<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 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
(Exact name of registrant as specified in its charter)
UTAH 87-0398877
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1825 RESEARCH WAY, SALT LAKE CITY, UTAH 84119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 975-7200
-----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date.
CLASS OF COMMON STOCK NOVEMBER 12, 1999
$0.001 PAR VALUE 8,218,255 SHARES
Transitional Small Business Disclosure Format (check one)
[ ] Yes [X] No
<PAGE> 2
GENTNER COMMUNICATIONS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
September 30, 1999 (unaudited) and June 30, 1999...................... 3
Statements of Income
Three Months Ended September 30, 1999 and
1998 (unaudited)...................................................... 4
Statements of Cash Flows
Three Months Ended September 30, 1999 and
1998 (unaudited)...................................................... 5
Notes to Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................... 14
</TABLE>
2
<PAGE> 3
GENTNER COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, June 30,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 4,228,128 $ 3,922,183
Accounts receivable ........................................ 2,797,391 2,242,294
Inventory .................................................. 2,813,408 2,858,835
Deferred taxes ............................................. 115,000 115,000
Other current assets ....................................... 312,554 143,441
----------- -----------
Total current assets .................................. 10,266,481 9,281,753
Property and equipment, net ...................................... 2,193,853 2,125,959
Other assets, net ................................................ 98,291 111,702
----------- -----------
Total assets .......................................... $12,558,625 $11,519,414
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 422,691 $ 725,193
Accrued compensation and other benefits .................... 476,657 762,345
Accrued federal and state income taxes ..................... 702,087 229,087
Other accrued expenses ..................................... 629,260 562,187
Current portion of capital lease obligations ............... 221,714 215,854
----------- -----------
Total current liabilities ............................. 2,452,409 2,494,666
Capital lease obligations ........................................ 397,713 455,389
Deferred tax liability ........................................... 217,000 217,000
----------- -----------
Total liabilities ..................................... 3,067,122 3,167,055
Shareholders' equity:
Common stock, 50,000,000 shares authorized, par value $.001,
8,193,748 and 8,129,691 shares issued and outstanding at
September 30, 1999 and June 30, 1999 ..................... 8,194 8,130
Additional paid-in capital ................................. 5,083,542 5,024,858
Retained earnings .......................................... 4,399,767 3,319,371
----------- -----------
Total shareholders' equity ............................ 9,491,503 8,352,359
----------- -----------
Total liabilities and shareholders' equity ............ $12,558,625 $11,519,414
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Product sales ................................. $ 6,007,545 $ 4,714,897
Service sales ................................. 1,076,728 783,046
----------- -----------
Total net sales ......................... 7,084,273 5,497,943
Cost of goods sold - products ................. 2,101,325 1,925,906
Cost of goods sold - services ................. 614,293 591,456
----------- -----------
Cost of goods sold ...................... 2,715,618 2,517,362
----------- -----------
Gross profit .................................. 4,368,655 2,980,581
Operating Expenses:
Marketing and selling ................... 1,471,897 1,129,179
General and administrative .............. 746,619 635,632
Product development ..................... 460,676 363,529
----------- -----------
Total operating expense ............ 2,679,192 2,128,340
Operating income ................... 1,689,463 852,241
Other income (expense):
Interest income ......................... 45,767 8,825
Interest expense ........................ (18,550) (34,460)
Other, net .............................. 4,716 (9,809)
----------- -----------
Total other income (expense) ....... 31,933 (35,444)
----------- -----------
Income before income taxes .................... 1,721,396 816,797
Provision for income taxes .................... 641,000 308,000
----------- -----------
Net income ......................... $ 1,080,396 $ 508,797
=========== ===========
Basic earnings per common share ............... $ 0.13 $ 0.06
=========== ===========
Diluted earnings per common share ............. $ 0.12 $ 0.06
=========== ===========
</TABLE>
See accompanying notes
4
<PAGE> 5
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 1,080,396 $ 508,797
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment ....................................... 182,056 216,106
Amortization of other assets ...................... 5,458 5,458
Changes in operating assets and liabilities:
Accounts receivable .......................... (555,097) (455,949)
Inventory .................................... 45,427 631,930
Other current assets ......................... (169,113) 30,200
Accounts payable and other accrued expenses .. (48,117) 256,964
----------- -----------
Net cash provided by operating activities .... 541,010 1,193,506
Cash flows from investing activities:
Purchases of property and equipment .................... (249,950) (48,038)
Repayment of note receivable ........................... 7,953 3,659
----------- -----------
Net cash used in investing activities ........ (241,997) (44,379)
Cash flows from financing activities:
Proceeds from issuance of common stock ................. 1,612 1,064
Exercise of employee stock options ..................... 57,136 316,955
Principal payments of capital lease obligations ........ (51,816) (54,056)
Principal payments of long-term debt ................... -- (68,468)
----------- -----------
Net cash provided by financing activities .... 6,932 195,495
