<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 December 31, 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 small business issuer 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)
(801) 975-7200
(Issuer's telephone number)
-----------------------------------------------------------------
(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 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 FEBRUARY 10, 1999
$0.001 PAR VALUE 8,267,815 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
December 31, 1999 (unaudited) and June 30, 1999.................... 3
Statements of Income
Three Months Ended December 31, 1999 and
1998 (unaudited)................................................... 4
Statements of Income
Six Months Ended December 31, 1999 and
1998 (unaudited)................................................... 5
Statements of Cash Flows
Six Months Ended December 31, 1999 and
1998 (unaudited)................................................... 6
Notes to Financial Statements........................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................17
</TABLE>
2
<PAGE> 3
GENTNER COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
December 31, June 30,
1999 1999
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 4,173,089 $ 3,922,183
Accounts receivable .............................................. 3,174,904 2,242,294
Inventory ........................................................ 2,901,939 2,858,835
Deferred taxes ................................................... 115,000 115,000
Other current assets ............................................. 483,623 143,441
------------ -----------
Total current assets ......................................... 10,848,555 9,281,753
Property and equipment, net .......................................... 2,192,408 2,125,959
Other assets, net .................................................... 82,855 111,702
------------ -----------
Total assets ................................................. $ 13,123,818 $11,519,414
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 678,465 $ 725,193
Accrued compensation and other benefits .......................... 461,780 762,345
Accrued federal and state income taxes ........................... (44,913) 229,087
Other accrued expenses ........................................... 618,073 562,187
Current portion of capital lease obligations ..................... 238,679 215,854
------------ -----------
Total current liabilities .................................... 1,952,084 2,494,666
Capital lease obligations ............................................ 327,526 455,389
Deferred tax liability ............................................... 217,000 217,000
------------ -----------
Total liabilities ............................................ 2,496,610 3,167,055
Shareholders' equity:
Common stock, 50,000,000 shares authorized, par value $.001,
8,229,170 and 8,129,691 shares issued and outstanding at
December 31, 1999 and June 30, 1999 ............................ 8,229 8,130
Additional paid-in capital ....................................... 5,167,446 5,024,858
Retained earnings ................................................ 5,451,533 3,319,371
------------ -----------
Total shareholders' equity ................................... 10,627,208 8,352,359
------------ -----------
Total liabilities and shareholders' equity ................... $ 13,123,818 $11,519,414
============ ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
December 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Product sales ................................ $ 6,114,738 $ 4,478,778
Service sales ................................ 1,301,101 774,699
----------- -----------
Total net sales .......................... 7,415,839 5,253,477
Cost of goods sold - products ................ 2,262,365 1,731,335
Cost of goods sold - services ................ 696,304 630,829
----------- -----------
Total cost of goods sold ................. 2,958,669 2,362,164
----------- -----------
Gross profit ................................. 4,457,170 2,891,313
Operating Expenses:
Marketing and selling .................... 1,564,876 1,090,110
General and administrative ............... 750,392 553,087
Product development ...................... 495,912 407,406
----------- -----------
Total operating expense .............. 2,811,180 2,050,603
Operating income ..................... 1,645,990 840,710
Other income (expense):
Interest income .......................... 55,361 35,611
Interest expense ......................... (17,411) (55,830)
Other, net ............................... (6,174) 4,590
----------- -----------
Total other income (expense) ......... 31,776 (15,629)
----------- -----------
Income before income taxes ................... 1,677,766 825,081
Provision for income taxes ................... 626,000 308,000
----------- -----------
Net income ........................... $ 1,051,766 $ 517,081
=========== ===========
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 INCOME
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
December 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Product sales .............................. $ 12,122,283 $ 9,193,674
Service sales .............................. 2,377,829 1,557,745
------------ ------------
Total net sales ........................ 14,500,112 10,751,419
Cost of goods sold - products .............. 4,363,690 3,657,240
Cost of goods sold - services .............. 1,310,597 1,222,285
------------ ------------
Total cost of goods sold ............... 5,674,287 4,879,525
------------ ------------
Gross profit ............................... 8,825,825 5,871,894
Operating Expenses:
Marketing and selling .................. 3,036,772 2,219,290
