UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 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
GENTNER COMMUNICATIONS CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0398877
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1825 Research Way, Salt Lake City, Utah 84119
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 975-7200
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-----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class of Common Stock February 12, 2001
$0.001 par value 8,609,898 shares
GENTNER COMMUNICATIONS CORPORATION
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 2000 (unaudited) and June 30, 2000........... 3
Consolidated Statements of Income
Three Months Ended December 31, 2000 and
1999 (unaudited).......................................... 4
Consolidated Statements of Income
Six Months Ended December 31, 2000 and
1999 (unaudited).......................................... 5
Consolidated Statements of Cash Flows
Six Months Ended December 31, 2000 and
1999 (unaudited).......................................... 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Plan
of Operation................................................12
Item 3. Qualitative and Quantitative Disclosure about Market Risk...17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........18
Item 6. Exhibits and Reports on Form 8-K...........................18
2
GENTNER COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
December 31, June 30,
---------------------------
2000 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 5,727,589 $ 5,374,996
Accounts receivable........................................ 5,123,708 4,153,677
Inventory.................................................. 4,999,548 3,484,992
Income tax receivable...................................... -- 987,912
Deferred taxes............................................. 136,000 136,000
Other current assets....................................... 1,308,794 678,744
------------- ------------
Total current assets................................... 17,295,639 14,816,321
Property and equipment, net.................................... 3,339,184 3,050,349
Related party note receivable.................................. 30,834 52,488
Goodwill, net.................................................. 2,727,794 --
Other assets, net.............................................. 260,622 1,373
------------- ------------
Total assets........................................... $ 23,654,073 $ 17,920,531
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 775,934 $ 767,095
Accrued compensation and other benefits.................... 569,899 694,219
Income tax payable......................................... 355,312 --
Other accrued expenses..................................... 1,403,063 1,045,607
Current portion of capital lease obligations............... 231,074 249,859
------------- ------------
Total current liabilities.............................. 3,335,282 2,756,780
Capital lease obligations...................................... 96,451 205,530
Deferred tax liability......................................... 205,000 205,000
------------- ------------
Total liabilities...................................... 3,636,733 3,167,310
Shareholders' equity:
Common stock, 50,000,000 shares authorized, par value $.001,
8,594,384 and 8,427,145 shares issued and outstanding
at December 31, 2000 and June 30, 2000, respectively..... 8,594 8,427
Additional paid-in capital................................. 8,889,621 6,697,090
Retained earnings.......................................... 11,117,244 8,047,704
Cumulative foreign currency translation adjustments........ 1,881 --
------------- ------------
Total shareholders' equity............................. 20,017,340 14,753,221
------------- ------------
Total liabilities and shareholders' equity............. $ 23,654,073 $ 17,920,531
============= ============
See accompanying notes
3
GENTNER COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
December 31,
---------------------------------------
2000 1999
---- ----
Product sales............................................ $ 7,771,500 73.2% $ 6,114,738 82.5%
Service sales............................................ 2,840,248 26.8% 1,301,101 17.5%
----------- ---- ----------- ----
Total net sales...................................... 10,611,748 100.0% 7,415,839 100.0%
Cost of goods sold - products............................ 2,838,723 36.5% 2,262,365 37.0%
Cost of goods sold - services............................ 1,413,673 49.8% 696,304 53.5%
----------- ---- ----------- ----
Total cost of goods sold............................. 4,252,396 40.1% 2,958,669 39.9%
----------- ---- ----------- ----
Gross profit............................................. 6,359,352 59.9% 4,457,170 60.1%
Operating expenses:
Marketing and selling................................ 1,987,507 18.7% 1,564,876 21.1%
General and administrative........................... 1,405,979 13.2% 750,392 10.1%
Product development.................................. 591,506 5.6% 495,912 6.7%
----------- ---- ----------- ----
Total operating expenses......................... 3,984,992 37.5% 2,811,180 37.9%
----------- ---- ----------- ----
Operating income................................. 2,374,360 22.4% 1,645,990 22.2%
Other income (expense):
Interest income...................................... 104,340 1.0% 55,361 0.7%
Interest expense..................................... (10,761) (0.1)% (17,411) (0.2)%
Other, net........................................... 14,598 0.1% (6,174) (0.1)%
Gain on foreign currency transactions................ 10,550 0.1% -- 0.0%
----------- ---- ----------- ----
Total other income (expense)..................... 118,727 1.1% 31,776 0.4%
----------- ---- ----------- ----
Income before income taxes............................... 2,493,087 23.5% 1,677,766 22.6%
Provision for income taxes............................... 953,225 9.0% 626,000 8.4%
----------- ---- ----------- ----
Net income....................................... $ 1,539,862 14.5% $ 1,051,766 14.2%
=========== ==== =========== ====
Basic earnings per common share.......................... $ 0.18 $ 0.13
=========== ===========
Diluted earnings per common share........................ $ 0.17 $ 0.12
=========== ===========
See accompanying notes
4
GENTNER COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended
December 31,
---------------------------------------
2000 1999
---- ----
Product sales............................................ $15,578,128 75.5% $12,122,283 83.6%
Service sales............................................ 5,063,078 24.5% 2,377,829 16.4%
----------- ---- ----------- ----
Total net sales...................................... 20,641,206 100.0% 14,500,112 100.0%
Cost of goods sold - products............................ 5,692,138 36.5% 4,363,690 36.0%
Cost of goods sold - services............................ 2,587,081 51.1% 1,310,597 55.1%
----------- ---- ----------- ----
Total cost of goods sold............................. 8,279,219 40.1% 5,674,287 39.1%
----------- ---- ----------- ----
Gross profit............................................. 12,361,987 59.9% 8,825,825 60.9%
Operating expenses:
Marketing and selling................................ 3,995,331 19.4% 3,036,772 20.9%
General and administrative........................... 2,497,053 12.1% 1,497,013 10.3%
Product development.................................. 1,119,644 5.4% 956,588 6.6%
----------- ---- ----------- ----
Total operating expenses......................... 7,612,028 36.9% 5,490,373 37.9%
----------- ---- ----------- ----
Operating income................................. 4,749,959 23.0% 3,335,452 23.0%
Other income (expense):
Interest income...................................... 178,232 0.9% 101,129 0.7%
Interest expense..................................... (23,434) (0.1)% (35,961) (0.2)%
Other, net........................................... 17,458 0.1% (1,458) 0.0%
Gain on foreign currency transactions................ 10,550 0.1% -- 0.0%
----------- ---- ----------- ----
Total other income (expense)..................... 182,806 0.9% 63,710 0.4%
----------- ---- ----------- ----
Income before income taxes............................... 4,932,765 23.9% 3,399,162 23.4%
Provision for income taxes............................... 1,863,225 9.0% 1,267,000 8.7%
