1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number: 0-17219
GENTNER COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
UTAH 87-0398877
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1825 RESEARCH WAY, SALT LAKE CITY, UTAH 84119
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 975-7200
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date.
CLASS OF COMMON STOCK NOVEMBER 13, 1998
$0.001 PAR VALUE 8,122,616 SHARES
Transitional Small Business Disclosure Format (check one)
[ ] Yes [X] No
2
GENTNER COMMUNICATIONS CORPORATION
INDEX
PAGE
NUMBER
------
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
September 30, 1998 (unaudited) and June 30, 1998................... 3
Statements of Operations
Three Months Ended September 30, 1998 and
1997 (unaudited)................................................... 4
Condensed Statements of Cash Flows
Three Months Ended September 30, 1998 and
1997 (unaudited)................................................... 5
Notes to Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 8
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................11
2
3
GENTNER COMMUNICATIONS CORPORATION
BALANCE SHEETS
(Unaudited) (Audited)
September 30, June 30,
1998 1998
------------- ----------
ASSETS
Current assets:
Cash and cash equivalents .................................. $2,059,947 $ 715,325
Accounts receivable ........................................ 2,199,339 1,743,390
Inventory .................................................. 2,523,053 3,154,983
Deferred taxes ............................................. 40,000 40,000
Other current assets ....................................... 144,467 174,667
---------- ----------
Total current assets ................................... 6,966,806 5,828,365
Property and equipment, net .................................... 2,152,268 2,320,336
Related party note receivable .................................. 122,846 126,505
Other assets, net .............................................. 31,076 36,534
---------- ----------
Total assets ........................................... $9,272,996 $8,311,740
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 669,127 $ 537,202
Accrued compensation and other benefits .................... 562,332 486,658
Other accrued expenses ..................................... 422,187 372,823
Current portion of long-term debt .......................... 294,274 285,630
Current portion of capital lease obligations ............... 238,927 237,109
---------- ----------
Total current liabilities .............................. 2,186,847 1,919,422
Long-term debt ................................................. 325,472 402,584
Capital lease obligations ...................................... 696,854 752,728
---------- ----------
Total liabilities ...................................... 3,209,173 3,074,734
Shareholders' equity:
Common stock, 50,000,000 shares authorized, par value $.001,
8,122,095 and 7,698,523 shares issued and outstanding
at September 30, 1998 and June 30, 1998 .................. 8,122 7,699
Additional paid-in capital ................................. 4,772,004 4,454,407
Retained earnings .......................................... 1,283,697 774,900
---------- ----------
Total shareholders' equity ............................. 6,063,823 5,237,006
---------- ----------
Total liabilities and shareholders' equity ............. $9,272,996 $8,311,740
========== ==========
See accompanying notes
3
4
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
-----------------------------
1998 1997
----------- -----------
Net sales ................................. $ 5,497,943 $ 3,724,979
Cost of goods sold ........................ 2,517,362 1,827,190
----------- -----------
Gross profit .............................. 2,980,581 1,897,789
Operating Expenses:
Marketing and selling ................. 1,129,179 736,780
General and administrative ............ 635,632 599,522
Product development ................... 363,529 296,489
----------- -----------
Total operating expense ........... 2,128,340 1,632,791
Operating income .................. 852,241 264,998
Other income (expense):
Interest income ....................... 8,825 3,717
Interest expense ...................... (34,460) (64,554)
Other, net ............................ (9,809) 4,018
----------- -----------
Total other income (expense) ...... (35,444) (56,819)
----------- -----------
Income before income taxes ................ 816,797 208,179
Provision for income taxes ................ 308,000 --
----------- -----------
Net income ........................ $ 508,797 $ 208,179
=========== ===========
Basic earnings (loss) per common share .... $ 0.06 $ 0.03
=========== ===========
Diluted earnings (loss) per common share... $ 0.06 $ 0.03
=========== ===========
See accompanying notes
4
5
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
-----------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
Net income .................................................. $ 508,797 $ 208,179
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment ............................................. 216,106 159,483
Amortization of other assets ............................ 5,458 14,147
Changes in operating assets and liabilities:
