UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2001
------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number: 0-17219
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GENTNER COMMUNICATIONS CORPORATION
----------------------------------
Exact name of registrant as specified in its charter)
Utah 87-0398877
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1825 Research Way, Salt Lake City, Utah 84119
--------------------------------------- -----
(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.)
Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class of Common Stock November 1, 2001
$0.001 par value 8,640,578 shares
GENTNER COMMUNICATIONS CORPORATION
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 2001 (unaudited) and June 30, 2001................ 3
Consolidated Statements of Income
Three Months Ended September 30, 2001 and
2000 (unaudited)................................................ 4
Consolidated Statements of Cash Flows
Three Months Ended September 30, 2001 and
2000 (unaudited)................................................ 5
Notes to Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Plan
of Operation......................................................16
Item 3. Qualitative and Quantitative Disclosure about Market Risk........23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................24
2
GENTNER COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
2001 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 7,920,726 $ 6,852,243
Accounts receivable, net................................... 8,849,114 7,212,970
Note receivable - current portion.......................... 164,174 71,423
Inventory.................................................. 3,740,761 4,132,034
Deferred tax assets........................................ 247,402 247,402
Prepaid expenses........................................... 693,378 779,648
------------- ------------
Total current assets................................... 21,615,555 19,295,720
Property and equipment, net.................................... 3,810,882 3,696,615
Goodwill, net.................................................. 2,586,701 2,633,732
Note receivable - long term portion............................ 1,661,626 1,716,477
Other intangible assets, net................................... 161,215 181,722
Deposits and other assets...................................... 73,301 73,357
------------- ------------
Total assets........................................... $ 29,909,280 $ 27,597,623
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 583,093 $ 568,782
Accrued compensation and other benefits.................... 410,565 410,416
Income tax payable......................................... 974,788 421,749
Other accrued expenses..................................... 966,365 719,112
Current portion of capital lease obligations............... 136,366 181,827
------------- ------------
Total current liabilities.............................. 3,071,177 2,301,886
Capital lease obligations...................................... 31,081 48,227
Deferred tax liability......................................... 746,000 746,000
------------- ------------
Total liabilities...................................... 3,848,258 3,096,113
Shareholders' equity:
Common stock, 50,000,000 shares authorized,
par value $.001, 8,630,978 and
8,617,978 shares issued and outstanding
at September 30, 2001 and June 30, 2001, respectively.... 8,631 8,618
Additional paid-in capital................................. 9,110,492 8,962,699
Retained earnings.......................................... 16,941,899 15,530,193
------------- ------------
Total shareholders' equity............................. 26,061,022 24,501,510
------------- ------------
Total liabilities and shareholders' equity............. $ 29,909,280 $ 27,597,623
============= ============
See accompanying notes
3
GENTNER COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
2001 2000
---- ----
Product sales................................................. $ 7,491,317 66.8% $ 7,177,723 76.9%
1-800 LETS MEET(R)sales....................................... 3,729,066 33.2% 2,155,273 23.1%
----------- ----- ----------- -----
Total net sales........................................... 11,220,383 100.0% 9,332,996 100.0%
Cost of goods sold - products................................. 2,826,233 37.7% 2,636,143 36.7%
Cost of goods sold - 1-800 LETS MEET(R)....................... 1,755,744 47.1% 1,129,409 52.4%
----------- ----- ----------- -----
Total cost of goods sold.................................. 4,581,977 40.8% 3,765,552 40.3%
----------- ----- ----------- -----
Gross profit.................................................. 6,638,406 59.2% 5,567,444 59.7%
Operating expenses:
Marketing and selling..................................... 2,469,427 22.0% 1,912,087 20.5%
General and administrative................................ 1,279,667 11.4% 1,091,074 11.7%
Product development....................................... 751,951 6.7% 484,895 5.2%
----------- ----- ----------- -----
Total operating expenses.............................. 4,501,045 40.1% 3,488,056 37.4%
----------- ----- ----------- -----
Operating income...................................... 2,137,361 19.1% 2,079,388 22.3%
Other income (expense):
Interest income........................................... 108,087 0.9% 73,892 0.8%
Interest expense.......................................... (5,034) 0.0% (12,673) (0.1)%
Other, net................................................ 29,989 0.3% 2,860 0.0%
Gain on foreign currency transactions..................... 11,884 0.1% -- 0.0%
----------- ----- ----------- -----
Total other income (expense).......................... 144,926 1.3% 64,079 0.7%
----------- ----- ----------- -----
Income from continuing operations before income taxes......... 2,282,287 20.4% 2,143,467 23.0%
Provision for income taxes.................................... 870,581 7.8% 799,513 8.6%
----------- ----- ----------- -----
Income from continuing operations......................... 1,411,706 12.6% 1,343,954 14.4%
Discontinued operations:
Income from discontinued operations, net of applicable taxes..