----------- ---- ----------- ----
Net income....................................... $ 3,069,540 14.9% $ 2,132,162 14.7%
=========== ==== =========== ====
Basic earnings per common share.......................... $ 0.36 $ 0.26
=========== ===========
Diluted earnings per common share........................ $ 0.34 $ 0.24
=========== ===========
See accompanying notes
5
GENTNER COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
------------------------
2000 1999
---- ----
Cash flows from operating activities:
Net income.................................................... $ 3,069,540 $ 2,132,162
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment.... 501,033 362,954
Amortization of other assets............................... 134,062 7,508
Changes in operating assets and liabilities:
Accounts receivable..................................... (970,031) (932,610)
Inventory............................................... (1,215,470) (43,104)
Other current assets.................................... (608,426) (340,182)
Accounts payable and other accrued expenses............. 1,585,199 (565,407)
Other...................................................... 1,881 --
----------- -----------
Net cash provided by operating activities............. 2,497,788 621,321
Cash flows from investing activities:
Purchases of property and equipment........................... (473,586) (429,403)
Purchase of business.......................................... (1,758,085) --
Repayment of note receivable.................................. 21,654 21,339
----------- -----------
Net cash used in investing activities................. (2,210,017) (408,064)
Cash flows from financing activities:
Proceeds from issuance of common stock........................ 10,718 41,746
Exercise of employee stock options............................ 181,967 100,941
Principal payments on capital lease obligations............... (127,863) (105,038)
----------- -----------
Net cash provided by financing activities............. 64,822 37,649
----------- -----------
Net increase in cash............................................. 352,593 250,906
Cash at the beginning of the year................................ 5,374,996 3,922,183
----------- -----------
Cash at the end of the period.................................... $ 5,727,589 $ 4,173,089
========-== ===========
Supplemental disclosure of cash flow information:
Income taxes paid............................................. $(1,280,000) $(1,541,000)
Interest paid................................................. $ (23,435) $ (35,768)
Consideration paid in stock for purchase of business.......... $(2,000,013) $ --
See accompanying notes
6
GENTNER COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
(Unaudited)
1. Basis of Presentation
During October 2000, the Company established Gentner Communications EuMEA GmbH,
a wholly owned subsidiary headquartered in Nuremberg, Germany. The subsidiary
began operations during December 2000. Gentner EuMEA will focus on distribution,
technical support, and training in Europe, the Middle East and northern Africa.
The subsidiary conducts its sales and prepares its financial statements in
German Deutsche Marks.
Beginning the second quarter of fiscal 2001, the Company will provide
consolidated financial statements, and all intercompany transactions will be
eliminated.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q of Regulation S-K. Accordingly, certain
information and footnote disclosures normally included in complete financial
statements have been condensed or omitted. These financial statements should be
read in conjunction with the financial statements and footnotes thereto included
in the Company's 2000 Annual Report on Form 10-KSB.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The results of operations for interim periods are not necessarily indicative of
the results of operations to be expected for the full year.
2. Earnings Per Common Share
The following table sets forth the computation of basic and diluted net income
per share:
Three months ended
December 31,
-------------------------
2000 1999
---- ----
Numerator:
Net income.................................................................. $ 1,539,862 $ 1,051,766
=========== ===========
Denominator:
Denominator for basic net income per share - weighted average shares........ 8,579,626 8,218,818
Effect of dilutive securities using treasury stock method................... 447,470 571,762
----------- -----------
9,027,096 8,790,580
=========== ===========
Net income per share - basic.................................................... $ 0.18 $ 0.13
Net income per share - dilutive................................................. $ 0.17 $ 0.12
Six months ended
December 31,
-------------------------
2000 1999
---- ----
Numerator:
Net income.................................................................. $ 3,069,540 $ 2,132,162
=========== ===========
Denominator:
Denominator for basic net income per share - weighted average shares........ 8,567,730 8,195,398
Effect of dilutive securities using treasury stock method................... 461,887 519,286
----------- -----------
9,029,617 8,714,684
=========== ===========
Net income per share - basic.................................................... $ 0.36 $ 0.26
Net income per share - dilutive................................................. $ 0.34 $ 0.24
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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, 2000 and 1999 was $3,071,421 and
$2,132,162, respectively.
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)
December 31, June 30,
2000 2000
---- ----
Raw Materials $ 2,798,400 $ 1,559,210
Work in progress 626,354 437,112
Finished Goods 1,574,794 1,488,670
----------- -----------
Total inventory $ 4,999,548 $ 3,484,992
=========== ===========
6. Stock Option Exercise
The following table shows the changes in stock options outstanding.
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Options outstanding as of June 30, 2000............... 1,508,548 $ 7.01
Options granted....................................... 106,000 $ 13.58
Options exercised..................................... (5,650) $ 2.66
Options expired & canceled............................ (44,250) $ 9.02
--------- -------
Options outstanding as of September 30, 2000.......... 1,564,648 $ 7.42
Options granted....................................... 360,000 $ 12.61
Options exercised..................................... (31,050) $ 5.38
Options expired & canceled............................ (3,000) $ 2.66
---------- -------
Options outstanding as of December 31, 2000........... 1,890,598 $ 8.45
========= =======
7. Purchase of Business
In May 2000, the Company entered into an agreement to purchase substantially all
of the assets of ClearOne, Inc. ("ClearOne") for $3.4 million plus approximately
$300,000 in inventory, with a combination of cash and restricted stock. Under
the terms of the agreement, the Company issued 129,871 shares of common stock
valued at $15.40 and cash of $1,758,085. Goodwill resulting from the difference
between the purchase price plus acquisition costs and the net assets acquired,
including a non-compete agreement of $240,000, totaled approximately $2.8
million and is being amortized on a straight-line basis over fifteen years.
Gentner assumed the lease agreement on ClearOne office space in Woburn,
Massachusetts beginning in July 2000. The base monthly rent for this office
space is approximately $3,300 monthly. ClearOne was a privately held developer
and manufacturer of multimedia group communications products. On July 5, 2000,
the acquisition was consummated and was accounted for under the purchase method
of accounting.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
7. Purchase of Business - (continued)
The following pro forma combined financial information reflects operations as if
the acquisition of ClearOne had occurred as of July 1, 1999. The pro forma
combined financial information is presented for illustrative purposes only, does
not purport to be indicative of the Company's results of operations as of the
date hereof and is not indicative necessarily of what the Company's actual
results of operations would have been had the acquisition been consummated on
such date.
