UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 2000
------------------
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
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 975-7200
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-----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by 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
Indicate 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 1, 2000
$0.001 par value 8,576,598 shares
<PAGE>
GENTNER COMMUNICATIONS CORPORATION
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
September 30, 2000 (unaudited) and June 30, 2000.............. 3
Statements of Income
Three Months Ended September 30, 2000 and
1999 (unaudited).............................................. 4
Statements of Cash Flows
Three Months Ended September 30, 2000 and
1999 (unaudited).............................................. 5
Notes to Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Plan
of Operation................................................... 9
Item 3. Qualitative and Quantitative Disclosure about Market Risk......14
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.....................15
Item 6. Exhibits and Reports on Form 8-K..............................15
2
<PAGE>
<TABLE>
GENTNER COMMUNICATIONS CORPORATION
BALANCE SHEETS
<CAPTION>
(Unaudited) (Audited)
September 30, June 30,
------------------------------
2000 2000
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents.................................. $ 6,215,952 $ 5,374,996
Accounts receivable........................................ 4,910,505 4,153,677
Inventory.................................................. 4,313,476 3,484,992
Income tax receivable...................................... -- 987,912
Deferred taxes............................................. 136,000 136,000
Other current assets....................................... 488,767 678,744
------------- ------------
Total current assets................................... 16,064,700 14,816,321
Property and equipment, net.................................... 3,265,416 3,050,349
Related party note receivable.................................. 43,196 52,488
Goodwill, net.................................................. 2,774,824 --
Other assets, net.............................................. 280,623 1,373
------------- ------------
Total assets........................................... $ 22,428,759 $ 17,920,531
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 737,140 $ 767,095
Accrued compensation and other benefits.................... 687,843 694,219
Income tax payable......................................... 682,087 --
Other accrued expenses..................................... 1,416,276 1,045,607
Current portion of capital lease obligations............... 253,624 249,859
------------- ------------
Total current liabilities.............................. 3,776,970 2,756,780
Capital lease obligations...................................... 144,089 205,530
Deferred tax liability......................................... 205,000 205,000
------------- ------------
Total liabilities...................................... 4,126,059 3,167,310
Shareholders' equity:
Common stock, 50,000,000 shares authorized, par value $.001,
8,562,988 and 8,427,145 shares issued and outstanding
at September 30, 2000 and June 30, 2000, respectively.... 8,563 8,427
Additional paid-in capital................................. 8,716,755 6,697,090
Retained earnings.......................................... 9,577,382 8,047,704
------------- ------------
Total shareholders' equity............................. 18,302,700 14,753,221
------------- ------------
Total liabilities and shareholders' equity............. $ 22,428,759 $ 17,920,531
============= ============
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF INCOME
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C> <C> <C>
Product sales............................................ $ 7,806,628 77.8% $ 6,007,545 84.8%
Service sales............................................ 2,222,830 22.2% 1,076,728 15.2%
----------- ----- ----------- -----
Total net sales...................................... 10,029,458 100.0% 7,084,273 100.0%
Cost of goods sold - products............................ 2,853,415 36.6% 2,101,325 35.0%
Cost of goods sold - services............................ 1,173,408 52.8% 614,293 57.1%
----------- ----- ----------- -----
Total cost of goods sold............................. 4,026,823 40.1% 2,715,618 38.3%
----------- ----- ----------- -----
Gross profit............................................. 6,002,635 59.9% 4,368,655 61.7%
Operating expenses:
Marketing and selling................................ 2,007,824 20.0% 1,471,897 20.8%
General and administrative........................... 1,091,074 10.9% 746,619 10.5%
Product development.................................. 528,138 5.3% 460,676 6.5%
----------- ----- ----------- -----
Total operating expenses......................... 3,627,036 36.2% 2,679,192 37.8%
----------- ----- ----------- -----
Operating income................................. 2,375,599 23.7% 1,689,463 23.8%
Other income (expense):
Interest income...................................... 73,892 0.7% 45,767 0.6%
Interest expense..................................... (12,673) (0.1)% (18,550) (0.3)%
Other, net........................................... 2,860 0.0% 4,716 0.1%
----------- ----- ----------- -----
Total other income (expense)..................... 64,079 0.6% 31,933 0.5%
----------- ----- ----------- -----
Income before income taxes............................... 2,439,678 24.3% 1,721,396 24.3%
Provision for income taxes............................... 910,000 9.1% 641,000 9.0%
