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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended JUNE 30, 1998
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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 0-7219
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GENTNER COMMUNICATIONS CORPORATION
(Name of small business issuer 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)
Issuer's telephone number (801) 975-7200
Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year ended June 30, 1998 were
$17,267,886.
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The aggregate market value of the voting stock held by non-affiliates is
approximately $10,700,000 at September 1, 1998. This value was computed by
reference to the price at which the stock traded ($1.88) on September 1, 1998
(which date is within 60 days of the filing of this Form 10-KSB).
The number of shares outstanding of the issuer's Common Stock as of September 1,
1998 was 7,750,095.
PART I
ITEM 1. BUSINESS
OVERVIEW
Gentner Communications Corporation (the "Company") was organized under the laws
of the State of Utah on July 8, 1981 as Gentner Engineering Company, Inc. On
March 26, 1985, Gentner Engineering Company went public by way of a reverse
purchase when a shell corporation, Insular, Inc. (incorporated in Utah on July
8, 1983), acquired Gentner Engineering and changed its name to Gentner
Electronics Corporation. On July 1, 1991, Gentner Electronics Corporation
changed its name to Gentner Communications Corporation to more accurately
reflect the expanding nature of its business.
The Company develops, markets and distributes products for the broadcast,
audioconferencing and assistive listening markets. Until 1991, the Company's
primary business was the sale of studio and transmitter related equipment to
broadcast facilities. Since then, the Company has applied its core digital
technology to the development of products for the telecommunications and
assistive listening markets. In addition, the Company offers a conference
calling service.
The Company initially began selling its products to the telephone interface
portion of the broadcast market. This product line is primarily used to put
callers on the air for call-in talk shows. Additionally, the Company sells
remote facilities management systems that help engineers monitor and control
remote transmitter sites for the broadcast market. During fiscal year 1998, the
broadcast market accounted for 36% of the Company's total sales.
In 1991, using the technological expertise gained in the broadcast market, the
Company commenced marketing products specifically developed for the
audioconferencing market. The Company's audio teleconferencing products provide
users with a natural, two-way method of conversation without the cut-offs,
distortion, and noise associated with traditional speakerphones.
Teleconferencing products are installed in conference rooms, courtrooms, and
distance learning facilities. In fiscal 1993, the Company enhanced its
telecommunication offerings with Gentner Conference Call(SM) (1-800 LETS
MEET(R)), a comprehensive conference calling service. Sales of products and
services to the teleconferencing market accounted for 51% of the Company's total
sales during fiscal 1998.
The Company also has other sources of revenue that account for the remaining 13%
of sales, which include assistive listening products, product repair and various
other products.
BUSINESS STRATEGY
For fiscal year 1999, the Company plans to increase its efforts in the areas of
remote facilities management and international business. To accomplish this, it
has created two distinct business divisions, Remote Facilities Management and
Gentner Products and Services, as well as an international sales and marketing
team. Each has undergone extensive research to ensure that its markets offer
growth opportunities that are congruent with the Company's overall objectives.
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The Remote Facilities Management (RFM) division is focused on increasing the
Company's share of the broadcast market as well as expanding RFM product lines
into complementary markets such as the communications industry and government
services.
The Gentner Products and Services division is responsible for the following
areas: Room System Audioconferencers, Assistive Listening Systems, Conference
Call Services, and Educational Services. Through this division the Company
intends to broaden its product and service offerings in the conferencing market
by providing a greater share of technology and service solutions.
The Company's products and services help businesses facilitate group
communication, avoid wasted travel time, solve problems through group input, and
get faster results. Sales growth is expected to come through growth in
conference calling services, new equipment introductions and enhancements,
increased international distribution, and an increase in the total number of
dealers/distributors.
The Company's international sales and marketing team is dedicated exclusively to
the development of a distribution channel of dealers throughout the world. The
major product lines promoted in international markets are room system products,
telephone interface products and RFM products.
PRODUCTS AND SERVICES
Telephone Interface Products
The Company continues to market and develop new products and enhancements for
its telephone interface product line. The Company has developed strong brand
awareness in this market and has experienced continued sales growth. While
domestic growth for telephone interface products is limited by the small size of
the market, the international market is expanding and continues to offer strong
growth opportunities.
The Company's telephone interface product line offers 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 talk-show programs. An example of the computerized multi-line
system is the Company's TS612, which it began selling in fiscal 1995. Using the
TS612, talk-show hosts can screen calls, bring callers on-air, conference
several callers together, or monitor whether callers are on hold or talking to
the show's producer. The Company currently has a 60% share of the domestic
telephone interface market, with potential for the largest growth in
international markets.
Remote Site Control Products
RFM products help broadcasters fulfill legal requirements for monitoring and
controlling their transmitters, which are often located in remote areas such as
on mountaintops. The Company's products provide monitoring of conditions at the
transmitter site and permit users to make adjustments to transmitters by remote
control. Components of the system offer users the option of monitoring and
making such adjustments using either a desktop computer or touch-tone telephone.
In fiscal 1997, the Company began shipping the GSC3000 product series. These
hardware and software products are designed to augment the Company's existing
transmitter site control products by permitting station managers to monitor
several different sites using the same equipment. The GSC3000 has enjoyed
better-than-expected sales performance.
Room System Audioconferencing Products
In 1991, the Company applied the digital technology developed in its broadcast
telephone products to develop a line of audio teleconferencing products that is
used in conference rooms, distance learning facilities and court rooms. These
products are used to provide high quality audio teleconferencing, improving the
audio quality of speakerphones, video teleconferencing products, and sound
systems. The Company's products are used, for example, by the North Carolina and
Indiana school systems as the audio portion of their video teleconferencing
system in distance learning classes. The Company's products are also used by the
Federal Bankruptcy Courts in San Jose for audio teleconferencing and sound
reinforcement. The Company has become well known for these types of quality
products.
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Recently the Company introduced and began shipping a new line of
audioconferencing products under the brand name of Audio Perfect(TM). The Audio
Perfect(TM) product line currently consists of the AP800, AP10 and AP Tools.
The AP800 is a comprehensive room audio control system designed to excel in the
most demanding acoustic environments and routing configurations. Typical
applications include hotel and convention center conference rooms, courtrooms,
corporate boardrooms and distance learning facilities. It is also used for
integrating audio with video conferencing systems.
The AP800 performs the combined functions of several audio devices, including an
eight-channel automatic microphone mixer, a 12 X 12 matrix mixer, an audio
processor, an equalizer and an audio network controller. It also functions as an
echo canceller using a new digital technology called Distributed Echo
Cancellation(TM) (D.E.C.). Before D.E.C., only one echo canceller was used to
eliminate acoustic echo during a call. With D.E.C., an echo canceller, an
equalizer and an audio processor are placed on every microphone input, yielding
crystal-clear audio in a greater variety of environments.
The AP10 is used with the AP800 as a telephone interface to connect
audioconferencing participants via a telephone line. Each Audio Perfect(TM)
system can be expanded to interface with up to eight AP800's and 16 AP10's,
providing a network of up to 16 phone lines, 32 line inputs, and 64 microphones,
all operating as a single unit.
AP Tools is PC-based software designed to enhance the Audio Perfect(TM) family
of products. AP Tools simplifies the set-up, configuration and operation of the
Audio Perfect(TM) system by employing a graphic user interface. The graphic
orientation provides access to the same features available via the front panel
controls of the AP800 and AP10, but does so in a manner that is more
user-friendly. AP Tools can control an entire Audio Perfect(TM) system using
only one serial connection, and can communicate with AP units both locally and
remotely via modem.
The Company believes that its Audio Perfect(TM) product line will provide its
customers with significantly better performance with less equipment and
complexity. The Company also believes there is a much larger market for its new
line of teleconferencing products, particularly when combined with the Company's
conference calling service.
Assistive Listening Products
In March 1993, the Company began shipping its Assistive Listening System (ALS)
products. These products help the Company's customers comply with the Americans
with Disabilities Act (ADA) by provide amplified audio for hearing impaired
people in public places such as theaters, houses of worship, schools,
courtrooms, stadiums and arenas.
Conference Calling Service
In February 1993, the Company launched its conference calling service to provide
customers with a complete offering of teleconferencing solutions. Gentner
Conference Call(SM) (1-800 LETS MEET(R)) can connect many different telephone
callers worldwide with superior service and excellent clarity. The Company saw
significant growth from this segment during the last fiscal year as a result of
hiring a dedicated sales force to target businesses that need conference calling
services. The Company believes opportunity exists in pursuing vertical markets
for its products and services in conference rooms, distance learning facilities
and courtrooms. The Company believes these vertical markets will be responsive
to a higher level of quality and service, which it can provide with its premium
products and services.
MARKETS
Teleconferencing Market
The Company believes that there is significant growth potential in the U.S.
teleconferencing market. Frost & Sullivan, an international marketing consulting
company that publishes market research reports, projects the teleconferencing
market to grow to over $24 billion by 2003.
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The teleconferencing market is made up of the audio, video and data conferencing
segments. Sales to the audio segment of the market represented approximately 51%
of total Company sales in fiscal 1998. During fiscal 1998, the Company entered
the data conferencing market by partnering with Broadband Associates, Inc. to
add Broadband's "M.Show(TM)" distance presentation service to its portfolio of
conference calling services. The Company expects to realize increased revenue
from this service during fiscal 1999. Although the Company designs and
manufactures audio equipment that works in connection with the videoconferencing
segment, it specializes in the audio portion of the teleconferencing market.
Products and services sold by all companies to the teleconferencing market
include terminal equipment, telephone bridge equipment, and conference calling
services and transmission services. The Company's primary focus is in the
terminal equipment and conference calling service categories.
The Company believes that the audioconferencing segment of the teleconferencing
market provides significant sales growth potential for the future, and plans to
continue providing solutions to businesses and other end users through the sale
of teleconferencing equipment and services.
Broadcast Market
For fiscal 1998, the broadcast market, which is served by telephone interface
and remote facilities management products, generated 36% of the Company's total
sales. The Company's products are targeted and sold to radio and television
stations, broadcast networks and other professional audio customers.
The Company believes that the worldwide market for its telephone interface and
site control products is approximately $40 million. The Company believes it has
a worldwide market share of approximately 15%. The United States is considered
to be the predominant segment of the worldwide broadcast market, with over
12,000 radio and television stations in operation. The Company estimates that
the U.S. market will grow at an average annual rate of approximately 5%.
The Company's products are sold to upgrade studios and transmitter sites.
Although little new broadcast-station construction has taken place in the United
States over the past several years (due to the limited number of frequencies
that become available at any given time), the Company believes that it will
continue to experience growth in the broadcast market through international
opportunities and as product innovations allow broadcast stations to upgrade
their existing equipment and reduce operating costs.
The Company has also noted a recent organizational shift in the broadcast
industry, as an increasing number of stations have come under consolidated
ownership and/or management control. The Company expects this trend to continue
over the next few years, and believes its broadcast products are especially
suited to provide sales growth during this trend as its newer site control
products provide centralized monitoring and control of several facilities.
The Company has traditionally concentrated its efforts on selling its products
in the United States. However, while the United States is considered to be the
largest single broadcast market segment in the world, it is believed to
represent only 20% of the total worldwide broadcast market. The international
broadcast market is expanding as a result of government deregulation and
privatization of stations and the increasing number of frequencies available for
commercial use. In 1991, the Company began focusing efforts on expanding its
international market share and has appointed dealers located in key areas around
the world (see "Description of Business-Distribution"). Such international
broadcast sales accounted for 26% of all sales by the Company to the broadcast
market in fiscal year 1998.
Other Markets
In addition to broadcast and teleconferencing markets, the Company's products
are sold into other markets, primarily the professional audio market. The
professional audio market includes sound contractors who install audio and other
equipment in churches, schools, auditoriums and other large facilities. The
Company sells its products into this market generally through the same
manufacturers' representatives and dealers that represent the Company in the
teleconferencing market. The products sold to this market are primarily the
telephone interface products, teleconferencing products and ALS products.
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MARKETING AND SALES
Teleconferencing systems sales efforts are primarily aimed at audio/visual
equipment dealers and consultants. These companies, in turn, provide audio
solutions to end users in applications such as audio and video corporate
boardroom systems, distance learning facilities, telemedicine examination and
diagnosis systems, and court rooms. The Company reaches these end users through
a sales representative and dealer network that regularly interacts with
potential end users in the target market. The Company actively participates
alongside this network at communication forums, trade shows and industry
promotions. The Company intends to reinforce those efforts and increase sales by
remaining involved in the distribution network and to offer training through
"Gentner University" (an educational and training setting where dealers can
obtain training on the Company's products and services).
Historically, the Company relied on its existing sales force and outside
representative network to sell its conference calling service. During fiscal
year 1998, the Company continued to increase its direct sales staff in an effort
to increase sales for the Company's services and to work in tandem with its
dealer network. The Company believes that it has the potential to cross-sell its
products and services by partnering with key dealers. The Company believes its
strategic advantage is that it can provide higher quality products and services
as a package for organizations that require premium, mission critical solutions
for their teleconferencing needs.
Additionally, the Company has currently formed, and is pursuing additional,
strategic alliances with companies promoting Internet technologies. The Company
believes that through these strategic alliances it will not only have the
opportunity to sell its own services, but also to re-sell the services of its
strategic partners.
Due to the large size of the conferencing market and its potential for intense
competition, the marketing of teleconferencing products and services will
continue to require substantial marketing resources and research and development
efforts. To this end, the Company will continue to seek highly trained and
experienced personnel. Additionally, the Company has aggressively focused on
research and development to create an expanded and, what the Company believes to
be a technologically superior line of products. The Company's strategy continues
to be to sell its teleconferencing products through national and international
dealers who focus on integrating conferencing facilities for organizations.
Sales efforts for the Company's telephone interface and RFM products focus on
the domestic and international sale of these products through a worldwide
network of dealers. Such efforts have included a combination of product
catalogs, trade shows, telemarketing, direct mail, trade advertising, fax on
demand, an Internet Web-page and direct selling. The Company will continue to
support dealers with product information, brochures and data sheets, and has
been increasing its activities aimed at garnering the attention of end users.
The Company will continue to sponsor sales promotions to encourage dealers to
feature the Company's products, and will also focus more on end-user interaction
efforts. The Company will also continue to exhibit its products at high-profile
industry trade shows to ensure that its products remain highly visible to
dealers and broadcasters.
TECHNICAL SUPPORT
Technical support, which is generally conducted over the telephone and sometimes
on site, provides timely, interactive help to customers needing operational or
technical assistance with their products. The Company's technical support team
regularly communicates with the Company's engineering and manufacturing groups
to ensure that customer feedback can be directed toward initiating product
improvements and incorporated into future products. The technical support team
provides a vital role in solving customer problems and building customer
confidence. The Company has focused its resources to ensure that strong
technical support to its customers remains a competitive advantage.
WARRANTY AND SERVICE
The Company provides a one-year warranty on its products, which covers both
parts and labor. The Company, at its option, repairs or replaces products that
are defective during the warranty period if the proper preventative maintenance
procedures have been followed by customers. Repairs that are necessitated by
misuse of such products or that are required outside the warranty period are not
covered by the Company's warranty.
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In case of a defective product, the customer typically returns it to the
Company's facility in Salt Lake City, Utah. The Company's service personnel then
replace or repair the defective item and ship it back to the customer.
Generally, all servicing is done at the Company's plant, and the Company charges
its customers a fee for those service items that are not covered by warranty.
The Company does not offer its customers any formal written service contracts.
DISTRIBUTION
Teleconferencing Products
The Company sells its teleconferencing systems and components through
independent audio/visual equipment dealers and consultants. The Company also
uses a national network of independent sales representatives. Currently, most of
the Company's teleconferencing system sales are in the United States. The
Company's primary strategy for foreign expansion is to establish dealers and
master distributors in markets where it believes there is a growing need for
products and services of the type offered by the Company.
The Company distributes products to the professional audio market via this same
network of sales representatives and to independent sound contractors. These
products include the Company's Assistive Listening Systems (ALS) product line.
Teleconferencing Services
The Company primarily sells its conference calling service through telemarketing
directly to end users, and continues to expand its activities and the number of
employees in this area. The Company utilizes this sales force in selling certain
teleconferencing products directly to end-users. The Company also sells services
through its product dealers and independent representatives and provides
wholesale conference calling services to several long distance companies.
Telephone Interface and Remote Facilities Management Products
The Company's telephone interface and RFM products are generally sold in the
United States through non-exclusive, independent broadcast equipment dealers.
End users generally place orders with a dealer by calling a toll free number.
The market is highly competitive, and it is not unusual for a customer to call
several dealers to get the best possible price. Once a customer orders
equipment, a dealer orders the product from the Company to be shipped directly
to the customer or, in some instances, ships the product to the customer from
the dealer's inventory.
The Company's has several dealers that are also manufacturers of communications
systems and equipment. The largest of these is the Company's predominant dealer
in the Broadcast market and is believed by the Company to be the dominant
supplier of equipment for radio stations in the United States. Sales to this
dealer represent a significant portion of Company sales, accounting for
approximately 7% of the Company's total sales in fiscal 1998, and 12% and 11%
during fiscal 1997 and fiscal 1996 respectively. However, the Company believes
that if it were to lose this dealer, it could sell its products to end-customers
either directly or through other dealers.