Three months ended
December 31,
------------
2000 1999
---- ----
Net revenue...................................... $10,611,748 $ 7,385,700
=========== ===========
Net income....................................... $ 1,539,862 $ 779,793
=========== ===========
Net income per share - basic..................... $ 0.18 $ 0.09
Net income per share - dilutive.................. $ 0.17 $ 0.09
Six months ended
December 31,
------------
2000 1999
---- ----
Net revenue...................................... $20,641,206 $14,878,570
=========== ==========
Net income....................................... $ 3,069,540 $ 1,919,126
=========== ==========
Net income per share - basic..................... $ 0.36 $ 0.23
Net income per share - dilutive.................. $ 0.34 $ 0.22
8. Segment Reporting
The Company reports four different segments - Remote Facilities Management
(RFM)/Broadcast, Conferencing Products, Conferencing Services and Other. The
RFM/Broadcast segment consists of remote site control products that 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 and TV airwaves to
millions of listeners. The Conferencing Products segment consists of a full line
of room system conferencing products including installed and portable audio- and
videoconferencing products. The Conferencing Services segment includes
conference calling services, audio bridging, document conferencing services and
the addition of the professional services group, which provides consultation
services, meeting facilitation and web presentation services.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies included within the
Company's Form 10-KSB for the year ended June 30, 2000. 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 meet different customer needs. They are managed
separately because each segment requires focus and attention on their market and
distribution channel.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
8. Segment Reporting - (continued)
The following table summarizes the segment information:
RFM/ Conferencing Conferencing Company
Broadcast Products Services All Other Totals
--------- -------- -------- --------- ------
Quarter Ended December 31, 2000:
- -------------------------------
Net sales $ 1,867,268 $ 5,889,955 $ 2,799,390 $ 55,135 $ 10,611,748
Cost of goods sold 687,318 2,155,019 1,377,108 32,951 4,252,396
---------- --------- --------- ------ ---------
Gross profit 1,179,950 3,734,936 1,422,282 22,184 6,359,352
Marketing and selling 155,938 1,242,553 587,760 1,256 1,987,507
Product development 65,154 526,352 591,506
General and administrative 1,405,979
---------
Total operating expenses 3,984,992
Operating profit 2,374,360
Other income (expense) 118,727
----------
Income before income taxes 2,493,087
Provision for income taxes (953,225)
---------
Net income $ 1,539,862
============
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
Product development 253,989 241,923 495,912
General and administrative 750,392
----------
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
============
RFM/ Conferencing Conferencing Company
Broadcast Products Services All Other Totals
--------- -------- -------- --------- ------
Year-to-Date At December 31, 2000:
- ----------------------------------
Net sales $ 3,694,494 $ 11,796,769 $ 4,954,663 $ 195,280 $ 20,641,206
Cost of goods sold 1,477,370 4,233,466 2,506,517 61,866 8,279,219
--------- --------- --------- -------- -----------
Gross profit 2,217,124 7,563,303 2,448,146 133,414 12,361,987
Marketing and selling 326,865 2,423,711 1,242,551 2,204 3,995,331
Product development 147,843 971,801 1,119,644
General and administrative 2,497,053
---------
Total operating expenses 7,612,028
Operating profit 4,749,959
Other income (expense) 182,806
----------
Income before income taxes 4,932,765
Provision for income taxes (1,863,225)
-----------
Net income $ 3,069,540
============
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
8. Segment Reporting - (continued)
Year-to-Date At December 31, 1999:
- ----------------------------------
Net sales $ 3,858,172 $ 8,176,749 $ 2,254,341 $ 210,850 $ 14,500,112
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
Product development 509,672 446,916 956,588
General and administrative 1,497,013
---------
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
============
11
Item 2. Management's Discussion and Analysis of Plan of Operation
- -----------------------------------------------------------------
General
The Company develops, manufactures, markets, and distributes products and
services for the broadcast and conferencing markets. The Company reports four
different segments - Remote Facilities Management (RFM)/Broadcast, Conferencing
Products, Conferencing Services and Other. The Company has applied its core
digital technology to the development of products for small, medium and large
conferencing venues, as well as assistive listening markets.
Results of Operations
Sales for the three-month period ended December 31, 2000 increased 43 percent to
$10.6 million from $7.4 million compared the same three-month period ended
December 31, 1999. For the six-month period ended December 31, 2000, sales
increased 42 percent to $20.6 million from $14.5 million compared to the same
six-month period ended December 31, 1999. This increase is mainly due to the
strong growth in sales of conferencing products and conferencing services, as
discussed below.
Conferencing Products experienced a 37 percent sales growth when comparing the
second quarter of fiscal 2001 to the same quarter of fiscal 2000, from $4.3
million to $5.9 million. Sales in Conferencing Products increased 44 percent,
from $8.2 million to $11.8 million, 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 Perfect(R) product line, as
well as the introduction of new products, including the APV200 IP and the
GT1524. The Audio Perfect(R) product line began shipping in April of 1998 with
the AP800, and also includes the AP10, the AP400, AP Tools, the AP IR Remote,
and the APV200 IP. The Company has realized more of the revenue associated with
a room installation as a result of the expanded applications. During the third
quarter of fiscal 2000, the Company started shipping the PA870 power amplifier.
During the second quarter of fiscal 2001, the Company began shipping the PSR1212
digital matrix mixer.
Conferencing Services, the conference calling portion of which is known as 1-800
LETS MEET(R), experienced sales growth of 123 percent in the second quarter of
this fiscal year as compared to the same quarter of last fiscal year. Revenues
for the second quarter of fiscal 2001 were $2.8 million compared to $ 1.3
million for the same quarter of fiscal 2000. Conferencing Services increased 120
percent for this fiscal year-to-date as compared to the same period in fiscal
2000. Revenues for the first six months of fiscal 2001 were $5.0 million
compared to $2.3 million for the first six months of fiscal 2000. Over the past
year, the Company has expanded its service offerings to include on-demand,
reservationless conference calling, and Webconferencing. The Company attributes
this growth in sales to an increased customer base due in part to the Company's
increase in sales staff for marketing conference calling services as well as the
overall market growth over the last year for such services. 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 four percent in the second quarter of this fiscal
year to $1.9 million from $1.8 million in the same quarter of last fiscal year.
RFM/Broadcast sales decreased four percent in the first six months of fiscal
2001 to $3.7 million from $3.9 million in the same period 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 25 percent during the second quarter of this
fiscal year compared to the same quarter of last year and decreased 13 percent
during the first six months of this fiscal year compared to the same period of
last fiscal year. Telephone hybrids are used to connect telephone line audio to
professional audio equipment. RFM increased 70 percent in the second quarter of
this fiscal year when compared to the same quarter last year and increased 10
percent in the first six months of this fiscal year when compared to the same
period of last fiscal year, mainly due to increased sales of the GSC3000 during
second quarter of fiscal 2001. Also contributing to this increase is sales of
the VRC2500, which began shipping in the first quarter of fiscal 2001.
Other sales decreased 29 percent in the second quarter of this fiscal year
compared to the same quarter of last fiscal year. Sales for the second quarter
of fiscal 2001 were $55,135 compared to $78,037 for the same quarter of fiscal
2000. Other sales decreased seven percent for the first six months of this
fiscal year compared to the same period of last fiscal year. Sales for the first
six months of fiscal 2001 were $195,281 compared to $210,850 for the same period
of fiscal 2000. In general, the Company is not promoting Other Products, and
those sales are expected to continue to decrease.
