form10-q12312008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x Quarterly Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
For the
quarterly period ended December 31,
2008
Commission
file number: 000-17219
CLEARONE COMMUNICATIONS,
INC.
(Exact
name of registrant as specified in its charter)
Utah
|
|
87-0398877
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
employer
identification
number)
|
5225 Wiley Post Way, Suite 500
Salt Lake City, Utah
|
|
84116
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (801)
975-7200
Indicate
by check 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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated Filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer x
(Do not check if smaller reporting
company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨No x
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
Common
Stock
Title
of Class
|
8,928,060
Number
of Shares
Outstanding
at February 5, 2009
|
CLEARONE
COMMUNICATIONS, INC.
TABLE
OF CONTENTS TO FORM 10-Q
FOR
THE QUARTER ENDED DECEMBER 31, 2008
|
|
Page
Number
|
PART
I – FINANCIAL INFORMATION
|
Item
1
|
Consolidated
Financial Statements:
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and June 30, 2008
|
1
|
|
Consolidated
Statements of Operations for the three months ended December 31, 2008 and
2007 and the six months ended December 31, 2008 and 2007
|
2
|
|
Consolidated
Statements of Cash Flows for the six months ended December 31, 2008 and
2007
|
4
|
|
Notes
to Condensed Consolidated Financial Statements
|
6
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
11
|
Item
3
|
Quantitative
and Qualitative Disclosures About Market Risk
|
17
|
Item
4
|
Controls
and Procedures
|
17
|
PART
II – OTHER INFORMATION
|
Item
1
|
Legal
Proceedings
|
18
|
Item
1A
|
Risk
Factors
|
20
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
20
|
Item
3
|
Defaults
Upon Senior Securities
|
20
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
21
|
Item
5
|
Other
Information
|
21
|
Item
6
|
Exhibits
|
21
|
Signatures
|
|
22
|
PART I –
FINANCIAL INFORMATION
Item
1. Financial Statements
CLEARONE
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
(in
thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
December
31,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,323 |
|
|
$ |
3,327 |
|
Marketable
securities
|
|
|
9,628 |
|
|
|
5,922 |
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
of
$64 and $87, respectively
|
|
|
7,532 |
|
|
|
7,238 |
|
Deposit,
bond for preliminary injunction
|
|
|
0 |
|
|
|
908 |
|
Note
receivable
|
|
|
14 |
|
|
|
43 |
|
Inventories,
net
|
|
|
12,859 |
|
|
|
7,799 |
|
Income
tax receivable
|
|
|
592 |
|
|
|
0 |
|
Deferred
income taxes
|
|
|
3,124 |
|
|
|
2,828 |
|
Prepaid
expenses
|
|
|
627 |
|
|
|
820 |
|
Total
current assets
|
|
|
36,699 |
|
|
|
28,885 |
|
|
|
|
|
|
|
|
|
|
Long-term
marketable securities
|
|
|
0 |
|
|
|
11,168 |
|
Property
and equipment, net
|
|
|
2,768 |
|
|
|
2,554 |
|
Intangible
assets, net
|
|
|
42 |
|
|
|
47 |
|
Note
Receiveable - long-term
|
|
|
0 |
|
|
|
0 |
|
Long-term
deferred tax asset
|
|
|
724 |
|
|
|
1,639 |
|
Other
assets
|
|
|
21 |
|
|
|
7 |
|
Deferred
income taxes
|
|
|
0 |
|
|
|
0 |
|
Total
assets
|
|
$ |
40,254 |
|
|
$ |
44,300 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,736 |
|
|
$ |
2,187 |
|
Accrued
taxes
|
|
|
0 |
|
|
|
72 |
|
Accrued
liabilities
|
|
|
3,463 |
|
|
|
3,600 |
|
Deferred
product revenue
|
|
|
4,881 |
|
|
|
4,547 |
|
Total
current liabilities
|
|
|
10,080 |
|
|
|
10,406 |
|
|
|
|
|
|
|
|
|
|
Deferred
rent
|
|
|
622 |
|
|
|
700 |
|
Deferred
income taxes, net
|
|
|
0 |
|
|
|
0 |
|
Other
long-term liabilities
|
|
|
1,372 |
|
|
|
1,054 |
|
Total
liabilities
|
|
|
12,074 |
|
|
|
12,160 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001, 50,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
8,891,756
and 10,228,902 shares issued and outstanding, respectively
|
|
|
9 |
|
|
|
10 |
|
Additional
paid-in capital
|
|
|
38,191 |
|
|
|
44,618 |
|
Accumulated
other comprehensive income (loss)
|
|
|
36 |
|
|
|
(694 |
) |
Accumulated
deficit
|
|
|
(10,056 |
) |
|
|
(11,794 |
) |
Total
shareholders' equity
|
|
|
28,180 |
|
|
|
32,140 |
|
Total
liabilities and shareholders' equity
|
|
$ |
40,254 |
|
|
$ |
44,300 |
|
See
accompanying notes to condensed consolidated financial
statements
|
|
|
|
|
|
CLEARONE
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
(in
thousands of dollars, except per share amounts)
|
|
(unaudited)
|
|
|
|
Three
Months Ended
December
31,
|
|
|
Six
Months Ended
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
9,970 |
|
|
$ |
10,787 |
|
|
$ |
20,229 |
|
|
$ |
20,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
4,168 |
|
|
|
4,414 |
|
|
|
7,794 |
|
|
|
8,714 |
|
Gross
profit
|
|
|
5,802 |
|
|
|
6,373 |
|
|
|
12,435 |
|
|
|
11,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
& Marketing
|
|
|
1,934 |
|
|
|
1,578 |
|
|
|
3,911 |
|
|
|
3,180 |
|
Research
and product development
|
|
|
1,844 |
|
|
|
1,678 |
|
|
|
3,620 |
|
|
|
3,433 |
|
General
and administrative
|
|
|
1,257 |
|
|
|
1,198 |
|
|
|
2,329 |
|
|
|
4,093 |
|
Total
operating expenses
|
|
|
5,035 |
|
|
|
4,454 |
|
|
|
9,860 |
|
|
|
10,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
767 |
|
|
|
1,919 |
|
|
|
2,575 |
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income, net
|
|
|
96 |
|
|
|
311 |
|
|
|
161 |
|
|
|
653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
|
863 |
|
|
|
2,230 |
|
|
|
2,736 |
|
|
|
1,462 |
|
(Provision)
for income taxes
|
|
|
(259 |
) |
|
|
(449 |
) |
|
|
(998 |
) |
|
|
(620 |
) |
Income
from continuing operations
|
|
|
604 |
|
|
|
1,781 |
|
|
|
1,738 |
|
|
|
842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
0 |
|
|
|
1 |
|
|
|
0 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
604 |
|
|
$ |
1,782 |
|
|
$ |
1,738 |
|
|
$ |
858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements
|
|
CLEARONE
COMMUNICATIONS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
(in
thousands of dollars, except per share amounts)
|
|
(unaudited)
|
|
|
|
Three
Months Ended
December
31,
|
|
|
Six
Months Ended
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share from continuing operations
|
|
$ |
0.07 |
|
|
$ |
0.16 |
|
|
$ |
0.18 |
|
|
$ |
0.08 |
|
Diluted
earnings per common share from continuing operations
|
|
$ |
0.07 |
|
|
$ |
0.16 |
|
|
$ |
0.18 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share from discontinued operations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Diluted
earnigns per common share from discontinued operations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.07 |
|
|
$ |
0.16 |
|
|
$ |
0.18 |
|
|
$ |
0.08 |
|
Diluted
earnings per comons share
|
|
$ |
0.07 |
|
|
$ |
0.16 |
|
|
$ |
0.18 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
8,889,974 |
|
|
|
10,840,193 |
|
|
|
9,501,381 |
|
|
|
