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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-17219
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
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(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. [ ]
The issuer's revenues for its most recent fiscal year ended June 30,
1999 were $22,990,327.
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The aggregate market value of the voting stock held by non-affiliates is
approximately $39,500,000 at September 1, 1999. This value was computed at the
price of $6.63 at which the stock traded on September 1, 1999 (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, 1999 was 8,188,748.
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 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 primarily develops, markets and distributes products and services
for the broadcast and conferencing 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 conferencing and assistive listening
markets. In addition, the Company offers conferencing services, including
conference calling, Webconferencing, document conferencing and end-user training
and education.
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 control systems to the broadcast market that help radio and television
station engineers monitor and control remote transmitter sites. During fiscal
year 1999, the broadcast market accounted for 30% 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 conferencing
market. The Company's conferencing products provide users with a natural,
two-way method of conversation without the cut-offs, distortion, noise and echo
associated with traditional speakerphones. Conferencing 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 conferencing market accounted for
61% of the Company's total sales during fiscal 1999.
The Company also has other sources of revenue that account for the remaining 9%
of sales, which include assistive listening systems, product repair and various
other products.
BUSINESS STRATEGY
For fiscal year 2000, the Company plans to increase its efforts in both the
Conferencing and Remote Facilities Management ("RFM") segments. Each has
undergone extensive research to ensure that its markets offer growth
opportunities that are congruent with the Company's overall objectives.
The RFM segment 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.
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The Conferencing segment is responsible for the following areas: room system
audio- and videoconferencing products, conference calling services, and
educational services. Through this segment 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 conferencing 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.
PRODUCTS AND SERVICES
RFM Segment
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 somewhat limited by the finite size of the market, consolidation within the
industry has created new sales opportunities as companies look to upgrade and
expand existing facilities. The international market is expanding and continues
to offer 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 believes it currently has a 60% share of the
domestic telephone interface market, with potential for the largest growth in
international markets.
Remote Control Products. Remote control products help broadcasters stay on the
air and generate revenue while fulfilling a legal requirement for monitoring and
controlling their transmitters, which often are located in remote areas such as
on mountaintops. The Company's products provide monitoring of conditions at the
transmitter site and enable 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 enabling station managers to monitor
several different sites using the same equipment.
Conferencing Segment
Room System Conferencing Products. In 1991, the Company applied the digital
technology in its broadcast telephone products to develop a line of conferencing
products. These products are used in such settings as conference rooms, distance
learning facilities and courtrooms. Examples of current applications include
executive boardrooms for Bell South Telecommunications and The Boeing Company;
distance learning facilities in Indiana, Nebraska, North Carolina and Wisconsin;
and the Federal Bankruptcy Courts in San Jose. The Company has become well known
for these types of quality products.
Recently the Company introduced and began shipping a new line of conferencing
products under the brand name of Audio Perfect(R). The Audio Perfect(R) product
line currently consists of the AP800, AP400, AP10, AP Tools, AP IR Remote
Control and APV200.
The AP800 and AP400 are comprehensive room audio control systems 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. Both are also
used for integrating audio with videoconferencing systems.
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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 the Company's digital Distributed Echo Cancellation(TM)
(D.E.C.)(TM) technology. 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(R)
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.
The AP400 combines the functions of the AP800, the AP10 and an internal power
amplifier. Its four microphone inputs, compared to the AP800's eight microphone
inputs, make the AP400 more practical for small to medium sized rooms.
AP Tools is PC-based software designed to enhance the Audio Perfect(R) family of
products. AP Tools simplifies the set-up, configuration and operation of the
Audio Perfect(R) system by employing a graphical user interface. The graphic
orientation provides access to the same features available via the front panel
controls of the AP800, AP400 and AP10, but does so in a manner that is more
user-friendly. AP Tools can control an entire Audio Perfect(R) system using only
one serial connection, and can communicate with AP units both locally and
remotely via modem.
The AP IR Remote Control uses infrared transmission to operate the AP800, AP400
and AP10. Features include connect, disconnect, dial, redial, speed dial, hook
flash, volume control and microphone mute.
The APV200 is a television-quality videoconferencing system that the Company
purchases from RSI Systems, Inc. The APV 200 delivers television-quality video,
is standards based and connects directly to any size TV, LCD projector, flat
screen, PC or laptop computer. When combined with other Audio Perfect(R)
products, the APV200 can support up to 64 microphones and multiple cameras,
providing top-quality sound and video for any size room.
The Company believes that its Audio Perfect(R) product line provides 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
conferencing products, particularly when combined with the Company's conference
calling service.
Conference Calling Service. In February 1993, the Company launched its
conference calling service to provide customers with a complete offering of
conferencing 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 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.
Other Segment
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 providing
amplified audio for hearing impaired people in public places such as theaters,
houses of worship, schools, courtrooms, stadiums and arenas.
In February 1999, the Company introduced its Venture series of ALS products
designed specifically for tour audio and language translation applications.
Venture operates in the 216 MHz frequency range that has been designated by the
Federal Communications Commission (FCC) for use in hearing assistance
applications not specifically designed for the hearing impaired.
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MARKETS
Broadcast Market
For fiscal 1999, the broadcast market, which is served by telephone interface
and remote control products, generated 30% of the Company's total sales. The
Company's telephone interface and remote control 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
remote control products is approximately $30 million, and that the Company 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 1,200 television stations in operation.
The Company's products are sold to upgrade studios and transmitter sites.
Although the size of the broadcast market is fixed, due to the limited number of
frequencies that become available at any given time, a federal mandate to
upgrade all television transmission to high definition ("HDTV") is driving the
replacement of older transmitter towers and fostering sales of remote control
products. Through product innovation and a strong sales focus, the Company
believes that it will continue to experience growth in the domestic broadcast
market.
The Company has also noted a recent organizational shift in the broadcast
industry, as an increasing number of radio 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 remote control products are especially
suited to provide sales growth during this trend as these products provide
centralized monitoring and control of several remote 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 13% of all sales by the Company to the broadcast
market in fiscal year 1999.
Conferencing Market
The Company believes that there is significant growth potential in the U.S.
conferencing market. Frost & Sullivan, an international marketing consulting
company that publishes market research reports, projects the audio and document
conferencing services, systems and server software market to grow from $1.09
billion in 1998 to $2.94 billion in 2005, or a compound annual growth rate of
15.2%.
This market is made up of three separate components, the audioconferencing
services market, the audioconferencing systems market and the document
conferencing server software market. According to Frost & Sullivan, the
audioconferencing services market in 1998 was $883 million and should grow to
$1,807 million by 2005, which is a compound annual growth rate of 10.8%. The
audioconferencing systems market is $173 million in 1998, and with a compound
annual growth rate of 22.7%, should grow to $724 million by 2005.