With respect to international sales, the Company has established, and continues
to establish, international relationships with dealers for its broadcast
products in Europe, Canada, Asia, the South Pacific and Latin America.
COMPETITION
The principal competitive factors in the Company's markets include innovative
product design, product quality, established customer relationships, name
recognition, distribution and price.
The Company believes that its ability to successfully compete in the
teleconferencing market is essential to the Company's growth and development.
There are other companies with substantial financial, technical, manufacturing
and marketing
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resources currently engaged in the development and marketing of similar products
and services. Some of these companies have launched products competitive with
those being developed and manufactured by the Company. However, the Company has
used its core digital technology to produce what it believes to be superior
audio teleconferencing systems and equipment. The Company believes it is the
only provider of both high-end teleconferencing products and mission critical
conference calling services, and feels it can uniquely position itself in the
rapidly expanding teleconferencing market.
In the telephone interface and RFM markets, the Company has several competitors
in each of its product lines. There is not, however, any single competitor who
directly competes with the Company in all such product lines. Although some of
the Company's competitors are smaller in terms of annual revenues and
capitalization, such competitors usually focus on a single product line. They
can therefore devote their resources to products that are directly competitive
with, and which may adversely impact sales of, the Company's products. However,
the Company's name is well known with respect to its products. This advantage,
coupled with the Company's size, will likely enable it to preserve and increase
its market share.
RESEARCH AND PRODUCT DEVELOPMENT
The Company is highly committed to research and product development. The Company
views its investment in research and product development as a key ingredient to
long-term business success. The Company expended $1,142,605, $1,046,757 and
$929,132 on research and product development in the fiscal years ended June 30,
1998, 1997 and 1996, respectively.
The Company is continually developing new products and services. Current
research and product development efforts are focused on the teleconferencing
system products, broadcast telephone interface products and enhancements to the
RFM product family. The Company also invests resources in refining existing
products. Moreover, the Company continues to allocate resources to obtain and
maintain product regulatory compliance, both domestically and internationally.
The Company's core technological competencies include many areas of
telecommunications and telephone acoustic echo cancellation. The Company's
capability to use Digital Signal Processing (DSP) technology to perform audio
processing operations is also a core competency. This technology is critical to
the performance of the Company's products.
The Company maintains an internal computer aided design (CAD) team. This team
creates the necessary electrical schematics, printed circuit board designs,
mechanical designs, and manufacturing documentation to support the research and
product development efforts. The Company's CAD and product design teams use
networked computing systems and sophisticated software programs to facilitate
all aspects of product development.
The Company believes that ongoing development of its core technological
competencies is vitally important to future sales.
PATENT AND PROPRIETARY RIGHTS
Trade secrets, proprietary information, and technical know-how are important to
the Company's scientific and commercial success. The Company currently relies on
a combination of trade secrets and nondisclosure agreements to establish and
protect its proprietary rights in its products.
The Company currently holds a federal registered servicemark for 1-800 LETS
MEET(R), and federal registered trademarks for GENTNER(R), and "GENTNER(R)" (as
both the name and logo). In addition to these registered servicemarks and
trademarks, the Company has federal applications pending for the following
trademarks: AUDIO PERFECT(TM), and DISTRIBUTED ECHO CANCELLATION(TM). In
addition, the Company has federal applications pending for the following
servicemarks: WE PUT THE WORLD ON SPEAKING TERMS(SM), and COMMUNICATION AUDIT
PROCESS(SM).
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GOVERNMENT REGULATION
The Company designs and manufactures its equipment in accordance with the
technical design standards of the Federal Communications Commission (FCC) Part
15 and Part 68. Part 15 of the FCC Rules governs the levels of electromagnetic
radiation emanating from commercial computing equipment. The Company endeavors
to conform all of its products covered by Part 15 of the FCC Rules based on
testing performed at a FCC approved testing facility. Part 68 of the FCC Rules
sets forth standards for telephone equipment that is intended to be connected to
the Public Switch Telephone Network (PSTN) used within the United States. The
Company's applicable telecommunications products are tested by an independent
testing laboratory and are registered with the FCC.
The Company also designs and manufactures its equipment pursuant to industry
product safety standards. The Canadian Standards Association (CSA), an approved
Nationally Recognized Testing Laboratory (NRTL) under direction of the
Occupational Safety and Health Administration (OSHA), tests all products and
performs quarterly audits for continuing compliance to applicable safety
standards.
Several of the Company's products are currently registered for sale in various
international markets. The Company must conform to design standards similar to
those of the FCC and CSA in each of the foreign countries in which the products
are sold.
MANUFACTURING
The Company currently manufactures and/or assembles its products using purchased
or leased manufacturing equipment. The equipment presently being used will
continue to be utilized for several years. The Company's manufacturing facility
incorporates modern, modular assembly work stations and work accessories that
enhance the efficiency and quality of the manufacturing process. In July 1996,
the Company installed a surface-mount assembly line, which has reduced
manufacturing costs, and increased production efficiencies and capacity. Toward
the end of fiscal 1998, the Company completely overhauled its manufacturing
floor process, decreasing the manufacturing cycle time by two-thirds and
improving the efficiency of raw materials management. The new process will
enable the Company to more effectively meet the demand generated by increasing
sales.
If sales continue to increase substantially, the Company may be required to
invest in additional manufacturing equipment. Subject to financial
considerations, the Company does not believe it would experience any difficulty
in obtaining any additional equipment that might be needed as a result of any
substantial sales increase (see "Management's Discussion and Analysis--Financial
Condition and Liquidity").
The Company generally purchases its assembly components from distributors, but
also buys a limited amount directly from local fabricators. Its principal
suppliers are Avnet, Arrow Electronics, Bell Industries, Standard Supply
Company, Precise Metal Products Company, and Precision Technology.
The Company's general policy is to have a minimum of two vendor sources. Many of
the components utilized are bonded by certain distributors and manufacturers.
This bonding process places ordered products on the distributors' shelves until
the Company requires the products. This allows the Company to reduce its
inventory while maintaining available stock.
The Company's ALS products are manufactured in Taiwan and shipped to its
facility to complete the packaging before shipping to its customers.
The Company uses a real time computer system to monitor its manufacturing
process, which allows the Company to utilize cost accounting for each product
and to monitor profitability in each phase of the manufacturing process. The
software is covered under a maintenance contract that allows for new version
upgrades. The Company has developed an extensive software back-up system that
provides for daily back-ups housed in a fireproof safe as well as biweekly
backups in an off-site storage facility.
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Telecommunications and Information Systems
The Company has become heavily reliant on its telecommunications and information
systems (network) in order to conduct its day-to-day operations. Failure of the
network for an extended amount of time could be detrimental to the Company's
ongoing business (see "Risk Factors"). As such, the Company is establishing and
will continue to develop an infrastructure that can support and enhance growth,
reduce down time and improve operational efficiencies. Network features aimed at
these objectives include pre-wiring of the Company's building for ease of
changes and new installations; several different back-up power sources to guard
against power failure; redundant equipment and circuit cards for some equipment;
alarm systems and monitoring equipment; and a temperature controlled network
room. In addition, the Company backs up its electronic data daily in case of
catastrophic failure.
The Company is now focused on making its network fully scalable to accommodate
expected growth. Especially noteworthy is that as conference calling service
revenues grow, the network structure must expand at the same rate.
EMPLOYEES
As of June 30, 1998, the Company had 143 employees, all of which were employed
on a full-time basis. None of the Company's employees are subject to a
collective bargaining agreement.
ITEM 2. PROPERTIES
All of the Company's operations, including its executive offices, conference
call service, product sales, research and development, and manufacturing, are
conducted in a 40,000 square-foot facility located south of Salt Lake City (the
"Research Way facility"). The Research Way facility is a modern building leased
by the Company. The base monthly rent for this facility currently is
approximately $22,400. The facility is in good condition and the Company
believes the facility will be reasonably adequate to meet its immediate needs.
Monthly rents are scheduled to increase ratably over the next 10 years. The new
facilities will allow the Company to grow steadily during this time, as the
landlord has granted certain expansion options to the Company with respect to
adjacent building space.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during the
quarter ended June 30, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market on the
NASDAQ System under the symbol "GTNR." The following table sets forth quotations
for the common stock for the last two fiscal years.
<TABLE>
<CAPTION>
1998 High Low
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<S> <C> <C>
First Quarter $1.06 $0.75
Second Quarter 1.56 0.97
Third Quarter 1.50 0.91
Fourth Quarter 2.75 1.28
1997
First Quarter $1.06 $0.75
Second Quarter 0.94 0.69
Third Quarter 0.97 0.66
Fourth Quarter 0.78 0.59
</TABLE>
The above inter-dealer quotations were obtained from the National Association of
Securities Dealers (NASD), do not reflect markups, markdowns, or commissions,
and may not represent actual transactions.
As of September 1, 1998, there were approximately 3,500 holders of common stock
of the Company.
The Company does not pay a cash dividend and does not anticipate doing so in the
foreseeable future. Currently, the Company's line of credit prohibits the
payment of dividends. The Company intends to retain earnings for future capital
requirements, growth and product development.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997.
Sales for the year ended June 30, 1998 ("fiscal 1998") increased 29% compared to
the prior fiscal year ended June 30, 1997. This increase is mainly due to the
strong growth of sales in the teleconferencing market, but growth in revenues
from the broadcast market also contributed to the increase.
Revenues from the teleconferencing market increased 67% during fiscal 1998 as
compared to fiscal 1997. Product sales increased 55% mainly due to the
introduction of the Audio Perfect(TM) product line and an increase in the sales
of GT724 audio conferencing systems. The Audio Perfect(TM) product line began
shipping in April of 1998. These products use a new digital technology called
Distributed Echo Cancellation(TM) and incorporate several functional devices
including automatic microphone mixing, echo cancellation, audio routing, audio
equalization and audio processing into a single device. The Company will get
more of the revenue associated with a room installation as a result of the
expanded applications. The Company's conference calling service, 1-800 LETS
MEET(SM), experienced sales growth of 117% for fiscal 1998 as compared to fiscal
1997. This growth is a result of the Company expanding its
11
<PAGE> 12
sales staff, who are aggressively marketing its conference calling service. This
service is being marketed not only to corporate clients, but also to long
distance telephone service providers for resale.
Sales in the broadcast market grew 7% in fiscal 1998 compared to the previous
fiscal year. In this market, Remote Facilities Management (formerly known as
Remote Site Control) grew significantly (36%), mainly due to large sales of the
GSC3000. The GSC3000 allows broadcasters to monitor and control many transmitter
sites from one location. Sales to the television market and the introduction of
the Voice Interface also contributed to the increased sales of the GSC3000. The
Voice Interface allows an engineer to call the remote equipment from any
telephone, check on its status, and make adjustment using only the telephone.
Sales to Telephone Interface customers dropped slightly (4%). Even though
domestic sales of Telephone Interface products dropped, international sales are
showing strong growth with a 51% increase in fiscal 1998 sales compared to
fiscal 1997.
During fiscal 1998, sales of products that are not in either the Broadcast or
Teleconferencing markets ("Other Products") changed less than 1%. Within Other
Products, sales of Assistive Listening Systems ("ALS") increased 23%. Non-ALS
Other Products sales declined, and are expected to continue to decline.
The Company's gross profit margin increased to 52% in fiscal 1998. It was 48% in
fiscal 1997. This increase is primarily due to price increases at the beginning
of this fiscal year, aggressive vendor pricing, new products with higher gross
profit margins, a different product mix and increased efficiencies in the
manufacturing process.
The Company's operating expenses increased 10% when comparing fiscal 1998 to
fiscal 1997. Most of the increase in operating expenses came in the General and
Administrative area. Product Development expenses also increased.
General and Administrative expenses increased 23% in fiscal 1998 as compared to
the previous fiscal year. The one-time expense of the severance package of the
former CEO contributed to the increase. Facility expenses also increased as a
result of moving into a larger facility in November of 1996.
Sales and Marketing expenses for fiscal 1998 only increased 2% from fiscal 1997.
A major expense increase in this area came from commissions, which was a direct
result of increased sales. However, this was offset from the Company reducing
other expenses by bringing all advertising development in house and closely
monitoring other advertising expenses.
Product Development costs increased 9% in fiscal 1998 as compared to fiscal
1997. This was mainly due to increased personnel and product compliance
activities. The Company increased R&D personnel so that each engineer can
specialize in a specific product area. The Company believes it will improve the
development cycle by having specialized engineers.
Interest expense increased 23% when comparing fiscal 1998 to fiscal 1997 due to
increased debt balances used to finance the facility expansion.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996.
Sales for the year ended June 30, 1997 ("fiscal 1997") increased 17% compared to
the prior fiscal year ended June 30, 1996. This increase is due to the Company
focusing on its core businesses: Teleconferencing products and services, Remote
Facilities Management and Telephone Interface products.
Product and conference calling service revenues to the teleconferencing market
increased 29% during fiscal year 1997 as compared to fiscal year 1996. Product
sales increased 20% primarily due to sales of the GT724 audio teleconferencing
system. The Company started shipping this product in the beginning of the fiscal
year and sales have remained strong during the entire year. The GT724 system is
used in conference rooms, distance learning facilities and courtrooms. The
Company's conference calling service increased 93% in fiscal year 1997 over
fiscal 1996. This significant increase is due to the Company hiring a dedicated,
direct sales force and due to aggressive marketing campaigns during the year.
The Company is focused on providing premium, mission critical conference calling
services for conference rooms, distance learning facilities and courtrooms.
12
<PAGE> 13
Sales in the broadcast market grew 20% in fiscal year 1997 as compared to fiscal
year 1996. In the Telephone Interface segment, the Company introduced a new
product line late in the fiscal year, unveiling the new digital hybrid line at
the National Association of Broadcasters show in April 1997. Shipments began in
June 1997. Remote Facilities Management sales grew significantly when the
Company began shipping the GSC3000 Remote Facilities Management product line in
November 1996. The GSC3000 monitors and adjust settings at one or more remote
transmitter sites, or an engineer can adjust the settings via a personal
computer. Historically, the Company's Remote Facilities Management products have
sold primarily in the radio market, but the GSC3000 has been accepted in the
television market, resulting in increased sales.
During fiscal 1997, other product sales experienced a 37% decrease as compared
to fiscal 1996 as the Company's primary focus was on its core business lines.
The Company stopped selling Audio Processing products and has seen decreased
sales in the audio routing and distribution and portable teleconferencing
products. The Company believes these product lines have taken focus and
resources away from its core businesses and expects to see these continue to
decline.
The Company's gross profit margin increased to 48% in fiscal 1997 as compared to
45% in fiscal 1996. This improvement in gross profit margin can be attributed to
higher margin product mix, product pricing and the in-house surface mount
manufacturing technology the Company began using in fiscal 1997. The Company
continues to work towards increasing its gross profit margin. For products, the
Company has recently increased prices and is working to reduce actual
manufacturing costs. However, the Company's conference calling service has a
lower gross profit margin, which, as it becomes a higher percentage of total
sales, could negatively impact the Company's overall gross profit margin.
For the year ending June 30, 1997, the Company's operating expenses increased
40% compared to the previous fiscal year. As previously reported, the Company
invested significantly in its infrastructure during fiscal 1997 in an effort to
prepare for future growth. Sales and Marketing expenses increased 49%, General
and Administrative expenses increased 43% and Product Development expenses
increase 13% when comparing fiscal 1997 to fiscal year 1996.
The Company underwent some significant changes in its Sales and Marketing area
in fiscal 1997. It hired its first Vice President of Sales and Marketing to
focus specifically on increasing sales. The Company also hired a direct sales
force to sell its conference calling service, incurred one time marketing
expenses regarding its conference calling service, hired internal marketing
people and invested significantly in market research prior to developing new
products. All these events contributed to the increase in sales and marketing
expenses and the Company believes these initiatives will help sustain long-term
sales growth.
General and Administrative expenses increased 43% in fiscal 1997 as compared to
fiscal 1996. Most of this increase is due to the Company expanding its facility,
doubling the square footage. Occupancy costs increased significantly, as well as
other costs associated with expanding operations (human resources and
information systems management). The Company feels this investment in the
infrastructure will sustain long term growth as it moves forward.
During fiscal 1997, Product Development expenses increased 13% as compared to
fiscal 1996. This increase is a result of hiring additional engineers to focus
on specific product areas. The Company also expended significant resources in
developing new teleconferencing and site control products.
Interest expense increased 6% when comparing fiscal 1997 to fiscal 1996 due to
increased borrowing requirements to fund growth. This increased borrowing
occurred toward the end of the fiscal year when the Company finalized the
financing required for the facility expansion.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financial condition grew stronger in fiscal year 1998. The
Company's current ratio was 3.0:1 at the end of fiscal 1998 as compared to 2.2:1
at the end of fiscal 1997. Inventories increased 18% and accounts receivable
increased 4% during fiscal 1998 as a result of higher sales. Cash on hand
increased due to strong positive cash flows from operations. These changes all
contribute to the financial strength of the Company.