10,900,725 |
|
Diluted
weighted average shares outstanding
|
|
|
8,989,283 |
|
|
|
10,941,491 |
|
|
|
9,600,291 |
|
|
|
11,012,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements
|
|
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands of dollars)
(Unaudited)
|
|
Six Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income from continuing operations
|
|
$ |
1,738 |
|
|
$ |
842 |
|
Adjustments
to reconcile net income from continuing operations
|
|
|
|
|
|
to
net cash (used in) provided by operating activities:
|
|
|
|
|
|
Depreciation
and amortization expense
|
|
|
353 |
|
|
|
384 |
|
Stock-based
compensation
|
|
|
325 |
|
|
|
372 |
|
Write-off
of inventory
|
|
|
374 |
|
|
|
406 |
|
(Gain)
loss on disposal of assets and fixed assets write-offs
|
|
|
(5 |
) |
|
|
4 |
|
Provision
for (recovery of) doubtful accounts
|
|
|
(22 |
) |
|
|
6 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(718 |
) |
|
|
61 |
|
Deposit
- Bond
|
|
|
908 |
|
|
|
(908 |
) |
Deferred
taxes
|
|
|
186 |
|
|
|
- |
|
Note
receivable
|
|
|
29 |
|
|
|
80 |
|
Inventories
|
|
|
(5,434 |
) |
|
|
65 |
|
Prepaid
expenses and other assets
|
|
|
192 |
|
|
|
(299 |
) |
Accounts
payable
|
|
|
(5 |
) |
|
|
(282 |
) |
Accrued
liabilities
|
|
|
(137 |
) |
|
|
1,173 |
|
Income
taxes
|
|
|
(346 |
) |
|
|
(490 |
) |
Deferred
product revenue
|
|
|
334 |
|
|
|
108 |
|
Net
change in other assets/liabilities
|
|
|
(14 |
) |
|
|
- |
|
Net
cash (used in) provided by operating activities
|
|
|
(2,242 |
) |
|
|
1,522 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(635 |
) |
|
|
(423 |
) |
Purchase
of marketable securities
|
|
|
- |
|
|
|
(6,874 |
) |
Sale
of marketable securities
|
|
|
8,626 |
|
|
|
7,069 |
|
Net
cash provided by (used in) continuing investing activities
|
|
|
7,991 |
|
|
|
(228 |
) |
Net
cash provided by discontinued investing activities
|
|
|
- |
|
|
|
16 |
|
Net
cash provided by (used in) investing activities
|
|
|
7,991 |
|
|
|
(212 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from common stock
|
|
|
17 |
|
|
|
519 |
|
Common
stock purchased and retired
|
|
|
(6,768 |
) |
|
|
(1,664 |
) |
Tax
benefit attributable to exercise of stock options
|
|
|
(2 |
) |
|
|
67 |
|
Net
cash (used in) financing activities
|
|
|
(6,753 |
) |
|
|
(1,078 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,004 |
) |
|
|
232 |
|
Cash
and cash equivalents at the beginning of the period
|
|
|
3,327 |
|
|
|
2,782 |
|
Cash
and cash equivalents at the end of the period
|
|
$ |
2,323 |
|
|
$ |
3,014 |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements
|
|
CLEARONE
COMMUNICATIONS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(in
thousands of dollars)
(Unaudited)
|
|
Six Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
914 |
|
|
$ |
1,056 |
|
Cash
paid for interest
|
|
$ |
- |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
Exchanged
accounts receivable from a vendor with
|
|
|
|
|
|
|
|
|
acccounts
payable to the same vendor
|
|
$ |
446 |
|
|
$ |
168 |
|
Adoption
of FIN48
|
|
$ |
- |
|
|
$ |
295 |
|
Unrealized
gain on available-for-sale investments, net of tax of $434
|
|
$ |
730 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements
|
|
CLEARONE
COMMUNICATIONS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis
of Presentation
The
accompanying interim consolidated financial statements for the three and six
month periods ended December 31, 2008 and 2007 are not audited. Our consolidated
financial statements are prepared in accordance with the requirements for
unaudited interim periods, and consequently do not include all disclosures
required to be in conformity with accounting principles generally accepted in
the United States of America. The accompanying consolidated financial statements
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of our financial position as of December 31, 2008, the
results of operations for the three and six month periods ended December 31,
2008 and 2007, and the condensed statements of cash flows for the six months
ended December 31, 2008 and 2007. The results of operations for the three and
six month periods ended December 31, 2008 and 2007 are not necessarily
indicative of the results for a full-year period. These interim
consolidated financial statements should be read in conjunction with the
financial statements included in our Annual Report on Form 10-K/A for the year
ended June 30, 2008 filed with the Securities and Exchange Commission (the
“SEC”).
2. Inventories
Inventories,
net of reserves, consisted of the following as of December 31, 2008 and June 30,
2008 (in thousands):
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
1,049 |
|
|
$ |
724 |
|
Finished
goods
|
|
|
10,132 |
|
|
|
5,356 |
|
Consigned
inventory
|
|
|
1,678 |
|
|
|
1,719 |
|
Total
inventory
|
|
$ |
12,859 |
|
|
$ |
7,799 |
|
Our
inventory increased approximately $5 million from June 30, 2008 as we continued
to build up safety stock of certain of our key products to mitigate stock-outs
in addition to taking advantage of volume discounts. We also stocked and
commenced fulfillment from our Hong Kong facility which we expect will better
serve the majority of our international partners and enable us to enhance our
profitability by working in the favorable Hong Kong business
environment.
Consigned
inventory represents inventory at distributors and other customers where revenue
recognition criteria have not been achieved.
3. Stock-based
Compensation
Stock-based
compensation expense for the three and six month periods ended December 31,
2008 and 2007 has been allocated as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cost
of goods sold
|
|
$ |
17 |
|
|
$ |
23 |
|
|
$ |
41 |
|
|
$ |
40 |
|
Sales
& marketing
|
|
|
18 |
|
|
|
26 |
|
|
|
32 |
|
|
|
48 |
|
Research
& development
|
|
|
7 |
|
|
|
35 |
|
|
|
15 |
|
|
|
67 |
|
General
&administrative
|
|
|
121 |
|
|
|
117 |
|
|
|
237 |
|
|
|
217 |
|
Total
stock-based compensation
|
|
$ |
163 |
|
|
$ |
201 |
|
|
$ |
325 |
|
|
$ |
372 |
|
As of
December 31, 2008, the total remaining unrecognized compensation cost related to
non-vested stock options, net of forfeitures, was approximately $946,000. During
the six months ended December 31, 2008 and 2007, we granted 213,500 and 315,000
stock options, respectively. We use judgment in determining the fair
value of the share-based payments on the date of grant using an option-pricing
model with assumptions regarding a number of highly complex and subjective
variables. These variables include the risk-free interest rate of the
awards, the expected life of the awards, the expected volatility over the term
of the awards, the expected dividends of the awards, and an estimate of the
amount of awards that are expected to be forfeited. We use the
Black-Scholes option pricing model to determine the fair value of share-based
payments granted under SFAS No. 123R and the original SFAS No. 123.