Accounts receivable .................................. (455,949) (263,391)
Inventory ............................................ 631,930 (24,337)
Other current assets ................................. 30,200 4,591
Accounts payable and other accrued expenses .......... 256,964 (5,967)
----------- -----------
Net cash provided by operating activities ............ 1,193,506 92,705
Cash flows from investing activities:
Purchases of property and equipment ......................... (48,038) (74,309)
Repayment of note receivable ................................ 3,659 --
Increase in other assets .................................... -- (1,061)
----------- -----------
Net cash used in investing activities ................ (44,379) (75,370)
Cash flows from financing activities:
Proceeds from issuance of common stock ...................... 1,064 811
Exercise of employee stock options .......................... 316,955 7,719
Net borrowings under line of credit ......................... -- 44,040
Principal payments of capital lease obligations ............. (54,056) (65,916)
Principal payments of long-term debt ........................ (68,468) (60,894)
----------- -----------
Net cash provided by (used in) financing activities... 195,495 (74,240)
Net increase (decrease) in cash ................................. 1,344,622 (56,905)
Cash at the beginning of the year ............................... 715,325 63,992
----------- -----------
Cash at the end of the year ..................................... $ 2,059,947 $ 7,087
=========== ===========
Supplemental disclosure of cash flow information:
Property and equipment financed by capital leases .... $ -- $ 11,545
Income taxes paid .................................... $ 53,500 $ (900)
Interest paid ........................................ $ 33,638 $ (67,947)
See accompanying notes
5
6
GENTNER COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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 1998 Annual Report and Form 10-KSB.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for interim periods are not necessarily
indicative of the results of operations to be expected for the full year.
2. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
income per share:
Three months ended
September 30,
-----------------------
1998 1997
--------- ----------
Numerator:
Net income.................................................................. $ 508,798 $ 208,179
========= =========
Denominator:
Denominator for basic net income per share -- weighted average shares....... 7,948,358 7,666,409
Effect of dilutive securities using treasury stock method................... 174,082 97,608
--------- ---------
$8,122,440 $7,764,017
========= =========
Net income per share -- basic................................................... $ 0.06 $ 0.03
Net income per share - dilutive................................................. $ 0.06 $ 0.03
3. COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Comprehensive income for
the three-month periods ended September 30, 1998 and 1997 was equal to net
income.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
these accompanying notes. Actual results could differ from those estimates.
5. INVENTORY
Inventory is summarized as follows:
(Unaudited) (Audited)
September 30, June 30,
------------- -----------
1998 1998
------------- -----------
Raw Materials $ 847,147 $ 1,014,732
Work in progress 403,296 524,313
Finished Goods 1,272,610 1,615,938
----------- -----------
Total inventory $ 2,523,053 $ 3,154,983
=========== ===========
6
7
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION EXERCISE
The following table shows the changes in stock options outstanding.
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Options outstanding as of June 30, 1998.............................. 1,853,080 $1.61
Options expired & canceled........................................... (4,500) $0.75
Options exercised.................................................... (423,202) $0.75
--------- -----
Options outstanding as of September 30, 1998......................... 1,425,378 $1.86
========= =====
7. COMMITMENTS
The Company has entered into an agreement to purchase 300 units of RSI
video conference engines over the next year.
7
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales for the three months ended September 30, 1998 increased 48% compared
to the same three-month period last year.
Sales in Teleconferencing operations increased 95% comparing the first
quarter of this fiscal year to the same quarter last year. This increase is due
to increased sales of the Company's teleconferencing products. Teleconferencing
products experienced a 96% sales growth, driven by the Audio Perfect(TM) product
line. The Audio Perfect(TM) product line began shipping in April of 1998. These
products use a new digital technology called Distributed Echo Cancellation(TM)
and incorporate several functional devices including automatic microphone
mixing, echo cancellation, audio routing, audio equalization and audio
processing into a single device. Instead of just getting the revenue from the
sale of an echo cancellation unit, the Company will get more of the revenue
associated with a room installation as a result of the expanded applications.