13
<PAGE> 14
The Company has an outstanding revolving line of credit of $2.0 million, which
is secured by the Company's accounts receivable and inventory. The interest rate
on the line of credit is a variable interest rate (anywhere from three to five
percentage points over the London Interbank Offered Rate (LIBOR)). There was no
outstanding balance on June 30, 1998. The line of credit expires in December of
1998.
As described in the notes to the financial statements, the Company has certain
commitments relating to capital expenditures. These commitments are in the form
of obligations classified as long-term debt and capital leases, both related to
the financing of furniture and equipment. Together, the current obligation on
these commitments was $639,214 in fiscal 1998 and will be $625,459 in fiscal
1999.
The Company continued to experience positive cash flows in fiscal 1998. Higher
sales and closely managing the operating expenses provided positive operational
cash flows for the Company. As sales continue to increase, the Company
anticipates that it can achieve its business plan through a combination of
internally generated funds and short-term and/or long-term borrowing, if
necessary.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
To the extent any statement presented herein deals with information that is not
historical, such statement is necessarily forward looking. As such, it is
subject to occurrence of many events outside of the Company's control. These
occurrences could cause the Company's results to differ materially from those
anticipated. A sample listing of such occurrences follows:
Competition - Rapid Technological Change
The Broadcast, Teleconferencing and ALS markets are highly competitive and
characterized by rapid technological change. The Company's future performance
will depend in large part upon its ability to remain competitive and to develop
and market new products and services in these markets. The Company competes with
businesses having substantial financial, research and development,
manufacturing, marketing and other resources.
The markets in which the Company competes have historically involved the
introduction of new and technologically advanced products and services that cost
less or perform better. If the Company is not competitive in its research and
development efforts, its products may become obsolete or be priced above
competitive levels.
Although management believes that based on their performance and price, its
products are attractive to customers, there can be no assurance that competitors
will not introduce comparable or technologically superior products, which are
priced more favorably than the Company's products.
Marketing
The Company has experience in marketing its products. However, it is subject to
all of the risks inherent in the sale and marketing of current and new products
and services in an evolving marketplace. The Company must effectively allocate
its resources to the marketing and sale of these products through diverse
channels of distribution. The Company's strategy is to establish distribution
channels and direct selling efforts in markets where it believes there is a
growing need for its products and services. There can be no assurance that this
strategy will prove successful.
Dependence on Distribution Network
The Company markets its products primarily through a network of representatives,
dealers and master distributors. All of the Company's agreements retaining such
representatives and dealers are non-exclusive and terminable at will by either
party. Although the Company believes that its relationships with such
representatives and dealers are good, there can be no assurance that any of such
representatives or dealers will continue to offer the Company's products.
14
<PAGE> 15
Price discounts are based on performance. However, there are no obligations on
the part of such representatives and dealers to provide any specified level of
support to the Company's products or to devote any specific time, resources or
efforts to the marketing of the Company's products. There are no prohibitions on
dealers offering products that are competitive with those of the Company. Most
dealers do offer competitive products. The Company reserves the right to
maintain house accounts, which are for products sold direct. The loss of a
majority or all representatives or dealers could have a material adverse effect
on the Company's business.
Limited Capitalization
As of June 30, 1998, the Company had $715,325 in cash and $3,908,943 in working
capital. The Company may be required to seek additional financing if anticipated
levels of revenue are not realized, if higher than anticipated costs are
incurred in the development, manufacture or marketing of the Company's products,
or if product demand exceeds expected levels. There can be no assurance that any
additional financing thereby necessitated will be available on acceptable terms,
or at all.
In addition, the Company's revolving $2 million line of credit matures in
December of 1998 and there can be no assurance that the Company will be able to
extend the maturity date of the line of credit or obtain a replacement line of
credit from another commercial institution. The Company had no outstanding
balance payable on the line of credit as of June 30, 1998. To the extent the
line of credit is not extended or replaced and cash from operations is
unavailable to pay the indebtedness then outstanding under the line of credit,
the Company may be required to seek additional financing.
Telecommunications and Information Systems (Network)
The Company is highly reliant on its network equipment, data and software to
support all functions of the Company. The Company's conference calling service
relies 100% on the network for its revenues. While the Company endeavors to
provide for failures in the network by providing back up systems and procedures,
there is no guarantee that these back up systems and procedures will operate
satisfactorily in an emergency. Should the Company experience such a failure, it
could seriously jeopardize its ability to continue operations. In particular,
should the Company's conference calling service experience even a short term
interruption of its network, its ongoing customers may choose a different
provider.
Dependence Upon Key Employees
The Company is substantially dependent upon certain of its employees, including
Frances M. Flood, a Director, President and Chief Executive Officer and a
stockholder of the Company. The loss of Ms. Flood by the Company could have a
material adverse effect on the Company. The Company currently has in place a key
person life insurance policy on the life of Ms. Flood in the amount of
$1,000,000.
The Company is also dependent upon Brooks Gibbs, Director of Technology. Due to
his technological expertise and product familiarity, the loss of Mr. Gibbs by
the Company could have a material adverse effect on the Company. The Company
currently has in place a key person life insurance policy on the life of Mr.
Gibbs in the amount of $1,000,000.
Dependence on Supplier and Single Source of Supply
The Company does not have written agreements with any suppliers. Furthermore,
certain digital microprocessor chips used in connection with the Company's
products can only be obtained from a single manufacturer and the Company is
dependent upon the ability of this manufacturer to deliver such chips to the
Company's suppliers so that they can meet the Company's delivery schedules. The
Company does not have a written commitment from such suppliers to fulfill the
Company's future requirements. The Company's suppliers maintain an inventory of
such chips, but there can be no assurance that such chips will always be readily
available, available at reasonable prices, available in sufficient quantities,
or deliverable in a timely fashion. If such chips or other key components become
unavailable, it is likely that the Company will experience delays, which could
be significant, in production and delivery of its products unless and until the
Company can otherwise procure the required component or components at
competitive prices, if at all. The lack of availability of these components
could have a materially adverse effect on the Company.
15
<PAGE> 16
Although the Company believes that most of the key components required for the
production of its products are currently available in sufficient production
quantities, there can be no assurance that they will remain available.
Furthermore, suppliers of some of these components are currently or may become
competitors of the Company, which might also affect the availability of key
components to the Company. It is possible that other components required in the
future may necessitate custom fabrication in accordance with specifications
developed or to be developed by the Company. Also, in the event the Company, or
any of the manufacturers whose products the Company expects to utilize in the
manufacture of its products, is unable to develop or acquire components in a
timely fashion, the Company's ability to achieve production yields, revenues and
net income will be adversely affected.
Lack of Patent Protection
The Company currently relies on a combination of trade secret and nondisclosure
agreements to establish and protect its proprietary rights in its products.
There can be no assurance that others will not independently develop similar
technologies, or duplicate or design around aspects of the Company's technology.
The Company believes that its products and other proprietary rights do not
infringe any proprietary rights of third parties. There can be no assurance,
however, that third parties will not assert infringement claims in the future.
Government Funding and Regulation
In the teleconferencing market, the Company is dependent on government funding
to place its distance learning sales and courtroom equipment sales. In the event
government funding was stopped, these sales would be negatively impacted.
Additionally, many of the Company's products are regulated by governmental
regulations. New regulations could significantly impact sales.
Dividends Unlikely
The Company has never paid cash dividends on its securities and does not intend
to declare or pay cash dividends in the foreseeable future. Earnings are
expected to be retained to finance and expand its business. Furthermore, the
Company's revolving line of credit prohibits the payment of dividends on its
Common Stock.
Potential Dilutive Effect of Outstanding Options and Possible Negative Effect of
Future Financing
The Company has outstanding options. The outstanding options are issued under
the Company's 1990 Incentive Plan and the 1998 Stock Option Plan, which includes
options to purchase up to 1,700,000 shares of Common Stock granted or available
for grant. Holders of these options are given an opportunity to profit from a
rise in the market price of the Company's Common Stock with a resulting dilution
in the interests of the other stockholders. The holders of the options may
exercise them at a time when the Company might be able to obtain additional
capital through a new offering of securities on terms more favorable than those
provided therein.
Possible Control by Officers and Directors
The officers and directors of the Company together had beneficial ownership of
approximately 24.6% of the Common Stock (including options that are currently
exercisable or exercisable within sixty (60) days) of the Company as of
September 1, 1998. This significant holding in the aggregate place the officers
and directors in a position, when acting together, to effectively control the
Company (see "Security Ownership of Certain Beneficial Owners and Management").
Year 2000
The Company is continuing to assess the impact of the Year 2000 issue* on its
information technology ("IT") and non-IT systems and believes that certain
software and hardware currently in use will have to be upgraded. To date, the
Company has assessed approximately 100% of its existing IT systems and 80% of
its existing non-IT systems. The Company estimates a cost of $50,000 to upgrade
existing systems so that they are Year 2000 compatible. None of that cost has
been incurred so far. To date, the Company has identified two of its systems
that will have to be upgraded. None of these upgrades have taken place yet, but
all upgrades are scheduled for completion by November 30, 1998. There should be
no
16
<PAGE> 17
significant interruptions to the business caused by the upgrade process.
However, if these upgrades are not completed in a timely manner, the impact on
the operations of the Company could be material. The Company plans to finance
these upgrades with operating income.
The first system so far identified as requiring upgrading is the internal phone
system, including the voice mail system. The software and hardware to upgrade
this system will be purchased so that the system will be upgraded to meet a
scheduled completion date of the end of October of 1998. The estimated cost of
this software and hardware is $50,000. The second system identified to date is
the conference calling bridge. This system is essential to the Company's
conference calling service. It is scheduled for upgrading in November of 1998.
The manufacturer is furnishing the software to the Company at no cost.
The Company is in the process of determining through direct contacts whether its
material vendors and suppliers, and its larger customers are Year 2000
compliant. To date, no major customer or supplier that the Company contacted has
any Year 2000 compliance problems that would significantly impact the operations
of the Company.
At the present time, the company believes that a reasonably likely worst case
scenario involving a Year 2000 event would be in a non-IT system affecting the
Company's manufacturing process. Such an event could result in the suspension of
the affected portion of the manufacturing process until such a problem is
corrected. However, the Company believes that as it continues its Year 2000
assessment the risk of such an event will decrease.
The Company currently is in the process of developing contingency plans for
dealing with Year 2000 issues, including the worst case scenario just described.
Those plans are scheduled to be complete and in place by the end of fiscal 1999.
The Company has performed a Year 2000 compliance review of its product line. To
date, the company has addressed all existing Year 2000 compliance issues on
products.
The costs of the projects and the dates on which the Company believes it will
complete the Year 2000 upgrades are based on management's best estimates at this
time, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantees that these estimates will be achieved, that
personnel trained in this area will be available at a reasonable cost, or that
we will locate and correct all relevant computer codes and similar
uncertainties.
* The "Year 2000 Problem" has arisen because many computer programs were
written using only the last two digits to refer to a year (i.e. "98" for
1998). Therefore, these computer programs may not properly recognize the year
2000. If not corrected, many computer applications could fail or create
erroneous results.
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128,
"Earnings per Share." SFAS 128 replaced the calculation of primary and fully
diluted earnings (loss) per share with basic and diluted earnings (loss) per
share. Unlike primary earnings (loss) per share, basic earnings (loss) per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings (loss) per share is very similar to the previously reported
fully diluted earnings (loss) per share. All earnings (loss) per share amounts
for all periods have been presented, and where appropriate, restated to conform
to the SFAS 128 requirements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income", which
established standards for reporting and display of "Comprehensive Income" which
is the total of net income and all other non-owner changes in stockholders'
equity and its components. SFAS 130 is effective for fiscal years beginning
after December 15, 1997 with earlier application permitted. The Company will
adopt the standard in fiscal 1999 and does not expect comprehensive income it
differ significantly form previously reported net income.
17
<PAGE> 18
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131, which supersedes SFAS Nos. 14,
18, 24 and 30, establishes new standards for segment reporting in which
reportable segments are based on the same criteria on which management
disaggregates a business for making operating decisions and assessing
performance. SFAS 131 is effective for fiscal years beginning after December 15,
1997 with earlier application permitted. The Company will adopt the standard in
fiscal 1999 and is currently analyzing the impact this new standard will have on
previously reported information.
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
Report of Independent Auditors
Balance Sheets for June 30, 1998 and 1997.
Statements of Operations for fiscal years ended June 30, 1998, 1997 and 1996.
Statements of Cash Flows for fiscal years ended June 30, 1998, 1997 and 1996.
Statements of Shareholders' Equity for fiscal years ended June 30, 1998, 1997
and 1996.
Notes to Financial Statements
18
<PAGE> 19
Report of Independent Auditors
The Board of Directors and Shareholders
GENTNER COMMUNICATIONS CORPORATION
We have audited the accompanying balance sheets of Gentner Communications
Corporation as of June 30, 1998 and 1997, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended June 30, 1998. 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 generally accepted auditing
standards. 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 financial position of Gentner Communications
Corporation at June 30, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young, L.L.P.
Salt Lake City, Utah
July 31, 1998
19
<PAGE> 20
GENTNER COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 715,325 $ 63,992
Accounts receivable, less allowances of $246,000 in 1998,
and $115,000 in 1997 ................................... 1,743,390 1,682,254
Inventory ................................................ 3,154,983 2,668,761
Deferred taxes ........................................... 40,000 --
Other current assets ..................................... 174,667 136,177
----------- -----------
Total current assets ................................. 5,828,365 4,551,184
Property and equipment, net .................................. 2,320,336 2,493,287
Related party note receivable ................................ 126,505 139,000
Other assets, net ............................................ 36,534 152,383
----------- -----------
Total assets ......................................... $ 8,311,740 $ 7,335,854
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................ $ -- $ 722,997
Accounts payable ......................................... 537,202 471,072
Accrued compensation and other benefits .................. 486,658 197,209
Other accrued expenses ................................... 372,823 159,237
Current portion of long-term debt ........................ 285,630 257,164
Current portion of capital lease obligations ............. 237,109 254,951
----------- -----------
Total current liabilities ............................ 1,919,422 2,062,630
Long-term debt ............................................... 402,584 687,274
Capital lease obligations .................................... 752,728 784,354
----------- -----------
Total liabilities .................................... 3,074,734 3,534,258
Shareholders' equity:
Common stock, 50,000,000 shares authorized,
par value $.001, 7,698,523 and
7,663,405 shares issued and outstanding
at June 30, 1998 and 1997 .............................. 7,699 7,663
Additional paid-in capital ............................... 4,454,407 4,423,482
Retained earnings (accumulated deficit) .................. 774,900 (629,549)
----------- -----------
Total shareholders' equity ........................... 5,237,006 3,801,596
----------- -----------
Total liabilities and shareholders' equity ........... $ 8,311,740 $ 7,335,854
=========== ===========
</TABLE>
See accompanying notes
20
<PAGE> 21
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales .................................. $ 17,267,886 $ 13,371,851 $ 11,469,155
Cost of goods sold ......................... 8,347,300 6,874,590 6,279,775
------------ ------------ ------------
Gross profit ............................... 8,920,586 6,497,261 5,189,380
Operating expenses:
Marketing and selling .................. 3,649,876 3,572,882 2,394,415
General and administrative ............. 2,470,949 2,006,998 1,406,786
Research and product development ....... 1,142,605 1,046,757 929,132
------------ ------------ ------------
Total operating expenses ........... 7,263,430 6,626,637 4,730,333
------------ ------------ ------------
Operating income (loss) ............ 1,657,156 (129,376) 459,047
Other income (expense):
Interest income ........................ 13,475 7,836 1,988
Interest expense ....................... (240,371) (196,176) (185,676)
Other, net ............................. 13,189 (18,282) 7,525
------------ ------------ ------------
Total other income (expense) ....... (213,707) (206,622) (176,163)
------------ ------------ ------------
Income (loss) before income taxes .......... 1,443,449 (335,998) 282,884
Provision for income taxes ................. 39,000 36,900 900
------------ ------------ ------------
Net income (loss) .................. $ 1,404,449 $ (372,898) $ 281,984
============ ============ ============
Basic earnings (loss) per common share ..... $ 0.18 $ (0.05) $ 0.04
============ ============ ============
Diluted earnings (loss) per common share ... $ 0.18 $ (0.05) $ 0.04
============ ============ ============
</TABLE>
See accompanying notes
21
<PAGE> 22
GENTNER COMMUNICATIONS CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................... $ 1,404,449 $ (372,898) $ 281,984
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment ....................................... 678,501 621,024 513,781
Amortization of other assets ...................... 41,383 52,654 41,258
Deferred income tax ............................... (40,000) -- --
Gain (loss) on investments ........................ (1,785) 21,378 (36,895)
Other ............................................. -- 36,000 21,339
Changes in operating assets and liabilities:
Accounts receivable ............................ (61,136) (125,818) 87,940
Inventory ...................................... (486,222) 561,004 95,101
Other current assets ........................... (38,490) (24,434) (31,975)
Accounts payable and other accrued expenses .... 569,165 29,621 (443,252)
----------- ----------- -----------
Net cash provided by operating activities .... 2,065,865 798,531 529,281
Cash flows from investing activities:
Purchases of property and equipment .................. (313,050) (623,949) (176,743)
Issuance of note receivable .......................... -- (147,327) --
Repayment of note receivable ......................... 12,495 8,327 60,320
Decrease (increase) in other assets .................. 76,251 (108,541) 139
----------- ----------- -----------
Net cash used in investing activities ........ (224,304) (871,490) (116,284)
Cash flows from financing activities:
Proceeds from issuance of common stock ............... 3,366 736 --
Exercise of warrants and employee stock options ...... 27,595 -- 142,313
Net borrowings (repayments) under line of credit ..... (722,997) (193,044) (308,959)
Net financing of trade payables with
short-term notes ................................... -- -- (283,687)
Proceeds from issuance of long-term debt ............. -- 566,906 400,000
Principal payments of capital lease obligations ...... (241,968) (238,378) (135,825)
Principal payments of long-term debt ................. (256,224) (213,032) (132,314)
----------- ----------- -----------
Net cash used in financing activities ........ (1,190,228) (76,812) (318,472)
----------- ----------- -----------
Net increase (decrease) in cash ......................... 651,333 (149,771) 94,525
Cash at the beginning of the year ....................... 63,992 213,763 119,238
----------- ----------- -----------
Cash at the end of the year ............................. $ 715,325 $ 63,992 $ 213,763
=========== =========== ===========
Supplemental disclosure of cash flow information:
Property and equipment financed by capital leases .... $ 192,500 $ 975,732 $ 25,490
Income taxes paid .................................... $ (28,000) $ (12,800) $ (25,900)
Interest paid ........................................ $ (241,371) $ (193,500) $ (194,148)
</TABLE>
See accompanying notes
22
<PAGE> 23
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Total
----------------------- Paid-In (Accumulated Shareholder's
Shares Amount Capital Deficit) Equity
--------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1995 ................ 7,455,375 $ 7,455 $4,244,641 $ (538,635) $3,713,461
Exercise of employee stock
options ............................. 207,000 207 142,106 -- 142,313
Tax benefits allocated to
contributed capital ................ -- -- 36,000 -- 36,000
Net income ........................... -- -- -- 281,984 281,984
--------- ---------- ----------- ---------- ----------
Balances at June 30, 1996................. 7,662,375 7,662 4,422,747 (256,651) 4,173,758
Issuance of common stock ............. 1,030 1 735 -- 736
Net loss ............................. -- -- -- (372,898) (372,898)
--------- ---------- ----------- ---------- ----------
Balances at June 30, 1997................. 7,663,405 7,663 4,423,482 (629,549) 3,801,596
Exercise of employee stock
options ............................ 32,000 32 27,563 -- 27,595
Issuance of common stock ............. 3,118 4 3,362 -- 3,366
Net income ........................... -- -- -- 1,404,449 1,404,449
--------- ---------- ----------- ---------- ----------
Balances at June 30, 1998 ................ 7,698,523 $ 7,699 $ 4,454,407 $ 774,900 $5,237,006
========= ========== =========== ========== ==========
</TABLE>
See accompanying notes
23
<PAGE> 24
GENTNER COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Gentner Communications Corporation (the "Company"), designs and
manufactures high-technology electronic equipment for the Teleconferencing,
Telephone Interface and Remote Facilities Management markets. The Company
also provides domestic and international conference calling services. The
Company grants credit without requiring collateral to substantially all its
customers within these markets.