4. Discontinued
Operations
Summary
operating results of our discontinued operations are as follows (in thousands of
dollars):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
December 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on disposal of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
OM
Video
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
25 |
|
Total
gain on disposal of discontinued operations
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (provision) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OM
Video
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(9 |
) |
Total
income tax (provision) benefit
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income from discontinued operations, net of income taxes:
|
|
|
|
|
|
|
|
|
|
OM
Video
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
16 |
|
Total
income from discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of income taxes
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
16 |
|
OM
Video
On March
4, 2005, we sold all of the issued and outstanding stock of our Canadian
subsidiary, ClearOne Communications of Canada, Inc. (“ClearOne Canada”) to
6351352 Canada Inc., a Canada corporation. ClearOne Canada owned all the issued
and outstanding stock of Stechyson Electronics, Ltd., which conducted business
under the name OM Video. We agreed to sell the stock of ClearOne Canada for
$200,000 in cash; a $1.3 million note receivable over a 15-month period, with
interest accruing on the unpaid balance at the rate of 5.3% per year; and
contingent consideration ranging from 3.0% to 4.0% of related gross revenue over
a five-year period. In June 2005, we were advised that the OM Purchaser had
settled an action brought by the former employer of certain of OM Purchaser’s
owners and employees alleging violation of non-competition agreements. The
settlement reportedly involved a cash payment and an agreement not to sell
certain products for a period of one year. Based on an analysis of the facts and
circumstances that existed at the end of fiscal 2005, and considering the
guidance from Topic 5U of the SEC Rules and Regulations, “Gain Recognition on
the Sale of a Business or Operating Assets to a Highly Leveraged Entity,” the
gain was recognized as cash was collected (as collection was not reasonably
assured). Through December 31, 2005, all required payments had been made
however, 6351352 Canada Inc. failed to make any subsequent, required payments
under the note receivable until June 30, 2006, when we received a payment of
$50,000. We reevaluated our alternatives and concluded that our best course of
action was to enforce our security and appoint a receiver over the assets of OM
Video. The amount of the promissory note and contingent earn-out provision was
approximately $660,000 which is net of $632,000 collected through
receivership.
5. Shareholders’
Equity
Our
shareholders’ equity of $28.2 million at December 31, 2008 declined
approximately $4.0 million from June 30, 2008. During the quarter ending
September 30, 2008, we repurchased 1,342,620 shares for approximately $6.8
million. The share repurchase was partially offset by comprehensive income for
the six months ending December 31, 2008 of approximately $2.5 million which
included an unrealized gain, net of tax, of $730,000 related to our auction rate
securities investments.
6.
Income Taxes
During
our first six months of fiscal 2009, we recorded approximately $434,000 related
to unrecognized tax benefits that would favorably impact our effective tax rate
if recognized. The total outstanding balance for liabilities related
to unrecognized tax benefits at December 31, 2008 was $1.7 million of which
$119,000 was associated with interest and penalties. We account for interest
expense and penalties for unrecognized tax benefits as part of our income tax
provision.
7.
Contingent Liability
We have
accrued for legal fees and costs of the probable amount the Company was able to
estimate at December 31, 2008, of our contingent liability under indemnification
agreements with two former officers. In accordance with Statement of
Financial Accounting Standards No. 5, “Accounting for Contingencies,” we have
accrued a total of $3.3 million, the balance of which was about $1.5 million at
December 31, 2008 representing the probable amount that, as of the date of the
financial statements, could be reasonably estimated of our contingent liability,
through trial, under the indemnification agreements if required under applicable
law. In accordance with SFAS No. 5, we will adjust our contingent
liability, as necessary, to reflect the probable amount that can be reasonably
estimated. Our actual liability may be higher or lower than the
estimate upon final resolution of the matter. We will adjust our
contingent liability, as needed, so that it remains an estimable and probable
amount of our contingent financial liability as of the date of issuance of the
applicable financial statements.
8.
Investments
During
October 2008 we accepted offers to repurchase our auction rate securities
(“ARSs”), at par value, from the two investment banks that sold them to us.
Recently, auctions for these securities were not successful, resulting in our
continuing to hold these securities and the issuers paying interest at the
maximum contractual rate. Between November 2008 and January 2009, UBS and Morgan
Stanley fulfilled their offers and repurchased our ARSs, at par value, totaling
approximately $12.2 million.
Prior to
our quarter ended December 31, 2008 we recognized unrealized losses in equity
securities primarily related to our ARSs. However, as a result of our ARSs
having been subsequently repurchased at par value, the unrealized losses in
these securities were zero at December 31, 2008.
Changes
in the unrealized holding gains and losses on our marketable securities are
reported as a separate component of accumulated other comprehensive income as
follows (in thousands):
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Balance,
beginning of period
|
|
$ |
(895 |
) |
|
$ |
- |
|
|
$ |
(694 |
) |
|
$ |
- |
|
Unrealized
holding gains, in equity securities
|
|
|
1,485 |
|
|
|
- |
|
|
|
1,164 |
|
|
|
- |
|
Income
tax
|
|
|
(554 |
) |
|
|
- |
|
|
|
(434 |
) |
|
|
- |
|
Balance,
end of period
|
|
$ |
36 |
|
|
$ |
- |
|
|
$ |
36 |
|
|
$ |
- |
|
The
components of comprehensive income are (in thousands):
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
604 |
|
|
$ |
1,782 |
|
|
$ |
1,738 |
|
|
$ |
858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on available-for-sale investment
|
|
|
1,485 |
|
|
|
- |
|
|
|
1,164 |
|
|
|
- |
|
Income
tax
|
|
|
(554 |
) |
|
|
- |
|
|
|
(434 |
) |
|
|
- |
|
Comprehensive
Income
|
|
$ |
1,535 |
|
|
$ |
1,782 |
|
|
$ |
2,468 |
|
|
$ |
858 |
|
10.
Fair Value Measurements
We
adopted SFAS No. 157 “Fair Value Measurements” (as impacted by SFAS 157-2) on
July 1, 2008. This statement defines fair value, establishes a
framework to measure fair value, and expands disclosures about fair value
measurements. SFAS 157 defines fair value as the price that could be
received upon the sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. SFAS
157 establishes a fair value hierarchy used to prioritize the quality and
reliability of the information used to determine fair
values. Categorization within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value
measurement. The fair value hierarchy is defined into the following
three categories:
Level 1:
Valuations based on quoted prices in active markets for identical instruments
that we are able to access. Since valuations are based on quoted prices that are
readily and regularly available in an active market, valuation of these products
does not entail a significant degree of judgment.