Frost & Sullivan projects the videoconferencing systems market to grow from $811
million in 1998 to $2.8 billion in 2005, or at a compound annual growth rate of
19.4%.
Products and services sold by all companies to the conferencing market include
terminal equipment, telephone bridge equipment, and conference calling and
transmission services. The Company's primary focus is in the terminal equipment
and conference calling service categories.
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The Company believes that the conferencing 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 conferencing equipment and
services.
Other Markets
In addition to broadcast and conferencing 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
conferencing market. The products sold to this market are primarily the
telephone interface products, conferencing products and ALS products.
During fiscal 1999, the RFM segment expanded its distribution into a market
outside of broadcast through its contract with Crown International to supply
remote control equipment to the National Weather Service.
MARKETING AND SALES
Sales efforts for the Company's telephone interface and remote control 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.
Conferencing 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, 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 offering dealer training.
The Company relies on a direct sales force and outside representative network
to sell its conference calling and Webcasting services. The Company believes
that it has the potential to cross-sell its products and services by partnering
with key dealers. The Company also believes that its advantage is that it can
provide higher quality products and services as a package for organizations
that require premium, mission critical solutions for their conferencing needs.
Due to the large size of the conferencing market and its potential for intense
competition, the marketing of conferencing 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 conferencing products through national and international dealers
who focus on integrating conferencing facilities for organizations.
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
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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.
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 also sells extended warranties for its Audio Perfect products, which
enables customers to get a replacement unit within 24 hours.
DISTRIBUTION
RFM Segment
Telephone Interface and Remote Control Products. The Company's telephone
interface and remote control 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 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 6% of the Company's total sales in fiscal 1999, and 7% and 12%
during fiscal 1998 and fiscal 1997 respectively. The Company believes the
relationship with this dealer is strong and mutually beneficial. However, if
this dealer were lost, the Company believes it could sell its products to
end-customers either directly or through other dealers.
With respect to international telephone interface and remote control sales, the
Company has established, and continues to establish, international relationships
with dealers for its broadcast products in Africa, Asia, Australia, Europe,
North America, and South America.
Conferencing Segment
Conferencing Products. The Company sells its conferencing systems and components
through independent audio/visual equipment dealers and consultants. The Company
also uses a national network of independent sales representatives. Currently,
95% of the Company's conferencing 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.
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With respect to international conferencing sales, the Company has established,
and continues to establish, international relationships with dealers for its
conferencing products in Africa, Asia, Australia, Europe, North America, and
South America.
Conferencing 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 conferencing 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.
Other Segment
ALS Products. The Company sells its ALS products to the professional audio
market via the same network of sales representatives and independent sound
contractors that sell the Company's conferencing products.
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
conferencing market is essential to the Company's growth and development. There
are other companies with substantial financial, technical, manufacturing and
marketing 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 conferencing systems and equipment. The Company believes it is the
only provider of both high-end conferencing products and conference calling
services, and feels it can uniquely position itself in the rapidly expanding
conferencing market.
In the broadcast market, 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 development. The Company views
its investment in research and development as a key ingredient to long-term
business success. The Company expended $1,494,952, $1,142,605 and $1,046,757 on
research and development in the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
The Company is continually developing new products and services. Current
research and development efforts are focused on the conferencing system
products, broadcast telephone interface products and enhancements to the remote
control 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
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and 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 federal registered servicemarks for 1-800 LETS
MEET(R) and WE PUT THE WORLD ON SPEAKING TERMS(R), and federal registered
trademarks for GENTNER(R), "GENTNER(R)" (as both the name and logo), and AUDIO
PERFECT(R). In addition to these registered servicemarks and trademarks, the
Company has federal applications pending for the following trademarks:
DISTRIBUTED ECHO CANCELLATION(TM), and DISTRIBUTED ECHO CANCELLATION
(D.E.C.)(TM). In addition, the Company has federal applications pending for the
following servicemarks: COMMUNICATION AUDIT PROCESSSM, GENTNER CONFERENCE
CALLSM, GENTNER COURT CONFERENCESM, and PERFECT COMMUNICATION THROUGH
TECHNOLOGY, SERVICE AND EDUCATIONSM.
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.
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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/Bell, Standard Supply Company, Precise Metal Products
Company, Precision
Technology, and RSI Systems.
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's videoconferencing products are manufactured by RSI Systems, Inc.
in Minneapolis, Minnesota and shipped to the Company's 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.
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 "Factors that May Affect Future Results"). 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 and stores the backup information off-site in
case of catastrophic failure.
Especially noteworthy is that as conference calling revenues grow, the network
structure must expand at the same rate. The Company has a fully scalable network
sufficient to accommodate future growth.
EMPLOYEES
As of June 30, 1999, the Company had 156 employees, 154 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. This
facility is a modern building leased by the Company. The base monthly rent for
this facility currently is approximately $23,700. The facility is in good
condition and the Company believes the facility will be reasonably adequate to
meet its immediate needs. Monthly rents will increase over the next eight years
at rates approximating the consumer price index.
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This facility 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, 1999.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ Small-Cap Stock Market under
the symbol "GTNR." The following table sets forth quotations for the common
stock for the last two fiscal years.
<TABLE>
<CAPTION>
1999 High Low
---- ---- ---
<S> <C> <C>
First Quarter $ 3.00 $ 1.81
Second Quarter 4.31 1.44
Third Quarter 4.34 3.00
Fourth Quarter 5.75 2.88
</TABLE>
<TABLE>
<CAPTION>
1998
----
<S> <C> <C>
First Quarter $ 1.13 $ 0.75
Second Quarter 1.63 0.88
Third Quarter 1.50 0.91
Fourth Quarter 2.78 1.25
</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, 1999, there were approximately 4,000 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
Certain statements contained in this report are forward looking statements. This
includes the discussion regarding the Company's beliefs, plans, objectives,
expectations, and intentions about the Company's ability to obtain more of the
revenue associated with room installations, the Company's belief that it will
improve its development cycle, and the Company's anticipation that it can
achieve its business plan through a combination of internally generated funds
and short-term and/or long-term borrowing. While the Company believes that such
statements are accurate, the Company's business is dependent upon general
economic conditions, particularly those that affect the demand for its products,
including increased competition, and future trends and results which cannot be
predicted with certainty. The Company's actual results could differ materially
from those discussed in such forward looking statements. The cautionary
statements made in this report should be read as being applicable to all related
forward-looking statements wherever they appear in this report. Factors that
could cause or contribute to such differences include those discussed below in
the section entitled "Factors that may Affect Future Results."
RESULTS OF OPERATIONS
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998.
12
<PAGE> 13
Sales for the year ended June 30, 1999 ("fiscal 1999") increased 33% compared to
the prior fiscal year ended June 30, 1998. This increase is mainly due to the
strong growth of sales in the conferencing market, but growth in revenues from
the broadcast market also contributed to the increase.