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.
Revenue Recognition - Revenue from product sales is recognized at the time
product is shipped, net of allowances for returns and uncollectible
accounts. Revenue from service sales is recognized at the time the service
is rendered, net of allowances for uncollectible accounts.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization are provided over the estimated useful lives
of the respective assets using the straight-line method. In fiscal 1997,
the Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" without a significant
impact to operating results, financial position or cash flow.
Other Assets - Other assets consist principally of deposits, insurance
policy cash values, capitalized software costs, purchased technology and
certain other intangible assets. The Company amortizes software costs,
purchased technology and intangible assets on a straight-line basis over
periods ranging from three to ten years. Accumulated amortization was
$209,626 and $168,243 at June 30, 1998 and 1999, respectively. The Company
performs an evaluation of these amounts on a periodic basis to determine
that the recorded costs are not in excess of their net realizable value.
Earnings (Loss) ("FASB")Per Common Share - In 1997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings per Share." SFAS
128 replaced the calculation of primary and fully diluted earnings (loss)
per share with basic and diluted earnings (loss) per share. Unlike primary
earnings (loss) per share, basic earnings (loss) per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings (loss) per share is very similar to the previously reported fully
diluted earnings (loss) per share. All earnings (loss) per share amounts
for all periods have been presented, and where appropriate, restated to
conform to the SFAS 128 requirements.
24
<PAGE> 25
The following table sets forth the computation of basic and diluted net
income (loss) per share:
<TABLE>
<CAPTION>
June 30
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income (loss) $1,404,449 $ (372,898) $ 281,984
========== ========== ==========
Denominator for basic net income (loss) per
share - weighted average shares: 7,679,985 7,662,494 7,639,637
Dilutive common stock equivalents using
treasury stock method: 280,267 630,532 129,086
---------- ---------- ----------
7,960,252 8,293,026 7,768,723
========== ========== ==========
Basic net income (loss) per share $ 0.18 $ (0.05) $ 0.04
========== ========== ==========
Diluted net income (loss) per share $ 0.18 $ (0.05) $ 0.04
========== ========== ==========
</TABLE>
Options to purchase 20,000 shares of common stock were outstanding as of
June 30,1998, 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.
Software Development Costs - The Company capitalizes a portion of its
software development costs. Both capitalized software development costs and
purchased software costs are amortized on a straight-line basis over the
estimated useful life of three years or the ratio of current revenue to the
total current and anticipated future revenue, whichever provides for
greater amortization. Amortization generally commences when shipments of
the related products begin. Amortization expense recorded during the
respective years ended June 30, 1998, 1997 and 1996 was $18,608, $31,900
and $31,900. Unamortized costs are stated at the lower of cost or net
realizable value and are included in other assets net of accumulated
amortization of $95,700 in 1998, $77,100 in 1997 and $45,200 in 1996.
Income Taxes - The Company provides for income taxes based on the liability
method which requires the recognition of deferred tax assets and
liabilities based on differences between financial reporting and tax bases
of assets and liabilities measured using enacted tax rates and laws that
are expected to be in effect when the differences are expected to reverse.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles 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 - The Company adopted SFAS 123 "Accounting for
Stock Based Compensation," effective July 1, 1996. SFAS 123 defines a fair
value-based method of accounting for and measuring compensation expense
related to stock based compensation plans and encourages adoption of the
new standard. However, the statement allows entities to continue to measure
compensation expense for stock-based plans using the intrinsic value-based
method prescribed by 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 expenses are expensed as incurred.
Advertising expense for fiscal years 1998, 1997 and 1996 totaled $229,629,
$598,500 and $331,300, respectively.
New Accounting Pronouncements - In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income", which established standards for reporting
and display of "Comprehensive Income" which is the total of net income and
all other non-owner changes in stockholders' equity and its components.
SFAS 130 is effective for fiscal years beginning after December 15, 1997
with
25
<PAGE> 26
earlier application permitted. The Company will adopt the standard in
fiscal 1999 and does not expect comprehensive income it differ
significantly form previously reported net income.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131, which
supersedes SFAS Nos. 14, 18, 24 and 30, establishes new standards for
segment reporting in which reportable segments are based on the same
criteria on which management disaggregates a business for making operating
decisions and assessing performance. SFAS 131 is effective for fiscal years
beginning after December 15, 1997 with earlier application permitted. The
Company will adopt the standard in fiscal 1999 and is currently analyzing
the impact this new standard will have on previously reported information.
Reclassifications - Certain 1997 and 1996 amounts have been reclassified to
conform with the current year presentation.
2. SIGNIFICANT CUSTOMER
The Company sells a substantial portion of its products to a major
distributor in the Telephone Interface and Remote Facilities Management
product areas. For the fiscal years ended June 30, 1998, 1997 and 1996,
sales to this distributor aggregated to $1,228,278 (7%), $1,551,811 (12%)
and $1,223,438 (11%), respectively. At the end of those years amounts due
from this customer were $23,248, $77,920 and $80,983, respectively.
3. FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, the note receivable,
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 also approximate fair value because applicable
interest rates fluctuate based on market conditions.
4. INVENTORY
Inventory is summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------- ----------
1998 1997
---- ----
<S> <C> <C>
Raw materials $1,014,732 $ 897,481
Work in progress 524,313 648,712
Finished goods 1,615,938 1,122,568
---------- ----------
Total Inventory $3,154,983 $2,668,761
========== ==========
</TABLE>
5. PROPERTY AND EQUIPMENT
Major classifications of property and equipment and estimated useful lives
are as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Office furniture and equipment - 5 to 10 years........ $ 3,357,347 $ 3,174,708
Manufacturing and test equipment - 5 to 10 years...... 1,708,857 1,616,125
Telephone bridging equipment - 10 years............... 731,750 593,070
Vehicles - 3 to 5 years............................... 33,862 22,318
----------- -----------
5,831,816 5,406,221
Accumulated depreciation and amortization............. (3,511,480) (2,912,934)
- -- ----------- -----------
Net property and equipment............................ $ 2,320,336 $ 2,493,287
=========== ===========
</TABLE>
26
<PAGE> 27
6. LINE OF CREDIT
The Company maintains a revolving line of credit (no outstanding balance on
$2.0 million available at June 30, 1998, and $722,997 was outstanding on
$2.5 million available at June 30, 1997) with a commercial bank that
expires December 24, 1998 and which the Company anticipates renewing beyond
that date. Borrowings accrue interest at a rate of anywhere from three to
five percent over the London Interbank Offered Rate (LIBOR). The borrowing
rate was 9.15% as of June 30, 1998. The weighted average interest rate as
of June 30, 1998, 1997 and 1996, respectively, was 10.8%, 11.0% and 9.8%.
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.
7. LONG TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30,
----------------------
1998 1997
---- ----
<S> <C> <C>
1.5% over prime note due to a financial
institution, with monthly payments of $5,846
through July 1999, secured generally by
manufacturing and test equipment (on June 30,
1998, the interest rate was 10.7%) $ 82,809 $ 140,983
9.25% note to a financial institution, with
monthly payments of $8,069, through February
2001, secured generally by equipment, furniture
and other assets 220,073 292,849
11.5% note due to a financial institution, with
monthly payments of $14,851, through December
2000, secured generally by furniture 385,332 510,606
--------- ---------
688,214 944,438
Less current portion (285,630) (257,164)
--------- ---------
Total long term debt $ 402,584 $ 687,274
========= =========
</TABLE>
Annual principal installments of long-term debt are $285,630, $263,980 and
$138,604 for the years ending June 30, 1999, 2000 and 2001, respectively.
8. 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:
<TABLE>
<CAPTION>
June 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Office furniture and equipment...................... $ 890,360 $ 842,238
Manufacturing and test equipment.................... 524,917 496,718
Telephone bridging equipment........................ 600,250 477,042
Vehicles............................................ 33,862 22,318
----------- ----------
2,049,389 1,838,316
Accumulated depreciation and amortization........... (1,099,093) (810,477)
----------- ----------
Net property and equipment under capital leases..... $ 950,296 $1,027,839
=========== ==========
</TABLE>
27
<PAGE> 28
Future minimum lease payments under capital leases and noncancelable
operating leases with initial terms of one year or more are as follows:
<TABLE>
<CAPTION>
Capital Operating
---------- ----------
<S> <C> <C>
For years ending June 30:
1999......................................................... $ 353,584 $ 277,318
2000......................................................... 361,479 267,680
2001......................................................... 336,861 265,752
2002......................................................... 202,014 265,752
2003......................................................... 29,562 265,752
Thereafter................................................... 0 1,063,008
---------- ----------
Total minimum lease payments............................... 1,283,500 $2,405,262
==========
Less use taxes.................................................. (76,636)
----------
Net minimum lease payments................................. 1,206,864
Less amount representing interest............................... (217,027)
----------
Present value of net minimum lease payments................ 989,837
Less current portion............................................ (237,109)
----------
Capital lease obligation................................... $ 752,728
==========
</TABLE>
Certain operating leases contain escalation clauses based on the consumer
price index. Rental expense, which was composed of minimum rentals under
operating lease obligations, was $265,759, $245,996 and $144,877 for the
years ended June 30, 1998, 1997 and 1996, respectively. The Company's
operating lease on its facility, which expires 2007, provides for renewal
options extending the terms an additional ten years. Rates charged would be
at prevailing market rates at the time of renewal.
9. ROYALTY AGREEMENTS
The Company is 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, 1998,
1997 and 1996, was $43,500, $45,100 and $29,400, respectively. In fiscal
1997, GR2L sold the proprietary interest in a new Remote Facilities
Management product to the Company in exchange for a royalty agreement.
Royalty expense under this agreement with GR2L for the years ended June 30,
1998 and 1997 was $54,810 and $36,588, respectively. As of June 30, 1998
and 1997, GR2L owed the Company $126,505 and $139,000, respectively, which
is a note receivable from the partnership to the Company. The terms of the
note are such that 50% of all the royalty proceeds will be applied to the
payment of the note's principle and interest first. The note is payable in
full on April 30, 2001, and the interest rate on the note is equal to the
Company's cost of short term funds.
10. 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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation...................... $229,000 $164,000
Unamortized software costs...................... -- 7,000
-------- --------
Total deferred tax liabilities................ 229,000 171,000
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C>
Deferred tax assets:
Unamortized software costs .............. 11,000 --
Accounts receivable and other reserves .. 70,000 29,000
Inventory reserves ...................... 35,000 34,000
Product warranty accruals ............... 8,000 8,000
Net operating loss carryforwards ........ -- 504,000
Tax credit carryforwards ................ 304,000 245,000
-------- --------
Total deferred tax assets .................. 428,000 820,000
Valuation allowance for deferred tax assets (159,000) (649,000)
-------- --------
Net deferred tax assets .............. 269,000 171,000
-------- --------
Net deferred taxes ......................... $ 40,000 $ --
======== ========
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal .................................. $ 69,000 $ -- $ --
State .................................... 6,000 900 900
Tax benefits allocated to contributed
capital .................................. 4,000 -- 36,000
-------- -------- --------
Total current ......................... 79,000 900 36,900
Deferred:
Federal .................................. (36,500) 33,000 (33,000)
State .................................... (3,500) 3,000 (3,000)
-------- -------- --------
Total deferred ........................ (40,000) 36,000 (36,000)
-------- -------- --------
$ 39,000 $ 36,900 $ 900
======== ======== ========
</TABLE>
The provision for federal income taxes was reduced due to the use of
approximately $1,300,000, $1,000,000 and $1,100,000 in net operating loss
benefits in 1998, 1997 and 1996, respectively.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at federal statutory rate ........................... 34.0% (34.0)% 34.0%
Increase (reduction) in computed tax rate resulting from:
State income tax, net of federal effect .............. 3.3 (3.5) 3.2
Valuation allowance .................................. (33.9) 45.8 (14.9)
Federal income tax credits generated ................. (4.0) -- (20.9)
Statutory tax disallowance of entertainment expenses . 0.2 1.0 0.8
Nondeductible life insurance premiums ................ 0.1 -- 0.3
Utilization of capital loss carryforward ............. -- -- (2.1)
Nondeductible intangible asset amortization and other 3.0 0.6 (0.1)
----- ----- -----
2.7% 9.9% 0.3%
===== ===== =====
</TABLE>
At June 30, 1998, for income tax purposes the Company had research and
development tax credit carryforwards of approximately $289,000 that expire
beginning in 2004.
11. 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. Stock options vest over a five
year period at 10%, 15%, 20%, 25% and 30% per year over years one through
five. Additionally, the plan has some performance based
29
<PAGE> 30
options that vest on net income goals for fiscal years 1998 to 2000. The
Company also has a 1998 Stock Option Plan ("1998 Plan"). Provisions of the
1998 Plan include the granting of stock options. Currently the vesting
schedule is performance based where options will vest based on an earnings
per share goal for the next five years. Under the 1998 Plan, there are
1,700,000 shares available. The 1998 Plan expires June 10, 2008, or when
all the shares available under the plan have been issued. Information for
the fiscal years 1996 through 1998 with respect to the Plans is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Stock Options Shares Exercise Price
---------- --------------
<S> <C> <C>
Outstanding at June 30, 1995 490,000 $0.74
Options granted 140,000 0.84
Options expired and canceled (23,000) 0.82
Options exercised (207,000) 0.69
---------
Outstanding at June 30, 1996 400,000 0.80
Options granted 605,000 0.79
Options expired and canceled (55,000) 0.72
---------
Outstanding at June 30, 1997 950,000 0.80
Options granted 1,193,000 2.05
Options expired and canceled (258,000) 0.80
Options exercised (32,000) 0.74
---------
Outstanding at June 30, 1998 1,853,000 $1.61
=========
</TABLE>
The following table summarized information about stock options outstanding
at June 30, 1998 under the Plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted
Options Average Weighted Options Average
Exercise Outstanding at Contractual Average Exercisable at Exercise
Price Range June 30, 1998 Remaining Life Exercise Price June 30, 1998 Price
-------------- --------- --------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
$0.69 to $0.84 1,018,000 4.7 years $0.76 580,500 $0.75
$1.81 20,000 2.0 years $1.81 20,000 $1.81
$2.66 815,000 6.0 years $2.66
--------- -------
Total 1,853,000 600,500
========= =======
</TABLE>
There were 1,085,000 options available for future grant at June 30, 1998.