General and administrative ............. 1,497,013 1,188,718
Product development .................... 956,588 770,935
------------ ------------
Total operating expense ............ 5,490,373 4,178,943
Operating income ................... 3,335,452 1,692,951
Other income (expense):
Interest income ........................ 101,129 44,436
Interest expense ....................... (35,961) (90,290)
Other, net ............................. (1,458) (5,218)
------------ ------------
Total other income (expense) ....... 63,710 (51,072)
------------ ------------
Income before income taxes ................. 3,399,162 1,641,879
Provision for income taxes ................. 1,267,000 616,000
------------ ------------
Net income ......................... $ 2,132,162 $ 1,025,879
============ ============
Basic earnings per common share ............ $ 0.26 $ 0.13
============ ============
Diluted earnings per common share .......... $ 0.24 $ 0.12
============ ============
</TABLE>
See accompanying notes
5
<PAGE> 6
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
December 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 2,132,162 $ 1,025,879
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment ........................................ 362,954 376,402
Amortization of other assets ....................... 7,508 10,916
Changes in operating assets and liabilities:
Accounts receivable ............................. (932,610) (758,345)
Inventory ....................................... (43,104) 932,808
Other current assets ............................ (340,182) (112,088)
Accounts payable and other accrued expenses ..... (565,407) 572,778
----------- -----------
Net cash provided by operating activities ....... 621,321 2,048,350
Cash flows from investing activities:
Purchases of property and equipment .................... (429,403) (282,348)
Repayment of note receivable ........................... 21,339 10,277
----------- -----------
Net cash used in investing activities ........... (408,064) (272,071)
Cash flows from financing activities:
Proceeds from issuance of common stock ................. 41,746 2,073
Exercise of employee stock options ..................... 100,941 317,040
Principal payments of capital lease obligations ........ (105,038) (104,569)
Principal payments of long-term debt ................... -- (138,743)
----------- -----------
Net cash provided by financing activities ....... 37,649 75,801
Net increase in cash ....................................... 250,906 1,852,080
Cash at the beginning of the year .......................... 3,922,183 715,325
----------- -----------
Cash at the end of the period .............................. $ 4,173,089 $ 2,567,405
=========== ===========
Supplemental disclosure of cash flow information:
Income taxes paid ............................... $(1,541,000) $ (93,800)
Interest paid ................................... $ (35,768) $ (93,018)
</TABLE>
See accompanying notes
6
<PAGE> 7
GENTNER COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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 tables set forth the computation of basic and diluted net income
per share:
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Numerator:
Net income ............................................................... $1,051,766 $ 517,081
========== ==========
Denominator:
Denominator for basic net income per share - weighted average shares ..... 8,218,818 8,122,593
Effect of dilutive securities using treasury stock method ................ 571,762 297,682
---------- ----------
8,790,580 8,420,275
========== ==========
Net income per share - basic ................................................. $ 0.13 $ 0.06
Net income per share - dilutive .............................................. $ 0.12 $ 0.06
</TABLE>
<TABLE>
<CAPTION>
Six months ended
December 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Numerator:
Net income ............................................................... $ 2,132,162 $1,025,879
========== ==========
Denominator:
Denominator for basic net income per share - weighted average shares ..... 8,195,398 8,036,454
Effect of dilutive securities using treasury stock method ................ 519,286 244,964
---------- ----------
8,714,684 8,281,418
========== ==========
Net income per share - basic.................................................... $ 0.26 $ 0.13
Net income per share - dilutive................................................. $ 0.24 $ 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 six-month periods ended December 31, 1999 and 1998 was equal to net income.
7
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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)
December 31, June 30,
1999 1999
------------ ----------
<S> <C> <C>
Raw Materials $1,054,402 $1,055,615
Work in progress 414,293 347,898
Finished Goods 1,433,244 1,455,322
---------- ----------
Total inventory $2,901,939 $2,858,835
========== ==========
</TABLE>
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
Options expired & canceled ....................... (142,500) 2.42
Options exercised ................................ (34,900) 1.95
Options granted .................................. 224,500 12.42
--------- ------
Options outstanding as of December 31, 1999 ...... 1,386,398 $ 3.81
========= ======
</TABLE>
7. SEGMENT REPORTING
The Company has changed how it evaluates its operations internally resulting in
a change in its segments from its Form 10-KSB. 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 operates in four different segments - Remote Facilities
Management (RFM)/Broadcast, Conferencing Products, Conferencing Services and
Other. The RFM/Broadcast segment consists of 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 and document conferencing services.
