The U.S. Securities and Exchange Commission Wednesday accused Salt Lake-based ClearOne Communications of misleading investors and inflating its revenues and earnings since at least March 2001 in order to meet the company's earnings projections.
The complaint, filed in U.S. District Court, alleges that ClearOne (formerly Gentner Communications), with the knowledge and direction of two of its executives, "overstated revenues, income and accounts receivable by recording certain transactions with its distributors and resellers as sales when in fact the transactions did not meet the requirements of generally accepted accounting principles for sales."
The complaint alleges the violations reach back to early 2001 when "it became apparent to (ClearOne head Frances Flood) that ClearOne would not meet its sales and revenue projections for the quarter ended March 31, 2001."
ClearOne Communications officials declined to comment Wednesday, stating they had not had time to examine the charges.
Ken Israel, SEC district administrator, said the commission was tipped off by a ClearOne insider, who raised suspicions about the company's performance.
"The company has been something of a high-flier as of recently," Israel said. "We're alleging that they've achieved those consistent increases in earnings and revenues through illegally recognizing revenue when they shouldn't have."
Israel said the SEC believes ClearOne engaged in a process called "channel stuffing." In each financial quarter since March 2001, the SEC complaint alleges that "ClearOne would 'sweep the floor' of its inventory, stuff the distribution channels with ClearOne products and force distributors to accept product that they did not want. ClearOne would then enter into undisclosed verbal agreements with its distributors and resellers whereby the distributors and resellers agreed to pay for the ClearOne merchandise as it was sold rather than in accordance with the written contracts ClearOne had with those entities."
The company then recorded revenue and accounts receivable for those transactions, contrary to GAAP, the documents state.
"In a couple of the most recent periods, their net income was overstated by 25 percent," Israel said. "And that's a pretty conservative estimate."
The SEC implicates Flood, ClearOne chairman, president and chief executive officer, as well as Susie Strohm, the company's chief financial officer. According to the charges, Flood "designed, advocated and approved the transactions that resulted in ClearOne's material overstatement of revenue, accounts receivable and income." The SEC alleged that Flood directed ClearOne employees to "dump" product onto the company's distributors and resellers and devised the repayment scheme allowing distributors to pay for the merchandise only when it was sold to customers.
Strohm, the SEC alleged, knew of the company's activities and allowed ClearOne to lie about its performance to the commission.
The company's alleged activities included millions of dollars worth of merchandise, some of which was outdated or obsolete, the complaint stated.
The SEC seeks injunctions against ClearOne, Flood and Strohm against future violations of SEC regulations; disgorgement of "ill-gotten gains" by Flood and Strohm; civil money penalties; a bar prohibiting Flood and Strohm from serving as officers or directors of any public company; and the imposition of an independent monitor to oversee some of ClearOne's operations.
Israel declined to comment whether the SEC would refer the case for criminal investigation.
ClearOne, which specializes in audio- and videoconferencing products and services, reported a net loss of $1.2 million, or 10 cents a share, on sales of $13 million for its first fiscal quarter ended Sept. 30, 2002. At the time, ClearOne blamed the loss on a slowdown of sales of its core conferencing products and projected that its second quarter sales would remain flat.
Last September, the company announced it was letting go 20 percent of its total work force of 311 employees, or roughly 62 people.
For the fiscal year ended June 30, 2002, ClearOne reported net income of $7.4 million, or 74 cents per share, on sales of $54.5 million. That compared with net income of $5.5 million, or 61 cents per share, on sales of $39.9 million for the previous fiscal year. In October 2001, ClearOne/Gentner was ranked 18th on a Forbes magazine list of the top 200 small companies in the United States.
In 2000, Flood was honored as one of Utah's 50 most powerful women in business.
ClearOne stock was down 13 cents, or about 3 percent, at $3.83 per share in early trading Wednesday. The stock has ranged in price from $2.82 to $18.80 in the last year.
The company is scheduled to announce earnings for its second quarter of fiscal 2003 before the market opens Thursday, Jan. 23.
E-MAIL: jnii@desnews.com