The Company's gross profit margin percentage was 59.9 percent for the second
quarter of fiscal 2001 and 60.1 percent for the same quarter last year. Gross
profit margin percentage was 59.9 percent for the first six months of fiscal
2001 and 60.9 percent for the same six-month period last year. This decrease was
primarily due to the increase in the pricing of select core components used in
Company products and the increase in service revenues which generally have lower
margins.
The Company believes that most of the key components required for the production
of its products are currently available in sufficient quantities. The Company
12
has experienced long component lead times in the past, but is starting to see
moderating lead times on many products. Even though the Company has purchased
more of these "longer-lead-time" parts to ensure continued delivery of products,
reduction in these inventories will track the reduction of lead times with an
undetermined lag time. The Company also continues to focus on locating other
sources for raw materials and enhancing vendor relationships to further ensure
adequate materials.
The Company's operating expenses increased 41.8 percent when comparing the
second quarter of this fiscal year compared to the same quarter of last fiscal
year and 38.7 percent when comparing the first six months of this fiscal year
compared to the same period of last fiscal year. The most significant portion of
these increases came in general and administrative expenses.
Marketing and selling expenses for the second quarter of fiscal 2001 increased
27 percent from the second quarter of last fiscal year, although expenses
decreased as a percent of revenue from 21.1 percent in the second quarter of
fiscal 2000 to 18.7 percent in the second quarter of fiscal 2001. Year-to-date
marketing and selling expenses increased 32 percent compared to the same period
last fiscal year, although expenses decreased from 20.9 percent for the first
six months of fiscal 2000 to 19.4 percent for the same period of fiscal 2001 as
a percent of revenue. The increase in dollars was primarily due to higher
commission expense resulting from the increase in sales. Also contributing to
the increase was shelving expenses with respect to the retail market.
Product development costs increased 19 percent in the second quarter of fiscal
2001 as compared to the second quarter of fiscal 2000, but decreased as a
percent of revenue from 6.7 percent in the second quarter of fiscal 2000 to 5.6
percent in the second quarter of fiscal 2001. Year-to-date product development
expenses increased 17 percent for the six months ended December 31, 2001 as
compared to the same period of fiscal 2000, but decreased as a percent of
revenue from 6.6 percent in the first six months of fiscal 2000 to 5.4 percent
in the first six months of fiscal 2001. The increase in absolute dollars was
primarily due to new product development and higher salary expenses.
General and administrative expenses increased 87 percent in the second quarter
of fiscal 2001 as compared to the second quarter in the previous fiscal year,
while expenses increased as a percent of revenue from 10.1 percent in the second
quarter of fiscal 2000 to 13.2 percent in the second quarter of fiscal 2001.
Year-to-date general and administrative expenses increased 67 percent in the
first six months of fiscal 2001 as compared to the first six months of the
previous fiscal year, while expenses increased as of percent of revenue from
10.3 percent in the first six months of fiscal 2000 to 12.1 percent in the first
six months of fiscal 2001. This increase in absolute dollars was mainly due to a
one-time bad debt write off of $398,453 with respect to a single customer who
filed bankruptcy early in the quarter. Also associated with this increase were
the costs incurred with hiring of personnel to support sales increases and the
infrastructure costs associated with the hiring of such new personnel, as well
as costs associated with the Company's Woburn, MA office and the amortization
expense associated with the goodwill purchased in the ClearOne acquisition.
Interest income increased 88 percent when comparing the second quarter of fiscal
2001 to the second quarter of fiscal 2000. Interest income increased 76 percent
when comparing the first six months of 2001 to the same period of fiscal 2000.
Interest expense decreased 38 percent when comparing the second quarter of
fiscal 2001 to the second quarter of fiscal 2000. Interest expense decreased 35
percent when comparing the first six months of fiscal 2001 to the first six
months of fiscal 2000 due to the maturing of certain of the Company's leases.
During the second quarter of fiscal 2001, income tax expense was calculated at a
combined federal and state tax rate of 38.2 percent, resulting in a tax expense
of $953,000, compared to 37.3 percent and $626,000 in the second quarter of
fiscal 2000. Year-to-date income tax expense was calculated at a combined
federal and state tax rate of 37.8 percent, resulting in a tax expense of
$1,863,000, compared to 37.3 percent and $1,267,000 in the first six months of
fiscal 2000.
Net income increased 46 percent the second quarter of this fiscal year as
compared to the second quarter in the previous year. Net income increased 44
percent the first six months of this fiscal year as compared to the six months
in the previous year.
Financial Condition and Liquidity
The Company had cash and cash equivalents of $5.7 million and $5.4 million at
December 31, 2000 and June 30, 2000, respectively, an increase of $300,000. Net
operating activities provided cash of $2.5 million in the first six months of
fiscal 2001, primarily due to profitable operations and increased accrued
liabilities, which were paid early in the third quarter of fiscal 2001, as well
as increased amortization and depreciation expense which was offset by increased
inventory as discussed above. Net investing activities used cash of $2.2 million
primarily due to the purchase of the assets of ClearOne. Net cash provided by
financing activities was $65,000.
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 variable (250 basis points over the London Interbank
13
Offered Rate (LIBOR) or prime less 0.25 percent, whichever the Company chooses).
The borrowing rate was 9.25 percent at December 31, 2000. There was no
outstanding balance on December 31, 2000. The line of credit was renewed as of
December 22, 2000 and will expire on December 22, 2001. Borrowings under the
line of credit are subject to certain financial and operating covenants. The
Company was in compliance with the covenants at December 31, 2000.
Management believes that the Company's working capital, bank line of credit and
cash flow from operating activities will be sufficient to meet the Company's
operating and capital expenditures requirements for the next twelve months. In
the longer term, or if the Company experiences a decline in revenue, or in the
event of other unforeseen events, the Company may require additional funds and
may seek to raise such funds through public or private equity or debt financing,
bank lines of credit, or other sources. No assurance can be given that
additional financing will be available or, if available will be on terms
favorable to the Company. See "Factors that May Affect Future Results - Limited
Capitalization."
Factors that May Affect Future Results
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended.
Forward-looking statements relate to the Company's future plans, objectives,
expectations, and intentions. These statements may be recognized by the use of
words such as "believes," "expects," "may," "will," "intends," "plans,"
"should," "seeks," "anticipates," and similar expressions. In particular,
statements regarding the Company's markets and market share, demand for its
products and services, FCC actions, manufacturing capacity and component
availability, and the development and introduction of new products and services
are forward-looking statements and subject to material risks. Actual results
could differ markedly from those projected in the forward-looking statements as
a result of the factors set forth below and the matters set forth in the report
generally, as well as the factors set forth in the Company's reports filed with
the Securities and Exchange Commission including the Form 10-KSB filed for the
year ended June 30, 2000. The Company cautions the reader, however, that this
list of factors may not be exhaustive, particularly with respect to future
factors. Any forward-looking statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
Rapid Technological Change
The RFM/Broadcast, conferencing products, conferencing services, and other
product markets are highly competitive and characterized by rapid technological
change. The Company's future performance will depend in large part upon its
ability to remain competitive and to develop and market new products and
services in these markets in a timely fashion that responds to customers' needs
and incorporates new technology and standards.