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. SEGMENT REPORTING - (CONTINUED)
As the Company continues to evaluate its internal reporting, the Company has
further clarified the breakdown of its operations resulting in a change in the
way certain revenues and expenses are reported in the second quarter as compared
to the first quarter. All periods presented have been restated to reflect these
changes.
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 satisfy different customer needs. They are managed
separately because each segment requires focus and attention on their market and
distribution channel.
The following tables summarize the segment information:
<TABLE>
<CAPTION>
Conferencing Conferencing Company
RFM/Broadcast Products Services All Other Totals
------------- ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Quarter Ended December 31, 1999:
- --------------------------------
Net sales $ 1,799,641 $4,281,404 $ 1,256,757 $78,037 $ 7,415,839
Cost of goods sold 758,900 1,493,633 678,211 27,925 2,958,669
----------- ---------- ----------- ------- -----------
Gross profit 1,040,741 2,787,771 578,546 50,112 4,457,170
Marketing and selling 311,472 872,373 380,013 1,018 1,564,876
General and administrative 750,392
Product development 253,989 241,923 495,912
-----------
Total operating expenses 2,811,180
Operating profit 1,645,990
Other income (expense) 31,776
-----------
Income before income taxes 1,677,766
Provision for income taxes (626,000)
-----------
Net income $ 1,051,766
===========
Quarter Ended December 31, 1998:
- --------------------------------
Net sales $ 1,685,318 $2,745,879 $ 745,154 $77,126 $ 5,253,477
Cost of goods sold 695,694 1,030,173 606,450 29,847 2,362,164
----------- ---------- ----------- ------- -----------
Gross profit 989,624 1,715,706 138,704 47,279 2,891,313
Marketing and selling 289,028 581,298 218,468 1,316 1,090,110
General and administrative 553,087
Product development 115,182 283,310 8,914 407,406
-----------
Total operating expenses 2,050,603
Operating profit 840,710
Other income (expense) (15,629)
-----------
Income before income taxes 825,081
Provision for income taxes (308,000)
-----------
Net income $ 517,081
===========
</TABLE>
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. SEGMENT REPORTING - (CONTINUED)
<TABLE>
<CAPTION>
Conferencing Conferencing Company
RFM/Broadcast Products Services All Other Totals
------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Year-to-Date At December 31, 1999:
Net sales $3,858,172 $ 8,176,749 $ 2,254,341 $ 210,850 $ 14,550,112
Cost of goods sold 1,523,901 2,804,807 1,272,350 73,229 5,674,287
---------- ------------ ----------- ----------- ------------
Gross profit 2,334,271 5,371,942 981,991 137,621 8,825,825
Marketing and selling 642,862 1,697,187 694,132 2,591 3,036,772
General and administrative 1,497,013
Product development 509,672 446,916 956,588
------------
Total operating expenses 5,490,373
Operating profit 3,335,452
Other income (expense) 63,710
------------
Income before income taxes 3,399,162
Provision for income taxes (1,267,000)
------------
Net income $ 2,132,162
============
Year-to-Date At December 31, 1998:
Net sales $3,392,072 $ 5,621,814 $ 1,455,332 $ 282,201 $ 10,751,419
Cost of goods sold 1,403,624 2,194,719 1,175,155 106,027 4,879,525
---------- ------------ ----------- ----------- ------------
Gross profit 1,988,448 3,427,095 280,177 176,174 5,871,894
Marketing and selling 585,534 1,189,097 440,170 4,489 2,219,290
General and administrative 1,188,718
Product development 191,397 570,624 8,914 770,935
------------
Total operating expenses 4,178,943
Operating profit 1,692,951
Other income (expense) (51,072)
------------
Income before income taxes 1,641,879
Provision for income taxes (616,000)
------------
Net income $ 1,025,879
============
</TABLE>
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company reports four different segments - Remote Facilities Management
(RFM)/Broadcast, Conferencing Products, Conferencing Services and Other. Total
sales for the three months ended December 31, 1999 increased 41% compared to the
same three-month period last year. Total sales for the six months ended December
31, 1999 increased 35% compared to the same six-month period last year. In both
cases, growth is primarily due to increased Conferencing Products and
Conferencing Services sales.
