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By mklein9
August 19, 2005

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After sleejohnson's really excellent work, here's my impressions from the 10-K.

In many cases I came up with similar number that sleejohnson did, but with a few exceptions (or I took a somewhat different approach):

* In looking at operating performance, I considered only the "Product" category (since everything else is being divested), and so only looked at COGS and SG&A costs in rough proportion of Product sales to total sales. In FY2003 my rough proportion was only 1/2 because Product sales to total sales was only 48% whereas in previous years it was higher, up to 60%. So for example, I came up with total G&A expenses in FY2003 of $7.8 million after backing out my estimate of $10.2 million of one-time expenses related to all the bad stuff Flood and Strohm did. So I charged 1/2 of that, or $3.9 million. Same with Sales & Marketing. But I kept the full R&D. Hopefully that balances out OK more or less.

* I tried calculating Operating Income (actually, EBIT) using the above strategy and got about a ($1.4 million) loss for FY03. FY02 was a positive $0.8 million and FY01 $2.9 million. So even in a really bad year where everything was falling apart, the continuing operations more or less treaded water, sinking just a bit. In any case, aside from the known liabilities ($5 million settlement, $2 million rough additional audit and legal fees) it is very unlikely we will be seeing large real losses in FY04 and FY05 ("real" meaning those actually affecting cash). FY04 may not look all that great yet but I would expect FY05 to be pretty good, but those are definitely guesses.

* I agree, the balance sheet looks pretty good. There is insignificant debt (they couldn't borrow anything anyway with their current credit rating :-) Current Account has gotten much more reasonable (lower AR and inventories than FY02). Fixed capital is really quite small ($7 million) -- that is great news for ROIC.

* In trying to figure out the current cash position, I subtracted a bit more stuff, specifically the likely growth in AR and Inventory to support growth. I also assumed that for FY04 and FY05 the cash flow from operations would only just meet the required cash flow for investing (CapEx). Here is the estimate:


Item                     FY03     FY04     FY05
===============================================
Class settlement                ($2.5)   ($2.5)
Add'l acct & legal fees         ($1.0)   ($1.0)
Incr in Current Acct            ($2.0)   ($2.0)
Net proceeds, divest                     $21.5
-----------------------------------------------
Total Cash & Equiv:      $8.2    $2.7    $18.7

That's more conservative than sleejohnson's $25 million.

Stock: a little unclear to my reading. There are 11.3 million outstanding at 7/31/05. On page 24 the 10-K lists 2.6 million options as of the end of FY03, counting both exercisable and available for future issuance under compensation plans. It is not clear how many of these have been exercised or have expired that I saw. So there doesn't seem to be a single set of consistent numbers (at a single date). Also there are 1.0 million shares yet to be issued as part of the civil settlement (they haven't been issued as of 7/31/05). I'm going to go with 15 million shares to be conservative on this.

So cash/share with this method is $1.25, not too far from sleejohnson's estimate but I think I'm being pretty conservative. Total shareholder equity should also increase from $18.7 million at the end of FY03 by the same amount as cash plus the additional current account balance to a total of about $33 million, or $2.20/share.

So the entire business' cash generating capability is being offered to us for something around $2-$3 a share right now depending on how you want to value the assets per share. Valuing the earnings potential is hard right now. I would expect (see comments below) that earnings will be growing much faster than revenues for a while. It's probably too early to try to estimate profit margins, growth rates, and P/E multipliers at this point but if anyone can try, please do....

Note, the cash ending numbers assume zero contribution by the business over and above the investment required for CapEx and any other investment, so they could be higher (although probably not by a lot). They haven't done any acquisitions, and the Inovar agreement may also bring some cash in (not sure).

Other items:

* I really liked the 10-K. It was well written and very clear, although long. I did not read the contracts and agreements that form the back 1/2.

* I also really liked this comment (page 41): We have refocused our organization on our original core competency, which is where we intend to keep our focus for the foreseeable future. The core competency is audio conferencing and they appear to have some good technology originally from Gentner. And the best part: the core technology is the one that produces the highest margins, they are basing all their new products on their core technology, and they've even outsourced manufacturing to reduce costs further. I get a pretty good feeling that management knows what they're doing.

* Reading about the acquisitions and divestitures is quite interesting. They went on a binge in 2002 especially, and all of them turned out badly. All acquisitions in the 2000-2002 timeframe have been either written off as worthless or sold at this point -- even the one that gave them the ClearOne name (which was video teleconferencing).

-Mike


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