The Company may not be able to design and manufacture products that address
customer needs or achieve market acceptance. Any significant failure to design,
manufacture, and successfully introduce new products could materially harm the
Company's business.
The markets in which the Company competes have historically involved the
introduction of new and technologically advanced products and services that cost
less or perform better. If the Company is not competitive in its research and
development efforts, its products may become obsolete or be priced above
competitive levels.
Although management believes that, based on their performance and price, its
products are currently attractive to customers, there can be no assurance that
competitors will not introduce comparable or technologically superior products
which are priced more favorably than the Company's products.
Competition
The markets for the Company's products and services are highly competitive.
These markets include the Company's traditional dealer channel, the market for
its conferencing services, and the retail channel. The Company competes with
businesses having substantially greater financial, research and development,
manufacturing, marketing, and other resources. If the Company fails to maintain
or enhance its competitive position, it could experience pricing pressures and
reduced sales, margin, profits, and market share, each of which could materially
harm the Company.
Marketing
The Company is subject to the risks inherent in the marketing and sale of
current and new products and services in an evolving marketplace. The Company
must effectively allocate its resources to the marketing and sale of these
products through diverse channels of distribution. The Company's current
strategy is to establish distribution channels and direct selling efforts in
markets where it believes there is a growing need for its products and services.
For example, with the acquisition of the ClearOne assets the Company has
expanded its products to include the retail market. There can be no assurance
that this strategy will prove successful.
14
Difficulties in Managing Growth
The Company is experiencing a period of significant expansion in personnel,
facilities and infrastructure, and management anticipates that further expansion
will be required to address potential growth in our customer base and market
opportunities. This expansion will require continued application of management,
operational and financial resources
To manage the expected growth of operations and personnel, the Company may need
to improve its transaction processing, operational and financial systems,
procedures and controls. The Company's current and planned personnel, systems,
procedures and controls may not be adequate to support our future operations.
Difficulties in managing this challenges could adversely affect the Company's
financial performance.
Dependence on Distribution Network
The Company markets its products primarily through a network of representatives,
dealers, and master distributors. All of the Company's agreements retaining such
representatives and dealers are non-exclusive and terminable at will by either
party. Although the Company believes that its relationships with such
representatives and dealers are good, there can be no assurance that any or all
such representatives or dealers will continue to offer the Company's products.
Price discounts to the Company's distribution market are based on performance.
However, there are no obligations on the part of such representatives and
dealers to provide any specified level of support to the Company's products or
to devote any specific time, resources or efforts to the marketing of the
Company's products. There are no prohibitions on dealers offering products that
are competitive with those of the Company. Most dealers do offer competitive
products. The Company reserves the right to maintain house accounts which are
for products sold directly to customers. The loss of representatives or dealers
could have a material adverse effect on the Company's business.
Limited Capitalization
As of December 31, 2000, the Company had $5.7 million in cash and $14.0 million
in working capital. The Company may be required to seek additional financing if
anticipated levels of revenue are not realized, if higher than anticipated costs
are incurred in the development, manufacture, or marketing of the Company's
products, or if product demand exceeds expected levels. There can be no
assurance that any additional financing thereby necessitated will be available
on acceptable terms, or at all.
In addition, the Company's $5 million revolving line of credit matures in
December of 2001 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, 2000. To the extent the
line of credit is not extended or replaced and cash from operations is
insufficient to fund operations, the Company may be required to seek additional
financing.
Telecommunications and Information Systems Network
The Company is highly reliant on its network equipment, telecommunications
providers, data, and software, to support all functions of the Company. The
Company's conference calling service relies 100 percent 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 or
telecommunication providers, its ongoing customers may choose a different
provider, and its reputation may be damaged, reducing its attractiveness to new
customers.
Dependence on Supplier and Single Source of Supply
The Company does not typically have written contracts with any of its suppliers.
Furthermore, certain electronic components used in connection with the Company's
products can only be obtained from single manufacturers and the Company is
dependent upon the ability of these manufacturers to deliver such components to
the Company's suppliers so that they can meet the Company's delivery schedules.
The Company does not have a written commitment from such suppliers to fulfill
the Company's future requirements. The Company's suppliers maintain an inventory
of such components, but there can be no assurance that such components will
always be readily available, available at reasonable prices, available in
sufficient quantities, or deliverable in a timely fashion. If such key
components become unavailable, it is likely that the Company will experience
delays, which could be significant, in production and delivery of its products
unless and until the Company can otherwise procure the required component or
components at competitive prices, if at all. The lack of availability of these
components could have a materially adverse effect on the Company.
15
The Company believes that most of the key components required for the production
of its products are currently available in sufficient quantities. The Company
has experienced long component lead times in the past, but is starting to see
moderating lead times on many products. Even though the Company has purchased
more of these "longer-lead-time" parts to ensure continued delivery of products,
reduction in these inventories will track the reduction of lead times with an
undetermined lag time. 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.
Software Risks
The Company has developed custom software for its products and has licensed
additional software from third parties. This software may contain undetected
errors, defects or bugs. Although we have not suffered significant harm from any
errors or defects to date, we may discover significant errors or defects in the
future that we may or may not be able to fix or fix in a timely or cost
effective manner. The Company's inability to do so could harm its business.
Manufacturing Process Risks
While the Company has substantial experience in designing and manufacturing its
products, the Company may still experience technical difficulties and delays
with the manufacturing of our products. Potential difficulties in the design and
manufacturing process that could be experienced by us include difficulty in
meeting required specifications, difficulty in achieving necessary manufacturing
efficiencies, and difficulties in obtaining materials on a timely basis.
Reliance on Efficiency of Distribution and Third Parties
The Company's financial performance is dependent in part on its ability to
provide prompt, accurate, and complete services to customers on a timely and
competitive basis. Delays in distribution in our day-to-day operations or
material increases in our costs of procuring and delivering products could have
an adverse effect on our results of operations. Any failure of either our
computer operating systems, the Internet or our telephone system could adversely
affect our ability to receive and process customers' orders and ship products on
a timely basis. Strikes or other service interruptions affecting Federal Express
Corporation, United Parcel Service of America, Inc., or other common carriers
used by the Company to receive necessary components or other materials or to
ship our products also could impair its ability to deliver products on a timely
and cost-effective basis.
Lack of Patent Protection
The Company currently relies on a combination of trade secret and nondisclosure
agreements to establish and protect its proprietary rights in its products.
There can be no assurance that others will not independently develop similar
technologies, or duplicate or design around aspects of the Company's technology.
The Company believes that its products and other proprietary rights do not
infringe any proprietary rights of third parties. There can be no assurance,
however, that third parties will not assert infringement claims in the future.
Such claims could divert management's attention and be expensive, regardless of
their merit. The Company might be required to license third party technology or
redesign its products, which may not be possible or economically feasible.