----------- ----- ----------- -----
Net income....................................... $ 1,529,678 15.3% $ 1,080,396 15.3%
=========== ===== =========== =====
Basic earnings per common share.......................... $ 0.18 $ 0.13
=========== ============
Diluted earnings per common share........................ $ 0.17 $ 0.12
=========== ============
</TABLE>
See accompanying notes
4
<PAGE>
<TABLE>
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
Three Months Ended
September 30,
------------------------
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income.................................................... $ 1,529,678 $ 1,080,396
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment................................................ 238,920 182,056
Amortization of other assets............................... 67,031 5,458
Changes in operating assets and liabilities:
Accounts receivable..................................... (756,828) (555,097)
Inventory............................................... (529,398) 45,427
Income taxes............................................ 1,670,000 473,000
Other current assets.................................... 211,601 (169,113)
Accounts payable and other accrued expenses............. 334,335 (521,117)
----------- ----------
Net cash provided by operating activities............. 2,765,339 541,010
Cash flows from investing activities:
Purchases of property and equipment........................... (137,704) (249,950)
Purchase of business.......................................... (1,758,085) --
Repayment of note receivable.................................. 9,293 7,953
----------- ----------
Net cash used in investing activities................. (1,886,496) (241,997)
Cash flows from financing activities:
Proceeds from issuance of common stock........................ 4,760 1,612
Exercise of employee stock options............................ 15,029 57,136
Principal payments on capital lease obligations............... (57,676) (51,816)
----------- ----------
Net cash provided by (used in) financing
activities......................................... (37,887) 6,932
----------- ----------
Net increase in cash............................................. 840,956 305,945
Cash at the beginning of the year................................ 5,374,996 3,922,183
---------- ----------
Cash at the end of the period.................................... $ 6,215,952 $ 4,228,128
=========== ===========
Supplemental disclosure of cash flow information:
Income taxes paid............................................. $ -- $ (168,000)
Interest paid................................................. $ (12,673) $ (18,689)
Consideration paid in stock for purchase of business.......... $ 2,000,013 $ --
</TABLE>
See accompanying notes
5
<PAGE>
GENTNER COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
(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-Q of Regulation S-K. 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 2000 Annual Report on 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,
-------------
2000 1999
---- ----
Numerator:
<S> <C> <C>
Net income.................................................................. $ 1,529,678 $ 1,080,396
=========== ===========
Denominator:
Denominator for basic net income per share - weighted average shares........ 8,555,835 8,171,978
Effect of dilutive securities using treasury stock method................... 226,063 541,094
---------- -----------
8,781,898 8,713,073
=========== ===========
Net income per share - basic.................................................... $ 0.18 $ 0.13
Net income per share - dilutive................................................. $ 0.17 $ 0.12
</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, 2000 and 1999 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:
(Unaudited) (Audited)
September 30, June 30,
2000 2000
---- ----
Raw Materials $ 2,292,026 $ 1,559,210
Work in progress 427,857 437,112
Finished Goods 1,593,593 1,488,670
----------- -----------
Total inventory $ 4,313,476 $ 3,484,992
=========== ===========
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (continued)
6. Stock Option Exercise
The following table shows the changes in stock options outstanding.
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Options outstanding as of June 30, 2000............... 1,508,548 $ 7.01
Options granted....................................... 106,000 $ 13.58
Options exercised..................................... (5,650) $ 2.66
Options expired & canceled............................ (44,250) $ 9.02
--------- --------
Options outstanding as of September 30, 2000.......... 1,564,648 $ 7.42
========= ========
7. Purchase of Business
In May 2000, the Company entered into an agreement to purchase substantially all
of the assets of ClearOne, Inc. ("ClearOne") for $3.4 million plus approximately
$300,000 in inventory, with a combination of cash and restricted stock. Under
the terms of the agreement, the Company issued 129,871 shares of common stock
valued at $15.40 and cash of $1,758,085. Goodwill resulting from the difference
between the purchase price plus acquisition costs and the net assets acquired
totaled approximately $2.8 million and is being amortized on a straight-line
basis over fifteen years. Gentner assumed the lease agreement on the office
space in Woburn, Massachusetts beginning in July 2000. The base monthly rent for
this office space is approximately $3,300 monthly. ClearOne was a privately held
developer and manufacturer of multimedia group communications products. On July
5, 2000, the acquisition was consummated and was accounted for under the
purchase method of accounting.