The following are the options exercisable at the corresponding weighted
average exercise price at June 30, 1998, 1997 and 1996, respectively:
600,500 at $0.79; 284,000 at $0.78; and 209,500 at $0.78.
On June 30, 1993 the Company registered with the Securities and Exchange
Commission all shares of common stock previously issued or issuable under
the 1990 Plan.
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations in accounting
for its plan. No compensation expense has been recognized for the stock
option plan 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 (loss) would have been the pro
forma amount indicated below:
30
<PAGE> 31
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1998 1997
---- ----
<S> <C> <C>
Net Income (Loss)
As Reported $1,404,449 $(372,898)
earnings per share $ 0.18 $ (0.05)
Pro Forma $1,223,317 $(460,116)
earnings per share $ 0.15 $ (0.06)
</TABLE>
The pro forma results above are not likely to be representative of the
effects of applying SFAS 123 on reported net income (loss) for future years
as these amounts only reflect the expense from two years.
The weighted average fair value (as defined by SFAS 123) of each option
granted in fiscal 1998, 1997 and 1996 is estimated as $1.24, $0.43 and
$0.36, respectively, on the date of grant using the Black-Scholes model
with the following weighted average assumptions: expected dividend yield,
0%; risk-free interest rate, 5.5% to 6.0% expected price volatility, 55.1%
to 84.8%; and expected life of options, 3 to 5 years.
12. WARRANTS
During 1991, the Company filed a registration statement with the Securities
and Exchange Commission in connection with a secondary public offering of
1,437,500 units. Each unit consisted of three shares of common stock and
two redeemable common stock purchase warrants. As of June 30, 1998 there
were no warrants outstanding, as all warrants expired on September 22,
1997. No warrants were exercised during fiscal 1998, 1997 or 1996.
13. INTERNATIONAL SALES
The Company provides products to the Telephone Interface and Remote
Facilities Management markets, and products to the Teleconferencing
markets. These products are all distributed from, and designed,
manufactured, and serviced at the Company's facilities in Salt Lake City,
Utah. The Company uses either master distributors or international dealers
to facilitate its international sales. Currently, the Company's products
are distributed to at least thirty-five different countries.
The Company ships products to unaffiliated distributors in worldwide
markets. In fiscal 1998, 1997 and 1996, respectively, such international
sales were $2,581,700, $2,183,000 and $1,454,000 and accounted for 15%, 15%
and 13% of total sales. During those years, the Company shipped the
following amounts, respectively, to the following areas: Canada - $798,800,
$724,000 and $357,900; Asia - $513,300, $451,400 and $519,000; Europe -
$817,400, $580,600 and $361,000; Latin America - $252,100, $158,800 and
$31,300; Other Areas - $200,100, $268,200 and $183,900.
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 contributions for the 1998, 1997 and
1996 fiscal years totaled $31,000, $0 and $16,000, respectively.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None exist.
31
<PAGE> 32
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
Directors
The following individuals are currently directors of the Company:
<TABLE>
<CAPTION>
Director
Name Age Principal Occupation Since
---- --- -------------------- -----
<S> <C> <C>
Frances M. Flood 42 Chief Executive Officer 1998
and President
Edward Dallin Bagley* 60 Attorney 1994
Brad R. Baldwin 43 President and Chief 1988
Executive Officer of Bank
One, Utah
Edward N. Bagley* 86 Vice President of Smith 1993
Barney and Chairman of
the Board of Mining
Services International
Dwight H. Egan 45 President and Chief 1994
Executive Officer of
Broadcast International,
Inc.
K. Bradford Romney 42 Assistant Business Unit 1994
Manager, Small Business
Networking Operation,
Intel Corporation
</TABLE>
* Edward N. Bagley and Edward Dallin Bagley are father and son, respectively.
Frances M. Flood has been a Director of the Company since June of 1998. Ms.
Flood joined the Company in October 1996 as Vice-President of Sales and
Marketing. She was named President in December 1997 and Chief Executive Officer
in June 1998. Prior to joining the Company, Ms. Flood was Area Director of Sales
and Marketing for Ernst & Young, LLP, an international accounting and consulting
firm. Ms. Flood has nearly twenty-five years experience in sales, marketing,
change management, international business and finance.
Edward Dallin Bagley has been a Director of the Company since April 1994.
Previously, Mr. Bagley served as a Director of the Company from April 1987 to
July 1991. Mr. Bagley began practicing law in 1965. During the past six years,
Mr. Bagley has served as Vice President of National Financial, a computer
back-up accounting firm for health clubs. Mr. Bagley is also currently a
director of Tunex International, a chain of automotive engine performance and
service centers. Mr. Bagley received a Juris Doctorate in 1965 from the
University of Utah College of Law.
Brad R. Baldwin has been a Director of the Company since September 1988. Since
October 1, 1994, Mr. Baldwin has served as President and Chief Executive Officer
of Bank One, Utah, a commercial bank headquartered in Salt Lake City,
32
<PAGE> 33
Utah. Mr. Baldwin served as Senior Vice President and General Counsel of Bank
One from 1988 until his appointment as President and CEO. From 1981 to 1988, Mr.
Baldwin was engaged in the general practice of law at the firm of Biele, Haslam
& Hatch in Salt Lake City, Utah. Mr. Baldwin received a Juris Doctorate in 1980
from the University of Washington.
Edward N. Bagley has been a Director of the Company since January 1993. Mr.
Bagley is currently Vice President of Smith Barney, with whom he has been
associated since 1971. Mr. Bagley has worked in the investment industry since
1934. Mr. Bagley is also Chairman of the Board of Directors of Mining Services
International, a publicly held developer of explosives technology and suppliers
of chemicals to the mining industry, located in Salt Lake City, Utah. He
received a bachelors degree from Utah State University in 1933.
Dwight H. Egan has been a Director of the Company since November 1994. Mr. Egan
is currently the President and Chief Executive Officer of Broadcast
International, Inc., a satellite communications and business information company
located in Midvale, Utah. He is also currently a director of Data Broadcasting
Corp., the parent of Broadcast International, Inc. Mr. Egan has served as an
officer of Broadcast International since November 1985.
K. Bradford Romney has been a Director of the Company since November 1994. He
currently serves as Assistant Business Unit Manager of the Small Business
Networking Operation for Intel Corporation. From 1991 until its sale to Intel
Corporation in October 1997, Mr. Romney served as President and Chief Executive
Officer of Dayna Communications, Inc., a small business computer networking
company based in Salt Lake City, Utah. Prior to that, he served as Executive
Vice President of Dayna, beginning in 1986. From 1982 to 1986, Mr. Romney was
Executive Vice-President of Keith Romney Associates. The former chairman of the
Utah Information Technologies Association, Mr. Romney received a Juris Doctorate
and a Masters of Business Administration degree from Brigham Young University in
1982.
Director Compensation and Committees
All directors serve until their successors are elected and have qualified. Each
board member received options to purchase 25,000 shares of the Company's Common
Stock as compensation for services rendered through June 30, 1998. Employee
directors receive no additional compensation for serving on the Board.
The Board of Directors has three committees, the Executive, Audit and
Compensation Committees. The Executive Committee is composed of Ms. Frances M.
Flood, Mr. Brad R. Baldwin and Mr. Dwight H. Egan. The Audit Committee is
currently composed of Mr. Brad R. Baldwin, Mr. Edward Dallin Bagley Edward N.
Bagley, Dwight H. Egan and Mr. K. Bradford Romney. The Compensation Committee
is currently composed of Mr. Brad R. Baldwin, Mr. Edward Dallin Bagley, Edward
N. Bagley, K. Bradford Romney and Mr. Dwight H. Egan. The Executive Committee
exercises all the powers and authority of the Board of Directors in the
management of the business and affairs of the Company except those which by
statute, Articles of Incorporation or By-laws are reserved to the Board of
Directors. The Audit Committee is authorized to review proposals of the
Company's auditors regarding annual audits, recommend the engagement or
discharge of the Company's auditors, review recommendations of such auditors
concerning accounting principles and the adequacy of internal controls and
accounting procedures and practices, to review the scope of the annual audit,
to approve or disapprove each professional service or type of service other
than standard auditing services to be provided by the auditors, and to review
and discuss the audited financial statements with the auditors. The
Compensation Committee makes recommendations to the Board of Directors
regarding remuneration of the executive officers and directors of the Company
and administers the incentive plans for directors, officers and key
employees.
Meetings of the Board of Directors and Committees
The Board of Directors held eight meetings during the last fiscal year. The
Executive Committee held no formal meetings during the last fiscal year. The
Audit Committee held no formal meetings during the last fiscal year. The
Compensation Committee held two meetings during the last fiscal year.
33
<PAGE> 34
Executive Officers and Significant Employee
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Frances M. Flood 42 President and Chief Executive Officer
Susie S. Strohm 38 Vice President of Finance
</TABLE>
For the biography of Ms. Flood, see "Directors."
Susie S. Strohm became Vice President of Finance in 1997. In 1996, Ms. Strohm
joined the Company as its Controller. She is responsible for all the Company's
accounting, financial and tax planning, financial and management reporting and
SEC filings. Prior to joining the Company, Ms. Strohm was the Controller for
Newspaper Agency Corporation in Salt Lake City, Utah. She graduated from the
University of Utah with a Bachelor of Science degree in Accounting, and received
her Masters of Business Administration degree from Westminster College.
The significant employee of the Company is:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Brooks Gibbs 39 Director of Technology
</TABLE>
Brooks Gibbs was named Director of Technologies for Gentner Communications in
January of 1998. He has been with Gentner for 10 years serving in Product
Management, Sales, Marketing and Customer Service areas. He is responsible for
coordination of the company's strategic technical direction, product
development, manufacturing and technical service and support. Prior to joining
the Company Mr. Gibbs was a lead project design engineer for Centro Corporation,
a systems design and integration company. Mr. Gibbs has over eighteen years of
communications product development and product management experience.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes of ownership of equity securities of the Company. Officers, directors
and greater than 10% shareholders are required to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, persons as defined above have complied with all
applicable section 16(a) requirements during the preceding fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the compensation of the Chief Executive Officer
of the Company and the other most highly compensated executive officers of the
Company for each of the Company's last three fiscal years whose total salary and
bonus for the year ended June 30, 1998 exceeded $100,000, for services rendered
in all capacities to the Company during such fiscal years.
34
<PAGE> 35
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
------- -------
Securities
Other Restric- Under- All
Annual ted lying Other
Compen- Stock Options LTIP Compen-
Name and Position Year Salary Bonus sation Awards /SARS Payouts sation(1)
- ----------------- ---- ------ ----- ------ ------ ----- ------- ---------
Frances M. Flood Fiscal
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CEO & President(2) 97-98 $117,310 $16,649 None None None None None
Fiscal
96-97 $ 70,657 $ 8,903 None None None None None
Russell D. Gentner Fiscal
Former Chairman, 97-98 $122,950 $18,711 $96,403(3) None None None None
CEO, & President
Fiscal
96-97 $162,240 $11,760 None None None None None
Fiscal
95-96 $156,756 None None None None None $890
</TABLE>
(1) These amounts reflect the Company's contributions to the deferred
compensation plan (401(k) plan).
(2) Ms. Flood did not join the Company until fiscal 96-97.
(3) This includes a severance package.
STOCK OPTIONS/SARS
The following table sets forth the stock option and SAR grants to the named
executive officers for the last fiscal year:
OPTION/SAR GRANTS IN FISCAL YEAR ENDED JUNE 30, 1998
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
Number of Percent of
Securities Total Options
Underlying /SARs Granted Exercise
Options/SARs to Employees or Base Expiration
Name and Position Granted (#) in Fiscal Year Price ($/Sh) Date
- ----------------- ----------- -------------- ------------ ----
<S> <C> <C> <C> <C>
Frances M. Flood
CEO & President 181,000 14% $0.75 to $2.66 6/30/2004
Russell D. Gentner
Former Chairman,
CEO & President 87,000 7% $0.75 6/30/2004
</TABLE>
35
<PAGE> 36
AGGREGATED STOCK OPTION/SAR EXERCISES
The following table sets forth the aggregated stock options and SARs exercised
by the named executive officers in fiscal 1998 and the year-end value of
unexercised options and SARs:
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR ENDED JUNE 30, 1998
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares
Acquired Value Exercisable/ Exercisable/
Name and Position on Exercise(#) Realized($) Unexercisable Unexercisable
- ----------------- -------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Frances M. Flood
CEO & President 0 $0 39,000/301,000 $30,000/$128,250
Russell D. Gentner
Former Chairman,
CEO, & President 0 $0 0 $0
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership of the
Common Stock of the Company as of September 1, 1998 by (i) each person known to
the Company to be the beneficial owner of more than 5% of the outstanding Common
Stock of the Company, (ii) each director of the Company, (iii) the Chief
Executive Officer and each other executive officer of the Company whose salary
and bonus for the year ended June 30, 1998 exceeded $100,000, and (iv) all
executive officers and directors of the Company 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 the Company, 1825 Research
Way, Salt Lake City, Utah 84119, unless otherwise indicated.
<TABLE>
<CAPTION>
Amount of Percentage
Names of Beneficial Owners Beneficial Ownership(1) of Class(2)
-------------------------- ----------------------- ----------
<S> <C> <C>
Edward Dallin Bagley 1,394,335(3) 17.2%
Watson Investment Group 389,000(4) 5.0%
Edward N. Bagley 312,333(5) 4.0%
Brad R. Baldwin 130,166(6) 1.7%
Frances M. Flood 78,477(7) 1.0%
Dwight H. Egan 55,000(8) 0.7%
K. Bradford Romney, Jr 55,000(8) 0.7%
Directors and Executive Officers
as a Group (7 people) 2,059,282(3)(5)(6)(7)(8)(9) 24.6%
</TABLE>
36
<PAGE> 37
(1) For each shareholder, the calculation of percentage of beneficial ownership
is based on 7,750,095 shares of Common Stock outstanding as of September 1,
1998 and shares of Common Stock subject to options held by the shareholder
that are currently exercisable or exercisable within 60 days of September 1,
1998.
(2) The percentage ownership for any person is calculated assuming that all the
stock that could be acquired by that person within 60 days by option
exercise or otherwise, is in fact outstanding and that no other stockholder
has exercised a similar right to acquire additional shares.
(3) Director. Includes: 922,285 shares owned directly; 100,000 shares owned by a
corporation controlled by Mr. Bagley; 50 shares owned by Mr. Bagley's wife
as custodian for one of Mr. Bagley's daughters; and options to purchase
372,000 shares that are exercisable within 60 days. On September 9, 1998,
Mr. Bagley exercised the options referred to in this footnote.
Excludes: 50 shares owned by another of Mr. Bagley's daughters; and shares
owned by the Bagley Family Revocable Trust, all of which Mr. Bagley
disclaims beneficial ownership.
(4) Beneficial owner. Includes: shares held by an investment partnership, a
non-US investment company, and several managed accounts, as to all of which
Mr. Watson has sole investment authority. Mr. Watson's address is 237 Park
Avenue, Suite 801, New York, NY 10017.
(5) Director. Includes: 257,333 shares owned by the Bagley Family Revocable
Trust, of which Mr. Bagley is a co-trustee with his wife; and options to
purchase 55,000 shares that are exercisable within 60 days. Excludes: shares
held or controlled by Mr. Bagley's son (Edward Dallin Bagley) and
granddaughters as described in footnote 3 above, all of which Mr. Edward N.
Bagley disclaims beneficial ownership.
(6) Director. Includes: 65,166 shares owned directly; options to purchase 60,000
shares that are exercisable within 60 days; and 5,000 shares owned by Mr.
Baldwin's wife.
(7) President, CEO and Director. Includes: 49,229 shares owned directly; options
to purchase 29,248 shares that are exercisable within 60 days.
(8) Includes: options to acquire 55,000 shares that are exercisable within 60
days.
