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 March 31, 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 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 May 15, 2000
$0.001 par value 8,372,038 shares
Transitional Small Business Disclosure Format (check one)
[ ] Yes [X] No
<PAGE>
GENTNER COMMUNICATIONS CORPORATION
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
March 31, 2000 (unaudited) and June 30, 1999.................... 3
Statements of Income
Three Months Ended March 31, 2000 and
1999 (unaudited)................................................ 4
Statements of Income
Nine Months Ended March 31, 2000 and
1999 (unaudited)................................................ 5
Statements of Cash Flows
Nine Months Ended March 31, 2000 and
1999 (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
2
<PAGE>
<TABLE>
GENTNER COMMUNICATIONS CORPORATION
BALANCE SHEETS
<CAPTION>
(Unaudited) (Audited)
March 31, June 30,
2000 1999
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents .................................. $ 5,372,790 $ 3,922,183
Accounts receivable, net ................................... 3,620,967 2,242,294
Inventory .................................................. 3,459,214 2,858,835
Deferred taxes ............................................. 115,000 115,000
Other current assets ....................................... 347,482 143,441
----------- -----------
Total current assets ................................... 12,915,453 9,281,753
Property and equipment, net .................................... 2,572,657 2,125,959
Other assets, net .............................................. 62,484 111,702
----------- -----------
Total assets ........................................... $15,550,594 $11,519,414
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 747,493 $ 725,193
Accrued compensation and other benefits .................... 726,975 762,345
Accrued income tax ......................................... 378,087 229,087
Other accrued expenses ..................................... 935,186 562,187
Current portion of capital lease obligations ............... 244,190 215,854
----------- -----------
Total current liabilities .............................. 3,031,931 2,494,666
Capital lease obligations ...................................... 267,349 455,389
Deferred tax liability ......................................... 217,000 217,000
----------- -----------
Total liabilities ...................................... 3,516,280 3,167,055
Shareholders' equity:
Common stock, 50,000,000 shares authorized, par value $.001,
8,361,880 and 8,129,691 shares issued and outstanding at
March 31, 2000 and June 30, 1999 ......................... 8,362 8,130
Additional paid-in capital ................................. 5,334,164 5,024,858
Retained earnings .......................................... 6,691,788 3,319,371
----------- -----------
Total shareholders' equity ............................. 12,034,314 8,352,359
----------- -----------
Total liabilities and shareholders' equity ............. $15,550,594 $11,519,414
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF INCOME
<CAPTION>
(Unaudited)
Three Months Ended
March 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Product sales ................................ $ 6,161,804 $ 4,996,200
Service sales ................................ 1,705,629 822,951
----------- -----------
Total net sales .......................... 7,867,433 5,819,151
Cost of goods sold - products ................ 2,152,928 1,895,810
Cost of goods sold - services ................ 751,526 541,433
----------- -----------
Total cost of goods sold ................. 2,904,454 2,437,243
----------- -----------
Gross profit ................................. 4,962,979 3,381,908
Operating Expenses:
Marketing and selling .................... 1,808,549 1,290,077
General and administrative ............... 779,953 723,669
Product development ...................... 436,582 375,850
----------- -----------
Total operating expenses ............. 3,025,084 2,389,596
Operating income ..................... 1,937,895 992,312
Other income (expense):
Interest income .......................... 59,355 21,490
Interest expense ......................... (15,689) (37,077)
Other, net ............................... (2,576) (9,696)
----------- -----------
Total other income (expense) ......... 41,090 (25,283)
----------- -----------
Income before income taxes ................... 1,978,985 967,029
Provision for income taxes ................... 738,730 360,700
----------- -----------
Net income ........................... $ 1,240,255 $ 606,329
=========== ===========
Basic earnings per common share .............. $ 0.15 $ 0.07
=========== ===========
Diluted earnings per common share ............ $ 0.14 $ 0.07
=========== ===========
</TABLE>
See accompanying notes
4
<PAGE>
<TABLE>
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF INCOME
<CAPTION>
(Unaudited)
Nine Months Ended
March 31,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Product sales .............................. $ 18,284,087 $ 14,189,873
Service sales .............................. 4,083,458 2,380,696
------------ ------------
Total net sales ........................ 22,367,545 16,570,569