Revenues from the conferencing market increased 61% during fiscal 1999 as
compared to fiscal 1998. Product sales increased 66% mainly due to the success
of the Audio Perfect(R) ("AP") product line. The AP product line began shipping
in April of 1998. These products use a digital technology called Distributed
Echo Cancellation ("D.E.C.")(TM) and incorporate several functional devices
including automatic microphone mixing, echo cancellation, audio routing, audio
equalization and audio processing into a single device. The AP product line
integrates a number of audio components into one-box conferencing solutions for
corporate boardrooms, public meeting rooms, distance learning applications, and
other similar applications where audio is essential. The Company's conference
calling service, 1-800 LETS MEET(R), experienced sales growth of 46% for fiscal
1999 as compared to fiscal 1998. The Company attributes this growth in sales to
an increased customer base as well as the overall market growth over the last
year. 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 10% in fiscal 1999 compared to the previous
fiscal year. In this market, remote control grew 29%, 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 increased less than 1%.
During fiscal 1999, sales of products that are not in either the broadcast or
conferencing markets ("Other Products") decreased 11%. Within Other Products,
sales of Assistive Listening Systems ("ALS") increased 3%. With the exception of
ALS, the Company is not promoting Other Products, and those sales are expected
to continue to decline.
The Company's gross profit margin increased to 57% in fiscal 1999. It was 52% in
fiscal 1998. This increase is primarily due to increased efficiencies in the
manufacturing process, new products with higher gross profit margins, a
different product mix and aggressive vendor pricing.
The Company's operating expenses increased 23% when comparing fiscal 1999 to
fiscal 1998. Most of the increase in operating expenses came in the sales and
marketing area.
Product development expenses also increased.
Sales and marketing expenses for fiscal 1999 increased 35% from fiscal 1998. A
major expense increase in this area came from commissions and salaries, which
was a direct correlation to increased sales. The Company also had an increase in
direct advertising expense and advertising expense shared with dealers.
Product development costs increased 31% in fiscal 1999 as compared to fiscal
1998. This was mainly due to increased personnel and development costs of the
videoconferencing products. The Company increased R&D personnel so that each
engineer can specialize in a specific product area. The Company believes it will
continue to improve the development cycle by having specialized engineers.
General and administrative expenses increased 3% in fiscal 1999 as compared to
the previous fiscal year. Although there were increased expenses in the IS
department due to added personnel, these expenses were offset by decreases in
other general and administrative expenses related to the severance package in
fiscal 1998.
Interest expense decreased 38% when comparing fiscal 1999 to fiscal 1998 due to
payment in full of all long-term debt and not using the line of credit in fiscal
1999.
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 conferencing market, but growth in revenues from
the broadcast market also contributed to the increase.
13
<PAGE> 14
Revenues from the conferencing market increased 67% during fiscal 1998 as
compared to fiscal 1997. Product sales increased 55% mainly due to the
introduction of the Audio Perfect(R) product line and an increase in the sales
of GT724 audioconferencing systems. The Company's conference calling service,
1-800 LETS MEET(R), experienced sales growth of 117% for fiscal 1998 as compared
to fiscal 1997. This growth is a result of the Company expanding its 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 control grew significantly (36%), mainly due
to large sales of the GSC3000. Sales to the television market and the
introduction of the Voice Interface also contributed to the increased sales of
the GSC3000. 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
conferencing 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
Company's 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.
Interest expense increased 23% when comparing fiscal 1998 to fiscal 1997 due to
increased debt balances used to finance the facility expansion.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financial condition grew stronger in fiscal year 1999. The
Company's current ratio was 3.7:1 at the end of fiscal 1999 as compared to
3.0:1 at the end of fiscal 1998. Inventories decreased 9% and accounts
receivable increased 29% during fiscal 1999 as a result of higher sales. The
inventory decrease is attributable to improved manufacturing processes. Cash on
hand increased due to strong positive cash flows from operations. During fiscal
1999 the Company retired all outstanding notes. These changes all contribute to
the financial strength of the Company.
The Company has an available revolving line of credit of $5.0 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 (250 basis points over the London
Interbank Offered Rate (LIBOR) or prime less 0.25%, whichever the Company
chooses). There was no outstanding balance on June 30, 1999. The line of credit
expires on December 22, 2000.
14
<PAGE> 15
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 for fiscal 1999
and as capital leases for fiscal 2000. Both are related to the financing of
furniture and equipment. Together, the current obligation on these commitments
was $623,812 in fiscal 1999 and will be $296,449 in fiscal 2000. The Company
also has a commitment with a supplier as described in Note 14 in the financial
statements. The commitment with this supplier was $640,000 in fiscal 1999 and
for fiscal 2000 will be $252,000.
The Company continued to experience positive cash flows in fiscal 1999.
Increasing sales and profitability are the main reasons for positive operating
cash flows. The reduction of inventory and increases in accounts payable and
accrued expenses also were significant factors in improved operating cash flows.
The Company did consume cash by building up the accounts receivable balance, but
overall operating cash flows remain strong. 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Competition - Rapid Technological Change
The broadcast, conferencing and other product 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.
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.
15
<PAGE> 16
Limited Capitalization
As of June 30, 1999, the Company had $3,922,183 in cash and $6,787,087 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 $5 million line of credit matures in
December of 2000 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, 1999. 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
$3,000,000.
Dependence on Supplier and Single Source of Supply
The Company has a written agreement with only one of its 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.
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.
16
<PAGE> 17
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 conferencing 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 subject to 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 issued under the Company's 1990 Incentive
Plan and the 1998 Stock Option Plan, which includes options to purchase up to
1,900,000 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 27.2% of the Common Stock (including options that are currently
exercisable or exercisable within sixty (60) days) of the Company as of
September 1, 1999. 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").
Collectability of Outstanding Receivables
The Company grants credit without requiring collateral to substantially all of
its customers. Although the possibility of a large percentage of customers
defaulting exists, the Company considers this scenario to be highly unlikely.
The current default rate is less than 0.2%.
Year 2000
The Company has assessed the impact of the Year 2000 issue* on its information
technology ("IT") and non-IT systems. $53,400 has been incurred to upgrade
existing systems so that they are Year 2000 compatible. To date, the Company has
identified two of its systems and some personal computers that have been
upgraded. There were no significant interruptions to the business caused by the
upgrade process. The Company financed the upgrades with operating income.
The Company purchased the software and hardware to upgrade its internal phone
system, including the voice mail system. The system was upgraded, and associates
were trained how to use the new system. The cost of this software and hardware
was $49,900. The Company also upgraded its conference calling bridge. This
system is essential to the Company's conference calling service. The
manufacturer furnished the software to the Company at no cost, and internal
costs during
17
<PAGE> 18
the upgrade process were minimal. The personal computers were upgraded by the
end of April of 1999, at a cost of approximately $3,500.