Conferencing products experienced a 56% sales growth comparing the second
quarter of this fiscal year to the same quarter last year. Sales in conferencing
products increased 45% comparing the first six months of this fiscal year to the
first six months of last fiscal year. 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
flagship AP800 and the 4-channel AP400 products use advanced digital signal
processing technology to achieve the highest quality echo cancellation on the
market, Gentner's Distributed Echo CancellationTM, and incorporate several
functional devices including automatic microphone mixing, echo cancellation,
audio routing, audio equalization and audio processing into a single device. The
Company has realized more of the revenue associated with a room installation as
a result of the expanded applications. Additionally, the Company has expanded
its product line, including its video conferencing system, the APV200 IP, the
GT1524 for simpler applications and its newly announced PA 870 power amplifier.
In addition, Gentner provides Assistive Listening Devices, both for applications
in venues that require extra amplification for the hearing impaired, and its
Venture line, which operates on a frequency appropriate for other applications,
such as tours and language translation.
Conferencing services, 1-800 LETS MEET(R), experienced sales growth of 69% in
the second quarter of this fiscal year as compared to the second quarter of last
fiscal year. Conferencing services increased 55% for this fiscal year-to-date as
compared to the same period in fiscal 1999. 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, and the Company's
commitment to quality 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 increased 7% in the second quarter of this fiscal year
compared to the second 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
increased 23% during the second quarter of this year compared to the second
quarter of last year, primarily due to the Company's line of telephone hybrids.
Telephone hybrids are used to connect telephone line audio to professional audio
equipment. Remote Facilities Management decreased 18%, comparing second
quarters, mainly due to fewer sales of the GSC3000. The Company believes that
Year 2000 concerns attributed to fewer GSC3000 sales and does not expect to see
this trend continue. The GSC3000 allows broadcasters to monitor and control many
transmitter sites from one location.
RFM/Broadcast sales increased 14% for the six months ended December 31, 1999
compared to the six months ended December 31, 1998. Sales of the Telephone
Interface line increased 13% comparing fiscal 2000 to date over fiscal 1999 to
date. Remote Facilities Management increased 15%, comparing year-to-date, mainly
due to sales of the GSC3000 which were strong enough in the first quarter to
offset any decline in the second quarter as discussed above. Sales to the OEM,
television and international markets contributed to the increased sales of the
GSC3000.
Other sales increased 1% in the second quarter of this fiscal year compared to
the second quarter of last fiscal year, and decreased 25% for the six months
ending December 31, 1999 compared to the same period in 1998. 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 60% for the second quarter of
this year, and 55% for the same quarter last year. The Company's gross profit
margin percentage was 61% for the first six months of this year, compared to 55%
for the same period 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 level. The Company's
overall gross profit margin would be negatively impacted if the price of raw
components increases. Additionally, gross profit margins would be negatively
affected if services become a higher percentage of total sales due to services'
lower profit margin.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Results of Operations - (continued)
Operating expenses for the quarter increased 37% when comparing the second
quarters of this fiscal year and last fiscal year. Operating expenses for the
year-to-date increased 31% over last year. The most significant portion of these
increases came in Marketing and selling expenses.
Marketing and selling expenses increased 44% for the second quarter as compared
to last year. Marketing and selling expenses increased 37% for the year-to-date
as compared to last year-to-date. 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 22% in the second quarter of this year
compared to last year. Product Development expenses increased 24% for the
year-to-date as compared to the same period last year. The increase was due to
development expenses for new products and the hiring of personnel and associated
recruiting costs. The Company anticipates these expenses will enhance future
revenue growth.
Second quarter General and Administrative expenses increased 36% compared to the
same period last year. Year-to-date expenses increased 26% as compared to the
same period last year. This increase was mainly due to hiring of personnel to
support sales increases and the infrastructure costs associated with the hiring
of all new personnel. Also contributing to this increase was an accrual for
NASDAQ National Market Listing fees.