Level 2:
Valuations based on quoted prices in active markets for instruments that are
similar, or quoted prices in markets that are not active for identical or
similar instruments, and model-derived valuations in which all significant
inputs and significant value drivers are observable in active
markets.
Level 3:
Valuations based on inputs that are unobservable and significant to the overall
fair value measurement.
As of
December 31, 2008, financial assets utilizing Level 1 inputs included short term
investment securities traded on active securities exchanges. We did not have any
financial assets utilizing Level 2 or Level 3 inputs. We did not have any
liabilities that were required to be measured at fair value as of December 31,
2008.
Fair
value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure. Therefore, even when market assumptions are not readily
available, our own assumptions are set to reflect those that market participants
would use in pricing the asset or liability at the measurement date. We use
prices and inputs that are current as of the measurement date, including during
periods of market dislocation, such as the recent illiquidity in the auction
rate securities market. In periods of market dislocation, the observability of
prices and inputs may be reduced for many instruments. As a result of UBS and
Morgan Stanley repurchasing our auction rate securities, at par, between
November 2008 and January 2009, we have reclassified certain of our financial
instruments from Level 2 to Level 1 at December 31, 2008.
SFAS No.
157 requires that the valuation techniques used by us are consistent with at
least one of the three possible approaches: the market approach, income approach
and/or cost approach. Our Level 1 valuations are based on the market approach
and consist of quoted prices for identical items on active securities
exchanges.
The
following table provides our financial assets carried at fair value measured on
a recurring basis as of December 31, 2008 (in thousands):
|
|
Total
Fair Value at December 31, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
|
|
Significant
other observable inputs
(Level
2)
|
|
|
Significant
unobservable
inputs (Level 3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
available-for-sale securities
|
|
$ |
9,628 |
|
|
$ |
9,628 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,628 |
|
Long-term
available-for-sale securities
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
|
|
|
$ |
9,628 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,628 |
|
11. Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”), which defines fair value, establishes guidelines for measuring
fair value and expands disclosure regarding fair value measurements. SFAS No.
157 does not require new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, on a prospective basis. We adopted the
requirements of SFAS 157 on July 1, 2008, the beginning our of 2009 fiscal
year.
In
February 2007, the FASB issued SFAS 159 “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). This statement
permits entities to choose to measure many financial instruments and certain
other items at fair value that were not previously required to be measured at
fair value. The objective of SFAS 159 is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS 159
requires a business entity to report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. An entity may decide whether to elect the fair value
option for each eligible item on its election date, subject to certain
requirements described in the statement. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. We adopted SFAS 159 on July 1,
2008, and elected not to establish the fair market option allowed for financial
instruments and certain other items under this statement.
In
December 2007, the FASB issued SFAS No. 141R (revised 2007) “Business
Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS 141R is effective
for the financial statements issued for fiscal years beginning after December
15, 2008. We are currently evaluating the potential impact, if any,
that this statement may have on our consolidated financial position and results
of operations.
In
December 2007, the FASB issued SFAS No. 161 “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires
additional disclosures related to how and why an entity uses derivative
instruments and hedges, as well as how derivative instruments and hedges are
accounted for in an entity’s financial statements. SFAS 161 is
effective for financial statements issued for fiscal years beginning after
November 15, 2008. We are currently evaluating the potential impact, if any,
that this statement may have on our consolidated financial position and results
of operations.
Item
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This
report includes “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). All statements
in this report, other than statements of historical fact, are forward-looking
statements for purposes of these provisions, including any projections of
earnings, revenues or other financial items, any statements of the plans and
objectives of management for future operations, any statements concerning
proposed new products or services, any statements regarding future economic
conditions or performance, and any statements of assumptions underlying any of
the foregoing. All forward-looking statements included in this report
are made as of the date hereof and are based on information available to us as
of such date. We assume no obligation to update any forward-looking
statement. In some cases, forward-looking statements can be
identified by the use of terminology such as “may,” “will,” “expects,” “plans,”
“anticipates,” “intends,” “believes,” “estimates,” “potential,” or
“continue,” or the negative thereof or other comparable
terminology. Although we believe that the expectations reflected in
the forward-looking statements contained herein are reasonable, there can be no
assurance that any such expectations or any forward-looking statement will prove
to be correct. Our actual results will vary, and may vary materially,
from those projected or assumed in the forward-looking
statements. Future financial condition and results of operations, as
well as any forward-looking statements, are subject to inherent risks and
uncertainties, including, without limitation, product recalls and product
liability claims; infringement of our technology or assertion that our
technology infringes the rights of other parties; termination of supplier
relationships, or failure of suppliers to perform; inability to successfully
manage growth; delays in obtaining regulatory approvals, or the failure to
maintain such approvals; concentration of our revenue among a few customers,
products or procedures; development of new products and technology that could
render our products obsolete; market acceptance of new products; introduction of
products in a timely fashion; price and product competition, availability of
labor and materials, cost increases, and fluctuations in and obsolescence of
inventory; volatility of the market price of our common stock; foreign currency
fluctuations; changes in key personnel; work stoppage or transportation risks;
and other factors referred to in our press releases and reports filed with the
SEC, including our Annual Report on Form10-K/A, for the year ended June 30,
2008. All subsequent forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety by these
cautionary statements. Additional factors that may have a direct
bearing on our operating results are discussed in Part I, Item 1A “Risk Factors”
in our Annual Report on Form 10-K/A for the year ended June 30,
2008.
BUSINESS
OVERVIEW
We are an
audio conferencing products company. We develop, manufacture, market, and
service a comprehensive line of high-quality audio conferencing products, which
range from personal conferencing products to tabletop conferencing phones to
professionally installed audio systems. We also manufacture and sell
conferencing furniture. We have a strong history of product innovation and plan
to continue to apply our expertise in audio engineering to develop and introduce
innovative new products and enhance our existing products. We believe the
performance and reliability of our high-quality audio products create a natural
communications environment which saves organizations of all sizes time and money
by enabling more effective and efficient communication.
Our
products are used by organizations of all sizes to accomplish effective group
communication. Our end-users include some of the world’s largest and most
prestigious companies and institutions, small and medium-sized businesses,
educational institutions, and government organizations as well as individual
consumers. We sell our products to these end-users primarily through a network
of independent distributors who in turn sell our products to dealers, systems
integrators, and value-added resellers. We also sell products on a limited basis
directly to dealers, systems integrators, value-added resellers, and
end-users.
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis of our results of operations and financial condition are
based upon our condensed consolidated financial statements, which have been
prepared in conformity with U.S. generally accepted accounting
principles. We review the accounting policies used in reporting our
financial results on a regular basis. The preparation of these
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. We
evaluate our assumptions and estimates on an ongoing basis and may employ
outside experts to assist in our evaluations. We believe that the
estimates we use are reasonable; however, actual results could differ from those
estimates. We believe the following critical accounting policies
affect our more significant assumptions and estimates that we used to prepare
our condensed consolidated financial statements.
Revenue
and Associated Allowances for Revenue Adjustments and Doubtful
Accounts
Included
in continuing operations is product revenue, primarily from product sales to
distributors, dealers, and end-users. Product revenue is recognized
when (i) the products are shipped and any right of return expires, (ii)
persuasive evidence of an arrangement exists, (iii) the price is fixed and
determinable, and (iv) collection is reasonably assured.
