 2002. The audit
committee held two meetings during fiscal 2002. The compensation committee held
one meeting during fiscal 2002.
58
Executive Officers
Our executive officers as of June 30, 2002 are as follows:
Name Age Position
---- --- --------
Frances M. Flood 46 President and Chief Executive Officer
Angelina Beitia 39 Vice President of Marketing
DeLonie N. Call 49 Vice President of Human Resources
Timothy J. Morrison 45 Vice President of Sales
Susie Strohm 42 Vice President of Finance and Controller
Randall J. Wichinski 49 Vice President and Chief Financial Officer
For the biography of Ms. Flood, see "Directors."
Angelina Beitia joined us in March 2001 and was named vice president of
marketing in December 2001. She is responsible for the development and execution
of our marketing strategy and programs. Ms. Beitia was senior director of
worldwide marketing communications for Iomega Corp. from July 1997 to July 2000
and served as vice president of consumer marketing of International Data Group
from April 1993 to June 1997. Ms. Beitia graduated from Lewis & Clark College
with a bachelor's degree in both business administration and communications.
DeLonie Call joined us in October 2001 with nearly 15 years experience in
management and executive-level human resources positions. She currently serves
as vice president of human resources. From April 2000 to September 2001, Ms.
Call was director of human resources for Iomega Corp. and from June 1996 to
November 2000 she was vice president of human resources for Vitrex Corp., a
start-up technology company. Ms. Call graduated from Weber State University with
a bachelor's degree in business management and economics.
Timothy J. Morrison joined us in July 2001 as vice president of sales. He has
nearly 20 years of direct sales, marketing and top-level management experience.
Mr. Morrison served as general manager of the privately held Baldwin Steel Co.
from August 2000 to June 2001 and as president and chief executive officer of
Leeco Steel Products, Inc., a privately held steel company from March 1999 to
August 2000. In addition, he held various management and sales positions with
Olympic Steel from January 1997 to March 1999 and Bethlehem Steel Corp., one of
the nation's largest integrated steel companies, from July 1979 to January 1997.
Mr. Morrison graduated from Fordham University with a bachelor's degree in
communications.
Susie Strohm joined us in February 1996 as our controller and was named chief
financial officer in 1998. Ms. Strohm currently serves as our vice president of
finance and controller. She is responsible for all of our accounting and
financial planning, and financial and management reporting. Prior to joining us,
Ms. Strohm was the controller for Newspaper Agency Corporation in Salt Lake
City, Utah. She graduated from the University of Utah with a bachelor's degree
in accounting, and received her master's degree in business administration from
Westminster College.
For the biography of Mr. Wichinski, see "Directors."
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors and executive officers, and persons who own more than 10% of a
registered class of our equity securities to file with the SEC initial reports
of ownership and reports of changes of ownership of our equity securities.
Officers, directors and greater-than-10% shareholders are required to furnish us
with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such reports furnished to us, we
believe that all reports required by Section 16(a) were filed on a timely basis.
59
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth, for each of the last three fiscal years, the
compensation of our chief executive officer and the other four most highly
compensated executive officers and Tracy Bathurst and Eugene W. Kuntz, Jr. whose
total salary and bonus for fiscal 2002 exceeded $100,000, for services rendered
in all capacities during such fiscal years. We refer to these executive officers
as the named executive officers.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Securities
Other Under- All
Annual lying Other
Compen- Options Compen-
Name and Position Year Salary Bonus sation /SARS sation 1
- ----------------- ---- ------ ----- ------ ----- -------
Frances M. Flood Fiscal
President and Chief 2002 $179,615 $76,006 None 100,000 $2,148
Executive Officer
Fiscal
2001 $160,000 $58,400 None None $2,056
Fiscal
2000 $160,333 $73,700 None 50,000 $1,802
Tracy Bathurst Fiscal
Former Vice President2 2002 $102,497 $5,000 $165,858 None $2,000
Fiscal
2001 $100,000 $18,500 None None $1,850
Fiscal
2000 $93,073 $5,000 None 50,000 $1,765
Angelina Beitia Fiscal
Vice President3 2002 $120,466 $5,000 None None None
Eugene W. Kuntz, Jr. Fiscal
Former Vice President4 2002 $107,004 $10,000 $39,258 None None
Fiscal
2001 $92,502 $9,500 None 30,000 None
Timothy Morrison Fiscal
Vice President5 2002 $159,808 $24,500 None 60,000 None
Susie Strohm Fiscal
Vice President 2002 $114,615 $30,505 None None $2,108
Fiscal
2001 $110,000 $37,000 None None $2,316
Fiscal
2000 $100,167 $55,538 None 50,000 $1,976
60
Randall J. Wichinski Fiscal
Vice President and 2002 $112,673 $4,500 None 100,000 None
Chief Financial Officer6
- ------------
1 These amounts reflect our contributions to our deferred compensation plan
(401(k) plan) on behalf of the named executive officers.