Cost of goods sold - products .............. 6,516,618 5,553,051
Cost of goods sold - services .............. 2,062,123 1,763,717
------------ ------------
Total cost of goods sold ............... 8,578,741 7,316,768
------------ ------------
Gross profit ............................... 13,788,804 9,253,801
Operating Expenses:
Marketing and selling .................. 4,845,321 3,509,366
General and administrative ............. 2,276,966 1,912,388
Product development .................... 1,393,170 1,146,785
------------ ------------
Total operating expenses ........... 8,515,457 6,568,539
Operating income ................... 5,273,347 2,685,262
Other income (expense):
Interest income ........................ 160,484 65,926
Interest expense ....................... (51,650) (127,367)
Other, net ............................. (4,034) (14,913)
------------ ------------
Total other income (expense) ....... 104,800 (76,354)
------------ ------------
Income before income taxes ................. 5,378,147 2,608,908
Provision for income taxes ................. 2,005,730 976,700
------------ ------------
Net income ......................... $_3,372,417 $ 1,632,208
============ ============
Basic earnings per common share ............ $ 0.41 $ 0.20
============ ============
Diluted earnings per common share .......... $ 0.39 $ 0.19
============ ============
</TABLE>
See accompanying notes
5
<PAGE>
<TABLE>
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<CAPTION>
(Unaudited)
Nine Months Ended
March 31,
--------------------------
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income ............................................... $ 3,372,417 $ 1,632,208
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment .......................................... 559,742 535,633
Amortization of other assets ......................... 18,224 16,374
Changes in operating assets and liabilities:
Accounts receivable ............................... (1,378,673) (997,450)
Inventory ......................................... (600,379) 277,876
Other current assets .............................. (204,041) (56,495)
Accounts payable and other accrued expenses ....... 508,929 937,278
----------- -----------
Net cash provided by operating activities ......... 2,276,219 2,345,424
Cash flows from investing activities:
Purchases of property and equipment ...................... (1,006,440) (413,265)
Repayment of note receivable ............................. 30,994 17,459
Decrease in other assets ................................. 0 1,752
----------- -----------
Net cash used in investing activities ............. (975,446) (394,054)
Cash flows from financing activities:
Proceeds from issuance of common stock ................... 23,820 2,902
Exercise of employee stock options ....................... 285,718 318,050
Principal payments of capital lease obligations .......... (159,704) (166,115)
Principal payments of long-term debt ..................... 0 (688,214)
----------- -----------
Net cash provided by (used in) financing activities 149,834 (533,377)
Net increase in cash ......................................... 1,450,607 1,417,993
Cash at the beginning of the year ............................ 3,922,183 715,325
----------- -----------
Cash at the end of the period ................................ $ 5,372,790 $ 2,133,218
=========== ===========
Supplemental disclosure of cash flow information:
Income taxes paid ................................. $(1,856,000) $ (708,593)
Interest paid ..................................... $ (51,650) $ (129,857)
</TABLE>
See accompanying notes
6
<PAGE>
GENTNER COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 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-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
March 31,
---------
2000 1999
---- ----
Numerator:
<S> <C> <C>
Net income ................................................................. $1,240,255 $ 606,329
========== ==========
Denominator:
Denominator for basic net income per share - weighted average shares ....... 8,300,841 8,123,953
Effect of dilutive securities using treasury stock method .................. 554,964 418,191
---------- ----------
8,855,805 8,542,144
========== ==========
Net income per share - basic ................................................... $ 0.15 $ 0.07
Net income per share - dilutive ................................................ $ 0.14 $ 0.07
<CAPTION>
Nine months ended
March 31,
---------
2000 1999
---- ----
Numerator:
<S> <C> <C>
Net income ................................................................. $3,372,417 $ 1,632,208
========== ==========
Denominator:
Denominator for basic net income per share - weighted average shares ....... 8,230,546 8,064,981
Effect of dilutive securities using treasury stock method .................. 502,735 319,380
---------- ----------
8,733,281 8,384,361
========== ==========
Net income per share - basic ................................................... $ 0.41 $ 0.20
Net income per share - dilutive ................................................ $ 0.39 $ 0.19
</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 nine-month periods ended March 31, 2000 and 1999 was equal to net income.