Interest expense for the quarter is down 69% compared to the same quarter last
year. Interest expense for the year-to-date is down 60% compared to 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 second 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
$626,000 for the second quarter and $1,267,000 for the year-to-date. Income tax
expense was $308,000 for the second quarter of fiscal 1999 and $616,000 for
fiscal 1999 year-to-date, 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 5.56:1 on
December 31, 1999. This increase in the current ratio was due primarily to an
increase in the amount of cash on hand, a decrease in accrued expenses, as well
as an increase in 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
were offset by an increase in accounts receivable and other current assets.
During the second quarter, the Company conducted a physical inventory of fixed
assets. It was noted there were many fully depreciated assets still on the
books, that had been disposed of physically. In reconciling the books to the
physical fixed assets list, the Company wrote off gross fixed assets of $457,848
and wrote off accumulated deprecation of $452,710.
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 December 31, 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.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Forward Looking Statements and Risk Factors
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 the trend
of Year 2000 concerns attributing to fewer sales will not continue, 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, and the Company's belief that a large percentage of
customer credit defaults is unlikely. 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 RFM, 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. The Company competes with businesses having substantial financial,
research and development, manufacturing, marketing and other resources.
The markets in which the Company competes have historically involved the
introduction of new and technologically advanced products and services that cost
less or perform better. If the Company is not competitive in its research and
development efforts, its products may become obsolete or be priced above
competitive levels.
Although management believes that based on their performance and price, its
products are attractive to customers, there can be no assurance that competitors
will not introduce comparable or technologically superior products, which are
priced more favorably than the Company's products.
Marketing
The Company has experience in marketing its products. However, it is subject to
all of the risks inherent in the 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. 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.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Factors that may Affect Future Results - (continued)
Limited Capitalization
As of December 31, 1999, the Company had $4,173,089 in cash and $8,896,471 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 December 31, 1999. To the extent the
line of credit is not extended or replaced and cash from operations is
unavailable to pay the indebtedness then outstanding under the line of credit,
the Company may be required to seek additional financing.
Telecommunications and Information Systems (Network)
The Company is highly reliant on its network equipment, data and software to
support all functions of the Company. The Company's conference calling service
relies 100% on the network for its revenues. While the Company endeavors to
provide for failures in the network by providing back up systems and procedures,
there is no guarantee that these back up systems and procedures will operate
satisfactorily in an emergency. Should the Company experience such a failure, it
could seriously jeopardize its ability to continue operations. In particular,
should the Company's conference calling service experience even a short term
interruption of its network, its ongoing customers may choose a different
provider.
Dependence Upon Key Employees
The Company is substantially dependent upon certain of its employees, including
Frances M. Flood, a Director, President and Chief Executive Officer and a
stockholder of the Company. The loss of Ms. Flood by the Company could have a
material adverse effect on the Company. The Company currently has in place a key
person life insurance policy on the life of Ms. Flood in the amount of
$3,000,000.
Dependence on Supplier and Single Source of Supply
The Company has no written agreements 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.
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 may be adversely affected.
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Factors that may Affect Future Results - (continued)
Lack of Patent Protection
The Company currently relies on a combination of trade secret and nondisclosure
agreements to establish and protect its proprietary rights in its products.
There can be no assurance that others will not independently develop similar
technologies, or duplicate or design around aspects of the Company's technology.
The Company believes that its products and other proprietary rights do not
infringe any proprietary rights of third parties. There can be no assurance,
however, that third parties will not assert infringement claims in the future.
Government Funding and Regulation
In the conferencing market, the Company is dependent on government funding to
place its distance learning sales and courtroom equipment sales. In the event
government funding was stopped, these sales would be negatively impacted.
Additionally, many of the Company's products are subject to governmental
regulations. New regulations could significantly impact sales.
Dividends Unlikely
The Company has never paid cash dividends on its securities and does not intend
to declare or pay cash dividends in the foreseeable future. Earnings are
expected to be retained to finance and expand its business. Furthermore, the
Company's revolving line of credit prohibits the payment of dividends on its
Common Stock.