(9) Includes: an additional 27,251 shares owned directly by one additional
officer; and options to purchase 6,720 shares that are exercisable within 60
days by that officer.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gentner Research Ltd. ("GRL"), is a related limited partnership, formed on
August 1985, in which the Company is the general partner and Russell Gentner,
Edward Dallin Bagley and, among other unrelated parties, certain members of
their families, are the limited partners. In 1987 and 1988, GRL sold to the
Company 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 the Company for the years ending June 30, 1998 and 1997
was $43,500 and $45,100 respectively. The following directors and/or executive
officers and members of their immediate families have purchased the following
interests in GRL:
<TABLE>
<S> <C>
Russell D. Gentner (Former Pres/CEO/Director)..... 5.21%
Edward Dallin Bagley (Director)................... 10.42%
Edward N. Bagley (Director)....................... 5.21%
Hyrum S. Gentner (father of Russell Gentner)...... 5.21%
Robert O. Baldwin (father of Brad Baldwin)........ 10.42%
</TABLE>
The Company has also formed a second related limited partnership, Gentner
Research II, Ltd. ("GR2L"), also in which it acts as general partner. In fiscal
year 1997, GR2L sold proprietary interest in the GSC3000 to the Company in
exchange for royalty payments. Royalty expense with GR2L for the years ending
June 30, 1998 and 1997 was $54,810 and $36,588. The following directors and/or
executive officers and members of their immediate families have purchased the
following interests in GR2L:
37
<PAGE> 38
<TABLE>
<S> <C>
Brad R. Baldwin (Director).................................. 3.19%
Robert O. Baldwin (father of Brad Baldwin).................. 9.58%
Hyrum S. Gentner (father of Russell Gentner)................ 3.19%
Edward D. Bagley (Director)................................. 6.39%
Edward N. Bagley (Director, Father of Edward D. Bagley)..... 6.39%
</TABLE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
The following exhibits are hereby incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1989. The exhibit
numbers shown are those in the 1989 Form 10-K as originally filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1(1)(2) Articles of Incorporation and all amendments thereto through
March 1, 1988. (Page 10)
10.4(1)(2) VRC-1000 Purchase Agreement between Gentner Engineering
Company, Inc. (a former subsidiary of the Company which was
merged into the Company) and Gentner Research Ltd., dated
January 1, 1987. (Page 71)
</TABLE>
The following exhibits are hereby incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1991. The exhibit
numbers shown are those in the 1991 Form 10-K as originally filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1(1)(2) Amendment to Articles of Incorporation, dated July 1, 1991.
(Page 65)
10.1(1)(2) Internal Modem Purchase Agreement between Gentner Engineering
Company, Inc. and Gentner Research, Ltd., dated October 12,
1987. (Page 69)
10.2(1)(2) Digital Hybrid Purchase Agreement between Gentner Engineering,
Inc. and Gentner Research, Ltd., dated September 8, 1988. (Page
74)
</TABLE>
The following documents are hereby incorporated by reference from the Company's
Form 10-KSB for the fiscal year ended June 30, 1993. The exhibit numbers shown
are those in the 1993 Form 10-KSB as originally filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3(1)(2) Bylaws, as amended on August 24, 1993. (Page 16)
</TABLE>
The following documents are hereby incorporated by reference from the Company's
Form 10-KSB for the fiscal year ended June 30, 1996. The exhibit numbers shown
are those in the 1996 Form 10-KSB as originally filed.
38
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10(1)(2)(3) 1990 Incentive Plan, as amended August 7, 1996 (Page 40)
</TABLE>
The following documents are hereby incorporated by reference from the Company's
Form 10-KSB for the fiscal year ended June 30, 1997. The exhibit numbers shown
are those in the 1997 Form 10-KSB as originally filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1(1)(2) Commercial Credit and Security Agreement, and Promissory Note,
between Company and First Security Bank, N.A. (original
aggregate amount of $2,500,000) (Page 7)
10.2(1)(2)(3) 1997 Employee Stock Purchase Plan (Page 37)
10.3(1)(2) Promissory Note in favor of Safeco Credit Company ($419,000)
(Page 52)
10.4(1)(2) Commercial Credit and Security Agreement, and Promissory Note,
between Company and First Security Bank ($322,716.55) (Page 53)
10.5(1)(2) Lease between Company and Valley American Investment Company
(Page 71)
</TABLE>
The following documents are filed as exhibits to this Form 10-KSB.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1(3) 1998 Stock Option Plan & Form of Grant
10.2 Modification Agreement dated as of December 24, 1997, between
First Security Bank, N.A. and the Company
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
(1) Denotes exhibits specifically incorporated into this Form 10-KSB by
reference to other filings pursuant to the provisions of Rule 12B-32 under
the Securities Exchange Act of 1934.
(2) Denotes exhibits specifically incorporated into this Form 10-KSB by
reference, pursuant to Regulation S-B, Item 10(f)(2). These documents are
located under File No. 0-17219 and are located at the Securities and
Exchange Commission, Public Reference Branch, 450 South 5th St., N.W.,
Washington, DC 20549.
(3) Identifies management or compensatory plans, contracts or arrangements.
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the latest fiscal quarter.
39
<PAGE> 40
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GENTNER COMMUNICATIONS CORPORATION
September 28, 1998 By: /s/ Frances M. Flood
-----------------------
Frances M. Flood
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Frances M. Flood Director, President and September 28, 1998
- --------------------- Chief Executive Officer
Frances M. Flood (Principal Executive Officer)
/s/ Susie Strohm Vice President - Finance September 28, 1998
- --------------------- (Principal Financial and
Susie Strohm Accounting Officer)
</TABLE>
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, place and stead, in any and all
capacities, to sign any or all amendments to this report on Form 10-KSB 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Edward Dallin Bagley Director September 28, 1998
- ------------------------
Edward Dallin Bagley
/s/ Brad R. Baldwin Director September 28, 1998
- ------------------------
Brad R. Baldwin
/s/ Edward N. Bagley Director September 28, 1998
- ------------------------
Edward N. Bagley
/s/ K. Bradford Romney Director September 28, 1998
- ------------------------
K. Bradford Romney
/s/ Dwight H. Egan Director September 28, 1998
- ------------------------
Dwight H. Egan
</TABLE>
40
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1(1)(2) Articles of Incorporation and all amendments thereto through
March 1, 1988. (Page 10)
10.4(1)(2) VRC-1000 Purchase Agreement between Gentner Engineering
Company, Inc. (a former subsidiary of the Company which was
merged into the Company) and Gentner Research Ltd., dated
January 1, 1987. (Page 71)
3.1(1)(2) Amendment to Articles of Incorporation, dated July 1, 1991.
(Page 65)
10.1(1)(2) Internal Modem Purchase Agreement between Gentner Engineering
Company, Inc. and Gentner Research, Ltd., dated October 12,
1987. (Page 69)
10.2(1)(2) Digital Hybrid Purchase Agreement between Gentner Engineering,
Inc. and Gentner Research, Ltd., dated September 8, 1988. (Page
74)
10(1)(2)(3) 1990 Incentive Plan, as amended August 7, 1996 (Page 40)
10.1(1)(2) Commercial Credit and Security Agreement, and Promissory Note,
between Company and First Security Bank, N.A. (original
aggregate amount of $2,500,000) (Page7)
10.2(1)(2)(3) 1997 Employee Stock Purchase Plan (Page 37)
10.3(1)(2) Promissory Note in favor of Safeco Credit Company ($419,000)
(Page 52)
10.4(1)(2) Commercial Credit and Security Agreement, and Promissory Note,
between Company and First Security Bank ($322,716.55) (Page 53)
10.5(1)(2) Lease between Company and Valley American Investment Company
(Page 71)
10.1(3) 1998 Stock Option Plan & Form of Grant
10.2 Modification Agreement dated as of December 24, 1997, between
First Security Bank, N.A. and the Company
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.01
Grant No. ________
GENTNER COMMUNICATIONS CORPORATION
STOCK OPTION GRANT
OPTIONEE: ______________________________________________________________
ADDRESS: _______________________________________________________________
GRANT DATE: ____________________________________________________________
EXERCISE PRICE: $___________ per share
NUMBER OF OPTION SHARES: __________ shares
EXPIRATION DATE: _______________________________________________________
TYPE OF OPTION: _____ Incentive Option _____ Non-Statutory Option
EXERCISE SCHEDULE: The option shall become exercisable annually with
respect to a percentage of one-fifth (1/5) of the total Option Shares
upon the Corporation's achieving annual increases in earnings per share
("EPS") in the five fiscal years 1999-2003, as set forth on Schedule 1
attached. The annual increase in EPS and the number of Options to become
exercisable shall be determined by the Administrator within forty-five
(45) days of the end of the fiscal year and shall be determined based on
the Corporation's audited financial statements for such fiscal year. For
purposes of determining EPS, the Administrator may, in its discretion,
exclude or otherwise adjust annual EPS due to the occurrence of an
extraordinary event during the fiscal year. Extraordinary events shall
include the merger of the Corporation, the Corporation's acquisition of
all or substantially all assets or stock of another company, the sale of
all or substantially all assets or stock of the Corporation to a third
party, a change in the Company's fiscal year, and other extraordinary
transactions that are outside the ordinary course of business. In no
event shall the option become exercisable for any Option Shares not
vested at the time of Optionee's cessation of Service.
1. GRANT OF OPTION. Gentner Communications Corporation, a
Utah corporation (the "Corporation") hereby grants to the Optionee named above,
as of the Grant Date, an option to purchase up to the total number of Option
Shares specified above. This grant includes the terms of the Stock Option
Exercise Notice and Purchase Agreement attached hereto as Exhibit A, is made
subject to all of the terms and conditions of this Grant and the Corporation's
1998 Stock Option Plan, a copy of which is attached hereto as Exhibit B. All
capitalized terms not defined herein have the meaning set for the in the
Appendix to the Plan.
2. OPTION TERM. The option term shall be measured from the
Grant Date and shall accordingly expire at the close of business on the
Expiration Date specified above, unless sooner terminated in accordance with
paragraph 5 below.
3. LIMITED TRANSFERABILITY. This option shall be neither
transferable nor assignable, in whole or in part, by Optionee other than by will
or by the laws of descent and distribution following Optionee's death and may be
exercised, during Optionee's lifetime, only by Optionee. However, if this option
is designated a Non-Statutory Option above, then this option may also, in
connection with Optionee's estate plan, be assigned in whole or in part during
Optionee's lifetime to one or more members of Optionee's immediate family
(spouse or children) or to a trust established exclusively for the benefit of
one or more such immediate family members. Optionee shall give written notice of
any such assignment during Optionee's lifetime to the Corporation within 20 days
of assignment. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the
42
<PAGE> 2
same as those in effect for this option immediately prior to such assignment and
shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate.
4. EXERCISABILITY. This option shall become exercisable for
the Option Shares in one or more installments as provided in the Exercise
Schedule specified above. As the option becomes exercisable for such
installments, those installments shall accumulate and the option shall remain
exercisable for the accumulated installments until the Expiration Date or sooner
termination of the option term under paragraph 5 below.
5. CESSATION OF SERVICE. The option term specified in
paragraph 2 above shall terminate, and this option shall cease to be outstanding
prior to the Expiration Date, upon Optionee's ceasing to be in the Service of
the Corporation. In such event, the following provisions shall apply:
a. Should Optionee cease to remain in Service for any
reason (other than death, Permanent Disability or Misconduct)
while this option is outstanding, then Optionee shall have a
period of three (3) months (commencing with the date of such
cessation of Service) during which to exercise this option as to
vested Option Shares.
b. Should Optionee die while this option is outstanding,
then the personal representative of Optionee's estate (or the
person or persons to whom the option is transferred pursuant to
Optionee's will or in accordance with the laws of descent and
distribution) shall have a period of twelve (12) months
(commencing with the date of such cessation of Service) during
which to exercise this option as to vested Option Shares.
c. Should Optionee cease Service by reason of Permanent
Disability while this option is outstanding, then Optionee shall
have a period of twelve (12) months (commencing with the date of
such cessation of Service) during which to exercise this option
as to vested Option Shares.
d. Should Optionee's Service be terminated for Misconduct,
then this option shall terminate immediately and cease to remain
outstanding.
e. During the limited post-Service exercise period, this
option may not be exercised in the aggregate for more than the
number of vested Option Shares for which the option is
exercisable on the date of the Optionee's cessation of Service.
Upon the expiration of such limited post-Service exercise period
or upon the Expiration Date (if earlier), this option shall
terminate and cease to be outstanding for any vested Option
Shares for which the option has not been exercised. In no event
shall this option be exercisable at any time after the Expiration
Date. To the extent this option is not otherwise exercisable for
vested Option Shares at the time of Optionee's cessation of
Service, this option shall immediately terminate and cease to be
outstanding with respect to those shares.
6. ADJUSTMENT IN OPTION SHARES. Should any change be made to
the Common Stock by reason of any split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option, and (ii) the Exercise Price,
in order to reflect such change and thereby preclude a dilution or enlargement
of benefits hereunder.
7. STOCKHOLDER RIGHTS. The holder of this option shall not
have any stockholder rights with respect to the Option Shares until such person
shall have exercised the option, paid the Exercise Price, and become a holder of
record of the Purchased Shares.
43
<PAGE> 3
8. MANNER OF EXERCISING OPTIONS
a. In order to exercise this option with respect to all or
any part of the Option Shares for which this option is at the
time exercisable, Optionee (or any other person or persons
exercising this option) must take the following actions:
(1) Execute and deliver to the Corporation a Stock
Option Exercise Notice and Purchase Agreement for the
Option Shares for which the option is exercised.
(2) Pay the aggregate Exercise Price for the
Purchased Shares in one or more of the following forms:
(a) Cash or check made payable to the
Corporation; or
(b) A promissory note payable to the
Corporation, but only to the extent authorized by
the Plan Administrator in accordance with paragraph
12.
Upon prior written approval of the Plan Administrator, the
Exercise Price may also be paid as follows:
(c) In shares of Common Stock held by
Optionee (or any other person or persons exercising
the option) for the requisite period necessary to
avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair
Market Value on the Exercise Date; or
(d) Through a special sale and remittance
procedure pursuant to which Optionee (or any other
person or persons exercising the option) shall
concurrently provide irrevocable written
instructions (1) to a Corporation-designated
brokerage firm to effect the immediate sale of the
Purchased Shares and remit to the Corporation, out
of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate
Exercise Price payable for the Purchased Shares
plus all applicable federal, state and local income
and employment taxes required to be withheld by the
Corporation by reason of such exercise and (2) to
the Corporation to deliver the certificates for the
Purchased Shares directly to such brokerage firm in
order to complete the sale.
Except to the extent the sale and remittance procedure is
utilized in connection with the option exercise, payment of the Exercise Price
must accompany the Stock Option Exercise Notice and Purchase Agreement delivered
to the Corporation in connection with the option exercise.
(3) Furnish to the Corporation appropriate
documentation that the person or persons exercising the
option (if other than Optionee) have the right to exercise
this option.
(4) Execute and deliver to the Corporation such
written representations as may be requested by the
Corporation in order for it to comply with the applicable
requirements of federal and state securities laws.
(5) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or
retaining Optionee) for the satisfaction of all federal,
state and local income and employment tax withholding
requirements applicable to the option exercise.
a. As soon as practical after the Exercise
Date, the Corporation shall issue to, or, on behalf
of Optionee (or any other person or persons
44
<PAGE> 4
exercising this option), a share certificate for
the Purchased Shares.
b. In no event may this option be exercised
for any fractional shares.
9. COMPLIANCE WITH LAWS AND REGULATIONS
a. The exercise of this option and the issuance of the
Option Shares upon such exercise shall be subject to compliance
by the Corporation and Optionee with all applicable requirements
of law relating thereto and with all applicable regulations of
any stock exchange (or Nasdaq, if applicable) on which the Common
Stock may be listed for trading at the time of such exercise and
issuance.
b. The inability of the Corporation to obtain approval
from any regulatory body having authority deemed by the
Corporation to be necessary to the lawful issuance and sale of
any Common Stock pursuant to this option shall relieve the
Corporation of any liability with respect to the non-issuance or
sale of the Common Stock as to which such approval shall not have
been obtained. The Corporation, however, shall use its best
efforts to obtain all such approvals.
10. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in paragraph 3, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's permitted assigns and the legal representatives, heirs
and legatees of Optionee's estate.
11. NOTICES. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated on the Stock Option Grant. All notices
shall be deemed effective upon personal delivery or upon deposit in the U.S.
mail, postage prepaid and properly addressed to the party to be notified.
12. FINANCING. The Plan Administrator may, in its absolute
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchase Option Shares by delivering a full-recourse
promissory note payable to the Corporation. The terms of any such promissory
note (including the interest rate, the requirements for collateral and the terms
of repayment) shall be established by the Plan Administrator in its sole
discretion.
13. CONSTRUCTION. This Agreement and the option evidenced
hereby are made and granted pursuant to the Plan and are in all respects limited
by and subject to the terms of the Plan and the Stock Option Exercise Notice and
Purchase Agreement. All decisions of the Plan Administrator with respect to any
question or issue arising under the Plan or this Agreement shall be conclusive
and binding on all persons having an interest in this option.
14. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of Utah
without resort to its conflict-of-laws rules.
15. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the
event this option is designated an Incentive Option above, the following terms
and conditions shall also apply to the grant:
a. This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this
option is exercised for one or more Option Shares: (1) more than
three (3) months after the date Optionee ceases to be an Employee
or in the Service of the Corporation for any reason other than
death or Permanent Disability or (2) more than twelve (12) months
after the date Optionee ceases to be an Employee by reason of
death or Permanent Disability.