We
provide a right of return on product sales to distributors. Accordingly, revenue
from product sales to distributors is not recognized until the return privilege
has expired, which approximates when product is sold-through to customers of our
distributors (dealers, system integrators, value-added resellers, and end-users)
rather than when the product is initially shipped to a distributor. We evaluate,
at each quarter-end, the inventory in the channel through information provided
by certain of our distributors. The level of inventory in the channel will
fluctuate up or down, each quarter, based upon our distributors’ individual
operations. Accordingly, each quarter-end revenue deferral is calculated and
recorded based upon the underlying, estimated channel inventory at quarter-end.
Although certain distributors provide certain channel inventory amounts, we make
judgments and estimates with regard to the amount of inventory in the entire
channel, for all customers and for all channel inventory items, and
the appropriate revenue and cost of goods sold associated
with those channel products. Although these assumptions and judgments
regarding total channel inventory revenue and cost of goods sold could
differ from actual amounts, we believe that our calculations are indicative of
actual levels of inventory in the distribution channel. The amounts of
deferred cost of goods sold were included in consigned inventory. The following
table details the amount of deferred revenue, cost of goods sold, and gross
profit at each quarter end for the 12-month period ended December 31, 2008 (in
thousands).
|
|
Deferred Revenue
|
|
|
Deferred Cost of Goods Sold
|
|
|
Deferred Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
$ |
4,881 |
|
|
$ |
1,678 |
|
|
$ |
3,203 |
|
September
30, 2008
|
|
|
4,432 |
|
|
|
1,926 |
|
|
|
2,506 |
|
June
30, 2008
|
|
|
4,547 |
|
|
|
1,719 |
|
|
|
2,828 |
|
March
31, 2008
|
|
|
4,206 |
|
|
|
1,757 |
|
|
|
2,449 |
|
December
31, 2007
|
|
|
4,980 |
|
|
|
1,859 |
|
|
|
3,121 |
|
We offer
rebates and market development funds in some combination to certain of our
distributors, dealers/resellers, and end-users based upon volume of product
purchased by them. We record rebates as a reduction of revenue in accordance
with Emerging Issues Task Force (“EITF”) Issue No. 00-22, “Accounting for Points
and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers
for Free Products or Services to Be Delivered in the Future.”
We offer
credit terms on the sale of our products to a majority of our customers and
perform ongoing credit evaluations of our customers’ financial condition. We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability or unwillingness of our customers to make required payments based
upon our historical collection experience and expected collectability of all
accounts receivable. Our actual bad debts in future periods may differ from our
current estimates and the differences may be material, which may have an adverse
impact on our future accounts receivable and cash position.
Accounting
for Income Taxes
We are
subject to income taxes in both the United States and in certain non-U.S.
jurisdictions. We estimate our current tax position together with our future tax
consequences attributable to temporary differences resulting from differing
treatment of items, such as deferred revenue, depreciation, and other reserves
for tax and accounting purposes. These temporary differences result in deferred
tax assets and liabilities. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income, prior year carryback,
or future reversals of existing taxable temporary differences. To the extent we
believe that recovery is not more likely than not, we establish a valuation
allowance against these deferred tax assets. Significant judgment is required in
determining our provision for income taxes, our deferred tax assets and
liabilities, and any valuation allowance recorded against our deferred tax
assets. To the extent we establish a valuation allowance in a period, we must
include and expense the allowance within the tax provision in the consolidated
statement of operations.
Lower-of-Cost
or Market Adjustments and Reserves for Excess and Obsolete
Inventory
We
account for our inventory on a first-in, first-out basis, and make appropriate
adjustments on a quarterly basis to write-down the value of inventory to the
lower-of-cost or market.
In order
to determine what, if any, inventory needs to be written down, we perform a
quarterly analysis of obsolete and slow-moving inventory. In general, we
write-down our excess and obsolete inventory by an amount that is equal to the
difference between the cost of the inventory and its estimated market value if
market value is less than cost, based upon assumptions about future product
life-cycles, product demand, and market conditions. Those items that are found
to have a supply in excess of our estimated demand are considered to be
slow-moving or obsolete and the appropriate reserve is made to write-down the
value of that inventory to its realizable value. These charges are recorded in
cost of goods sold. If there were to be a sudden and significant decrease in
demand for our products, or if there were a higher incidence of inventory
obsolescence because of rapidly changing technology and customer requirements,
we could be required to increase our inventory allowances, and our gross profit
could be adversely affected.
Stock-Based
Compensation
We
account for stock-based compensation in accordance with SFAS No. 123R, Share-Based Payment. Under
the fair value recognition provisions of this statement, we measure share-based
compensation cost at the grant date based on the value of the award and is
recognized as expense over the vesting period. Judgment is
required in estimating the amount of share-based awards that are expected to be
forfeited. If actual results differ significantly from these
estimates, stock-based compensation expense and our results of operations could
be materially impacted.
SEASONALITY
Our audio
conferencing products revenue has historically been strongest during our second
and fourth quarters. There can be no assurance that any
historic sales patterns will continue and, as a result, sales for any prior
quarter are not necessarily indicative of the sales to be expected in any future
quarter.
ANALYSIS
OF RESULTS OF OPERATIONS
Results
of Operations for the three months or the second fiscal quarter (“2Q”) and six
months or the first half of the fiscal year (“1H”) ended December 31,
2008 and 2007
The
following table sets forth certain items from our unaudited condensed
consolidated statements of operations (in thousands) for the three and six
months ended December 31, 2008 and 2007, together with the percentage of total
revenue which each such item represents:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
(in
thousands)
|
|
|
(in
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
%
of Revenue
|
|
|
|
|
|
%
of Revenue
|
|
|
|
|
|
%
of Revenue
|
|
|
|
|
|
%
of Revenue
|
|
Revenue:
|
|
$ |
9,970 |
|
|
|
100% |
|
|
$ |
10,787 |
|
|
|
100% |
|
|
$ |
20,229 |
|
|
|
100% |
|
|
$ |
20,229 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of goods sold
|
|
|
4,168 |
|
|
|
42% |
|
|
|
4,414 |
|
|
|
41% |
|
|
|
7,794 |
|
|
|
39% |
|
|
|
8,714 |
|
|
|
43% |
|
Gross
profit
|
|
|
5,802 |
|
|
|
58% |
|
|
|
6,373 |
|
|
|
59% |
|
|
|
12,435 |
|
|
|
61% |
|
|
|
11,515 |
|
|
|
57% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
& marketing
|
|
|
1,934 |
|
|
|
19% |
|
|
|
1,578 |
|
|
|
15% |
|
|
|
3,911 |
|
|
|
19% |
|
|
|
3,180 |
|
|
|
16% |
|
Research
and product development
|
|
|
1,844 |
|
|
|
18% |
|
|
|
1,678 |
|
|
|
16% |
|
|
|
3,620 |
|
|
|
18% |
|
|
|
3,433 |
|
|
|
17% |
|
General
and administrative
|
|
|
1,257 |
|
|
|
13% |
|
|
|
1,198 |
|
|
|
11% |
|
|
|
2,329 |
|
|
|
12% |
|
|
|
4,093 |
|
|
|
20% |
|
Total
operating expenses
|
|
$ |
5,035 |
|
|
|
51% |
|
|
$ |
4,454 |
|
|
|
41% |
|
|
$ |
9,860 |
|
|
|
49% |
|
|
$ |
10,706 |
|
|
|
53% |
|
Revenue
Revenue
for 2Q 2009 decreased 8%, or approximately $817,000, compared to 2Q 2008.