2 Mr. Bathurst is no longer an executive officer.
3 Ms. Beitia became a named executive officer in fiscal 2002.
4 Mr. Kuntz ended his employment and position as an executive officer on
May 1, 2002.
5 Mr. Morrison became a named executive officer in fiscal 2002.
6 Mr. Wichinski became a named executive officer in fiscal 2002.
Stock Options
The following table sets forth the stock option grants made to the named
executive officers for fiscal 2002. We did not grant any stock appreciation
rights, or SARs, to the named executive officers during fiscal 2002.
Each option granted during fiscal 2002 to the named executive officers was
granted under the 1998 Plan. An option granted under the 1998 Plan is an option
to purchase shares of our common stock and is either a nonqualified or incentive
stock option under applicable IRS regulations. Certain options granted to named
executive officers vest in full after completing six years of service with us,
and others vest in full after completing 9.75 years of service with us, except
that up to one-fifth of the shares subject to each option may vest upon
completion of each year of service with us if specified earnings per share goals
established for the year are achieved.
In the event of specified corporate transactions, including change in control
events designated in the 1998 Plan, our board of directors has the authority to
automatically accelerate the vesting of each outstanding option whether or not
the outstanding option is assumed or substituted in connection with the
corporate transaction or change in control event.
The exercise price per share of each option granted was equal to the fair market
value of the underlying shares of common stock on the date of grant.
Potential realizable values are computed by (1) multiplying the number of shares
of common stock subject to a given option, by the per share assumed stock value
compounded at the annual 5% or 10% appreciation rate shown in the table for the
entire ten-year term of the option and (2) subtracting from that result the
aggregate option exercise price. The 5% and 10% assumed annual rates of stock
price appreciation are mandated by the rules of the SEC and do not represent our
estimate or projection of the future prices of our common stock. Actual gains,
if any, on stock option exercises are dependent on our future financial
performance, overall market conditions, and the named executive officer's
continued employment through the vesting periods. The actual value realized may
be greater or less than the potential realizable value set forth in the table.
OPTION GRANTS IN FISCAL YEAR ENDED JUNE 30, 2002
(INDIVIDUAL GRANTS)
Potential Realizable
Value of Assumed
Annual Rate of
Number of Percent of Stock Price
Securities Total Options Appreciation for
Underlying Granted Exercise Option Term
Options to Employees or Base Expiration -----------
Name and Position Granted (#) in Fiscal Year1 Price ($/Sh) Date 5%($) 10%($)
- ----------------- ----------- --------------- ------------ ---- ----- ------
Frances Flood 100,000 27% $11.39 08/06/2011 $809,077 $2,110,700
Tracy Bathurst - 0% - - $0 $0
Angelina Beitia - 0% - - $0 $0
61
Eugene W. Kuntz, Jr. - 0% - - $0 $0
Timothy J. Morrison 50,000 14% $10.55 07/02/2011 $374,704 $977,519
10,000 3% $20.45 11/14/2011 $145,264 $378,962
Susie Strohm - 0% - - $0 $0
Randall Wichinski 100,000 27% $12.00 08/23/2011 $852,407 $2,223,740
- ------------
1 Based on aggregate of 366,908 shares subject to options granted to our
employees in 2002, including the named executive officers.