The following table sets forth the comparative pro forma information:
Three months ended
September 30,
-------------
2000 1999
---- ----
Net revenue..................................... $ 10,029,458 $ 7,492,870
============ ===========
Net income...................................... $ 1,529,678 $ 1,139,333
=========== ===========
Net income per share - basic.................... $ 0.18 $ 0.14
Net income per share - dilutive................. $ 0.17 $ 0.13
8. Segment Reporting
The Company 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>
NOTES TO FINANCIAL STATEMENTS - (continued)
The following table summarizes the segment information:
<TABLE>
<CAPTION>
Conferencing Conferencing Company
------------ ------------ -------
RFM Products Services All Other Totals
--- -------- -------- --------- ------
Quarter Ended September 30, 2000:
--------------------------------
<S> <C> <C> <C> <C> <C>
Net sales ....................... $ 1,827,226 $ 5,906,814 $ 2,155,273 $ 140,145 $10,029,458
Cost of goods sold .............. 790,052 2,078,447 1,129,409 28,915 4,026,823
----------- ----------- ----------- ----------- -----------
Gross profit .................... 1,037,174 3,828,367 1,025,864 111,230 6,002,635
Marketing and selling ........... 170,927 1,181,158 654,791 948 2,007,824
Product development ............. 82,689 445,449 528,138
General and administrative ...... 1,091,074
-----------
Total operating expenses ........ 3,627,036
Operating profit ................ 2,375,599
Other income (expense) .......... 64,079
-----------
Income before income taxes ...... 2,439,678
Provision for income taxes ...... (910,000)
-----------
Net income ...................... $ 1,529,678
===========
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
===========
</TABLE>
9. Subsequent Event
A customer with approximately $400,000 in outstanding receivables filed
bankruptcy on October 11, 2000.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF PLAN OF OPERATION
Results of Operations
The Company develops, manufactures, markets, and distributes products and
services for the broadcast and conferencing markets. The Company reports four
different segments - Remote Facilities Management (RFM)/Broadcast, Conferencing
Products, Conferencing Services and Other. The Company has applied its core
digital technology to the development of products for small, medium and large
conferencing venues, as well as assistive listening markets. During fiscal 2000,
the Company introduced the APV200-IP, GT1524 and PA870 power amplifier, which
contributed to an increase of 50 percent in revenue growth in the Conferencing
Products segment for the three months ended September 30, 2000 compared to the
same three-month period last year. Over the past year, the Company has expanded
its service offerings to include on-demand, reservationless conference calling,
and Webconferencing. Revenue from the Conferencing Services segment increased by
116 percent for the three months ended September 30, 2000 compared to the same
three-month period last year.
Sales for the three-month period ended September 30, 2000 increased 42% from
$7,084,273 to $10,029,458 compared to the same three-month period ended
September 30, 1999. This increase is mainly due to the strong growth in sales of
conferencing products and conferencing services.
Conferencing Products experienced a 50% sales growth when comparing the first
quarter of fiscal 2001 to the same quarter of fiscal 2000, from $3,895,346 to
$5,906,814. This increase was mainly due to the continued success of the Audio
PerfectTM product line, as well as the introduction of new products, including
the APV200 IP and the GT1524. The Audio PerfectTM product line began shipping in
April of 1998 with the AP800, and also includes the AP10, the AP400, AP Tools,
the AP IR Remote, and the APV200 IP. The Company has realized more of the
revenue associated with a room installation as a result of the expanded
applications. During the third quarter of fiscal 2000, the Company started
shipping the PA870 power amplifier.
Conferencing Services, known as 1-800 LETS MEET(R), experienced sales growth of
116% in the first quarter of this fiscal year as compared to the same quarter of
last fiscal year. Revenues for the first quarter of fiscal 2001 were $2,155,273
compared to $997,584 for the same quarter of fiscal 2000. 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/Broadcast sales decreased 11% to $1,827,226 from $2,058,531 in the first
quarter of this fiscal year compared to the same quarter of last fiscal year.