Net increase in cash ......................................... 305,945 1,344,622
Cash at the beginning of the year ............................ 3,922,183 715,325
----------- -----------
Cash at the end of the period ................................ $ 4,228,128 $ 2,059,947
=========== ===========
Supplemental disclosure of cash flow information:
Income taxes paid ............................ $ 168,000 $ 53,500
Interest paid ................................ $ 18,689 $ 33,638
</TABLE>
See accompanying notes
5
<PAGE> 6
GENTNER COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB of Regulation S-B. Accordingly, certain
information and footnote disclosures normally included in complete financial
statements have been condensed or omitted. These financial statements should be
read in conjunction with the financial statements and footnotes thereto included
in the Company's 1999 Annual Report and Form 10-KSB.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
2. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Numerator:
Net income ......................................................... $1,080,396 $ 508,797
========== ==========
Denominator:
Denominator for basic net income per share - weighted average shares 8,171,978 7,948,358
Effect of dilutive securities using treasury stock method .......... 541,094 174,082
---------- ----------
8,713,073 8,122,440
========== ==========
Net income per share - basic ............................................. $ 0.13 $ 0.06
Net income per share - dilutive .......................................... $ 0.12 $ 0.06
</TABLE>
3. COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Comprehensive income for
the three-month periods ended September 30, 1999 and 1998 was equal to net
income.
4. 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.
5. INVENTORY
Inventory is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, June 30,
1999 1999
---------- ----------
<S> <C> <C>
Raw Materials $1,052,588 $1,055,615
Work in progress 507,402 347,898
Finished Goods 1,253,418 1,455,322
---------- ----------
Total inventory $2,813,408 $2,858,835
========== ==========
</TABLE>
6
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. STOCK OPTION EXERCISE
The following table shows the changes in stock options outstanding.
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Exercise Price
--------- --------
<S> <C> <C>
Options outstanding as of June 30, 1999 ............ 1,408,048 $ 1.94
Options expired & canceled ......................... (80,000) $ 2.66
Options exercised .................................. (63,750) $ 0.93
Options granted .................................... 75,000 $ 6.19
--------- --------
Options outstanding as of September 30, 1999 ....... 1,339,298 $ 2.16
========= ========
</TABLE>
7. COMMITMENTS
The Company has entered into an agreement to purchase 300 videoconference
engines. The remaining cost of this commitment is approximately $252,000 at
September 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 by December 31, 1999.
8. SEGMENT REPORTING
The Company has changed how it evaluates its operations internally resulting in
a change in its segments. To obtain a better understanding of conferencing
products and services and the related business opportunities, management has
divided the former conferencing segment into two segments. As a result, the
Company now reports four different segments - Remote Facilities Management
(RFM), Conferencing Products, Conferencing Services and Other. The RFM segment
consists remote site control products which are designed to monitor and control
processes and equipment from a single source to many locations. This segment
also consists of telephone interface products which are 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 Products segment consists of a full line of room system
conferencing products including installed audio- and videoconferencing products.
The Conferencing Services segment includes conference calling services, audio
bridging, document conferencing services and the addition of the professional
services group, which provides consultation services, meeting facilitation and
web presentation services.
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.
7
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes the segment information:
<TABLE>
<CAPTION>
Conferencing Conferencing Company
RFM Products Services All Other Totals
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Quarter Ended September 30, 1999:
Net sales $ 2,058,531 $ 3,895,346 $ 997,584 $ 132,812 $ 7,084,273
Cost of goods sold 812,038 1,265,708 594,139 43,733 2,715,618
----------- ----------- ----------- ----------- -----------
Gross profit 1,246,493 2,629,638 403,445 89,079 4,368,655
Marketing and selling 331,390 824,814 314,119 1,574 1,471,897
Product development 255,683 204,993 460,676
General and administrative 746,619
-----------
Total operating expenses 2,679,192
Operating profit 1,689,463
Other income (expense) 31,933
-----------
Income before income taxes 1,721,396
Provision for income taxes (641,000)
-----------
Net income $ 1,080,396
===========
Quarter Ended September 30, 1998:
Net sales $ 1,706,755 $ 2,875,935 $ 710,179 $ 205,074 $ 5,497,943
Cost of goods sold 759,249 1,116,379 568,706 73,028 2,517,362
----------- ----------- ----------- ----------- -----------
Gross profit 947,506 1,759,556 141,473 132,046 2,980,581
Marketing and selling 296,505 607,799 221,702 3,173 1,129,179
Product development 76,215 287,314 363,529
General and administrative 635,632
-----------
Total operating expenses 2,128,340
Operating profit 852,241
Other income (expense) (35,444)
-----------
Income before income taxes 816,797
Provision for income taxes (308,000)
-----------
Net income $ 508,797
===========
</TABLE>
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company has changed how it evaluates its operations internally resulting in
a change in its segments. To obtain a better understanding of conferencing
products and services and the related business opportunities, management has
divided the former conferencing segment into two segments. As a result, the
Company now reports four different segments - Remote Facilities Management
(RFM), Conferencing Products, Conferencing Services and Other.