Aggregated Stock Option/SAR Exercises
The following table sets forth information concerning stock options exercised by
the named executive officers during fiscal 2002 and the year-end value of
in-the-money, unexercised options:
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED JUNE 30, 2002
AND FISCAL YEAR-END OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
at FY-End (#) at FY-End ($)
Shares
Acquired Value Exercisable/ Exercisable/
Name and Position on Exercise (#) Realized ($)1 Unexercisable Unexercisable2
- ----------------- --------------- ------------- ------------- --------------
Frances M. Flood 5,900 $75,745 271,434/145,000 $3,270,560/$601,060
Tracy Bathurst 10,000 $165,858 29,849/60,151 $247,660/$150,391
Angelina Beitia 0 $0 4,375/20,625 $16,756/$78,994
Eugene W. Kuntz, Jr. 15,000 $39,258 0/0 $0/$0
Timothy J. Morrison 0 $0 8,750/51,250 $29,260/$179,740
Susie Strohm 0 $0 159,464/59,000 $1,849,267/$313,820
Randall J. Wichinski 0 $0 33,875/91,125 $58,729/$232,521
- ------------
1 Based upon the fair market value of the purchased shares on the exercise date
less the option exercise price paid for such shares.
2 Based on the market price of $14.73 per share, which was the closing selling
price of our common stock on the Nasdaq National Market on the last day of
our fiscal 2002, less the option exercise price payable per share.
Employment and Change in Control Arrangements with Named Executive Officers
As of the end of our 2002 fiscal year, none of the named executive officers was
party to an employment or severance agreement with us, and each named executive
officer's employment was "at-will," permitting either the Company or each
officer to terminate his or her employment for any reason or for no reason.
62
Under the 1998 Plan, our board of directors has the authority to automatically
accelerate the vesting of each outstanding option granted to a named executive
officer under the 1998 Plan in the event of specified corporate transactions,
including change in control events designated in the 1998 Plan, whether or not
the outstanding option is assumed or substituted in connection with the
corporate transaction or change in control event.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of our
common stock as of September 1, 2002 by (i) each person known to us to be the
beneficial owner of more than 5% of our outstanding common stock, (ii) each
director, (iii) the named executive officers, and (iv) all of our executive
officers and directors as a group. Each person has sole investment and voting
power with respect to the shares indicated, subject to community property laws
where applicable, except as otherwise indicated below. The address for each
beneficial owner is in care of ClearOne Communications, Inc., 1825 Research Way,
Salt Lake City, Utah 84119.
Names Amount of Percentage
of Beneficial Owners Beneficial Ownership of Class 1
-------------------- -------------------- -----------
Edward Dallin Bagley 2 1,743,618 14.9%
Frances M. Flood 3 330,943 2.8%
Susie Strohm 4 190,968 1.6%
Brad R. Baldwin 5 107,666 0.9%
Randall J. Wichinski 6 39,961 0.3%
David J. Wiener 7 24,750 0.2%
Harry Spielberg 8 10,000 0.1%
Timothy J. Morrison 9 9,336 0.1%
Angelina Beitia 10 4,804 0.0%
Michael A. Peirce 11 0 0.0%
Directors and Executive
Officers as a Group
(11 people) 2,465,708 3 to 11 21.0%
1 For each individual and group included in the table, the calculation of
percentage of beneficial ownership is based on 11,195,619 shares of common
stock outstanding as of August 30, 2002 and shares of common stock that
could be acquired by the individual group within 60 days of August 30,
2002, upon the exercise of options or otherwise.
2 Includes: (a) options to purchase 10,000 shares that are exercisable within
60 days after August 30; and (b) 312,333 shares held in the Bagley Family
Revocable Trust, of which Mr. Bagley is co-trustee. Excludes 50 shares
owned by one of Mr. Bagley's daughters who is not a member of his
household. Mr. Bagley disclaims beneficial ownership of such 50 shares and
50% of the shares owned by the Bagley Family Revocable Trust.
3 Includes options to purchase 271,434 shares that are exercisable within 60
days after August 30.
4 Includes options to purchase 159,464 shares that are exercisable within 60
days after August 30.
5 Includes 88,666 shares held in the Baldwin Family Trust; 9,000 shares owned
directly that are held in an IRA under the name of Mr. Baldwin; and options
to purchase 10,000 shares that are exercisable within 60 days after
August 30.
6 Includes options to purchase 33,875 shares that are exercisable within 60
days after August 30.
7 Includes options to purchase 18,750 shares that are exercisable within 60
days after August 30.
8 Includes options to purchase 10,000 shares that are exercisable within 60
days after August 30.
9 Includes options to purchase 8,750 shares that are exercisable within 60
days after August 30.
10 Includes options to purchase 4,375 shares that are exercisable within 60
days after August 30.