Our 2Q 2009 revenues were negatively affected by downward economic pressure
which impacted all of our product categories with the exception our personal and
furniture conferencing products in which were realized slight increases over 2Q
2008. 2Q 2009 revenue was further negatively impacted by an approximate $267,000
increase in our marketing related programs (e.g. marketing development funds,
rebates, etc.) which, in accordance with generally accepted accounting
principles, are accounted for as a reduction in revenue.
Despite
the 2Q 2009 revenue decline of 8% from 2Q 2008, revenue for 1H 2009 and 2008
remained consistent at $20,229 due to our solid revenue reported in 1Q 2009.
During the 1H 2009, we realized growth in our professional, personal and
conferencing furniture products which collectively increased approximately
$840,000 over 1H 2008. These increases were offset by reduced premium and
tabletop product sales which together declined about $400,000 in 1H2009 over the
same period last year. We also expended an additional $408,000 in marketing
related programs (e.g. marketing development funds, rebates, etc) in 1H 2009
compared to 1H 2008 which are accounted for as a reduction in
revenue.
We
evaluate, at each quarter-end, the inventory in the channel through information
provided by certain of our distributors. The level of inventory in the
channel will fluctuate up or down, each quarter, based upon our distributors’
individual operations. Accordingly, each quarter-end revenue deferral is
calculated and recorded based upon the underlying, estimated channel inventory
at quarter-end. During 2Q 2009 and 2008, the net change in deferred
revenue based on the net movement of inventory in the channel was a net deferral
of $449,000 and recognition of $895,000 in revenue, respectively. In 1H 2009 and
2008, the net change in deferred revenue based on the net movement of inventory
in the channel was a deferral of $334,000 and $108,000 in revenue,
respectively.
Costs of Goods Sold and
Gross Profit
Costs of
goods sold include expenses associated with finished goods purchased
from outsourced manufacturers, the manufacture of our products, including
material and direct labor, our manufacturing and operations organization,
property and equipment depreciation, warranty expense, freight expense, royalty
payments, and the allocation of overhead expenses.
Our gross
profit margin (GPM), gross profit as a percentage of sales, was 58% and 59% in
2Q 2009 and 2Q 2008, respectively. 2Q 2009 GPM was slightly lower than in the
same period of 2008 due primarily to higher inventory obsolescence reserve
requirements.
Our GPM
for 1H 2009 and 1H 2008 was 61% and 57%, respectively. The 1H 2009 GPM
improvement was due primarily to (1) selective channel price increases made
during 1H 2009, (2) certain of our new products having higher gross margins, (3)
lower production costs for several of our products, and (4) lower unfavorable
manufacturing variances.
Operating
Expenses
2Q 2009
operating expenses were about $5.0 million, an increase of $581,000, or 13%,
from $4.5 million in 2Q 2008. 1H 2009 operating expenses were $9.9
million, a decrease of $846,000, or 8%, from $10.7 million for 1H 2008. The
following is a more detailed discussion of expenses related to sales and
marketing, general and administrative, and research and product
development.
Sales and
Marketing expenses. S&M expenses include selling, customer
service, and marketing expenses such as employee-related costs, allocations of
overhead expenses, trade shows, and other advertising and selling
expenses. 2Q 2009 S&M expenses increased approximately $356,000,
or 23%, to $1.9 million compared to 2Q 2008 expenses of $1.6 million. As a
percentage of revenue, 2Q 2009 and 2008 S&M expenses were 19% and 15%,
respectively. The 2Q 2009 increase in S&M expenses over 2Q 2008
was due primarily to higher payroll and related expenses associated with higher
S&M headcount in addition to increased sales commissions paid to independent
manufacturer sales representatives. During 1Q 2009, we began paying certain
independent sales representatives commissions directly. These were formerly paid
by certain of our distributors and are partially offset by a channel price
increase to these distributors.
1H 2009
S&M expenses increased about $731,000, or 23%, to $3.9 million compared to
1H 2008 expenses of $3.2 million. As a percentage of revenues, 1H 2009 and 2008
marketing and selling expenses were 19% and 16%, respectively. The 1H 2009
increase in S&M expenses over 1H 2008 is due to higher payroll and related
expenses associated with higher S&M headcount in addition to the payment of
commissions to certain independent sales representatives which were formerly
paid by certain of our distributors.
Research
and Development expenses. R&D expenses include research
and development and product line management, including employee-related costs,
outside services, expensed materials and depreciation, and an allocation of
overhead expenses. 2Q 2009 R&D expenses increased $166,000, or
10%, to $1.8 million compared to 2Q 2008 expenses of $1.7 million. As a
percentage of revenue, 2Q 2009 and 2008 R&D expenses were 18% and 16%,
respectively. The 2Q 2009 increase was due primarily to slightly higher specific
R&D project spending.
1H 2009
R&D expenses increased $187,000, or 5%, to $3.6 million compared with 1H
2008 expenses of $3.4 million. The 1H 2009 increase in R&D
expenses was also due primarily to slightly higher specific R&D project
spending.
General
and Administrative expenses. G&A expenses include
employee-related costs, professional service fees, allocations of overhead
expenses, litigation costs and corporate administrative costs, including finance
and human resources. 2Q 2009 G&A expenses increased slightly to $1.3 million
compared to 2Q 2008 expenses of $1.2 million. 2Q 2009 and 2008 G&A expenses
were 13% and 11% of sales, respectively.
1H 2009
G&A expenses decreased $1.8 million, or 43%, to $2.3 million compared to 1H
2008 expenses of $4.1 million. 1H 2009 and 2008 G&A expenses were 12% and
20% of sales, respectively. The significant 1H 2009 decrease was primarily due
to the 1H 2008 estimation and establishment of a $1.9 million accrual for a
contingent liability. Also, during 1H 2008 we paid Edward D. Bagley, our former
director and Chairman, $200,000 upon his resignation and in consideration for
his service as a director of the Company since 1994.
Operating
income. 2Q 2009 operating income was $767,000 compared to $1.9
million in 2Q 2008. The 2Q 2009 operating income decrease of
approximately $1.1 million was due to the lower revenue and associated gross
profit during 2Q 2009 in addition to the higher operating expenses discussed
above.
The 1H
2009 operating income increase of approximately $1.8 million was primarily a
result of the higher gross profit achieved during 1H 2009 in addition to the non
recurrence of the $1.9 million contingent liability charged to G&A expenses
in 1H 2008.