45
<PAGE> 5
b. No installment under this option shall qualify for
favorable tax treatment as an Incentive Option if (and to the
extent) the aggregate Fair Market Value (determined at the Grant
Date) of the Common Stock for which such installment first
becomes exercisable hereunder would, when added to the aggregate
value (determined as of the respective date or dates of grant) of
any earlier installments of the Common Stock and any other
securities for which this option or any other Incentive Options
granted to Optionee prior to the Grant Date (whether under the
Plan or any other option plan of the Corporation or any Parent or
Subsidiary) first become exercisable during the same calendar
year, exceed One Hundred Thousand Dollars ($100,000) in the
aggregate. Should such One Hundred Thousand Dollar ($100,000)
limitation be exceeded in any calendar year, this option shall
nevertheless become exercisable for the excess shares in such
calendar year as a Non-Statutory Option.
c. Should the Board elect to accelerate the exercisability
of this option upon a Corporate Transaction, then this option
shall qualify as an Incentive Option only to the extent the
aggregate Fair Market Value (determined at the Grant Date) of the
Common Stock for which this option first becomes exercisable in
the calendar year in which the Corporate Transaction occurs does
not, when added to the aggregate value (determined as of the
respective date or dates of grant) of the Common Stock or other
securities for which this option or one or more other Incentive
Options granted to Optionee prior to the Grant Date (whether
under the Plan or any other option plan of the Corporation or any
Parent or Subsidiary) first become exercisable during the same
calendar year, exceed One Hundred Thousand Dollars ($100,000) in
the aggregate. Should the applicable One Hundred Thousand Dollar
($100,000) limitation be exceeded in the calendar year of such
Corporate Transaction, the option may nevertheless be exercised
for the excess shares in such calendar year as a Non-Statutory
Option.
d. Should Optionee hold, in addition to this option, one
or more other options to purchase Common Stock which become
exercisable for the first time in the same calendar year as this
option, then the foregoing limitations on the exercisability of
such options as Incentive Options shall be applied on the basis
of the order in which such options are granted.
e. The grant of this option is subject to approval of the
Plan by Corporation's stockholders within twelve (12) months
after the adoption of the Plan by the Board. In the event that
such stockholder approval is not obtained, then this option shall
not qualify as an Incentive Option.
f. If the Option Shares covered by this Agreement exceed,
as of the Grant Date, the number of shares of Common Stock which
may without stockholder approval be issued under the Plan, then
this option shall cease to qualify as an Incentive Option unless
stockholder approval of an amendment sufficiently increasing the
number of shares of Common Stock issuable under the Plan is
obtained in accordance with the provisions of the Plan.
g. If Optionee is a 10% Stockholder, then the Exercise
Price shall not be less than one hundred ten percent (110%) of
the Fair Market Value per share of Common Stock on the Grant
Date, and the option term shall not exceed five (5) years
measured from the Grant Date.
h. Shares purchased pursuant to this option shall cease to
qualify for favorable tax treatment as Incentive Option shares if
and to the extent Optionee disposes of such shares within two (2)
years from the Grant Date or within one (1) year of Optionee's
purchase of said shares.
i. Optionee acknowledges that the rules regarding
Incentive Options as contained in the Internal Revenue Code are
subject to amendment in the future. Optionee should consult his
or her tax advisor prior to taking any action with respect to
this option or the shares purchased hereunder.
IN WITNESS WHEREOF, this Agreement is executed as of the Grant Date
first noted above.
46
<PAGE> 6
GENTNER COMMUNICATIONS
CORPORATION
By______________________________________
Title___________________________________
47
<PAGE> 7
ACKNOWLEDGEMENT
Optionee understands and agrees that the option is granted subject to and in
accordance with the terms of the Corporation's 1998 Stock Option Plan (the
"Plan"). Optionee further agrees to be bound by the terms of the Plan and the
terms of the option as set forth in this Agreement. Optionee understands that
any Option Shares purchased under the option shall be subject to the terms set
forth in the Stock Option Exercise Notice and Purchase Agreement attached hereto
as Exhibit A.
Optionee hereby acknowledges receipt of a copy of the Plan in the form
attached hereto as Exhibit B, and represents that Optionee has read and
understands the Plan, and accepts this option subject to all terms and
provisions of the Plan and the Plan documents. Optionee hereby agrees to accept
as binding, conclusive and final, all decisions and interpretations of the Board
of Directors upon any questions arising under the Plan. Optionee acknowledges
that there may be adverse tax consequences upon exercise of this option and/or
upon disposition of the Purchased Shares, and that Optionee should consult a tax
advisor prior to such exercise or disposition.
OPTIONEE
------------------------------------
OPTIONEE
------------------------------------
DATE
48
<PAGE> 8
SCHEDULE 1
- -------------------------
Name of Optionee
- -------------------------
Date of Grant
- -------------------------
Number of Option Shares
This Schedule 1 sets forth the vesting of stock options granted pursuant
to the Gentner Communications, Inc. Stock Option Grant referenced above.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Percentage of the
Annual Earnings Per Share($) one-fifth
Fiscal Year ------------------------------ installment that
(June 30) From To vests
- ---------------------------------------------------------------------
<S> <C> <C> <C>
1999 0.0000 0.1699 0%
0.1700 0.1799 50%
0.1800 0.1899 60%
0.1900 0.1999 70%
0.2000 0.2099 80%
0.2100 0.2199 90%
>0.2199 100%
- ---------------------------------------------------------------------
2000 0.0000 0.2799 0%
0.2800 0.2899 50%
0.2900 0.2999 60%
0.3000 0.3099 70%
0.3100 0.3199 80%
0.3200 0.3299 90%
>0.3299 100%
- ---------------------------------------------------------------------
2001 0.0000 0.4199 0%
0.4200 0.4399 50%
0.4400 0.4599 60%
0.4600 0.4799 70%
0.4800 0.4999 80%
0.5000 0.5199 90%
>0.5199 100%
- ---------------------------------------------------------------------
2002 0.0000 0.6399 0%
0.6400 0.6899 50%
0.6900 0.7399 60%
0.7400 0.7899 70%
0.7900 0.8399 80%
0.8400 0.8899 90%
>0.8899 100%
- ---------------------------------------------------------------------
2003 0.0000 1.0499 0%
1.0500 1.1299 50%
1.1300 1.2099 60%
1.2100 1.2899 70%
1.2900 1.3699 80%
1.3700 1.4499 90%
>1.4499 100%
- ---------------------------------------------------------------------
</TABLE>
49
<PAGE> 9
EXHIBIT A
GENTNER COMMUNICATIONS CORPORATION
STOCK OPTION EXERCISE NOTICE
AND PURCHASE AGREEMENT
This Stock Option Exercise Notice and Purchase Agreement ("Agreement")
is made as of this ____ day of ___________, 19____, by and between Gentner
Communications Corporation, a Utah corporation and ______________________,
Optionee under the Corporation's 1998 Stock Option Plan (the "Plan").
All capitalized terms used in this Agreement and not defined herein
shall have the meaning assigned to them in the Appendix to the Plan.
50
<PAGE> 10
1. EXERCISE OF OPTION
a. EXERCISE. Optionee hereby elects to exercise Optionee's option
to purchase ___________________________________ (_____________) shares
of Common Stock (the "Purchased Shares") of the Corporation, pursuant to
that certain option (the "Option") granted Optionee on
__________________, 19____ (the "Grant Date") to purchase _____________
shares of Common Stock under the Plan at the exercise price of
$___________ per share (the "Exercise Price").
b. PAYMENT. Concurrent with the delivery of this Agreement to the
Corporation, Optionee shall pay the Exercise Price for the Purchased
Shares in accordance with the provisions of the Stock Option Grant and
shall deliver whatever additional documents may be required by the Stock
Option Grant as a condition for exercise with respect to the Purchased
Shares.
2. MARKET STAND-OFF AGREEMENT
a. RESTRICTION ON TRANSFER. In connection with any underwritten
public offering by the Corporation of its equity securities pursuant to
an effective registration statement filed under the 1933 Act, including
the Corporation's initial public offering, Owner shall not sell, make
any short sale of, loan, hypothecate, pledge, grant any option for the
purchase of, or otherwise dispose or transfer for value or otherwise
agree to engage in any of the foregoing transactions with respect to,
any Purchased Shares without the prior written consent of the
Corporation or its underwriters. Such restrictions (the "Market
Stand-Off") shall be in effect for such period of time from and after
the effective date of the final prospectus for the offering as may be
requested by the Corporation or such underwriters. In no event, however,
shall such period exceed one hundred eighty (180) days and the Market
Stand-Off shall in all events terminate two (2) years after the
effective date of the Corporation's initial public offering.
b. OFFICERS AND DIRECTORS. Owner shall be subject to the Market
Stand-Off provided and only if the officers and directors of the
Corporation are also subject to similar restrictions.
c. ADDITIONAL SHARES. Any new, substituted or additional
securities which are, by reason of any Recapitalization or
Reorganization, distributed with respect to the Purchased Shares shall
be immediately subject to the Market Stand-Off, to the same extent the
Purchased Shares are at such time covered by such provisions.
d. STOP TRANSFER. In order to enforce the Market Stand-Off, the
Corporation may impose stop-transfer instructions with respect to the
Purchased Shares until the end of the applicable stand-off period.
3. MISCELLANEOUS PROVISIONS
a. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement
or in the Plan shall confer upon Optionee any right to continue in
Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any
Parent or Subsidiary employing or retaining Optionee) or of Optionee,
which rights are hereby expressly reserved by each, to terminate
Optionee's Service at any time for any reason with or without cause.
b. NOTICES. Any notice required to be given under this Agreement
shall be in writing and shall be deemed effective upon personal delivery
or upon deposit in the U.S. mail, registered or certified, postage
prepaid and properly addressed to the party entitled to such notice at
the address indicated below such party's signature line on this
Agreement or at such other address as such party may designate by ten
(10) days' advance written notice under this paragraph to all other
parties to this Agreement.
c. AMENDMENTS AND WAIVERS. No waiver or amendment of this
Agreement shall be effective unless agreed to in writing by the parties
hereto. No waiver of any breach or condition of this Agreement shall be
deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
d. OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever
additional action and execute whatever additional documents the
Corporation may deem necessary or advisable in order to carry out or
effect one or more of the obligations or restrictions imposed on either
Optionee or the Purchased Shares pursuant to the provisions of this
Agreement.
e. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Utah without
resort to that State's conflict-of-laws rules.
51
<PAGE> 11
f. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and upon Optionee, Optionee's permitted assigns
and the legal representatives, heirs and legatees of Optionee's estate,
whether or not any such person shall have become a party to this
Agreement and have agreed in writing to join herein and be bound by the
terms hereof.
52
<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first indicated above.
GENTNER COMMUNICATIONS CORPORATION
By:____________________________________
Title:_________________________________
_______________________________________
OPTIONEE
Address:_______________________________
_______________________________________
53
<PAGE> 13
EXHIBIT B
1998 STOCK OPTION PLAN
ARTICLE 1.
GENERAL PROVISIONS
1.1. PURPOSE OF THE PLAN
This 1998 Stock Option Plan (the "Plan") is intended to promote
the interests of Gentner Communications Corporation, a Utah corporation, (the
"Corporation") by providing eligible persons with the opportunity to acquire or
increase their proprietary interest in the Corporation as an incentive for them
to remain in the Service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms
in the attached Appendix.
1.2. ADMINISTRATION OF THE PLAN
a. The Plan shall be administered by the Board or, to the extent
required under applicable Stock Exchange requirements or if desired by the
Board, a committee of the Board. If administered by committee, the Primary
Committee shall have sole and exclusive authority to administer the Plan with
respect to Section 16 Insiders; committee authority to administer the Plan with
respect to all other persons may be vested in either the Primary Committee or a
Secondary Committee, as determined by the Board.
b. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may terminate the functions of any
Secondary Committee at any time and delegate all powers and authority previously
delegated to such committee to the Primary Committee. To the extent committee
administration is no longer required by applicable law, regulation or Stock
Exchange requirement, the Board may also terminate the functions of any
committee at any time and reassume all powers and authority previously delegated
to such committee.
c. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Plan and to make such determinations under, and issue such
interpretations of, the provisions of the Plan and any outstanding options
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the Plan under
its jurisdiction or any option thereunder.
d. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants under the Plan.
e. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority (subject to the
provisions of the Plan) to determine which eligible persons are to receive
option grants, the time or times when such option grants are to be made, the
number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times at which each option is to become exercisable, the vesting schedule (if
any) applicable to the option shares, the acceleration of such vesting schedule,
and all other terms and conditions of the option grants.
1.3. ELIGIBILITY
54
<PAGE> 14
The following persons shall be eligible to participate in the
Plan:
a. Employees,
b. non-employee members of the Board or the board of directors of
any Parent or Subsidiary, and
c. consultants and other independent advisors who provide
Services to the Corporation or any Parent or Subsidiary.
1.4. STOCK SUBJECT TO THE PLAN
a. The stock issuable under the Plan shall be shares of
authorized but unissued Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 1,700,000 shares,
which number of shares may be changed from time to time in accordance with
Article 3.4 below.
b. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
2.4. However, should the Exercise Price be paid with shares of Common Stock or
should shares of Common Stock otherwise issuable under the Plan be withheld by
the Corporation in satisfaction of the withholding taxes incurred in connection
with the exercise of an option under the Plan, then the number of shares of
Common Stock available for issuance under the Plan shall be reduced by the gross
number of shares for which the option is exercised, and not by the net number of
shares of Common Stock issued to the holder of such option.
c. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities for which any one
person may be granted options per calendar year, and (iii) the number and/or
class of securities and the Exercise Price in effect under each outstanding
option in order to prevent the dilution or enlargement of benefits thereunder.
The adjustments determined by the Plan Administrator shall be final, binding and
conclusive.
ARTICLE 2.
OPTION GRANT PROGRAM
2.1. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of Article
2.2 of the Plan, below.
a. Exercise Price
(1) The Exercise Price shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the Grant Date.
(2) The Exercise Price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Article 3.1, and
the documents evidencing the option, be payable in one or more of the forms
specified below:
(a) cash or check made payable to the Corporation,
55
<PAGE> 15
(b) a promissory note payable to the Corporation,
but only to the extent authorized by the Administrator pursuant to
Section 12 of the Plan,
(c) shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, but only upon prior written approval of the Plan
Administrator, or
(d) upon the prior written approval of the Plan
Administrator, and to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable written
instructions to (a) a Corporation-designated brokerage firm to effect
the immediate sale of the Purchased Shares and remit to the Corporation,
out of the sale proceeds available on the settlement date, sufficient
funds to cover the aggregate Exercise Price payable for the Purchased
Shares plus all applicable federal, state and local income and
employment taxes required to be withheld by the Corporation by reason of
such exercise and (b) the Corporation to deliver the certificates for
the Purchased Shares directly to such brokerage firm in order to
complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the Exercise Price for the Purchased Shares must be made on
the Exercise Date.
b. Exercise and Term of Options. Each option shall be exercisable
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the Grant Date.
c. Effect of Termination of Service
(1) The following provisions shall govern the exercise of
any options held by the Optionee at the time of cessation of Service:
(a) Any option outstanding at the time of the
Optionee's cessation of Service for any reason except death, Permanent
Disability or Misconduct shall remain exercisable for a three (3) month
period thereafter, provided no option shall be exercisable after the
Expiration Date.
(b) Any option outstanding at the time of the
Optionee's cessation of Service due to death or Permanent Disability
shall remain exercisable for a twelve (12) month period thereafter,
provided no option shall be exercisable after the Expiration Date.
Subject to the foregoing, any option exercisable in whole or in part by
the Optionee at the time of death may be exercised subsequently by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution.
(c) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(d) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of shares for which the option is exercisable on the date of
the Optionee's cessation of Service; the option shall, immediately upon
the Optionee's cessation of Service, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable. Upon the expiration of the applicable exercise period or
(if earlier) upon the Expiration Date, the option shall terminate and
cease to be outstanding for any shares for which the option has not been
exercised.
(2) The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
(a) extend the period of time for which the option
is to remain exercisable following the Optionee's cessation of Service
from the period otherwise in effect for that option to such greater
56
<PAGE> 16
period of time as the Plan Administrator shall deem appropriate, but in
no event beyond the Expiration Date, and/or
(b) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of shares of Common Stock for which such option is exercisable at
the time of the Optionee's cessation of Service but also with respect to
one or more additional shares that would have vested under the option
had the Optionee continued in Service.
d. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the Exercise Price, and become a
holder of record of the Purchased Shares.
e. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options may be exercised only by the Optionee, and shall not
be assignable or transferable except by will or the laws of descent and
distribution following the Optionee's death. Non-Statutory Options may be
assigned or transferred in whole or in part only (i) during the Optionee's
lifetime if in connection with the Optionee's estate plan to one or more members
of the Optionee's immediate family (spouse and children) or to a trust
established exclusively for the benefit of one or more such immediate family
members, or (ii) by will or the laws of descent and distribution following the
Optionee's death. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.
2.2. INCENTIVE OPTIONS
The terms specified below shall apply to all Incentive Options.
Except as modified by the provisions of this Article 2.2, all the provisions of
this Plan shall apply to Incentive Options. Options specifically designated as
Non-Statutory Options when issued under the Plan shall not be subject to the
terms of this Article 2.2.
a. Eligibility. Incentive Options may only be granted to
Employees.
b. Exercise Price. The Exercise Price shall not be less than one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
Grant Date.
c. Dollar Limitation. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one (1) calendar
year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied in the
order in which such options are granted.
d. 10% Stockholder. If an Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the Exercise Price shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common Stock on
the Grant Date, and the option term shall not exceed five (5) years measured
from the Grant Date.
e. Holding Period. Shares purchased pursuant to an option shall
cease to qualify for favorable tax treatment as Incentive Option Shares if and
to the extent Optionee disposes of such shares within two (2) years of the Grant
Date or within one (1) year of Optionee's purchase of said shares.