Continuing strong sales in teleconferencing services also contributed to
Teleconferencing growth. The Company's conference calling service experienced a
90% sales growth over the same quarter last fiscal year. This increase is the
result of the Company expanding its sales staff, who are aggressively marketing
its conference calling service.
Broadcast sales increased 22% in the first quarter of this fiscal year as
compared to the first quarter of last fiscal year. In this market, Remote
Facilities Management (formerly known as Remote Site Control) grew 46%, mainly
due to increased sales of the GSC3000. The GSC3000 allows broadcasters to
monitor and control many transmitter sites from one location. Sales to the
television market and the introduction of the Voice Interface also contributed
to the increased sales of the GSC3000. The Voice Interface allows an engineer to
call the remote equipment from any telephone, check on its status, and make
adjustments using only the telephone. The Telephone Interface line of products
also contributed to the broadcast sales growth, primarily due to the Company's
line of new telephone hybrids. Telephone hybrids are used to connect telephone
line audio to professional audio equipment.
All other sales decreased 13% in the first quarter of this fiscal year as
compared to the first quarter of last fiscal year. This was caused by the drop
in Assistive Listening Systems (ALS) product sales. ALS sales were higher in the
first quarter of fiscal 1998 than in the first quarter of fiscal 1999 due to a
large backlog of orders for ALS products, including the then new PTX portable
transmitter.
The Company's gross profit margin percentage was 54% for the first quarter
of this year, compared to 51% for the same quarter last year. This increase is
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's conference calling service has a lower
gross profit margin than its manufacturing operations. As conference calling
becomes a higher percentage of total sales, this could negatively impact the
Company's overall gross profit margin.
Operating expenses for the quarter increased 30% when comparing the first
quarters of this fiscal year and last fiscal year. The most significant portion
of this increase came in Sales & Marketing expenses, which increased 53%,
comparing first quarters of this year and last year.
Sales and Marketing expenses increased 53%. This was mainly due to
increased commission expense resulting from the increase in sales. This increase
is also due to the hiring of additional personnel to more aggressively market
the Company's products and service. An expanded co-op program for the Company's
dealers also contributed to increased Sales and Marketing expenses.
Product Development expenses increased 23% in the first quarter of this
year compared to last year. The Product Development team is aggressively working
on new product development, which the Company anticipates will enhance future
revenue growth. Part of this product development requires hiring additional
personnel and investment in technical research.
First quarter General and Administrative expenses are up 6% compared to the
same period last year. This increase is mainly due to consulting fees related to
assessing internal needs for various information systems. The Company is
currently evaluating its customer contact information systems. Plans are
underway to implement a new contact management database in the second fiscal
quarter of this fiscal year. Additionally, the Company is obtaining training to
better utilize its financial information systems.
8
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Results of Operations -- (continued)
Interest expense for the quarter is down 47% compared to the same quarter
last year. In the past three months, the Company has not used its line of
credit. Since there was no outstanding balance, there was no interest expense
associated with the line of credit. Also contributing to this decrease in
interest expense was the maturing of some of the Company's leases.
Due to tax loss carryforwards, the Company paid no income taxes in the
first quarter of fiscal 1998. During the first quarter of fiscal 1999, income
tax expense was calculated at a combined federal and state tax rate of about
38%, resulting in a tax expense of $308,000.
Financial Condition and Liquidity
The Company's current ratio increased from 3.04:1 on June 30, 1998 to
3.19:1 on September 30, 1998. This increase in current ratio was caused
primarily by an increase in the amount of cash on hand, offsetting the increase
in accounts payable and accrued expenses. Also affecting the current ratio is
the increase in the Accounts Receivable due to increased sales.
The Company continues to experience strong operating cash flows. The
reduction of inventory has been a significant factor in operating cash flows.
Inventory has been reduced due to improvements made to the manufacturing
process. The length of time that a job is open has been reduced from an average
of 60 days to 5 to 7 days. Increasing sales and profitability have also
contributed to positive operating cash flows.
The Company has an available revolving line of credit of $2.0 million,
which is secured by the Company's accounts receivable. The interest rate on the
line of credit is a variable interest rate (anywhere from three to five
percentage points over the London Interbank Offered Rate (LIBOR)). There was no
outstanding balance on September 30, 1998. The line of credit expires in
December of 1998. The Company intends to renew a line of credit.