of $110,487 in 2000....................................... -- 185,724
----------- -----------
Net income............................................ $ 1,411,706 $ 1,529,678
=========== ===========
Basic earnings per common share from continuing operations.... $ 0.16 $ 0.16
Diluted earnings per common share from continuing operations.. $ 0.16 $ 0.15
Basic earnings per common share from discontinued operations.. $ 0.00 $ 0.02
Diluted earnings per common share from discontinued operations $ 0.00 $ 0.02
Basic earnings per common share............................... $ 0.16 $ 0.18
Diluted earnings per common share............................. $ 0.16 $ 0.17
See accompanying notes
4
GENTNER COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
2001 2000
---- ----
Cash flows from operating activities:
Net income from continuing operations......................... $1,411,706 $1,343,954
Adjustments to reconcile net income from continuing operations
to net cash provided by continuing operating activities:
Depreciation and amortization of property and equipment.... 277,090 235,952
Amortization of other assets............................... 67,598 67,031
Provision for bad debts.................................... 33,574 30,229
Changes in operating assets and liabilities:
Accounts receivable..................................... (1,669,718) (787,057)
Inventory............................................... 391,273 (519,255)
Income taxes............................................ 553,039 1,670,000
Other current assets.................................... 48,366 211,601
Accounts payable and other accrued expenses............. 261,713 340,085
---------- ----------
Net cash provided by continuing operating activities.. 1,374,641 2,592,540
Cash flows from investing activities:
Purchases of property and equipment........................... (391,357) (137,704)
Purchase of business.......................................... -- (1,758,085)
---------- ----------
Net cash used in investing activities................. (391,357) (1,895,789)
Cash flows from financing activities:
Proceeds from issuance of common stock........................ -- 4,760
Exercise of employee stock options............................ 200,770 15,029
Repurchase of common stock.................................... (52,964) --
Principal payments on capital lease obligations............... (62,607) (57,676)
---------- ----------
Net cash provided by (used in) financing activities... 85,199 (37,887)
---------- ----------
Net increase in cash from continuing operations.................. 1,068,483 658,864
Net cash flow from discontinued operations....................... -- 182,092
Cash at the beginning of the year................................ 6,852,243 5,374,996
---------- ----------
Cash at the end of the period.................................... $7,920,726 $6,215,952
========== ==========
Supplemental disclosure of cash flow information:
Income taxes paid............................................. $ (240,000) $ --
Interest paid................................................. $ (5,034) $ (12,673)
Consideration paid in stock for purchase of business.......... $ -- $2,000,013
See accompanying notes
5
GENTNER COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q of Regulation S-X.
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 2001 Annual Report on Form 10-K.
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.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS 141
establishes new standards for accounting and reporting requirements for business
combinations and supersedes APB Opinion No. 16, "Business Combinations" and SFAS
No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interest method is now prohibited. The statement applies to any
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001 or later, modifies the criteria for recognizing
intangible assets and expands disclosure requirements. The Company is continuing
to evaluate the impact of this statement on its financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 eliminates amortization of goodwill and intangible assets
with indefinite lives and instead sets forth methods to periodically evaluate
goodwill for impairment. SFAS No. 142 provides guidance for testing goodwill and
intangible assets that will not be amortized for impairment. The amortization
provisions of Statement 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, companies are required to adopt Statement 142 in their
fiscal year beginning after December 15, 2001 (i.e., January 1, 2002 for
calendar year companies). Early adoption is permitted for companies with fiscal
years beginning after March 15, 2001 provided that their first quarter financial
statements have not been issued. The Company plans to adopt this statement on
July 1, 2002 and, as such, the Company is continuing to evaluate the impact of
this statement on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations and Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that opinion). This Statement also amends ARB No. 51, "Consolidated
Financial Statements," to eliminate the consolidation for a subsidiary for which
control is likely to be temporary. The Company is required to adopt SFAS No. 144
effective July 1, 2002. The Company is currently evaluating the impact of this
statement on its financial statements.