Sales for the three months ended September 30, 1999 increased 29% compared to
the same three-month period last year. Growth was primarily due to increased
sales in conferencing products and conferencing services.
Sales in Conferencing products increased 35% comparing the first quarter of this
fiscal year to the same quarter last year. This increase was mainly due to the
success of the Audio Perfect(TM) product line. The Audio Perfect(TM) product
line began shipping in April of 1998 with the AP800. The Company has continued
to introduce new products in this family such as the AP400, APV200 and AP Tools.
These products use a new digital technology called Distributed Echo
Cancellation(TM) and incorporate several functional devices including automatic
microphone mixing, echo cancellation, audio routing, audio equalization and
audio processing into a single device. The Company anticipates generating more
of the revenue associated with a room installation as a result of the expanded
applications. The Company has also introduced a video conference system which
has contributed to sales.
Conferencing services, 1-800 LETS MEET(R), experienced sales growth of 40% in
the first quarter of this fiscal year as compared to the first quarter of last
fiscal year. The Company attributes this growth in sales to an increased
customer base as well as the overall market growth over the last year. This
increase was also the result of the Company expanding its sales staff, who
market its conference calling service. The Company's conference calling service
is being marketed not only to corporate clients, but also to long distance
telephone service providers for resale.
RFM sales increased 21% in the first quarter of this fiscal year as compared to
the first quarter of last fiscal year. Remote Facilities Management (formerly
known as Remote Site Control) grew 52%, mainly due to increased sales of the
GSC3000. The GSC3000 allows broadcasters to monitor and control many transmitter
sites from one location. Sales to the OEM, television and international markets
contributed to the increased sales of the GSC3000. Sales of the Telephone
Interface line increased 4% during the first quarter of this year compared to
the first quarter of last year.
Sales of Other Products decreased 35% in the first quarter of this fiscal year
as compared to the first quarter of last fiscal year. In general, the Company is
not promoting Other Products, and those sales are expected to continue to
decline.
The Company's gross profit margin percentage was 62% for the first quarter of
this year, compared to 54% for the same quarter last year. This increase was
primarily due to a critical focus on improving manufacturing processes,
aggressive vendor pricing, new products with higher gross profit margins, and a
different product mix. The Company does not expect to see margins remain at this
high level. The Company's overall gross profit margin would be negatively
impacted if the price of raw components increases or if services becomes a
higher percentage of total sales.
Operating expenses for the quarter increased 26% when comparing the first
quarters of this fiscal year and last fiscal year. The most significant portion
of this increase came in marketing and selling expenses, which increased 30%,
comparing first quarters of this year and last year.
Marketing and selling expenses increased 30% for the first quarter as compared
to last year. The increase was primarily due to the hiring of additional
personnel to more aggressively market and sell the Company's products and
service. Also contributing to the increase was higher commission expense
resulting from the increase in sales.
Product Development expenses increased 27% in the first quarter of this year
compared to last year. The Product Development team is working on new product
development, which the Company anticipates will enhance future revenue growth.
The increase was due to hiring of personnel and associated recruiting costs.
First quarter General and Administrative expenses are up 17% compared to the
same period last year. This increase was mainly due to hiring of personnel and
the infrastructure costs associated with the hiring of all new personnel.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Results of Operations - (continued)
Interest expense for the quarter was down 44% compared to the same quarter last
year due to the maturing of some of the Company's leases and the payoff of
several notes later in fiscal 1999.
During the first quarter of fiscal 2000, income tax expense was calculated at a
combined federal and state tax rate of about 37%, resulting in a tax expense of
$641,000. First quarter of fiscal 1999, income tax expense was $308,000 with a
calculated combined tax rate of about 38%.
Financial Condition and Liquidity
The Company's current ratio increased from 3.72:1 on June 30, 1999 to 4.19:1 on
September 30, 1999. This increase in current ratio was due primarily to an
increase in the amount of cash on hand, offsetting the increase in accrued
expenses, as well as a decrease in accounts payable. Also affecting the current
ratio was an increase in the accounts receivable due to increased sales.