7
<PAGE>
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:
(Unaudited) (Audited)
March 31, June 30,
2000 1999
---- ----
Raw Materials $ 1,507,356 $ 1,055,615
Work in progress 439,747 347,898
Finished Goods 1,512,111 1,455,322
----------- -----------
Total inventory $ 3,459,214 $ 2,858,835
========== ==========
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, 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
---------- ---------
Options expired & canceled .................... (62,000) 6.04
Options exercised ............................. (132,350) 1.24
Options granted ............................... 19,500 19.63
---------- ---------
Options outstanding as of March 31, 2000 ...... 1,211,548 $ 4.24
========== =========
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
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (continued)
videoconferencing products. The Conferencing Services segment includes
conference calling services and document conferencing services.
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 and third quarters
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 its market and
distribution channel.
The following tables summarize the segment information:
<TABLE>
<CAPTION>
Conferencing Conferencing Company
------------ ------------ -------
RFM/Broadcast Products Services All Other Totals
------------- -------- -------- --------- ------
Quarter Ended March 31, 2000:
- ----------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 1,802,155 $ 4,340,422 $ 1,667,139 $ 57,717 $ 7,867,433
Cost of goods sold 661,195 1,490,867 730,854 21,538 2,904,454
---------- --------- ---------- -------- ---------
Gross profit 1,140,960 2,849,555 936,285 36,179 4,962,979
Marketing and selling 261,973 1,032,111 514,472 (7) 1,808,549
General and administrative 779,953
Product development 154,816 281,766 436,582
----------
Total operating expenses 3,025,084
Operating profit 1,937,895
Other income (expense) 41,090
----------
Income before income taxes 1,978,985
Provision for income taxes (738,730)
----------
Net income $ 1,240,255
============
Quarter Ended March 31, 1999:
- ----------------------------
Net sales $ 1,843,548 $ 3,107,320 $ 797,320 $ 70,963 $ 5,819,151
Cost of goods sold 714,246 1,143,900 528,533 50,564 2,437,243
---------- --------- ------- -------- ---------
Gross profit 1,129,302 1,963,420 268,787 20,399 3,381,908
Marketing and selling 266,744 798,407 223,161 1,765 1,290,077
General and administrative 723,669
Product development 147,655 219,220 8,975 375,850
---------
Total operating expenses 2,389,596
Operating profit 992,312
Other income (expense) (25,283)
---------
Income before income taxes 967,029
Provision for income taxes (360,700)
---------
Net income $ 606,329
==========
</TABLE>
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (continued)
7. Segment Reporting - (continued)
<TABLE>
<CAPTION>
Conferencing Conferencing Company
------------ ------------ -------
RFM/Broadcast Products Services All Other Totals
------------- -------- -------- --------- ------
Year-to-Date At March 31, 2000:
<S> <C> <C> <C> <C> <C>
Net sales $ 5,660,327 $12,517,171 $ 3,921,480 $ 268,567 $ 22,367,545
Cost of goods sold 2,185,096 4,295,674 2,003,204 94,767 8,578,741
--------- --------- --------- -------- -----------
Gross profit 3,475,231 8,221,497 1,918,276 173,800 13,788,804
Marketing and selling 904,835 2,729,298 1,208,604 2,584 4,845,321
General and administrative 2,276,966
Product development 664,488 728,682 1,393,170
---------
Total operating expenses 8,515,457
Operating profit 5,273,347
Other income (expense) 104,800
---------
Income before income taxes 5,378,147
Provision for income taxes (2,005,730)
---------
Net income $ 3,372,417
============
Year-to-Date At March 31, 1999:
Net sales $ 5,235,620 $ 8,729,134 $ 2,252,652 $ 353,163 $ 16,570,569
Cost of goods sold 2,117,870 3,338,619 1,703,688 156,591 7,316,768
--------- --------- --------- ------- ---------
Gross profit 3,117,750 5,390,515 548,964 196,572 9,253,801
Marketing and selling 852,278 1,987,504 663,331 6,254 3,509,367
General and administrative 1,912,387
Product development 339,052 789,844 17,889 1,146,785
---------
Total operating expenses 6,568,539
Operating profit 2,685,262
Other income (expense) (76,354)
---------
Income before income taxes 2,608,908
Provision for income taxes (976,700)
---------
Net income $1,632,208
==========
</TABLE>
10
<PAGE>
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 March 31, 2000 increased 35% from $5,819,151 to
$7,867,433 compared to the same three-month period last year. Total sales for
the nine months ended March 31, 2000 increased 35% from $16,570,569 to
$22,367,545 compared to the same nine-month period last year. In both cases,
growth is primarily due to increased Conferencing Products and Conferencing
Services sales.