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
To the extent any statement presented herein deals with information that is
not historical, such statement is necessarily forward looking. As such, it is
subject to occurrence of many events outside of the Company's control that could
cause the Company's results to differ materially from predicted 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, 1998, incorporated herein by
reference.
Year 2000
The Company is continuing to assess the impact of the Year 2000 issue* on
its information technology ("IT") and non-IT systems and believes that certain
software and hardware currently in use will have to be upgraded. To date, the
Company has assessed approximately 100% of its existing IT systems and 80% of
its existing non-IT systems. $49,860 has been incurred to upgrade existing
systems so that they are Year 2000 compatible. The Company does not foresee any
other expense to upgrade. To date, the Company has identified two of its systems
that will have to be upgraded. One upgrade has taken place, and the other is
scheduled for completion by November 30, 1998. There should be no significant
interruptions to the business caused by the upgrade process. However, if these
upgrades are not completed in a timely manner, the impact on the operations of
the Company could be material. The Company plans to finance these upgrades with
operating income.
The Company has purchased the software and hardware to upgrade the internal
phone system, including the voice mail system. The system was upgraded, and
associates were trained how to use the new system by the end of October of 1998.
The cost of this software and hardware was $49,860. The second system identified
to date is the conference calling bridge. This system is essential to the
Company's conference calling service. It is scheduled for upgrading in November
of 1998. The manufacturer is furnishing the software to the Company at no cost.
9
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Forward Looking Statements and Risk Factors -- (continued)
The Company is in the process of determining through direct contacts
whether its material vendors and suppliers, and its larger customers are Year
2000 compliant. To date, no major customer or supplier that the Company
contacted has any Year 2000 compliance problems that would significantly impact
the operations of the Company.
At the present time, the company believes that a reasonably likely worst
case scenario involving a Year 2000 event would be in a non-IT system affecting
the Company's manufacturing process. Such an event could result in the
suspension of the affected portion of the manufacturing process until such a
problem is corrected. However, the Company believes that as it continues its
Year 2000 assessment the risk of such an event will decrease.
The Company currently is in the process of developing contingency plans for
dealing with Year 2000 issues, including the worst case scenario just described.
Those plans are scheduled to be complete and in place by the end of fiscal 1999.
The Company has performed a Year 2000 compliance review of its product
line. To date, the company has addressed all existing Year 2000 compliance
issues on products.
The costs of the projects and the dates on which the Company believes it
will complete the Year 2000 upgrades are based on management's best estimates at
this time, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantees that these estimates will be achieved, that
personnel trained in this area will be available at a reasonable cost, or that
we will locate and correct all relevant computer codes and similar
uncertainties.
* The "Year 2000 Problem" 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.
10
11
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.
11
12
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) (Page 7)
10.2(1)(2)(3) 1997 Employee Stock Purchase Plan (Page 37)
10.3(1)(2) Promissory Note in favor of Safeco Credit Company ($419,000)
(Page 52)
10.4(1)(2) Commercial Credit and Security Agreement, and Promissory Note,
between Company and First Security Bank ($322,716.55) (Page 53)
10.5(1)(2) Lease between Company and Valley American Investment Company
(Page 71)
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(3) 1998 Stock Option Plan and Form of Grant
10.2 Modification Agreement dated as of December 24, 1997, between
First Security Bank, N.A. and the Company
(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.
12
13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENTNER COMMUNICATIONS CORPORATION
/s/ Susie Strohm
----------------------------------------
Susie Strohm
Vice President, Finance
Date: November 13, 1998
13
5
3-MOS
JUN-30-1999
SEP-30-1998
2,059,947
0
2,460,339
(261,000)
2,523,053
6,966,806
5,879,645
(3,727,377)
9,272,996
2,186,847
0
0
0
8,122
6,055,701
9,272,996
5,497,943
5,506,768
2,517,362
4,645,702
0
0
34,460
816,797
308,000
508,797
0
0
0
508,797
0.06
0.06