2.3. CORPORATE TRANSACTION/CHANGE IN CONTROL
a. In the event of any Corporate Transaction, the Board of
Directors shall have the sole discretion to elect that each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, becomes fully exercisable
for all of the shares of Common Stock at the time
57
<PAGE> 17
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. The Board may exercise its discretion to
accelerate the vesting of options whether or not (i) such option is, in
connection with the Corporate Transaction, either to be assumed by the successor
corporation or parent thereof or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation or parent
thereof, (ii) such option is to be replaced with a cash incentive program of the
successor corporation which preserves the spread existing on the unvested option
shares at the time of the Corporate Transaction and provides for subsequent
payout in accordance with the same vesting schedule applicable to such option,
except to the extent that the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
b. The Plan Administrator's discretion under Article 2.3.a. above
shall be exercisable either at the time the option is granted or at any time
while the option remains outstanding, whether or not those options are to be
assumed or replaced in the Corporate Transaction. The Plan Administrator shall
also have the discretion to grant options which do not accelerate whether or not
such options are assumed in connection with a Corporate Transaction.
c. If the Board of Directors elects the automatic acceleration of
some or all of the outstanding options upon the occurrence of a Corporate
Transaction, all such outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof) immediately following the consummation of the Corporate
Transaction.
d. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities that would have been
issuable to the Optionee in consummation of such Corporate Transaction had the
option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction, (ii) the exercise price payable per share under each
outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same and (iii) the maximum number of securities
and/or class of securities for which any one person may be granted stock
options.
e. The Plan Administrator shall have the discretion, exercisable
at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of any options assumed or
replaced in a Corporate Transaction that do not otherwise accelerate at that
time in the event the Optionee's Service should subsequently terminate by reason
of an Involuntary Termination within eighteen (18) months following the
effective date of such Corporate Transaction. Any options so accelerated shall
remain exercisable for shares until the earlier of (i) the expiration of the
option term or (ii) the expiration of the one (1)-year period measured from the
effective date of the Involuntary Termination.
f. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to (i) provide for the automatic acceleration of one or more
outstanding options upon the occurrence of a Change in Control or (ii) condition
any such option acceleration upon the subsequent Involuntary Termination of the
Optionee's Service within a specified period (not to exceed eighteen (18)
months) following the effective date of such Change in Control. Any options
accelerated in connection with a Change in Control shall remain fully
exercisable until the Expiration Date or sooner termination of the option term.
g. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the federal tax laws.
h. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
58
<PAGE> 18
ARTICLE 3.
MISCELLANEOUS
3.1. FINANCING
a. The Plan Administrator may permit any Optionee to pay the
option Exercise Price by delivering a promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. Promissory notes may be authorized with or without security
or collateral. In all events, the maximum credit available to the Optionee may
not exceed the sum of (i) the aggregate option Exercise Price payable for the
Purchased Shares plus (ii) the amount of any federal, state and local income and
employment tax liability incurred by the Optionee in connection with the option
exercise.
b. The Plan Administrator may, in its discretion, determine that
one or more such promissory notes shall be subject to forgiveness by the
Corporation in whole or in part upon such terms as the Plan Administrator may
deem appropriate.
3.2. TAX WITHHOLDING
a. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options under the Plan shall be subject to the satisfaction
of all applicable federal, state and local income and employment tax withholding
requirements.
b. The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options under the Plan with the right to use shares
of Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options. Such right may be
provided to any such holder in either or both of the following formats:
(1) Stock Withholding: The election to have the
Corporation withhold, from the shares of Common Stock otherwise issuable
upon the exercise of such Non-Statutory Option, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of
the Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
(2) Stock Delivery: The election to deliver to the
Corporation, at the time the Non-Statutory Option is exercised, one or
more shares of Common Stock previously acquired by such holder (other
than in connection with the option exercise triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not
to exceed one hundred percent (100%)) designated by the holder.
3.3. EFFECTIVE DATE AND TERM OF THE PLAN
a. The Plan shall become effective on the Plan Effective Date.
However, no shares shall be issued under the Plan pursuant to Incentive Options
until the Plan is approved by the Corporation's stockholders. If such
stockholder approval is not obtained within twelve (12) months after the Plan
Effective Date, then all Incentive Options previously granted under this Plan
shall automatically convert into Non-Statutory Options.
b. The Plan shall terminate upon the earliest of (i) June 10,
2008, (ii) the date on which all shares available for issuance under the Plan
shall have been issued, or (iii) the termination of all outstanding options in
connection with a Corporate Transaction. Upon such Plan termination, all
outstanding options shall continue to have force and effect in accordance with
the provisions of the documents evidencing such options.
59
<PAGE> 19
3.4. AMENDMENT OF THE PLAN
a. The Board shall have complete and exclusive power and
authority to amend or modify the Plan in any or all respects, or to cancel any
grants made thereunder; provided, however, that no such amendment, modification,
or cancellation shall adversely affect any rights and obligations with respect
to options at the time outstanding under the Plan unless each affected Optionee
consents to such amendment, modification, or cancellation. In addition,
amendments to the Plan shall be subject to approval of the Corporation's
stockholders to the extent required by applicable laws, regulations, or Nasdaq
or Stock Exchange requirements.
b. Options to purchase shares of Common Stock may be granted
under the Plan that are in each instance in excess of the number of shares then
available for issuance under the Plan, provided any excess shares actually
issued are held in escrow until there is obtained Board approval (and
shareholder approval if required by applicable laws, regulations, or Stock
Exchange requirements) of an amendment sufficiently increasing the number of
shares of Common Stock available for issuance under the Plan.
3.5. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
3.6. REGULATORY APPROVALS
a. The implementation of the Plan, the granting of any option
under the Plan, and the issuance of any shares of Common Stock upon the exercise
of any option shall be subject to the Corporation's obtaining all approvals and
permits required by regulatory authorities having jurisdiction over the Plan and
the options granted under it, and the shares of Common Stock issued pursuant to
the Plan.
b. No shares of Common Stock shall be issued or delivered under
the Plan unless and until there shall have been compliance with all applicable
requirements of federal and state securities laws and all applicable listing
requirements of any stock exchange (or the Nasdaq market, if applicable) on
which Common Stock is then listed for trading.
3.7. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee, which rights
are hereby expressly reserved by each, to terminate such person's Service at any
time for any reason, with or without cause.
60
<PAGE> 20
APPENDIX
The following definitions shall be in effect under the Plan and
the Plan Documents:
0.1. BOARD shall mean the Corporation's Board of Directors.
2. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any person
or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders, which the Board
does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who
either (A) have been Board members continuously since the beginning of
such period or (B) have been elected or nominated for election as Board
members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time the Board
approved such election or nomination.
3. CODE shall mean the Internal Revenue Code of 1986, as amended.
4. COMMON STOCK shall mean the Corporation's common stock.
5. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction; or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
6. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
participate in the Plan.
7. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
8. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.
9. EXERCISE PRICE shall mean the exercise price per share as specified
in the Stock Option Grant.
10. EXPIRATION DATE shall mean the date on which the option expires as
specified in the Stock Option Grant.
11. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
61
<PAGE> 21
(i) If the Common Stock is traded at the time on the
Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as such
price is reported by the National Association of Securities Dealers on
the Nasdaq National Market or any successor system. If there is no
closing selling price for the Common Stock on the date in question, then
the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.
(iii) If the Common Stock is not listed on any Stock
Exchange nor traded on the Nasdaq National Market, then the Fair Market
Value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
(iv) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial
public offering pursuant to the Underwriting Agreement.
12. GRANT DATE shall mean the date on which the option is granted to
Optionee as specified in the Stock Option Grant.
13. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
14. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge
by the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A)
a change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or
her level of compensation (including base salary, fringe benefits and
participation in corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of such
individual's place of employment by more than fifty (50) miles, provided
and only if such change, reduction or relocation is effected by the
Corporation without the individual's consent.
15. MARKET STAND OFF shall mean the market stand off restriction on
disposition of the Purchased Shares as identified under such title in the Stock
Option Exercise Notice and Purchase Agreement.
16. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee or other person in the Service of the Corporation (or any Parent
or Subsidiary).
17. 1933 ACT shall mean the Securities Act of 1933, as amended.
18. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
62
<PAGE> 22
19. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.
20. OPTIONEE shall mean any person to whom an option is granted under
Plan.
21. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option as specified in the Stock Option Grant.
22. OWNER shall mean Optionee and all subsequent holders of the
Purchased Shares who derive their claim of ownership through a Permitted
Transfer from Optionee.
23. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one or the other corporations
in such chain.
24. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
25. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the
Purchased Shares, provided and only if Optionee obtains the Corporation's prior
written consent to such transfer, (ii) a transfer of title to the Purchased
Shares effected pursuant to Optionee's will or the laws of intestate succession
following Optionee's death, or (iii) a transfer to the Corporation in pledge as
security for any purchase-money indebtedness incurred by Optionee in connection
with the acquisition of the Purchased Shares.
26. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Board or a committee of the Board, which is authorized to administer the Plan
with respect to one or more classes of eligible persons, to the extent such
entity is carrying out its administrative functions under the Plan with respect
to the persons under its jurisdiction.
27. PLAN DOCUMENTS shall mean the Plan, the Stock Option Grant, and
Stock Option Exercise Notice and Purchase Agreement, collectively.
28. PLAN EFFECTIVE DATE shall mean _____________, the date on which the
Plan was adopted by the Board.
29. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members (as defined in the regulations to Section 16 of the
1934 Act) appointed by the Board to administer the Plan with respect to Section
16 Insiders.
30. PURCHASED SHARES shall mean the shares purchased upon exercise of
the Option.
31. RECAPITALIZATION shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other charge
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.
32. REORGANIZATION shall mean any of the following transactions:
(i) a merger or consolidation in which the Corporation is
not the surviving entity;
(ii) a sale, transfer or other disposition of all or
substantially all of the Corporation's assets;
63
<PAGE> 23
(iii) a reverse merger in which the Corporation is the
surviving entity but in which the Corporation's outstanding voting
securities are transferred in whole or in part to a person or persons
different from the persons holding those securities immediately prior to
the merger; or
(iv) any transaction effected primarily to change the
state in which the Corporation is incorporated or to create a holding
company structure.
33. SEC shall mean the Securities Exchange Commission.
34. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board
members appointed by the Board to administer the Plan with respect to eligible
persons other than Section 16 Insiders.
35. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
36. SERVICE shall mean the performance of services to the Corporation
(or any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.
37. STOCK EXCHANGE shall mean either the American Stock Exchange, the
New York Stock Exchange, another regional stock exchange, or the Nasdaq market
as established by the National Association of Securities Dealers.
38. STOCK OPTION EXERCISE NOTICE AND PURCHASE AGREEMENT shall mean the
agreement of said title in substantially the form of Exhibit A to the Stock
Option Grant, pursuant to which Optionee gives notice of his intent to exercise
the option and purchase Shares.
39. STOCK OPTION GRANT shall mean the Stock Option Grant document,
pursuant to which Optionee has been informed of the basic terms of the option
granted under the Plan.
40. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
41. TAXES shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options in connection
with the exercise of those options.
42. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
64
<PAGE> 1
EXHIBIT 10.2
<TABLE>
<CAPTION>
FIRST
SECURITY
BANK MODIFICATION AGREEMENT
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C>
$2,000,000.00 12-24-1997 9001 0023791 68073
- -----------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document
to any particular loan or item.
- -----------------------------------------------------------------------------------------------------------
Borrower: Gentner Communications Corporation Lender: First Security Bank, N.A.
1825 Research Way Commercial Banking
Salt Lake City, UT 84119 15 East 100 South
2nd Floor
Salt Lake City, UT 84111
*FMODA*
- -----------------------------------------------------------------------------------------------------------
</TABLE>
First Security Bank, N.A. ("Lender") has extended credit (the "Loan") to Gentner
Communications Corporation (individually and collectively "Borrower") pursuant
to a promissory note dated October 24, 1996 (the "Note") in the stated principal
amount of $2,000,000.00. The Loan is secured by security agreements, trust
deeds, mortgages, lien instruments, and/or other collateral documents (the
"Collateral Documents").
The Note and any loan agreements, guaranties, subordinations, Collateral
Documents, and other instruments and documents executed in connection therewith,
together with any previous modifications and any of these instruments or
documents, shall be referred to as the "Loan Documents."
Borrower has requested certain modifications to the Loan Documents and Lender is
willing to grant such modifications on the following terms and conditions:
1. Provided that all conditions stated herein are satisfied, the terms of
the Loan Documents are hereby modified as follows:
MODIFICATIONS TO THE TERMS OF THE NOTE:
The maturity date of the Note is extended to December 24, 1998.
This Agreement does not constitute a repayment of extinguishment of the
Note, but only a modification thereof.
2. As preconditions to the terms of this agreement, Borrower shall complete
or provide the following:
Borrower shall pay or shall have paid all reasonable fees, costs and
expenses, of whatever kind or nature, incurred by Lender in connection
with this Agreement, including but not limited to attorney's fees, lien
search fees, title reports and policies, and recording and filing fees.
Borrower shall pay a loan fee of 0.25% of the commitment amount
($5,000.00) upon execution of this Modification Agreement.
3. It is the intention and agreement of Borrower and Lender that: (i) all
collateral security in which Lender has acquired a security interest or
other lien pursuant to the Loan Documents shall continue to serve as
collateral security for payment and performance of all the obligations of
the Borrower under the Loan Documents, and (ii) all agreements,
representations, warranties, and covenants contained in the Loan
Documents are hereby reaffirmed in full by Borrower except as
specifically modified by this Agreement.
4. Borrower hereby acknowledges that: (i) the Loan Documents are in full
force and effect, as modified by this Agreement, and (ii) by entering
into this Agreement, Lender does not waive any existing default or any
default hereafter occurring or become obligated to waive any condition or
obligation under the Loan Documents.
5. Borrower hereby acknowledges that Borrower has no claim, demand, lawsuit,
cause of action, claim for relief, remedy, or defense against enforcement
of the Loan Documents that could be asserted against Lender, its
affiliates, directors, officers, employees, or agents, whether known or
unknown, for acts, failures to act (whether such act or failure to act is
intentional or negligent), representations, commitments, statements or
warranties, including without limitation any such conduct arising out of
or in any way connected with the Loan Documents. Notwithstanding the
foregoing, Borrower hereby waives, releases, and relinquishes any and all
claims, demands, lawsuits, causes of action, claims for relief, remedies,
or defenses against enforcement of the Loan Documents that could be
asserted against Lender, its affiliates, directors, officers, employees,
or agents, whether known or unknown.
6. In addition to this Agreement, the Loan Documents, and any additional
documents that this Agreement requires, this finance transaction may
include other written closing documentation such as resolutions, waivers,
certificates, financing statements, filings, statements, closing or
escrow instructions, loan purpose statements, and other documents that
Lender may customarily use in such transactions. Such documents are
incorporated herein by this reference. All the documents to which this
paragraph makes reference express, embody, and supersede any previous
understandings, agreements, or promises (whether oral or written) with
respect to this finance transaction, and represent the final expression
of the agreement between Lender and Borrower, the terms and conditions of
which cannot hereafter be contradicted by any oral understand (if any)
not reduced to writing and identified above.
66
<PAGE> 2
FINAL AGREEMENT. Borrower understands that the loan documents signed in
connection with this loan are the final expression of the agreement between
Lender and Borrower and may not be contradicted by evidence of any alleged oral
agreement.
Effective as of December 24, 1997.
LENDER:
First Security Bank, N.A.
By:
Authorized Officer
BORROWER:
Gentner Communications Corporation
By: /s/ Susie Strohm
-------------------------------
SUSIE STROHM, SECRETARY
67
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-KSB)
of Gentner Communications Corporation of our report dated July 31, 1998,
included in the 1998 Annual Report to Shareholders of Gentner Communications
Corporation.
/s/ Ernst & Young, LLP
Salt Lake City, Utah
September 28, 1998
69
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> $715,325
<SECURITIES> 0
<RECEIVABLES> $1,989,390
<ALLOWANCES> (246,000)
<INVENTORY> $3,154,983
<CURRENT-ASSETS> $5,828,365
<PP&E> $5,831,816
<DEPRECIATION> (3,511,480)
<TOTAL-ASSETS> $8,311,740
<CURRENT-LIABILITIES> $1,919,422
<BONDS> 0
0
0
<COMMON> $7,699
<OTHER-SE> $5,229,307
<TOTAL-LIABILITY-AND-EQUITY> $8,311,740
<SALES> $17,267,886
<TOTAL-REVENUES> $17,294,550
<CGS> $8,347,300
<TOTAL-COSTS> $15,610,730
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $240,371
<INCOME-PRETAX> $1,443,449
<INCOME-TAX> $39,000
<INCOME-CONTINUING> $1,404,449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $1,404,449
<EPS-PRIMARY> $0.18
<EPS-DILUTED> $0.18
</TABLE>