Conferencing products experienced a 40% sales growth comparing the third quarter
of this fiscal year to the same quarter last year from $3,107,320 to $4,340,422.
Sales in conferencing products increased 43% comparing the first nine months of
this fiscal year to the first nine months of last fiscal year from $8,729,134 to
$12,517,171. 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. During the third quarter, the Company started shipping the PA870
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 109% in
the third quarter of this fiscal year as compared to the third quarter of last
fiscal year. Revenues for the third quarter of fiscal 2000 were $1,667,189
compared to $797,320 for third quarter of fiscal 1999. Conferencing services
increased 74% for this fiscal year-to-date as compared to the same period in
fiscal 1999. Revenues for fiscal 2000 year-to-date were $3,921,480 compared to
$2,252,652 for fiscal 1999 year-to-date. 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 decreased 2% to $1,802,155 from $1,843,548 in the third
quarter of this fiscal year compared to the third 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 1% during the third quarter of this year
compared to the third quarter of last year, primarily due to the fact that
market growth has become flat and the product market has become primarily a
replacement market. Telephone hybrids are used to connect telephone line audio
to professional audio equipment. RFM decreased 5%, comparing third quarters,
mainly due to fewer sales of the GSC3000. GSC revenue last year was driven by
requirements by the FCC for the top 30 markets across the country to have the
HDTV infrastructure installed. Those sales trends were expected to continue into
the smaller markets as well, however, the FCC postponed the required
installation of HDTV in the remaining markets until 2002. The GSC3000 allows
broadcasters to monitor and control many transmitter sites from one location.
RFM/Broadcast sales increased 8% to $5,660,327 up from $5,235,620 for the nine
months ended March 31, 2000 compared to the nine months ended March 31, 1999.
Sales of the Telephone Interface line increased 9% comparing fiscal 2000
year-to-date over fiscal 1999 year-to-date. Remote Facilities Management
increased 7%, 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 and
third quarters as discussed above. Sales to the OEM, television and
international markets contributed to the increased sales of the GSC3000. New
32-bit software that enhances the features and functionality of the GSC3000 is
currently in beta testing and shipping is anticipated to begin in June. This new
software will allow for custom GUI screen design, custom reporting, TCPIP
connectivity, and faster alarm reporting. Gentner will also be shipping the
VRC2500, a smaller version of the GSC3000 designed for the small TV or radio
stations that only require 16 or fewer channels for monitoring various station
functions. The GSC3000 is designed to monitor up to 256 channels.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (continued)
Results of Operations - (continued)
Other sales decreased 19% in the third quarter of this fiscal year compared to
the third quarter of last fiscal year, and decreased 24% for the nine months
ending March 31, 2000 compared to the same period in 1999. Sales for the third
quarter of fiscal 2000 were $57,717 compared to $70,963 for the third quarter of
fiscal 1999. Sales for fiscal 2000 year-to-date were $268,567 compared to
$353,164 for fiscal 1999 year-to-date. 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 63% for the third quarter of
this year, and 58% for the same quarter last year. The Company's gross profit
margin percentage was 62% for the first nine months of this year, compared to
56% for the same period last year. This increase was primarily due to improved
margins in conferencing services, improved manufacturing processes, new products
with higher gross profit margins, and a different product mix. The Company's
overall gross profit margin would be negatively impacted if the price of raw
components increases.
Operating expenses for the quarter increased 27% when comparing the third
quarters of this fiscal year and last fiscal year. Operating expenses for the
year-to-date increased 30% over last year. The most significant portion of these
increases came in marketing and selling expenses.
Marketing and selling expenses increased 40% for the third quarter as compared
to last year. Marketing and selling expenses increased 38% for the year-to-date
as compared to last year-to-date. The increase was primarily due to higher
commission expense resulting from the increase in sales. Also contributing to
the increase was higher salary expenses connected to the hiring of additional
marketing and selling personnel.
Product Development expenses increased 16% in the third quarter of this year
compared to last year. Product Development expenses increased 21% 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.
Third quarter General and Administrative expenses increased 8% compared to the
same period last year. Year-to-date expenses increased 19% 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 such new personnel. Also contributing to this increase was the expense
associated with the NASDAQ National Market Listing fees.
Interest expense for the third quarter is down 58% compared to the same quarter
last year. Interest expense for the year-to-date is down 59% 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 third 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
$738,730 for the third quarter and $2,005,730 for the year-to-date. Income tax
expense was $360,700 for the third quarter of fiscal 1999 and $976,700 for
fiscal 1999 year-to-date, with a calculated combined tax rate of about 37%.