Other
income, net. Other income, net, includes interest income,
interest expense, capital gains, gain (loss) on the disposal of assets, and
currency gain (loss). 2Q 2009 other income was $96,000 compared to
$311,000 in 2Q 2008. The $215,000 decrease in 2Q 2009 was due primarily to our
lower cash and investment balances in addition to lower interest rates on our
investments compared to the same period last year.
1H 2009
other income was $161,000 compared to $653,000 in 1H 2009. The $492,000 decrease
in 1H 2009 was also due primarily to our lower cash and investment balances in
addition to lower interest rates on our investments compared to the same period
last year.
LIQUIDITY
AND CAPITAL RESOURCES
Net cash
used in operating activities was $2.2 million in 1H 2009, a decrease of $3.8
million from the net cash provided by operating activities of $1.5 million in 1H
2008. The year-over-year decrease can be attributed primarily to an
additional $5.4 million used in 1H 2009 to purchase inventory to stock our new
Asia-Pacific support and fulfillment center, build up safety stock of certain
key products to mitigate stock-outs in addition to taking advantage of volume
discounts in addition to an increase of approximately $718,000 of our accounts
receivable. The 1H 2009 decrease was partially offset by the $900,000 increase
in our net income in addition to our receipt of $908,000 for a previously posted
preliminary injunction bond.
Net cash
flows provided by investing activities was approximately $8.0 million in 1H
2009, an increase of approximately $8.2 million from 1H 2008. During 1H 2009, we
converted approximately $5.2 million of marketable securities to cash to fund
our 1Q 2009 repurchase of common stock. We also converted an additional $3.4
million of marketable securities to cash to support our cash used in operating
activities during 1H 2009.
Net cash
used in financing activities in 1H 2009 totaled $6.8 million for our 1Q 2009
repurchase of 1,342,620 shares of common stock. Net cash (used in)
financing activities in 1H 2008 totaled $1.1 million and was attributed to our
repurchase of approximately 270,000 shares of common stock for $1.7 million,
partially offset by the receipt of $519,000 from the exercise of stock options
and $67,000 related to the tax benefit attributable to the exercise of those
stock options.
Additionally
in 1H 2009, we paid approximately $914,000 in income taxes and exchanged
$446,000 of accounts receivable from a vendor with accounts payable to the same
vendor.
During
October 2008, we accepted offers to repurchase our Auction Rate Securities
(ARSs), at par value, from the two investment banks that sold them to us.
Between November 2008 and January 2009, UBS and Morgan Stanley fulfilled their
offers and repurchased our ARSs, at par value, totaling approximately $12.2
million.
We
currently believe that our present sources of liquidity and capital are adequate
for our current operations and for the foreseeable future.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our
exposure to market risk related to our investment in Auction Rate Securities
(ARSs) has changed since June 30, 2008 as the two investment banks that sold us
our ARSs subsequently repurchased them, at par value, between November 2008 and
January 2009.
Our
exposure to market risk for all other items disclosed in Item 7a of our Form
10-K for the year ended June 30, 2008 has not changed materially since June 30,
2008.
Item
4. CONTROLS AND PROCEDURES
An
evaluation of the effectiveness of our disclosure controls and procedures as of
December 31, 2008 was performed under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief Financial
Officer. Based on that evaluation, our management, including our
Chief Executive Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported as specified in the SEC’s
rules and forms.
There was
no change in our internal control over financial reporting during the quarter
ended December 31, 2008 that materially affected, or that we believe is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
Legal
Proceedings. In addition to the legal proceedings described
below, we are also involved from time to time in various claims and other legal
proceedings which arise in the normal course of business. Such matters are
subject to many uncertainties and outcomes that are not
predictable.
Former Officer
Indemnification. On July 25, 2007, the U.S. Attorney’s Office
for the District of Utah indicted two of our former officers, Frances Flood and
Susie Strohm, for allegedly causing us to issue materially misstated financial
statements for our 2001 and 2002 fiscal years. On January 31, 2008,
the U.S. Attorney’s Office filed a superseding indictment further alleging
perjury in connection with the prior investigation by the SEC into the alleged
misstatements. We are cooperating fully with the U.S. Attorney’s
Office in this matter and have been advised that we are neither a target nor a
subject of the investigation or indictment. In December 2003, we
entered into indemnification agreements with each former officer, requiring
payment of all reasonable attorney’s fees and costs incurred in defending
against the charges in certain circumstances consistent with and subject to
limitations under applicable law. To date, we have paid approximately
$1.8 million in reasonable attorney’s fees and costs to defend against the
charges. We understand that the criminal trial commenced on February
2, 2009. On August 21, 2008, Ms. Strohm and her counsel filed a lawsuit in the
Third Judicial District Court in Salt Lake City, Utah seeking a declaratory
judgment and injunctive relief to compel us to continue to advance Ms. Strohm’s
attorney’s fees and costs to defend against the charges, plus interest for
amounts previously requested and not paid. Also on August 21, 2008,
Ms. Flood filed a lawsuit in Federal District Court for the District of Utah
seeking similar relief. As of December 31, 2008, these former
officers have requested advancement of approximately an additional
$760,000 in legal fees and costs incurred as of that date, which amounts we
have not paid. On January 12, 2009, the Federal District Court in the
Flood lawsuit issued a
preliminary injunction requiring us (1) to pay 60% of Ms. Flood’s
legal fees and costs in the criminal proceeding to Ms. Flood’s attorneys
(as reflected in the invoices submitted by Flood’s attorneys), and (2) to
pay the remaining 40% of Ms. Flood’s legal fees and costs into a court
escrow account. We intend to challenge the Court’s order in this
regard. After the completion of the criminal trial, the Court intends
to make a reasonability determination concerning these fees and costs and the
Court’s order states that “[t]o the extent fees or costs are found to be
unreasonable, the monies held in escrow shall be refunded to
us.” Pursuant to the Court’s order, ClearOne has paid approximately
$97,000 to Ms. Flood’s attorneys and approximately $64,000 into the Court’s
escrow.
We have
accrued for legal fees and costs of the probable amount we were able to estimate
of our contingent liability under the indemnification agreements at December 31,
2008. In accordance with Statement of Financial Accounting Standards
No. 5, “Accounting for Contingencies,” we have accrued a total of $3.3 million,
the balance of which was about $1.5 million at December 31, 2008 representing
the probable amount that, as of the date of the financial statements, could be
reasonably estimated of our contingent liability, through trial, under the
indemnification agreements if required under applicable law. In
accordance with SFAS No. 5, we will adjust our contingent liability, as
necessary, to reflect the probable amount that can be reasonably
estimated. Our actual liability may be higher or lower than our
estimate upon final resolution of the matter. We will adjust our
contingent liability, as needed, so that it remains an estimable and probable
amount of our contingent financial liability as of the date of issuance of the
applicable financial statements.