Government Funding and Regulation
In the conferencing market, the Company is dependent on government funding to
place its distance learning sales and courtroom equipment sales. In the event
government funding was stopped, these sales would be negatively impacted.
Additionally, many of the Company's products are subject to governmental
regulations. New regulations could significantly adversely impact sales.
Dividends Unlikely
The Company has never paid cash dividends on its securities and does not intend
to declare or pay cash dividends in the foreseeable future. Earnings are
expected to be retained to finance and expand its business. Furthermore, the
Company's revolving line of credit prohibits the payment of dividends on its
Common Stock.
16
Potential Dilutive Effect of Outstanding Options and Possible Negative Effect of
Future Financing
The Company has outstanding options issued under the Company's 1990 Incentive
Plan and the 1998 Stock Option Plan, which include options to purchase up to
1,900,000 shares of Common Stock granted or available for grant. As of December
31, 2000, the Plans have 1,890,598 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.
Dependence Upon Key Employees
The Company is substantially dependent upon certain of its employees, including
Frances M. Flood, President and Chief Executive Officer and a director and
shareholder of the Company. The loss of Ms. Flood by the Company could have a
material adverse effect on the Company. The Company currently has in place a key
person life insurance policy on the life of Ms. Flood in the amount of
$3,000,000.
Possible Control by Officers and Directors
The officers and directors of the Company together had beneficial ownership of
approximately 26.3 percent of the Company's Common Stock (including options that
are currently exercisable or exercisable within sixty (60) days) as of February
1, 2001. This significant holding in the aggregate places the officers and
directors in a position, when acting together, to effectively control the
Company and could delay or prevent a change in control.
Collectability of Outstanding Receivables
The Company grants credit without requiring collateral to substantially all of
its customers. Although the possibility of a large percentage of customers
defaulting exists, the Company believes this scenario to be highly unlikely.
International Sales and Related Risks
International sales represent a significant portion of the Company's total
revenue. For example, international sales represented 11 percent of the
Company's total sales for the second quarter of fiscal 2001 and 12 percent for
the first six months of fiscal 2001. If the Company is unable to maintain
international market demand, its results of operations could be materially
harmed. The Company's international business is subject to the financial and
operating risks of conducting business internationally, including: unexpected
changes in, or imposition of, legislative or regulatory requirements;
fluctuating exchange rates, tariffs and other barriers; difficulties in staffing
and managing foreign subsidiary operations; export restrictions; greater
difficulties in accounts receivable collection and longer payment cycles;
potentially adverse tax consequences; and potential hostilities and changes in
diplomatic and trade relationships.
During October 2000, the Company established Gentner Communications EuMEA GmbH,
a wholly owned subsidiary headquartered in Nuremberg, Germany. The subsidiary
began operations during December 2000. Gentner EuMEA will focus on distribution,
technical support, and training in Europe, the Middle East and northern Africa.
Except for sales by Gentner EuMEA, which are denominated in German Deutsche
Marks, the Company's sales in the international market are denominated in U.S.
Dollars. Consolidation of Gentner EuMEA's financial statements with those of the
Company requires translation to U.S. Dollars. That translation is subject to
exchange rate risks.
Integration of Acquired Business
The Company has dedicated and will continue to dedicate, substantial management
resources in order to achieve the anticipated operating efficiencies from
integrating ClearOne. Difficulties encountered in integrating ClearOne's
operations could adversely impact the business, results of operations or
financial condition of the Company. Also, the Company intends to pursue
acquisition opportunities in the future. The integration of acquired businesses
could require substantial management resources. There can be no assurance that
any such integration will be accomplished without having a short or potentially
long-term adverse impact on the business, results of operations or financial
condition of the Company or that the benefits expected from any such integration
will be fully realized.
17
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial Statements." The effective
date of SAB 101 is the fourth quarter of fiscal years beginning after December
15, 1999. This SAB clarifies proper methods of revenue recognition given certain
circumstances surrounding sales transactions. The Company continues to evaluate
the impact of SAB 101, but believes it is in compliance with the provisions of
the SAB and accordingly, does not expect SAB 101 to have a material effect on
its financial statements.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by SFAS No. 137 "Accounting for Derivative Financial
Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No.
133" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended by
SFAS No. 137 and SFAS No. 138, is effective for all fiscal years beginning after
June 15, 2000. The Company does not expect the adoption of SFAS No. 133 to have
a material impact on the Company's financial condition or results of operations.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
- -------------------------------------------------------------------
In 1997, the SEC issued new rules (Item 305 of Regulation S-K) which require
disclosure of material risks as defined by Item 305, related to market risk
sensitive financial instruments. As defined, the Company currently has only
limited market risk sensitive instruments related to interest rates. The Company
has outstanding capital leases of $329,000 at December 31, 2000.
The Company does not have significant exposure to changing interest rates on
these capital leases because interest rates for the majority of the capital
leases are fixed. The Company has not undertaken any additional actions to cover
interest rate market risk and is not a party to any other interest rate market
risk management activities.
A hypothetical 10 percent change in market interest rates over the next year
would not impact the Company's earnings or cash flows as the interest rates on
the majority of the capital leases are fixed.
The Company does not purchase or hold any derivative financial instruments for
trading purposes.
18
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The only matters submitted by the Company to the shareholders occurred at the
annual meeting of shareholders of the Company held on November 16, 2000. At the
meeting, the shareholders acted to re-elect the then current directors of the
Company, all to serve for one-year terms, as follows: Frances M. Flood, Edward
Dallin Bagley, Brad R. Baldwin, Randall J. Wichinski, and David Wiener, with the
following vote:
For Against Abstain
--- ------- -------
Edward Dallin Bagley 6,130,816 26,682 0
Brad R. Baldwin 6,131,316 26,182 0
Frances M. Flood 6,131,316 26,182 0
Randall J. Wichinski 6,131,316 26,182 0
David Wiener 6,131,316 26,182 0
Additionally, Ernst & Young, LLP, certified public accountants, was affirmed at
the meeting as the Company's independent certified accountants for the 2001
fiscal year with the following vote: 6,117,922 for, 25,760 against, and 13,816
abstain. There were no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1 1 Articles of Incorporation and all amendments thereto through
March 1, 1988. (Page 10) (incorporated by reference from the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1989)
3.2 1 Amendment to Articles of Incorporation, dated July 1, 1991. (Page
65) (incorporated by reference from the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1991)
3.3 1 Bylaws, as amended on August 24, 1993. (Page 16) (incorporated by
reference from the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1993)
10.8 Third Addendum to Lease between Company and Valley American
Investment Company dated as of September 18, 2000.
10.9 Modification Agreement to Promissory Note, Loan Agreement, and
Commercial Security Agreement between Company and Bank One, Utah,
N.A. dated as of December 22, 2000 (original aggregate amount of
$5,000,000)
1 Denotes exhibits specifically incorporated into this Form 10-Q by
reference, pursuant to Regulation S-K, Item 10. 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.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the period covered by this
report.