Potential Dilutive Effect of Outstanding Options and Possible Negative Effect of
Future Financing
The Company has outstanding options issued under the Company's 1990 Incentive
Plan and the 1998 Stock Option Plan, which includes options to purchase up to
1,900,000 shares of Common Stock granted or available for grant. Holders of
these options are given an opportunity to profit from a rise in the market price
of the Company's Common Stock with a resulting dilution in the interests of the
other stockholders. The holders of the options may exercise them at a time when
the Company might be able to obtain additional capital through a new offering of
securities on terms more favorable than those provided therein.
Possible Control by Officers and Directors
The officers and directors of the Company together had beneficial ownership of
approximately 26.8% of the Common Stock (including options that are currently
exercisable or exercisable within sixty (60) days) of the Company as of December
31, 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" in
the Company's Form 10-KSB for the fiscal year ended June 30, 1999, incorporated
herein by reference).
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 approximately 0.24%.
Year 2000
The Company assessed the impact of the Year 2000 issue* on its information
technology ("IT") and non-IT systems. The Company completed all Year 2000
readiness work and did not experience any system problems. Approximately $53,500
was incurred during fiscal 1999 to upgrade existing systems so that they would
be Year 2000 compatible. During fiscal 2000, all necessary software upgrades and
patches were provided to the Company at no cost. The Company identified two of
its systems and some personal computers that had to be upgraded. There were no
significant interruptions to the business caused by the upgrade process. The
Company financed the upgrades with operating income.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Factors that may Affect Future Results - (continued)
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 on 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.
To the best of our knowledge, the Company determined through direct contacts
that its material vendors and suppliers, and its larger customers were Year 2000
compliant. To date, no major customer or supplier that the Company contacted has
experienced any Year 2000 compliance problems that have impacted the operations
of the Company.
The Company developed contingency plans for dealing with Year 2000 issues,
including the worst case scenarios. Those plans are in place. To date, it has
not been necessary to put any contingency plans into effect.
The Company's GSC3000 software that experienced a non-critical error related to
the date changing to 2000. No data was lost or corrupted as a result of the
problem. The alarm screen reported the date as 1/1/100 instead of 1/1/00. This
problem has been resolved for all customers through the application of a
software patch sent directly to each customer. The cost of this patch, including
labor and materials, was approximately $4,000.
* 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.
16
<PAGE> 17
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.
17
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1(1),(2) Commercial Credit and Security Agreement, and Promissory Note,
between Company and First Security Bank, N.A. (original
aggregate amount of $2,500,000) (Page7)
10.2(1),(2),(3) 1997 Employee Stock Purchase Plan (Page 37)
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(1),(2),(3) 1998 Stock Option Plan and Form of Grant (Page 42)
10.2(1),(2) Modification Agreement dated as of December 24, 1997, between
First Security Bank, N.A. and the Company (Page 66)
</TABLE>
The following document is filed as an exhibit to this Form 10-QSB.
<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.
18
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GENTNER COMMUNICATIONS CORPORATION
(Registrant)
Date: February 10, 1999 /s/ Susie Strohm
-------------------------------------
Susie Strohm
Vice President, Finance
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> $4,173,089
<SECURITIES> 0
<RECEIVABLES> $3,458,171
<ALLOWANCES> $(283,267)
<INVENTORY> $2,901,939
<CURRENT-ASSETS> $10,848,555
<PP&E> $6,059,780
<DEPRECIATION> $(3,867,372)
<TOTAL-ASSETS> $13,123,818
<CURRENT-LIABILITIES> $1,929,464
<BONDS> 0
0
0
<COMMON> $8,232
<OTHER-SE> $10,641,596
<TOTAL-LIABILITY-AND-EQUITY> $13,123,818
<SALES> $14,500,112
<TOTAL-REVENUES> $14,500,112
<CGS> $5,674,287
<TOTAL-COSTS> $8,825,825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $53,372
<INCOME-PRETAX> $3,399,162
<INCOME-TAX> $1,267,000
<INCOME-CONTINUING> $2,132,162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $2,132,162
<EPS-BASIC> $0.26
<EPS-DILUTED> $0.24
</TABLE>