11 Includes additional options to purchase 3,500 shares that are exercisable
within 60 days after August 30 by one executive officer who is not a named
executive officer.
63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gentner Research Ltd. (GRL), was a related limited partnership, formed on August
1985, in which we were the general partner and Edward Dallin Bagley and, among
other unrelated parties, certain members of his family, were the limited
partners. In 1987 and 1988, GRL sold to us proprietary interests in the VRC-1000
(now VRC-2000), VRC-1000 Modem (now VRC-2000) and Digital Hybrid in exchange for
royalty payments. Royalty expense recognized by us for the years ending June 30,
2001 and 2000 was $3,600 and $16,000, respectively. GRL was dissolved on
February 20, 2001 after consent to dissolution and liquidation was received by a
majority of the partners of GRL. The product line, which incorporated the
proprietary interest, was deemed no longer integral to our product segment. The
following directors and/or executive officers and members of their immediate
families had the following interests in GRL prior to its dissolution:
Edward Dallin Bagley (Director)....................... 10.42%
The Bagley Family Revocable Trust..................... 5.21%
Robert O. Baldwin (father of Brad Baldwin)............ 10.42%
We also formed a second related limited partnership, Gentner Research II, Ltd.
(GR2L), in which we acted as general partner. In fiscal year 1997, GR2L sold its
proprietary interest in the GSC3000 to us in exchange for royalty payments.
Royalty expense related to product sales with GR2L for the years ending June 30,
2001 and 2000 was $90,793 and $106,084. GR2L was dissolved on May 21, 2001 after
the completion of the sale of the remote control portion of the RFM/Broadcast
division to Burk Technology. We paid $178,516 to GR2L in 2001, representing its
royalty on the gain on the sale of the remote control product line. This amount
was included in the determination of gain on sale in the statement of income for
the year ended June 30, 2001. The following directors and/or executive officers
and members of their immediate families had the following interests in GR2L
prior to its dissolution:
Brad R. Baldwin (Director)............................ 3.19%
Robert O. Baldwin (father of Brad Baldwin)............ 9.58%
Edward D. Bagley (Director)........................... 6.39%
The Bagley Family Revocable Trust..................... 6.39%
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEUDLES, AND REPORTS ON FORM 8-K
Schedules not listed have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or
notes thereto.
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 our current report on Form 8-K filed October 18, 2001)
2.2 Agreement and Plan of Merger dated January 21, 2002 between
ClearOne, its wholly-owned subsidiary, Tundra Acquisitions
Corporation, and E.mergent, Inc. and the Voting Agreement dated
January 21, 2002, between ClearOne, Tundra Acquisitions
Corporation and Robin Sheeley, James W. Hansen, Richard F. Craven
and Jill Larson (incorporated be reference from our current
report on Form 8-K filed February 6, 2002)
2.3 Amendment to the Share Purchase Agreement dated April 8, 2002
between ClearOne and the shareholders of Ivron Systems, Ltd.
(incorporated by reference from our current report on Form 8-K
filed April 10, 2002)
3.1 Articles of Incorporation and all amendments thereto through
March 1, 1988 (incorporated by reference from our Annual Report
on Form 10-K for the fiscal year ended June 30, 1989)
3.2 Amendment to Articles of Incorporation, dated July 1, 1991
(incorporated by reference from our Annual Report on Form 10-K
for the fiscal year ended June 30, 1991)
3.3 Bylaws, as amended on August 24, 1993 (incorporated by reference
from our Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1993)
4.1 Form of Stock Purchase Agreement for private placement
transaction (incorporated by reference from our registration
statement on Form S-3 filed November 23, 2001)
64
10.1 VRC-1000 Purchase Agreement between Gentner Engineering Company,
Inc. (a former subsidiary of ClearOne which was merged into
ClearOne) and Gentner Research Ltd., dated January 1, 1987
(incorporated by reference from our Annual Report on Form 10-K
for the fiscal year ended June 30, 1989)
10.2 Digital Hybrid Purchase Agreement between Gentner Engineering,
Inc. and Gentner Research, Ltd., dated September 8, 1988
(incorporated by reference from our Annual Report on Form 10-K
for the fiscal year ended June 30, 1991)
10.3 1 1990 Incentive Plan, as amended August 7, 1996 (incorporated by
reference from our Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1996)
10.4 1 1997 Employee Stock Purchase Plan (incorporated by reference from
our Annual Report on Form 10-KSB for the fiscal year ended June
30, 1997)