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
stated 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 has developed contingency plans for dealing with Year 2000 issues,
including the worst case scenario just described. Those plans are in place.
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 Issue" 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, 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 earlier application permitted. The
Company adopted the standard in fiscal 1999. The Company's comprehensive income
does not differ from previously reported net income as the Company presently has
no additional items of comprehensive 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 adopted the standard in
fiscal 1999 and has analyzed the impact of this standard on previously reported
information. See Note 15 in the financial statements for additional segment
information.
18
<PAGE> 19
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
Report of Independent Auditors
Balance Sheets for June 30, 1999 and 1998.
Statements of Operations for fiscal years ended June 30, 1999, 1998, and 1997.
Statements of Cash Flows for fiscal years ended June 30, 1999, 1998, and 1997.
Statements of Shareholders' Equity for fiscal years ended June 30, 1999, 1998,
and 1997.
Notes to Financial Statements
19
<PAGE> 20
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, 1999 and 1998, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended June 30, 1999. 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, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young, L.L.P.
Salt Lake City, Utah
July 30, 1999
20
<PAGE> 21
GENTNER COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 3,922,183 $ 715,325
Accounts receivable, less allowances
of $241,000 in 1999, and $246,000 in 1998 .......... 2,242,294 1,743,390
Inventory .............................................. 2,858,835 3,154,983
Deferred taxes ......................................... 115,000 40,000
Other current assets ................................... 143,441 174,667
----------- -----------
Total current assets ............................... 9,281,753 5,828,365
Property and equipment, net ................................ 2,125,959 2,320,336
Related party note receivable .............................. 98,633 126,505
Other assets, net .......................................... 13,069 36,534
----------- -----------
Total assets ....................................... $11,519,414 $ 8,311,740
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 725,193 $ 537,202
Accrued compensation and other benefits ................ 762,345 486,658
Other accrued expenses ................................. 791,274 372,823
Current portion of long-term debt ...................... -- 285,630
Current portion of capital lease obligations ........... 215,854 237,109
----------- -----------
Total current liabilities .......................... 2,494,666 1,919,422
Long-term debt ............................................. -- 402,584
Capital lease obligations .................................. 455,389 752,728
Deferred tax liability ..................................... 217,000 --
----------- -----------
Total liabilities .................................. 3,167,055 3,074,734
Shareholders' equity:
Common stock, 50,000,000 shares authorized,
par value $.001, 8,129,691 and
7,698,523 shares issued and outstanding
at June 30, 1999 and 1998, respectively .............. 8,130 7,699
Additional paid-in capital ............................. 5,024,858 4,454,407
Retained earnings ...................................... 3,319,371 774,900
----------- -----------
Total shareholders' equity ......................... 8,352,359 5,237,006
----------- -----------
Total liabilities and shareholders' equity ......... $11,519,414 $ 8,311,740
=========== ===========
</TABLE>
See accompanying notes
21
<PAGE> 22
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ................................... $ 22,990,327 $ 17,267,886 $ 13,371,851
Cost of goods sold .......................... 9,877,687 8,347,300 6,874,590
------------ ------------ ------------
Gross profit ............................ 13,112,640 8,920,586 6,497,261
Operating expenses:
Marketing and selling ................... 4,929,740 3,649,876 3,572,882
General and administrative .............. 2,544,664 2,470,949 2,006,998
Research and product development ........ 1,494,952 1,142,605 1,046,757
Total operating expenses ............ 8,969,356 7,263,430 6,626,637
------------ ------------ ------------
Operating income (loss) ............. 4,143,284 1,657,156 (129,376)
------------ ------------ ------------
Other income (expense):
Interest income ......................... 91,411 13,475 7,836
Interest expense ........................ (148,253) (240,371) (196,176)
Other, net .............................. (21,271) 13,189 (18,282)
------------ ------------ ------------
Total other income (expense) ........ (78,113) (213,707) (206,622)
------------ ------------ ------------
Income (loss) before income taxes ........... 4,065,171 1,443,449 (335,998)
Provision for income taxes .................. 1,520,700 39,000 36,900
------------ ------------ ------------
Net income (loss) ................... $ 2,544,471 $ 1,404,449 $ (372,898)
============ ============ ============
Basic earnings (loss) per common share ...... $ 0.31 $ 0.18 $ (0.05)
============ ============ ============
Diluted earnings (loss) per common share .... $ 0.30 $ 0.18 $ (0.05)
============ ============ ============
</TABLE>
See accompanying notes
22
<PAGE> 23
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended June 30,
---------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ 2,544,471 $ 1,404,449 $ (372,898)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization of
property and equipment ...................................... 660,828 678,501 621,024
Amortization of other assets .................................. 27,495 41,383 52,654
Deferred income tax ........................................... 142,000 (40,000) --
(Gain) loss on investments .................................... (5,783) (1,785) 21,378
Other -- -- 36,000
Changes in operating assets and liabilities:
Accounts receivable ........................................ (498,904) (61,136) (125,818)
Inventory .................................................. 296,148 (486,222) 561,004
Other current assets ....................................... 31,226 (38,490) (24,434)
Accounts payable and other accrued expenses ................ 882,129 569,165 29,621
----------- ----------- -----------
Net cash provided by operating activities ................ 4,079,610 2,065,865 798,531
Cash flows from investing activities:
Purchases of property and equipment .............................. (466,451) (313,050) (623,949)
Issuance of note receivable ...................................... -- -- (147,327)
Repayment of note receivable ..................................... 27,872 12,495 8,327
Decrease (increase) in other assets .............................. 1,753 76,251 (108,541)
----------- ----------- -----------
Net cash used in investing activities .................... (436,826) (224,304) (871,490)
Cash flows from financing activities:
Proceeds from issuance of common stock ........................... 3,912 3,366 736
Exercise of warrants and employee stock options .................. 327,970 27,595 --
Stock option transactions ........................................ 239,000 -- --
Net repayments under line of credit .............................. -- (722,997) (193,044)
Proceeds from issuance of long-term debt ......................... -- -- 566,906
Principal payments of capital lease obligations .................. (318,594) (241,968) (238,378)
Principal payments of long-term debt ............................. (688,214) (256,224) (213,032)
----------- ----------- -----------
Net cash used in financing activities .................... (435,926) (1,190,228) (76,812)
----------- ----------- -----------
Net increase (decrease) in cash ..................................... 3,206,858 651,333 (149,771)
Cash at the beginning of the year ................................... 715,325 63,992 213,763
----------- ----------- -----------
Cash at the end of the year ......................................... $ 3,922,183 $ 715,325 $ 63,992
=========== =========== ===========
Supplemental disclosure of cash flow information:
Property and equipment financed by capital leases ................ $ -- $ 192,500 $ 975,732
Income taxes paid ................................................ $ (956,827) $ (28,000) $ (12,800)
Interest paid .................................................... $ (150,072) $ (241,371) $ (193,500)
</TABLE>
See accompanying notes
23
<PAGE> 24
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Total
---------------------------- Paid-In (Accumulated Shareholders'
Shares Amount Capital Deficit) Equity
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
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
Exercise of employee stock options .... 429,702 430 327,540 -- 327,970
Issuance of common stock .............. 1,466 1 3,911 -- 3,912
Tax benefits allocated to
contributed capital ................. -- -- 239,000 -- 239,000
Net income ............................ -- -- -- 2,544,471 2,544,471
----------- ----------- ----------- ----------- -----------
Balances at June 30, 1999 ................. 8,129,691 $ 8,130 $ 5,024,858 $ 3,319,371 $ 8,352,359
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes
24
<PAGE> 25
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 conferencing
and broadcast markets and provides conference calling services. The
Company provides products and services domestically and internationally.