RFM/Broadcast consists of two product lines, Telephone Interface and Remote
Facilities Management (RFM, formerly known as Remote Site Control). Sales of the
Telephone Interface line decreased 3% during the first quarter of this fiscal
year compared to the same quarter of last year. Telephone hybrids are used to
connect telephone line audio to professional audio equipment. RFM decreased 22%
in the first quarter of this fiscal year when compared to the same quarter last
year, mainly due to fewer sales of the GSC3000. The Company believes that
GSC3000 revenue last year was driven by the FCC requirement that the top 30
markets across the country have the HDTV infrastructure installed. Those sales
trends are not expected to continue into the smaller markets in the next year,
because the FCC postponed the required installation of HDTV in the remaining
markets until 2002.
Other sales increased 27% in the first quarter of this fiscal year compared to
the same quarter of last fiscal year. Sales for the first quarter of fiscal 2001
were $140,145 compared to $132,812 for the same quarter of fiscal 2000. In
general, the Company is not promoting Other Products, and those sales are not
expected to increase substantially.
The Company's gross profit margin percentage was 60% for the first quarter of
fiscal 2001 and 62% for the same quarter last year. This decrease was primarily
due to the increase in the pricing of select core components.
The Company believes that most of the key components required for the production
of its products are currently available in sufficient quantities, although lead
times and prices have been increasing. At least thirty-five percent of the raw
materials currently needed require lead times of ten weeks or longer. The
Company has purchased more of these "longer lead-time" parts to ensure continued
delivery of products thereby increasing overall inventory, but there can be no
assurance that such quantities will be sufficient. The Company also continues to
focus on locating other sources for raw materials and enhancing vendor
relationships to further ensure adequate materials.
9
<PAGE>
The Company's operating expenses increased 35% when comparing the first quarter
of this fiscal year compared to the same quarter of last fiscal year. The most
significant portion of these increases came in marketing and selling expenses.
Marketing and selling expenses for the first quarter of fiscal 2001 increased
36% from the first quarter of last fiscal year, although expenses remained
essentially the same as a percent of revenue. The increase in dollars was
primarily due to higher commission expense resulting from the increase in sales.
Also contributing to the increase was higher salary expenses and recruiting
costs connected to the hiring of additional marketing and selling personnel.
Product development costs increased 15% in the first quarter of fiscal 2001 as
compared to the first quarter of fiscal 2000, but decreased as a percent of
revenue from 6.5% in the first quarter of fiscal 2000 to 5.3% in the first
quarter of fiscal 2001. The increase in absolute dollars was primarily due to
new product development and higher salary expenses.
General and administrative expenses increased 46% in the first quarter of fiscal
2001 as compared to the first quarter in the previous fiscal year, although
expenses remained essentially the same as a percent of revenue. This increase in
absolute dollars was mainly due to hiring of personnel to support sales
increases and the infrastructure costs associated with the hiring of such new
personnel. Also associated with this increase was the costs associated with the
Woburn office and the amortization expense associated with the goodwill
purchased in the ClearOne acquisition.
Interest income increased 71% when comparing the first quarter of fiscal 2001 to
the first quarter of fiscal 2000.
Interest expense decreased 32% when comparing the first quarter of fiscal 2001
to the first quarter of fiscal 2000 due to the maturing of certain of the
Company's leases.
During the first quarter of fiscal 2001, income tax expense was calculated at a
combined federal and state tax rate of approximately 37%, resulting in a tax
expense of $910,000, compared to 37% and $641,000 in the first quarter of fiscal
2000.
Net income increased 41% the first quarter of this fiscal year as compared to
the first quarter in the previous year.
Financial Condition and Liquidity
The Company had cash and cash equivalents of $6.2 million and $5.4 million at
September 30, 2000 and June 30, 2000, respectively, an increase of $841,000. Net
operating activities provided cash of $2.8 million in the first quarter of
fiscal 2001, primarily due to receipts of tax refunds due to federal and state
tax benefits from stock options exercised in the fourth quarter of fiscal 2000.
Net investing activities used cash of $1.9 million primarily due to the purchase
of the assets of ClearOne. Net cash used by financing activities was $37,887.
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). The borrowing rate was 7.56% at September 30, 2000. There was no
outstanding balance on September 30, 2000. The line of credit expires on
December 22, 2000. Borrowings under the line of credit are subject to certain
financial and operating covenants. The Company was in compliance with the
covenants at September 30, 2000.