19
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: February 12, 2001
20
THIRD ADDENDUM TO LEASE
This addendum is entered into this 18th day of September, 2000, by and
between VALLEY AMERICAN INVESTMENT COMPANY, P.O. Box 186, Midvale, Utah 84047,
as Landlord; and GENTNER COMMUNICATIONS CORPORATION, of 1825 West Research Way,
West Valley City, UT 84199, as Tenant.
Whereas, both Tenant and Landlord have executed a uniform lease
agreement dated the 26th day of February, 1996, a First Addendum to Lease dated
the 31st day of January, 1997, and a Second Addendum to Lease dated the 2nd day
of May, 1997. The size of Tenant's leased premises is 40,250 square feet. The
current lease term shall expire on October 31, 2006.
Whereas, the purpose of this Third Addendum is to increase the size of
the leased premises.
Whereas, Tenant is desirous of leasing an additional 11,510 square feet
located at 1825 West Research Way, Suite 7 (the "Expansion Space"). Therefore,
the total size of the leased premises shall be 51,760 square feet.
The term for this expansion space shall commence on September 1, 2000,
and shall run co-terminously with the original lease, the First and Second
Addendums, expiring on October 31, 2006.
In consideration of this Addendum, Landlord and Tenant agree as follows:
a. Tenant shall take space in its current, as is condition.
b. Landlord shall deliver possession of the expansion space to
Tenant upon execution of this Addendum.
c. Tenant shall pay rent as follows:
=================== ================= ================= ================ =================
ITEM 09/01/00- 11/01/00- 11/01/02- 11/01/04-
10/31/00 10/31/02 10/31/04 10/31/06
- ------------------- ----------------- ----------------- ---------------- -----------------
Base Rent Per 22,258.00 24,039.00 25,912.00 28,039.00
Lease
- ------------------- ----------------- ----------------- ---------------- -----------------
1st Addendum 488.60 488.60 488.60 488.60
Amortization
- ------------------- ----------------- ----------------- ---------------- -----------------
2nd Addendum 1,049.00 1,049.00 1,049.00 1,049.00
Amortization
- ------------------- ----------------- ----------------- ---------------- -----------------
3rd Addendum 4,550.00 4,550.00 4,914.00 5,307.12
Expansion
- ------------------- ----------------- ----------------- ---------------- -----------------
CAM Budget 4,775.00 4,775.00 4,775.00 4,775.00
- ------------------- ----------------- ----------------- ---------------- -----------------
Total Monthly 33,120.60 34,901.60 37,138.60 39,658.72
Payment
=================== ================= ================= ================ =================
d. Tenant and Landlord agree if the space located at 1825 West
Research Way, Suite 6 (the "option space") ever becomes available
during the lease term, Tenant must, at Landlord's discretion,
lease this option space.
1. Tenant can lease the "option space" consisting of
approximately 7,214 square feet. Rent for the "option
space" shall be at the same rate as the current rent on
the expansion space at the time Tenant takes possession of
the "option space."
2. If Tenant does not want the "option space" described
above, Tenant must give up the "front office" space and
"rear loading" space (as shown on the attached Exhibit
"A") to Landlord so that Landlord may have a "marketable"
Suite #6. Tenant's rent and size shall then be reduced
accordingly.
Except as modified by the provisions of this Addendum, all terms,
conditions and provisions of the Lease shall remain unchanged and in full force
and effect.
Executed by the parties on the day and year first written above in Salt
Lake City, Utah.
LANDLORD: VALLEY AMERICAN INVESTMENT
/s/William C. Roderick
------------------------------------------------
William C. Roderick
Vice President
TENANT: GENTNER COMMUNICATIONS CORPORATION
/s/Susie Strohm
------------------------------------------------
By: Susie Strohm
Its: Chief Financial Officer
STATE OF UTAH )
County of Salt Lake )
On the 22nd day of September, 2000, personally appeared before me
WILLIAM C. RODERICK, the signer of the foregoing lease addendum who duly
acknowledged to me that he executed the same.
/s/
- ----------------------------------------
NOTARY PUBLIC
STATE OF UTAH )
County of Salt Lake )
On the 18th day of September, 2000, personally appeared before me Susie
Strohm, the signer of the foregoing lease addendum who duly acknowledged to me
that he/she executed the same.
/s/
- ----------------------------------------
NOTARY PUBLIC
MODIFICATION AGREEMENT
----------------------
DATE: December 22, 2000
PARTIES: Borrower GENTNER COMMUNICATIONS CORPOATION, a Utah corporation
Bank: BANK ONE, UTAH, NA, a national banking association
RECITALS:
- ---------
A. Bank has extended to Borrower credit ("Loan") in the principal amount of
$5,000,000.00 pursuant to the Loan Agreement, dated January 5, 1999 ("Loan
Agreement"), and evidenced by the Promissory Note, dated January 5, 1999
("Note"). The unpaid principal of the Loan as of the date hereof is $-0-.
B. The Loan and/or guaranty of Loan is secured by, among other things, the
Commercial Security Agreement, dated January 5, 1999, by Borrower, for the
benefit of Bank (the agreements, documents, and instruments securing the Loan
and the Note are referred to individually and collectively as the ("Security
Documents").
C. Bank and Borrower have executed and delivered previously the following
agreements ("Modifications") modifying the terms of the Loan, the Note, the Loan
Agreement, and/or the Security Documents: Modification Agreement, dated June 9,
1999. (The Note, the Loan Agreement, the Security Documents, any arbitration
resolution, and all other agreements, documents, and instruments evidencing,
securing, or otherwise relating to the Loan, as modified in the Modifications,
are sometimes referred to individually and collectively as the "Loan Documents".
Hereinafter, "Note", "Loan Agreement", and "Security Documents" shall mean such
documents as modified in the Modifications.)
D. Borrower has requested that Bank modify the Loan and the Loan Documents
as provided herein. Bank is willing to so modify the Loan and the Loan
Documents, subject to the terms and conditions herein.
AGREEMENT:
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For good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Borrower and Bank agree as follows:
1. ACCURACY OF RECITALS.
--------------------
Borrower acknowledges the accuracy of the Recitals.
2. MODIFICATION OF LOAN DOCUMENTS.
------------------------------
2.1 The Loan Documents are modified as follows:
2.1.1 Interest on the Loan and the Note shall be due and payable
commencing on February 1, 2001, and continuing on the same day of each
successive month thereafter until the maturity date. No payments of principal of
the Loan and the Note shall be due and payable until the maturity date.
2.1.2 The maturity date of the Loan and the Note is changed from
December 22, 2000, to December 21, 2001. On the maturity date Borrower shall pay
to Bank the unpaid principal, accrued and unpaid interest, and all other amounts
payable by Borrower under the Loan Documents as modified herein.