The Company grants credit without requiring collateral to most of 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. Revenue from service sales is recognized at the
time the service is rendered. The Company records reserves for sales
returns and 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 (FAS) 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, 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 $237,121 and $209,626
at June 30, 1999 and 1998, 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) Per Common Share - 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.
The following table sets forth the computation of basic and diluted net
income (loss) per share:
25
<PAGE> 26
<TABLE>
<CAPTION>
June 30
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 2,544,471 $ 1,404,449 $ (372,898)
=========== =========== ===========
Denominator for basic net income (loss) per
share - weighted average shares: 8,080,536 7,679,985 7,662,494
Dilutive common stock equivalents using treasury
stock method: 388,348 280,267 630,532
----------- ----------- -----------
8,468,884 7,960,252 8,293,026
=========== =========== ===========
Basic net income (loss) per share $ 0.31 $ 0.18 $ (0.05)
=========== =========== ===========
Diluted net income (loss) per share $ 0.30 $ 0.18 $ (0.05)
=========== =========== ===========
</TABLE>
Options to purchase 45,000 and 20,000 shares of common stock were
outstanding as of June 30, 1999 and 1998, respectively, 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 has capitalized a portion of
its software development costs in the past. 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,
1999, 1998 and 1997 was $0, $18,608 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 1999, $95,700
in 1998 and $77,100 in 1997.
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 1999, 1998 and 1997 totaled
$475,800, $229,600 and $598,500, 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 earlier application permitted. The Company
adopted the standard in fiscal 1999. For the years ended June 30, 1999,
1998 and 1997, comprehensive income is equivalent to net income.
26
<PAGE> 27
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 adopted the standard in fiscal 1999 and has
analyzed the impact of this standard on previously reported information.
Segment information is presented in Note 15.
2. SIGNIFICANT CUSTOMER
The Company sells a substantial portion of its products to a major
distributor in the telephone interface and remote control product areas.
For the fiscal years ended June 30, 1999, 1998 and 1997, sales to this
distributor aggregated to $1,484,439 (6%), $1,228,278 (7%) and
$1,551,811 (12%), respectively. At the end of those years, amounts due
from this customer were $31,909, $23,248 and $77,920, 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 and capital leases also
approximate fair value because applicable interest rates either
fluctuate based on market conditions or approximate the Company's
current borrowing rate.
4. INVENTORY
Inventory is summarized as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Raw materials $1,055,615 $1,014,732
Work in progress 347,898 524,313
Finished goods 1,455,322 1,615,938
---------- ----------
Total inventory $2,858,835 $3,154,983
========== ==========
</TABLE>
5. PROPERTY AND EQUIPMENT
Major classifications of property and equipment and estimated useful
lives are as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Office furniture and equipment - 5 to 10 years ..... $ 3,867,759 $ 3,357,347
Manufacturing and test equipment - 5 to 10 years ... 1,647,823 1,708,857
Telephone bridging equipment - 10 years ............ 547,965 731,750
Vehicles - 3 to 5 years ............................ 22,318 33,862
----------- -----------
6,085,864 5,831,816
Accumulated depreciation and amortization .......... (3,959,905) (3,511,480)
----------- -----------
Net property and equipment ...................... $ 2,125,959 $ 2,320,336
=========== ===========
</TABLE>
6. LINE OF CREDIT
The Company maintains a revolving line of credit (no outstanding balance
on $5.0 million available at June 30, 1999, and no outstanding balance
on $2.0 million available at June 30, 1998) with a commercial bank that
expires December 22, 2000 and which the Company anticipates renewing
beyond that date. The interest rate on the line of credit is a variable
interest rate (250 basis points over the London Interbank Offered Rate
(LIBOR) or prime less 0.25%, whichever the Company
27
<PAGE> 28
chooses). The borrowing rate was 7.56% as of June 30, 1999. The weighted
average interest rate for the years ended June 30, 1999, 1998 and 1997,
respectively, was 8.1%, 10.8% and 11.0%. 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,
-----------------------
1999 1998
------ ---------
<S> <C> <C>
1.5% over prime (at June 30, 1998, the interest
rate was 10.7%) note due to a financial
institution, with monthly payments of
$5,846, secured generally by manufacturing
and test equipment (paid in February 1999) $ -- $ 82,809
9.25% note to a financial institution, with
monthly payments of $8,069, secured generally
by equipment, furniture and other assets
(paid in February 1999) -- 220,073
11.5% note due to a financial institution,
with monthly payments of $14,851, secured
generally by furniture (paid in February 1999) -- 385,332
------ ---------
-- 688,214
Less current portion -- (285,630)
------ ---------
Total long-term debt $ -- $ 402,584
====== =========
</TABLE>
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,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Office furniture and equipment ......................... $ 781,289 $ 890,360
Manufacturing and test equipment ....................... 439,111 524,917
Telephone bridging equipment ........................... 418,593 600,250
Vehicles ............................................... 22,318 33,862
----------- -----------
1,661,311 2,049,389
Accumulated depreciation and amortization .............. (1,394,843) (1,099,093)
----------- -----------
Net property and equipment under capital leases ..... $ 266,468 $ 950,296
=========== ===========
</TABLE>
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:
2000 ............................................... $ 296,449 $ 582,957
2001 ............................................... 306,192 595,278
2002 ............................................... 201,446 577,302
2003 ............................................... 29,325 455,541
2004 ............................................... -- 355,225
Thereafter ......................................... -- 1,056,450
---------- ----------
Total minimum lease payments .................... 833,412 $3,622,753
---------- ==========
Less use taxes ........................................ (49,762)
Net minimum lease payments ...................... 783,650
Less amount representing interest ..................... (112,407)
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
<S> <C>
----------
Present value of net minimum lease payments ..... 671,243
Less current portion .................................. (215,854)
Capital lease obligation ........................ $ 455,389
----------
</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 $511,836, $362,888 and
$245,996 for the years ended June 30, 1999, 1998 and 1997, 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, 1999, 1998 and 1997, was $39,900, $43,500 and $45,100,
respectively. In fiscal 1997, GR2L sold the proprietary interest in a
new remote control product to the Company in exchange for a royalty
agreement. Royalty expense under this agreement with GR2L for the years
ended June 30, 1999, 1998 and 1997 was $82,989, $54,810 and $36,588,
respectively. As of June 30, 1999, 1998 and 1997, GR2L owed the Company