Theft of
Intellectual Property and Copyright Complaints. During
January 2007, we filed a lawsuit in the Third Judicial District Court, Salt Lake
County, State of Utah against WideBand Solutions, Inc. and two of its
principals, one of which was a former employee named Dr. Jun Yang, and one of
which was previously affiliated with an entity that sold certain assets to us
(the “Intellectual Property Case”). We also brought claims against
Biamp Systems Corporation, Inc. The matter was subsequently removed
to federal court, the United States District Court, District of Utah, Central
Division. The case is styled ClearOne Communications, Inc. v. Jun
Yang, et. al. Civil No. 2:07-co-37 TC. The complaint brought
claims against different combinations of the defendants for, among other things,
misappropriation of certain trade secrets, breach of contract, conversion,
unjust enrichment and intentional interference with business and contractual
relations, primarily in relation to certain algorithms and computer
code. The relief being sought by us includes an order enjoining the
defendants from further use of our trade secrets and an award consisting of,
among other things, compensation and damages related to the unjust enrichment of
the defendants. The court subsequently granted leave to add a third WideBand
principal as a defendant to the case. In August 2007, we filed a motion for a
preliminary injunction in the Intellectual Property Case, in the United States
District Court, District of Utah, seeking to enjoin Wideband Solutions, Inc.
from licensing certain technology we believe constitutes our intellectual
property and trade secrets to Harman Music Group, Inc. On September
13, 2007, the court in the Intellectual Property Case granted us leave to add
Harman and a former ClearOne employee working for Harman as defendants in that
case. For procedural reasons, these claims against Harman and the
Harman employee were refiled in Utah state court, the Third Judicial District
Court for Salt Lake County, on September 18, 2007 (the “Harman
Case”). Like the Intellectual Property Case, the Harman Case also
brings claims related to the theft and misuse of our confidential and trade
secret information. Harman filed a motion to dismiss the case, which
was denied by the Court on January 5, 2009. On January 30, 2009,
Harman filed an answer to our claims and filed a counterclaim for bad faith,
which we believe has no merit, including because it was already rejected in
principle by the court’s denial of Harman’s motion to
dismiss.
During
October 2007, in the Intellectual Property Case, the court issued an injunction
ordering Dr. Yang and others under his direction from working on or delivering
any source or object code to Harman until the completion of the
trial. During November 2007, the same court required us to post a
bond of approximately $908,000, which was subsequently reduced to
zero.
During
October 2007, we filed a second action against WideBand and the same three
principals named as defendants in the Intellectual Property Case, this time
alleging copyright infringement (the “Copyright Case”). The claims in the
Copyright Case arise out of a copyright issued to us for the same intellectual
property, including the algorithms and computer code that is the subject of the
claims in the Intellectual Property Case. The relief being sought by
us includes an order enjoining the defendants from further use of our
copyrighted material, and an award consisting of, among other things,
compensation and damages related to the copyright infringement. The
Copyright Case was eventually consolidated with the Intellectual Property
Case.
On May
12, 2008 the court granted us leave to add Versatile DSP, Inc. as a defendant to
the Intellectual Property Case.
During
June 2008, we filed a separate action in the United States District Court,
District of Utah, Central Division, against an affiliate of WideBand and Donald
Bowers, with claims for declaratory judgment, fraudulent transfer under Utah
law, and misappropriation of trade secrets (the “Fraudulent Transfer
Case”). On June 26, 2008, the United States District Court entered an
order granting our request for a temporary restraining order against any sale or
transfer of ownership of certain assets of WideBand to its affiliated entity,
and imposed certain prohibitions against any sale or transfer of ownership of
certain of WideBand’s computer code and related algorithms and against any
transfer of profits from the disputed code. Based upon this order and
representations to the court that the purported sale involving WideBand had been
rescinded, the court dismissed the Fraudulent Transfer Case without
prejudice.
Trial of
the Intellectual Property Case commenced on October 20, 2008. Prior
to trial, the Court dismissed certain claims for various legal and other
reasons, and the copyright claims were also not presented to the
jury. Accordingly, at trial ClearOne pursued theft of trade secret
claims against all defendants (including Biamp), breach of contract and breach
of the covenant of good faith and fair dealing claims against Jun Yang, and
breach of fiduciary duty claims against Jun Yang and Andrew
Chiang. On November 5, 2008, the jury returned a verdict in our favor
and awarded us approximately $3.5 million in compensatory damages and $7.0
million in punitive damages. Among other things, the jury found that
all of the Defendants willfully and maliciously misappropriated our trade
secrets. Based on that finding, the court may also award us
additional exemplary damages. The court may also award us reasonable
attorneys’ fees. The court left in place the previously-entered
preliminary injunction, pending our application for entry of a permanent
injunction against the Defendants. While we intend to vigorously
pursue collection of the damage awards, collectability of the judgments cannot
be guaranteed. Furthermore, the jury’s verdict and damage awards are
subject to post-trial challenges and appeal by one or more of the
Defendants.
After the
trial, we sought an expansion of the Court’s previously entered preliminary
injunction order. On February 4, 2009 an order was issued expanding
the scope of a previously issued preliminary injunction order, and prohibiting
WideBand Defendants, and others acting in concert with WideBand, from (among
other things) the use, sale or marketing of our trade secrets and WideBand’s
infringing products found to use these trade secrets.
On
February 10, 2009, the Court in the Intellectual Property case held a hearing on
a number of issues raised by us. As a result of this hearing, the
Court ordered that the Fraudulent Transfer Case against the affiliate of
WideBand and Donald Bowers would be reinstated, and that we would be allowed to
conduct certain discovery and undertake other actions to protect against
encumbrance of WideBand’s assets.
The Court
has scheduled a hearing on our request for entry of final judgment, exemplary
damages, and attorney fees, for March 13, 2009.
Ernst & Young Matter. The
commencement date of the arbitration proceedings in our claim for damages
against Ernst & Young has been rescheduled to July 9, 2009.
Item
1A. RISK FACTORS
In
addition to other information set forth in this Report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K/A for the year ended June 30, 2008, which could materially
affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K/A are not the only risks we
face. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially and adversely affect
our business, financial condition and/or operating results.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Not
applicable.
Item
3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
November 14, 2008, we held our 2008 Annual Meeting of Shareholders at which
shareholders considered and voted to elect the following individuals to serve as
directors with a term expiring at our 2009 Annual Meeting of
Shareholders:
|
VOTES
|
|
FOR
|
WITHHELD
|
Brad
R. Baldwin
|
7,073,530
|
555,480
|
Zeynep
“Zee” Hakimoglu
|
7,165,760
|
463,250
|
Larry
R. Hendricks
|
7,087,667
|
541,343
|
Scott
M. Huntsman
|
7,186,130
|
442,880
|
Item
5. OTHER INFORMATION
Not
applicable.
Item
6. EXHIBITS
Exhibit
|
|
|
No.
|
Title of Document
|
Location
|
31.1
|
Section
302 Certification of Chief Executive Officer
|
This
filing
|
31.2
|
Section
302 Certification of Principal Financial Officer
|
This
filing
|
32.1
|
Section
906 Certification of Chief Executive Officer
|
This
filing
|
32.2
|
Section
906 Certification of Principal Financial Officer
|
This
filing
|
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ClearOne
Communications, Inc., a Utah corporation
|
|
|
|
|
|
|
|
|
|
February
13, 2009
|
By:
|
/s/ Zeynep Hakimoglu
|
|
|
Zeynep
Hakimoglu
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
February
13, 2009
|
By:
|
/s/ Greg A. LeClaire
|
|
|
Greg
A. LeClaire
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial and Accounting Officer)
|
22