Management believes that the Company's working capital, bank line of credits and
cash flow from operating activities will be sufficient to meet the Company's
operating and capital expenditures requirements for the next twelve months. In
the longer term, or if the Company experiences a decline in revenue, or in the
event of other unforeseen events, the Company may require additional funds and
may seek to raise such funds through public or private equity or debt financing,
bank lines of credit, or other sources. No assurance can be given that
additional financing will be available or, if available will be on terms
favorable to the Company. See "Factors that May Affect Future Results - Limited
Capitalization."
Factors that May Affect Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended.
Forward-looking statements relate to the Company's future plans, objectives,
expectations, and intentions. These statements may be recognized by the use of
words such as "believes," "expects," "may," "will," "intends," "plans,"
"should," "seeks," "anticipates," and similar expressions. In particular,
statements regarding the Company's markets and market share, demand for its
products and services, FCC actions, manufacturing capacity and component
availability, and the development and introduction of new products and services
are forward-looking statements and subject to material risks. Actual results
could differ markedly from those projected in the forward-looking statements as
a result of the factors set forth below and the matters set forth in the report
10
<PAGE>
generally, as well as the factors set forth in the Company's reports filed with
the Securities and Exchange Commission including the Form 10-KSB filed for the
year ended June 30, 2000. The Company cautions the reader, however, that this
list of factors may not be exhaustive, particularly with respect to future
factors. Any forward-looking statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
Rapid Technological Change
The RFM/Broadcast, conferencing products, conferencing services, 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 in a timely fashion that responds to customers' needs
and incorporates new technology and standards.
The Company may not be able to design and manufacture products that address
customer needs or achieve market acceptance. Any significant failure to design,
manufacture, and successfully introduce new products could materially harm the
Company's business.
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 currently 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.
Competition
The market for the Company's products and services is highly competitive. The
Company competes with businesses having substantially greater financial,
research and development, manufacturing, marketing, and other resources. If the
Company fails to maintain or enhance its competitive position, it could
experience pricing pressures and reduced sales, margin, profits, and market
share, each of which could materially harm the Company.
Marketing
The Company is subject to the risks inherent in the marketing and sale 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.
For example, with the acquisition of the ClearOne assets the Company has
expanded its products to include the retail market. 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 or all
such representatives or dealers will continue to offer the Company's products.
Price discounts to the Company's distribution market 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 directly to customers. The loss of representatives or dealers
could have a material adverse effect on the Company's business.
Limited Capitalization
As of September 30, 2000, the Company had $6.2 million in cash and $12.3 million
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 $5 million revolving 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
11
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credit from another commercial institution. The Company had no outstanding
balance payable on the line of credit as of September 30, 2000. To the extent
the line of credit is not extended or replaced and cash from operations is
insufficient to fund operations, 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, and its reputation may be damaged, reducing its attractiveness to new
customers.
Dependence Upon Key Employees
The Company is substantially dependent upon certain of its employees, including
Frances M. Flood, President and Chief Executive Officer and a director and
shareholder 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 does not typically have written contracts with any of its suppliers.
Furthermore, certain electronic components used in connection with the Company's
products can only be obtained from single manufacturers and the Company is
dependent upon the ability of these manufacturers to deliver such components 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 components, but there can be no assurance that such components will
always be readily available, available at reasonable prices, available in
sufficient quantities, or deliverable in a timely fashion. If such 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.
The Company believes that most of the key components required for the production
of its products are currently available in sufficient quantities, although lead
times and prices have been increasing. At least thirty-five percent of the raw
materials currently needed require lead times of ten weeks or longer. The
Company has purchased more of these "longer-lead-time" parts to ensure continued
delivery of products thereby increasing overall inventory. The Company also
continues to locate other sources for raw materials and to enhance vendor
relationships to increase the availability of adequate materials. 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 may
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.
Such claims could divert management's attention and be expensive, regardless of
their merit. The Company might be required to license third party technology or
redesign its products, which may not be possible or economically feasible.