$98,633, $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 principal 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>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation ...................... $ 246,000 $ 229,000
Deferred tax assets:
Unamortized software costs ...................... 18,000 11,000
Accounts receivable and other reserves .......... 69,000 70,000
Inventory reserves .............................. 38,000 35,000
Product warranty accruals ....................... 8,000 8,000
Tax credit carryforwards ........................ 11,000 304,000
Total deferred tax assets .................... 144,000 428,000
--------- ---------
Valuation allowance for deferred tax assets ..... -- (159,000)
--------- ---------
Net deferred tax assets ...................... 144,000 269,000
--------- ---------
Net deferred taxes ........................... $(102,000) $ 40,000
========= =========
</TABLE>
Significant components of the provision for income taxes are as follows:
Years Ended June 30,
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal ........................................... $ 957,000 $ 69,000 $ --
State ............................................. 182,700 6,000 900
Tax benefits allocated to contributed capital ..... 239,000 4,000 --
---------- ---------- ----------
Total current .................................. 1,378,700 79,000 900
Deferred:
Federal ........................................... $ 128,000 $ (36,500) $ 33,000
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
State ............................................. 14,000 (3,500) 3,000
---------- ---------- ----------
Total deferred ................................. 142,000 (40,000) 36,000
---------- ---------- ----------
$1,520,700 $ 39,000 $ 36,900
========== ========== ==========
</TABLE>
The provision for federal income taxes was reduced due to the use of
approximately $1,300,000 and $1,000,000 in net operating loss benefits
in 1998 and 1997, 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,
--------------------------------------
1999 1998 1997
------ ------ ------
<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 3.3 (3.5)
Valuation allowance (3.9) (33.9) 45.8
Nondeductible entertainment expenses and life insurance premiums 0.1 0.3 1.0
Other 3.9 (1.0) 0.6
------ ------ ------
37.4% 2.7% 9.9%
====== ====== ======
</TABLE>
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. Generally, stock
options vest over a five year period at 10%, 15%, 20%, 25% and 30% per
year over years one through five. Certain other stock options vest in
full after eight years (2004). The Company also has a 1998 Stock Option
Plan ("1998 Plan"). Provisions of the 1998 Plan include the granting of
stock options. Currently options will vest based on earnings per share
goals through 2003 but cliff vest after 9.75 years if earnings per share
goals are not met. 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, 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
Options granted 100,000 3.38
Options expired and canceled (115,250) 2.25
Options exercised (429,702) 0.75
---------
Outstanding at June 30, 1999 1,408,048 $1.94
=========
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1999 under the Plans:
30
<PAGE> 31
<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, 1999 Remaining Life Exercise Price June 30, 1999 Price
--------------- --------- -------------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
$0.69 to $0.84 568,048 3.7 years $ 0.77 321,548 $ 0.76
$1.81 20,000 1.0 years $ 1.81 20,000 $ 1.81
$2.66 to $2.88 775,000 9.0 years $ 2.68 -- --
$3.94 45,000 10.0 years $ 3.94 -- --
--------- -------
Total 1,408,048 341,548
========= =======
</TABLE>
There were 1,075,000 options available for future grant at June 30,
1999. The following are the options exercisable at the corresponding
weighted average exercise price at June 30, 1999, 1998 and 1997,
respectively: 341,548 at $0.82; 600,500 at $0.79; and 284,000 at $0.78.
On May 12, 1999 the Company registered with the Securities and Exchange
Commission all shares of common stock previously issued or issuable
under the 1998 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 would have been the pro forma amount indicated below:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year
1999 1998
------------- -------------
<S> <C> <C>
Net Income
As Reported $ 2,544,471 $ 1,404,449
diluted earnings per share $ 0.30 $ 0.18
Pro Forma $ 1,865,777 $ 1,223,317
diluted earnings per share $ 0.22 $ 0.15
</TABLE>
The pro forma results above are not likely to be representative of the
effects of applying SFAS 123 on reported net income 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 1999, 1998 and 1997 is estimated as $1.97, $1.24 and
$0.43, 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, 4.75%; expected price volatility,
57.9%; and expected life of options, 6 years.
12. INTERNATIONAL SALES
The Company provides products to the broadcast and conferencing 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 1999, 1998 and 1997, such international sales were
$2,512,900, $2,581,700 and $2,183,000, respectively, and accounted for
11%, 15% and 15% of total sales. During those years, the Company shipped
the following amounts to the following areas: Canada - $1,070,800,
31
<PAGE> 32
$798,800 and $724,000; Asia - $355,500, $513,300 and $451,400; Europe -
$634,200, $817,400 and $580,600; Latin America - $88,900, $252,100 and
$158,800; Other Areas - $363,500, $200,100 and $268,200.
13. RETIREMENT SAVINGS AND PROFIT SHARING PLAN
The Company has a 401(k) retirement savings and profit sharing plan to
which it makes discretionary matching contributions, as authorized by
the Board of Directors. All full-time employees who are at least 21
years of age and have a minimum of six months of service with the
Company at the plan date are eligible to participate in the plan.
Matching contributions, if made, are based upon amounts participating
employees contribute to the plan. The Company's retirement plan
contribution expense for the 1999, 1998 and 1997 fiscal years totaled
$69,000, $31,000 and $0, respectively.
14. COMMITMENTS
The Company has entered into an agreement to purchase 300
videoconference engines. The remaining cost of this commitment is
approximately $252,000 at June 30, 1999. The Company has entered into
this agreement in order to secure parts for the new video product line
and expects to purchase the remaining units in fiscal 2000.
15. SEGMENT REPORTING
The Company has three reportable segments: Remote Facilities Management
(RFM), Conferencing and Other. The RFM segment consists of telephone
interface and remote site control products. These products are designed
to monitor and control processes and equipment from a single source to
many locations. In addition to monitoring and controlling equipment and
processes, this segment also consists of products designed to facilitate
the interface between regular telephone lines and the broadcast world
allowing callers to speak live on radio airwaves to millions of
listeners. The Conferencing segment consists of a full line of room
system conferencing products and conference calling services, targeting
an organization's need to communicate any form of collateral over
distance. This consists of installed audio- and videoconferencing
products, audio-, video- and document conferencing services and the
addition of professional training and collaborative services. The major
distributor referred to in Note 2 accounted for net sales in the RFM
segment of 21%, 17% and 15% for fiscal years 1999, 1998 and 1997,
respectively.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates the performance of these business segments based upon a
measure of gross profit since general and administrative costs are not
allocated to each segment.