The Company continues to experience positive operating cash flows. Increasing
sales and profitability have contributed to positive operating cash flows which
was offset by an increase in accounts receivable and other current assets.
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 September 30, 1999. The line of
credit expires on December 22, 2000.
As sales continue to increase, the Company expects to achieve its business plan
through a combination of internally generated funds and short-term or long-term
borrowings, if necessary.
Forward Looking Statements
Certain statements contained in this report are forward looking statements.
These include 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
enhance future revenue growth through the development of new products, the
Company's belief that it will improve its development cycle, 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, the
Company's belief that a large percentage of customer credit defaults is
unlikely, and the Company's belief that its continuing Year 2000 assessment will
decrease the risk of impact on the Company due to the Year 2000 issue. 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." Please see a detailed list of the risk factors that are outlined in
the Company's Form 10-KSB for the fiscal year ended June 30, 1999, incorporated
herein by reference.
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.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Factors that may Affect Future Results - (continued)
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 current 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.
Limited Capitalization
As of September 30, 1999, the Company had $4,228,128 in cash and $7,814,072 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 September 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.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Factors that may Affect Future Results - (continued)
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.
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.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Factors that may Affect Future Results - (continued)
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. Approximately $53,000 was incurred during
fiscal 1999 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 during fiscal
1999, and associates were trained how to use the new system. The cost of this
software and hardware was approximately $50,000. 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 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.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibits Required by Item 601 of Regulation S-B
The following exhibits are hereby incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1989. The exhibit
numbers shown are those in the 1989 Form 10-K as originally filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1(1,2) Articles of Incorporation and all amendments thereto through
March 1, 1988. (Page 10)
10.4(1,2) VRC-1000 Purchase Agreement between Gentner Engineering Company,
Inc. (a former subsidiary of the Company which was merged into
the Company) and Gentner Research Ltd., dated January 1, 1987.
(Page 71)
</TABLE>
The following exhibits are hereby incorporated by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1991. The exhibit
numbers shown are those in the 1991 Form 10-K as originally filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1(1,2) Amendment to Articles of Incorporation, dated July 1, 1991. (Page
65)
10.1(1,2) Internal Modem Purchase Agreement between Gentner Engineering
Company, Inc. and Gentner Research, Ltd., dated October 12, 1987.
(Page 69)
10.2(1,2) Digital Hybrid Purchase Agreement between Gentner Engineering,
Inc. and Gentner Research, Ltd., dated September 8, 1988. (Page
74)
</TABLE>
The following documents are hereby incorporated by reference from the Company's
Form 10-KSB for the fiscal year ended June 30, 1993. The exhibit numbers shown
are those in the 1993 Form 10-KSB as originally filed.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3(1,2) Bylaws, as amended on August 24, 1993. (Page 16)
</TABLE>
The following documents are hereby incorporated by reference from the Company's
Form 10-KSB for the fiscal year ended June 30, 1996. The exhibit numbers shown
are those in the 1996 Form 10-KSB as originally filed.
<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.
14
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1(1,2) Commercial Credit and Security Agreement, and Promissory Note,
between Company and First Security Bank, N.A. (original aggregate
amount of $2,500,000) (Page 7)
10.2(1,2,3) 1997 Employee Stock Purchase Plan (Page 37)
10.3(1,2) Promissory Note in favor of Safeco Credit Company ($419,000)
(Page 52)
10.4(1,2) Commercial Credit and Security Agreement, and Promissory Note,
between Company and First Security Bank ($322,716.55) (Page 53)
10.5(1,2) Lease between Company and Valley American Investment Company
(Page 71)
</TABLE>
The following documents are 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-QSB.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the latest fiscal quarter.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENTNER COMMUNICATIONS CORPORATION
/s/ Susie Strohm
-----------------------------------------
Susie Strohm
Vice President, Finance
Date: November 12, 1999
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 4,228,128
<SECURITIES> 0
<RECEIVABLES> 3,058,956
<ALLOWANCES> (261,565)
<INVENTORY> 2,813,408
<CURRENT-ASSETS> 10,266,481
<PP&E> 6,335,814
<DEPRECIATION> (4,141,961)
<TOTAL-ASSETS> 12,588,625
<CURRENT-LIABILITIES> 2,452,409
<BONDS> 0
0
0
<COMMON> 8,189
<OTHER-SE> 9,483,314
<TOTAL-LIABILITY-AND-EQUITY> 12,588,625
<SALES> 7,084,273
<TOTAL-REVENUES> 7,084,273
<CGS> 2,715,618
<TOTAL-COSTS> 5,394,810
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,550
<INCOME-PRETAX> 1,721,396
<INCOME-TAX> 641,000
<INCOME-CONTINUING> 1,080,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,080,396
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.12
</TABLE>