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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 adversely 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 include options to purchase up to
1,900,000 shares of Common Stock granted or available for grant. As of September
30, 2000, the Plans have 1,564,648 options outstanding. 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 26.6% of the Common Stock (including options that are currently
exercisable or exercisable within sixty (60) days) of the Company as of
September 1, 2000. This significant holding in the aggregate places the officers
and directors in a position, when acting together, to effectively control the
Company and could delay or prevent a change in control (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 believes this scenario to be highly unlikely.
International Sales
International sales represent a significant portion of the Company's total
revenue. For example, international sales represented 12% of the Company's total
sales for the first quarter of fiscal 2000. If the Company is unable to maintain
international market demand, its results of operations could be materially
harmed. The Company's international business is subject to the financial and
operating risks of conducting business internationally, including: unexpected
changes in, or imposition of, legislative or regulatory requirements;
fluctuating exchange rates, tariffs and other barriers; difficulties in staffing
and managing foreign subsidiary operations; export restrictions; greater
difficulties in accounts receivable collection and longer payment cycles;
potentially adverse tax consequences; and potential hostilities and changes in
diplomatic and trade relationships. All of the Company's sales in international
markets are priced in U.S. Dollars.
Integration of Acquired Business
The Company has dedicated and will continue to dedicate, substantial management
resources in order to achieve the anticipated operating efficiencies from
integrating ClearOne. Difficulties encountered in integrating the companies'
operations could adversely impact the business, results of operations or
financial condition of the Company. Also, the Company intends to pursue
acquisition opportunities in the future. The integration of acquired businesses
could require substantial management resources. There can be no assurance that
any such integration will be accomplished without having a short or potentially
long-term adverse impact on the business, results of operations or financial
condition of the Company or that the benefits expected from any such integration
will be fully realized.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." The effective
date of SAB 101 is the fourth quarter of fiscal years beginning after December
15, 1999. This SAB clarifies proper methods of revenue recognition given certain
circumstances surrounding sales transactions. The Company continues to evaluate
the impact of SAB 101, but believes it is in compliance with the provisions of
the SAB and accordingly, does not expect SAB 101 to have a material effect on
its financial statements.
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In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by SFAS No. 137 "Accounting for Derivative Financial
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended by
SFAS No. 137 and SFAS No. 138, is effective for all fiscal quarters beginning
after June 15, 2000. The Company has adopted SFAS No. 133 in this quarter. The
adoption of SFAS No. 133 did not have a material impact on the Company's
financial condition or results of operations.
QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
In 1997, the SEC issued new rules (Item 305 of Regulation S-K) which requires
disclosure of material risks as defined by Item 305, related to market risk
sensitive financial instruments. As defined, the Company currently has only
limited market risk sensitive instruments related to interest rates. The Company
has outstanding capital leases of $398,000 at September 30, 2000.
The Company does not have significant exposure to changing interest rates on
these capital leases because interest rates for the majority of the capital
leases are fixed. The Company has not undertaken any additional actions to cover
interest rate market risk and is not a party to any other interest rate market
risk management activities.
A hypothetical 10% change in market interest rates over the next year would not
impact the Company's earnings or cash flows as the interest rates on the
majority of the capital leases are fixed.
The Company does not purchase or hold any derivative financial instruments for
trading purposes.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
--------------------------------------------------
On July 5, 2000, the Company issued 129,871 shares of the Company's common stock
in partial consideration for substantially all of the assets of ClearOne, Inc.
These shares were issued in a manner not involving a public offering and
therefore did not require registration under the Securities Act of 1933, as
amended, pursuant to Section 4 (2) thereof.
This transaction was made directly by the Company without use of an underwriter
or placement agent and without payment of commissions or other remuneration.
With respect to the exemption from registration claimed under Section 4 (2) of
the Securities Act of 1933, neither the Company nor any person acting on its
behalf offered or sold the securities by means of any form of general
solicitation or advertising. Prior to making any offer or sale, the Company had
reasonable grounds to believe and believed that the prospective investor was
capable of the merits and risks of the investment and was able to bear the
economic risk of the investment. The purchaser represented that such purchaser
was an accredited investor and that the securities were being acquired for
investment for purchaser's own account, and agreed that the securities would not
be sold without registration under the Securities Act or exemption therefrom.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
----------------
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------------
A report on Form 8-K was filed on September 18, 2000, to announce the purchase
of substantially all of the assets of ClearOne, Inc.
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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
---------------------------------------------
Vice President, Finance
Date: November 14, 2000
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