The Company's reportable segments are strategic business units that
offer products and services to different customer needs. They are
managed separately because each segment requires focus and attention on
their market and distribution channel.
The following table summarizes the segment information:
32
<PAGE> 33
<TABLE>
<CAPTION>
Company
RFM Conferencing All Other Totals
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended June 30, 1999:
Net sales $ 6,888,827 $ 14,070,705 $ 2,030,795 $ 22,990,327
Cost of goods sold 2,685,769 6,160,027 1,031,891 9,877,687
------------ ------------ ------------ ------------
Gross profit 4,203,058 7,910,678 998,904 13,112,640
Marketing and selling 1,374,240 3,281,300 274,200 4,929,740
Research and product development 486,667 989,678 18,607 1,494,952
General and administrative 2,544,664
------------
Total operating expenses 8,969,356
Operating profit 4,143,284
Other items (78,113)
------------
Income before taxes 4,065,171
Provision for income taxes (1,520,700)
------------
Net income $ 2,544,471
============
Year ended June 30, 1998:
Net sales $ 6,256,039 $ 8,727,768 $ 2,284,079 $ 17,267,886
Cost of goods sold 2,650,033 4,250,096 1,447,171 8,347,300
------------ ------------ ------------ ------------
Gross profit 3,606,006 4,477,672 836,908 8,920,586
Marketing and selling 1,213,475 2,109,216 327,185 3,649,876
Research and product development 393,410 744,430 4,765 1,142,605
General and administrative 2,470,949
------------
Total operating expenses 7,263,430
Operating profit 1,657,156
Other items (213,707)
------------
Income before taxes 1,443,449
Provision for income taxes (39,000)
------------
Net income $ 1,404,449
============
Year ended June 30, 1997:
Net sales $ 5,870,460 $ 5,321,870 $ 2,179,521 $ 13,371,851
Cost of goods sold 2,715,820 2,832,000 1,326,770 6,874,590
------------ ------------ ------------ ------------
Gross profit 3,154,640 2,489,870 852,751 6,497,261
Marketing and selling 1,165,649 2,010,067 397,166 3,572,882
Research and product development 538,628 473,942 34,187 1,046,757
General and administrative 2,006,998
------------
Total operating expenses 6,626,637
Operating loss (129,376)
Other items (206,622)
------------
Loss before taxes (335,998)
Provision for income taxes (36,900)
------------
Net loss $ (372,898)
============
</TABLE>
33
<PAGE> 34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None exist.
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> <C>
Edward Dallin Bagley* 61 Attorney 1994
Edward N. Bagley* 87 Vice President of Smith 1993
Barney and Director of
Mining Services
International
Brad R. Baldwin 44 President and Chief 1988
Executive Officer of Bank
One, Utah
Dwight H. Egan 46 Executive Vice President 1994
of Sales and Marketing
of Data Broadcasting
Corporation
Frances M. Flood 43 Chief Executive Officer 1998
and President
K. Bradford Romney 43 Business Unit Manager, 1994
Small Business Networking
Operation, Intel
Corporation
Randall J. Wichinski 46 President of East 1999
Cincinnati Running
Company, Inc.
</TABLE>
* Edward N. Bagley and Edward Dallin Bagley are father and son, respectively.
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 and
34
<PAGE> 35
of National Environmental Services Company. Mr. Bagley received a Juris
Doctorate in 1965 from the University of Utah College of Law.
Edward N. Bagley has been a Director of the Company since January 1993. Mr.
Bagley is currently Vice President of Salomon Smith Barney, with whom he has
been associated since 1971. Mr. Bagley has worked in the investment industry
since 1934. Mr. Bagley is also a member 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 bachelor's degree from Utah State University in 1933.
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, 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.
Dwight H. Egan has been a Director of the Company since November 1994. Mr. Egan
is currently Executive Vice-President of Sales and Marketing as well as a Board
member of Data Broadcasting Corporation which is the leading provider of
real-time market data to the individual trader and investor. From November 1985
to August 1999, Mr. Egan was the President and Chief Executive Officer of
Broadcast International, Inc., a satellite communications and business
information company located in Midvale, Utah. Broadcast International, Inc. is a
subsidiary of Data Broadcasting Corporation.
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 over twenty-five years experience in sales, marketing,
change management, international business and finance.
K. Bradford Romney has been a Director of the Company since November 1994. He
currently serves as 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.
Randall J. Wichinski has been a Director of the Company since June 1999. He is
currently President of East Cincinnati Running Company, Inc. From April 1983 to
March 1999, Mr. Wichinski was employed at Ernst & Young LLP, an international
accounting and consulting firm, serving as a Tax Partner for ten years. He
received a bachelor's degree in 1977 and a Masters of Business Administration
degree in 1982 from the University of Wisconsin-Madison.
Director Compensation and Committees
All directors serve until their successors are elected and have qualified. The
Company paid each director $650 per month for services provided as a director.
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. Edward Dallin Bagley, Mr. Edward N. Bagley, Mr. Brad
R. Baldwin, Mr. Dwight H. Egan, Mr. K. Bradford Romney and Mr. Randall J.
Wichinski. The Compensation Committee is currently composed of Mr. Edward Dallin
Bagley, Mr. Edward N. Bagley, Mr. Brad R. Baldwin, Mr. Dwight H. Egan, Mr. K.
Bradford Romney and Mr. Randall J. Wichinski. 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
35
<PAGE> 36
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 six meetings during the last fiscal year. The
Executive Committee held no formal meetings during the last fiscal year. The
Audit Committee held one formal meeting during the last fiscal year. The
Compensation Committee held no formal meetings during the last fiscal year.
Executive Officers
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Frances M. Flood 43 President and Chief Executive Officer
Brooks Gibbs 40 Chief Technology Officer
Curtis Hewitson 35 Vice President of Human Resources
Susie S. Strohm 39 Vice President of Finance and Chief
Financial Officer
</TABLE>
For the biography of Ms. Flood, see "Directors."
Brooks Gibbs was named Chief Technology Officer for Gentner Communications in
November of 1998. He has been with Gentner for 11 years serving in Engineering,
Manufacturing, Product Management, Sales, Marketing and Customer Service areas.
He is responsible for coordination of the Company's strategic technical
direction. 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 19 years of communications product development and product
management experience.