10.5 1998 Stock Option Plan and Form of Grant (incorporated by
reference from our Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1998)
10.6 1 Promissory Note, Loan Agreement, and Commercial Security
Agreement between ClearOne and Bank One, Utah, N.A. dated as of
January 5, 1999 (original aggregate amount of $5,000,000)
(incorporated by reference from our Form 10-QSB for the quarter
ended December 31, 1998)
10.7 Modification Agreement to Promissory Note, Loan Agreement, and
Commercial Security Agreement between ClearOne and Bank One,
Utah, N.A. dated as of December 22, 2000 (original aggregate
amount of $5,000,000) (incorporated by reference from our Form
10-Q for the quarter ended December 31, 2000)
10.8 Asset Purchase Agreement and related documents between ClearOne
and ClearOne, Inc. dated as of July 5, 2000 (incorporated by
reference from our Form 8-K/A filed on September 12, 2000)
10.9 Lease between ClearOne and Valley American Investment Company
(incorporated by reference from our Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1997)
10.10 Third Addendum to Lease between ClearOne and Valley American
Investment Company dated as of September 18, 2000 (incorporated
by reference from our Form 10-Q for the quarter ended December
31, 2000)
10.11 Asset Purchase Agreement and related documents between ClearOne
and Burk Technology, dated as of April 12, 2001 (incorporated by
reference from our Form 8-K filed on April 26, 2001)
21.1 Subsidiaries of ClearOne
23.1 Consent of Ernst & Young LLP, Independent Auditors
- ------------
1 Identifies management or compensatory plans, contracts or arrangements.
Reports on Form 8-K
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.
A report on Form 8-K was filed May 29, 2002, to announce the revised employment
agreement between ClearOne Communications, Inc. and Robin Sheeley from an
employment agreement to a consulting agreement.
A report on Form 8-K was filed June 5, 2002, to announce the completion of the
acquisition of E.mergent, Inc. effective May 31, 2002.
A report on Form 8-K/A was filed August 14, 2002, to provide financial
statements of E.mergent, Inc.
A report on Form 8-K was filed August 28, 2002, to announce the acquisition of
OM Video, Inc., an audiovisual integration firm headquartered in Ottawa, Canada,
and to announce the sale of ClearOne's broadcast telephone interface product
line to Comrex, Corp., a privately held broadcast equipment provider located in
Devens, Mass.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CLEARONE COMMUNICATIONS, INC.
September 24, 2002 By: /s/ Frances M. Flood
---------------------
Frances M. Flood
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Frances M. Flood and Susie Strohm, jointly and
severally, his true and lawful attorney in fact and agent, with full power of
substitution for him and in his name, placed and stead, in any and all
capacities, to sign any or all amendments to this report on Form 10-K and to
file the same, with all exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorney in fact or his substitute or substitutes
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Frances M. Flood Director, President and September 24, 2002
- ---------------------
Frances M. Flood Chief Executive Officer
(Principal Executive Officer)
/s/ Randall J. Wichinski Director, Chief Financial Officer September 24, 2002
- -------------------------
Randall J. Wichinski (Principal Financial and
Accounting Officer)
/s/ Edward Dallin Bagley Director September 19, 2002
- ------------------------
Edward Dallin Bagley
/s/ Brad R. Baldwin Director September 23, 2002
- -------------------
Brad R. Baldwin
/s/ Harry Spielberg Director September 22, 2002
- -------------------
Harry Spielberg
/s/ David Wiener Director September 19, 2002
- ----------------
David Wiener
66
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Frances M. Flood, certify that:
1. I have reviewed this Annual Report on Form 10-K of ClearOne
Communications, Inc. (the "Annual Report");
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this Annual Report; and,
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of ClearOne Communications, Inc., as of, and for, the
periods presented in this Annual Report.
Date: September 24, 2002 /s/ Frances M. Flood
----------------------------
Frances M. Flood
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Randall J. Wichinski, certify that:
1. I have reviewed this Annual Report on Form 10-K of ClearOne
Communications, Inc. (the "Annual Report");
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this Annual Report; and,
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of ClearOne Communications, Inc., as of, and for, the
periods presented in this Annual Report.
Date: September 24, 2002 /s/ Randall J. Wichinski
----------------------------
Randall J. Wichinski
Chief Financial Officer
67