2.1.3 The Section entitled "Additional Affirmative Covenant - Debt
Service Coverage" of the Loan Agreement is modified to read in its entirety as
follows:
Additional Affirmative Covenant - Debt Service Coverage. Borrower
further covenants and agrees with Lender that, while this Agreement is in
effect, Borrower will comply at all times with the following ratio. Maintain as
of the end of each fiscal quarter, a ratio (a) net income, after taxes, plus
interest, depreciation, amortization and depletion, less any Distributions, for
the twelve month period then ending, to (b) interest plus current maturities of
long-term debt plus current maturities of capital leases for the same such
twelve month period, of not less than the following ratios for the following
periods: for the period ending December 31, 2000, 1.4 to 1.0; for the period
January 1, 2001 to termination of this Loan Agreement, 2.0 to 1.0.
2.1.4 The Section entitled "Affirmative Covenants. Compliance Certificate"
of the Loan Agreement is modified to read in its entirety as follows:
Compliance Certificate. Unless waived in writing by Lender, provide
Lender 45 days after each quarter with a certificate executed by Borrower's
chief financial officer, or other officer or person acceptable to Lender, (a)
certifiying that the representations and warranties set forth in this Agreement
are true and correct as of the date of the certificate and that, as of the date
of the certificate, no Event of Default exists under this Agreement, and (b)
demonstrating compliance with all financial covenants set forth in this
Agreement.
2.1.5 The Section entitled "Additional Provisions - Financial Statements" on
the Addendum to Loan Agreement is modified to read in its entirety as follows:
Additional Provisions - Financial Statements. Furnish Lender
with, as soon as available, but in no event later than ninety (90) days after
the end of each fiscal year, Borrower's balance sheet, income statement,
statement of changes in financial position, and 10K for the year ended, audited
by certified public accountant(s) reasonably acceptable to Lender, and as soon
as available, but in no event later than forty-five (45) days after the end of
each fiscal quarter, Borrower's balance sheet, income statement, statement of
changes in financial position, and 10Q for the period ended, prepared and
certified, subject to year end review adjustments, as correct to the best
knowledge and belief by Borrower's chief financial officer of other officer or
person acceptable to Lender. All financial reports required to be provided under
this Agreement shall be prepared in accordance with generally accepted
accounting principals, applied on a consistent basis, and certified by Borrower
as being true and correct.
2.2 Each of the Loan Documents is modified to provide that it shall be a
default or an event of default thereunder if Borrower shall fail to comply with
any of the covenants of Borrower herein or if any representation or warranty by
Borrower herein is materially incomplete, incorrect, or misleading as of the
date hereof.
2.3 Each reference in the Loan Documents to any of the Loan Documents shall
be a reference to such document as modified herein.
3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.
---------------------------------------------
The Loan Documents are ratified and affirmed by Borrower and shall remain in
full force and effect as modified herein. Any property or rights to or interests
in property granted as security in the Loan Documents shall remain as security
for the Loan and the obligations of Borrower in the Loan Documents.
4. BORROWER REPRESENTATIONS AND WARRANTIES.
---------------------------------------
Borrower represents and warrants to Bank:
4.1 No default or event of default under any of the Loan Documents as
modified herein, nor any event, that, with the giving of notice or the passage
of time or both, would be a default or an event of default under the Loan
Documents as modified herein has occurred and is continuing.
4.2 There has been no material adverse change in the financial condition of
Borrower or any other person whose financial statement has been delivered to
Bank in connection with the Loan from the most recent financial statement
received by Bank.
4.3 Each and all representations and warranties of Borrower in the Loan
Documents are accurate on the date hereof.
4.4 Borrower has no claims, counterclaims, defenses, or set-offs with
respect to the Loan or the Loan Documents as modified herein.
4.5 The Loan Documents as modified herein are the legal, valid, and binding
obligations of Borrower, enforceable against Borrower in accordance with their
terms.
4.6 Borrower is validly existing under the laws of the State of its
formation or organization and has the requisite power and authority to execute
and deliver this Agreement and to perform the Loan Documents as modified herein.
The execution and delivery of this Agreement and the performance of the Loan
Documents as modified herein have been duly authorized by all requisite action
by or on behalf of Borrower. This Agreement has been duly executed and delivered
on behalf of Borrower.
5. BORROWER COVENANTS.
------------------
Borrower covenants with Bank:
5.1 Borrower shall execute, deliver, and provide to Bank such additional
agreements, documents, and instruments as reasonably required by Bank to
effectuate the intent of this Agreement.
5.2 Borrower fully, finally, and forever releases and discharges Bank and
its successors, assigns, directors, officers, employees, agents, and
representatives from any and all actions, causes of action, claims, debts,
demands, liabilities, obligations, and suits, of whatever kind or nature, in law
or equity of Borrower, whether now known or unknown to Borrower, (i) in respect
of the Loan, the Loan Documents, or the actions or omissions of Bank in respect
of the Loan or the Loan Documents and (ii) arising from events occurring prior
to the date of this Agreement.
5.3 Contemporaneously with the execution and delivery of this Agreement,
Borrower has paid to Bank:
5.3.1 All accrued and unpaid interest under the Note and all amounts,
other than interest and principal, due and payable by Borrower under the Loan
Documents as of the date hereof.
5.3.2 All the internal and external costs and expenses incurred by Bank
in connection with this Agreement (including, without limitation, inside and
outside attorneys, title, filing, and recording costs, expenses, and fees).
5.3.3 A renewal fee of $12,500.00.
6. EXECUTION AND DELIVERY OF AGREEMENT BY BANK.
-------------------------------------------
Bank shall not be bound by this Agreement until (i) Bank has executed and
delivered this Agreement, (ii) Borrower has performed all of the obligations of
Borrower under this Agreement to be performed contemporaneously with the
execution and delivery of this Agreement, (iii) if required by Bank, Borrower
and any guarantor(s) of the Loan have executed and delivered to Bank an
arbitration resolution, and (iv) each guarantor of the Loan has executed the
Consent of Guarantor(s) below.
7. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.
-------------------------------------------------------------- ---------
The Loan Documents as modified herein contain the complete understanding and
agreement of Borrower and Bank in respect of the Loan and supersede all prior
representations, warranties, agreements, arrangements, understandings, and
negotiations. No provision of the Loan Documents as modified herein may be
changed, discharged, supplemented, terminated, or waived except in a writing
signed by the parties thereto.
8. BINDING EFFECT.
--------------
The Loan Documents as modified herein shall be binding upon and shall inure to
the benefit of Borrower and Bank and their respective successors and assigns.
9. CHOICE OF LAW.
-------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of Utah, without giving effect to conflicts of law principles.
10. COUNTERPART EXECUTION.
---------------------
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original and all of which together shall constitute one and the
same document. Signature pages may be detached from the counterparts and
attached to a single copy of this Agreement to physically form one document.
DATED as of the date first above stated.
BANK: BORROWER:
BANK ONE, UTAH, NA, GENTNER COMMUNICATIONS CORPORATION,
a national banking association a Utah corporation
By: /s/Mark F. Nelson BY: /s/Susie Strohm
--------------------------------- --------------------------------
Mark F. Nelson Susie Strohm
Its: Vice President Its: CFO