Curtis Hewitson was named Vice President of Human Resources for Gentner
Communications in November 1998. He has been with Gentner since December 1994
serving in Human Resources. He is responsible for all aspects of Human Resources
and office administration. Prior to joining the Company, Mr. Hewitson worked in
the telecommunications industry for nine years. In 1989, Mr. Hewitson received a
Bachelor of Science degree from the University of Utah.
Susie S. Strohm became Vice President of Finance in 1997, and was named CFO
during 1998. 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 Securities and Exchange Commission
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.
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.
36
<PAGE> 37
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, 1999 exceeded $100,000, for services rendered
in all capacities to the Company during such fiscal years.
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)
- ----------------------- ------ -------- -------- ------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frances M. Flood Fiscal
CEO & President(2) 98-99 $104,912 $ 66,064 None None None None $ 2,022
Fiscal
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
Susie Strohm Fiscal
CFO & Vice President(4) 98-99 $ 72,716 $ 44,414 None None None None $ 1,721
</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.
(4) Ms. Strohm did not meet the compensation constraint until fiscal year
1999.
STOCK OPTIONS/SARS
No stock options or SAR grants were made to any named executive officers during
the last fiscal year.
AGGREGATED STOCK OPTION/SAR EXERCISES
The following table sets forth the aggregated stock options and SARs exercised
by the named executive officers in fiscal 1999 and the year-end value of
unexercised options and SARs:
37
<PAGE> 38
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR ENDED JUNE 30, 1999
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 28,666 $56,368 55,334/217,000 $240,592/$753,835
Susie Strohm
CFO & Vice President 21,536 $42,378 25,964/142,500 $113,498/$432,334
</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, 1999 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, 1999 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.
<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) 17.0%
Edward N. Bagley 312,333(4) 3.8%
Frances M. Flood 151,196(5) 1.8%
Brad R. Baldwin 131,166(6) 1.6%
Susie Strohm 80,984(7) 1.0%
Dwight H. Egan 55,000(8) 0.7%
K. Bradford Romney, Jr 55,000(9) 0.7%
Randall J. Wichinski 2,500(9) 0.0%
Directors and Executive Officers
as a Group (10 people) 2,231,119(3 - 10) 27.2%
</TABLE>
(1) For each shareholder, the calculation of percentage of beneficial
ownership is based on 8,188,748 shares of Common Stock outstanding as of
September 1, 1999 and shares of Common Stock subject to options held by
the shareholder that are currently exercisable or exercisable within 60
days of September 1, 1999.
(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: 1,294,285 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. 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.
38
<PAGE> 39
(4) 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.
(5) President, CEO and Director. Includes: 51,862 shares owned directly;
options to purchase 99,334 shares that are exercisable within 60 days.
(6) Director. Includes: 66,166 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) Vice President and CFO. Includes: 29,020 shares owned directly; options
to purchase 51,964 shares that are exercisable within 60 days.
(8) Director. Includes: options to acquire 55,000 shares that are
exercisable within 60 days.
(9) Directors. All shares are owned directly.
(10) Includes: an additional 6,105 shares owned directly by two additional
officers; and options to purchase 42,500 shares that are exercisable
within 60 days by those officers.
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 Edward Dallin
Bagley and, among other unrelated parties, certain members of his family, 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, 1999, 1998 and 1997 was $39,900,
$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>
Edward Dallin Bagley (Director)................... 10.42%
Edward N. Bagley (Director)....................... 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, 1999, 1998 and 1997 was $82,989, $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:
<TABLE>
<S> <C>
Brad R. Baldwin (Director)..................................... 3.19%
Robert O. Baldwin (father of Brad Baldwin)..................... 9.58%
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.
39
<PAGE> 40
<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.
<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) (Page7)
10.2(1)(2)(3) 1997 Employee Stock Purchase Plan (Page 37)
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
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 hereby incorporated by reference from the Company's
Form 10-KSB for the fiscal year ended June 30, 1998. The exhibit numbers shown
are those in the 1998 Form 10-KSB as originally filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1(3) 1998 Stock Option Plan and Form of Grant
10.2 Modification Agreement dated as of December 24, 1997, between
First Security Bank, N.A. and the Company
</TABLE>
The following documents are hereby incorporated by reference from the Company's
Form 10-QSB for the fiscal quarter ended December 31, 1998. The exhibit numbers
shown are those in the Form 10-QSB as originally filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10 Promissory Note, Loan Agreement, and Commercial Security
Agreement between Company and Bank One, Utah, N.A. dated as of
January 5, 1999 (original aggregate amount of $5,000,000)
(Page 15)
</TABLE>
The following documents are filed as exhibits to this Form 10-KSB.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
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.
41
<PAGE> 42
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 16, 1999 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 16, 1999
- --------------------- Chief Executive Officer
Frances M. Flood (Principal Executive Officer)
/s/ Susie Strohm Vice President - Finance September 16, 1999
- --------------------- (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 16, 1999
- ------------------------
Edward Dallin Bagley
/s/ Edward N. Bagley Director September 16, 1999
- ------------------------
Edward N. Bagley
/s/ Brad R. Baldwin Director September 16, 1999
- ------------------------
Brad R. Baldwin
/s/ Dwight H. Egan Director September 16, 1999
- ------------------------
Dwight H. Egan
/s/ K. Bradford Romney Director September 16, 1999
- ------------------------
K. Bradford Romney
/s/ Randall J. Wichinski Director September 16, 1999
- ------------------------
Randall J. Wichinski
</TABLE>
42
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
43
<PAGE> 1
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the 1998 Stock Option Plan, 1997 Employee Stock
Purchase Plan, and the 1990 Incentive Plan of Gentner Communications
Corporation of our report dated July 30, 1999, with respect to the financial
statements of Gentner Communications Corporation included in the Annual Report
(Form 10-KSB) for the year ended June 30, 1999.
/s/ Ernst & Young, LLP
Salt Lake City, Utah
September 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> $3,922,183
<SECURITIES> 0
<RECEIVABLES> $2,483,294
<ALLOWANCES> $(241,000)
<INVENTORY> $2,858,835
<CURRENT-ASSETS> $9,281,753
<PP&E> $6,085,864
<DEPRECIATION> $(3,959,905)
<TOTAL-ASSETS> $11,519,414
<CURRENT-LIABILITIES> $2,494,666
<BONDS> 0
0
0
<COMMON> $8,130
<OTHER-SE> $8,344,229
<TOTAL-LIABILITY-AND-EQUITY> $11,519,414
<SALES> $22,990,327
<TOTAL-REVENUES> $22,990,327
<CGS> $9,877,687
<TOTAL-COSTS> $18,847,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $148,253
<INCOME-PRETAX> $4,065,171
<INCOME-TAX> $1,520,700
<INCOME-CONTINUING> $2,544,471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $2,544,471
<EPS-BASIC> $0.31
<EPS-DILUTED> $0.30
</TABLE>