Financial Condition and Liquidity
The Company's current ratio increased from 3.72:1 on June 30, 1999 to 4.26:1 on
March 31, 2000. This increase in the current ratio was due primarily to an
increase in the amount of cash on hand, an increase in accounts receivable due
to increased sales, and an increase in inventory. Offsetting the increase in the
current ratio was an increase in accrued expenses, particulartly in federal and
state income taxes and other accrued operating expenses.
The Company continued 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, inventory and purchases of
property and equipment.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (continued)
Results of Operations - (continued)
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. Thirty-five percent of the raw materials
currently needed require lead times of eight weeks or longer. The Company has
purchased more of these "longer lead time" parts to ensure continued delivery of
products thereby increasing overall inventory.
During the second and third quarters, 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
$1,042,366 and wrote off accumulated depreciation of $1,038,234 during the third
quarter.
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 March 31, 2000. The line of credit
expires on December 22, 2000.
As sales continue to increase, the Company expects to achieve its business plan
through a combination of internally generated funds and short-term or long-term
borrowings, if necessary.
Forward Looking Statements 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 belief that new 32-bit software
is currently in beta testing and shipping is anticipated to begin in June, the
Company's anticipation that it will ship the VRC2500 in September, the Company's
expectation that it will achieve its business plan through a combination of
internally generated funds and short-term or long-term borrowings and the
Company's belief it must establish distribution channels and direct selling
efforts in markets where it perceives a growing need for the Company's products
and services. 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."
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 substantially greater
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 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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (continued)
Factors that May Affect Future Results - (continued)
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.
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 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 direct. The loss of representatives or dealers could have a
material adverse effect on the Company's business.
Limited Capitalization
As of March 31, 2000, the Company had $5,372,790 in cash and $9,883,522 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 March 31, 2000. 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, President and Chief Executive Officer and a director and
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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (continued)
Factors that May Affect Future Results - (continued)
Dependence on Supplier and Single Source of Supply
The Company has 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 quantities,
lead times and prices have been increasing. Thirty-five percent of the raw
materials needed currently require lead times of eight weeks or longer. The
Company has purchased more of these "longer lead time" parts to ensure continued
delivery of products thereby increasing overall inventory. 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.
Government Funding and Regulation
In the conferencing market, the Company is dependent on government funding to
place its distance learning equipment 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. As of March 31,
2000, the Plans have 1,211,548 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.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (continued)
Factors that May Affect Future Results - (continued)
Possible Control by Officers and Directors
The officers and directors of the Company together had beneficial ownership of
approximately 25.7% of the Common Stock of the Company (including options that
are currently exercisable or exercisable within sixty (60) days) as of March 31,
2000. This significant holding in the aggregate places 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 and thus the possibility of a large percentage of customers
defaulting exists. The current default rate is approximately 0.24%.
16
<PAGE>
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.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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)
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.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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)
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.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3 1,2 Bylaws, as amended on August 24, 1993. (Page 16)
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.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10 1,2,3 1990 Incentive Plan, as amended August 7, 1996 (Page 40)
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>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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)
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.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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)
The following documents are filed as exhibits to this Form 10-QSB.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule
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>
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: May 15, 2000 /s/ Susie Strohm
---------------------------------------
Susie Strohm
Vice President, Finance
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> $5,372,790
<SECURITIES> 0
<RECEIVABLES> $3,921,039
<ALLOWANCES> $(304,762)
<INVENTORY> $3,459,214
<CURRENT-ASSETS> $12,910,763
<PP&E> $5,572,741
<DEPRECIATION> $(3,000,084)
<TOTAL-ASSETS> $15,545,904
<CURRENT-LIABILITIES> $3,053,125
<BONDS> 0
0
0
<COMMON> $8,362
<OTHER-SE> $12,025,952
<TOTAL-LIABILITY-AND-EQUITY> $15,545,904
<SALES> $22,367,545
<TOTAL-REVENUES> $22,367,545
<CGS> $8,578,741
<TOTAL-COSTS> $13,788,804
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $51,650
<INCOME-PRETAX> $5,378,147
<INCOME-TAX> $2,005,730
<INCOME-CONTINUING> $3,372,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $3,372,417
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.39
</TABLE>