6
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,
-------------
2001 2000
---- ----
Numerator:
Income from continuing operations........................................... $1,411,706 $1,343,954
Income from discontinued operations......................................... -- 185,724
--------- ----------
Net income.................................................................. $1,411,706 $1,529,678
========== ==========
Denominator:
Denominator for basic net income per share - weighted average shares........ 8,608,479 8,555,835
Dilutive common stock equivalents using treasury stock method............... 451,833 226,063
--------- ----------
Denominator for diluted net income per share - weighted average shares...... 9,060,312 8,781,898
========= ==========
Basic net income per share:
Continuing operations....................................................... $ 0.16 $ 0.16
Discontinued operations..................................................... 0.00 0.02
--------- ----------
Basic net income per share...................................................... $ 0.16 $ 0.18
========= ==========
Diluted net income per share:
Continuing operations....................................................... $ 0.16 $ 0.15
Discontinued operations..................................................... 0.00 0.02
--------- ----------
Diluted net income per share.................................................... $ 0.16 $ 0.17
========= ==========
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, 2001 and 2000 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)
September 30, June 30,
2001 2001
---- ----
Raw Materials $ 1,982,248 $ 2,500,098
Work in progress 102,085 195,149
Finished Goods 1,656,428 1,436,787
----------- -----------
Total inventory $ 3,740,761 $ 4,132,034
=========== ===========
Total inventory is net of a reserve for obsolete and slow-moving inventory of
$307,000 at September 30, 2001 and $226,000 at June 30, 2001.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
6. Stock Options
The following table shows the changes in stock options outstanding.
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Options outstanding as of June 30, 2001............. 1,750,798 $ 8.37
Options granted..................................... 250,000 $ 11.47
Options exercised................................... (18,000) $ 11.15
Options expired & canceled.......................... (25,000) $ 14.00
---------- -------
Options outstanding as of September 30, 2001........ 1,957,798 $ 8.67
========= =======
7. Segment Reporting
As a result of the sale of the remote control product line, the Company has
changed how it evaluates its operations internally, resulting in a change in its
reported segments from its Form 10-Q for the first quarter of fiscal 2001.
Subsequent to the disposal, the Company operates in two distinct segments -
Products and 1-800 LETS MEET(R). The Products segment includes products for
conferencing, sound reinforcement, broadcast telephone interface, assistive
listening applications and technical services related to our products. The 1-800
LETS MEET(R) segment includes operator-assisted conferencing; on-demand,
reservationless conference calling; Webconferencing; and audio and video
streaming. Information for the prior years has been restated to conform to this
new method of evaluating segments and to show continuing and discontinued
operations.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies included in the
Company's 2001 Annual Report on Form 10-K.
The Company's reportable segments are strategic business units that offer
products and services to satisfy different customer needs. They are managed
separately because each segment requires focus and attention on its market and
distribution channel.
The following table summarizes the segment information:
1-800 LETS Company
Products MEET(R) Totals
-------- ---------- ------
Quarter Ended September 30, 2001:
- --------------------------------
Net sales $ 7,491,317 $ 3,729,066 $ 11,220,383
Cost of goods sold 2,826,233 1,755,744 4,581,977
----------- ----------- -----------
Gross profit 4,665,084 1,973,322 6,638,406
Marketing and selling 1,662,565 806,862 2,469,427
General and administrative 724,655 555,012 1,279,667
Product development 751,951 - 751,951
----------- ----------- -----------
Total operating expenses 3,139,171 1,361,874 4,501,045
Operating income 1,525,913 611,448 2,137,361
Other income 144,926
-----------
Income from continuing operations
before income taxes 2,282,287
Provision for income taxes (870,581)
-----------
Net income from continuing operations $ 1,411,706
===========
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Quarter Ended September 30, 2000:
- --------------------------------
Net sales $ 7,177,723 $ 2,155,273 $ 9,332,996
Cost of goods sold 2,636,143 1,129,409 3,765,552
----------- ----------- -----------
Gross profit 4,541,580 1,025,864 5,567,444
Marketing and selling 1,257,296 654,791 1,912,087
General and administrative 711,141 379,933 1,091,074
Product development 484,895 - 484,895
----------- ----------- -----------
Total operating expenses 2,453,332 1,034,724 3,488,056
Operating income 2,088,248 (8,860) 2,079,388
Other income 64,079
-----------
Income from continuing operations
before income taxes 2,143,467
Provision for income taxes (799,513)
-----------
Income from continuing operations 1,343,954
Income from discontinued operations,
net of applicable taxes of $110,487 185,724
-----------
Net income $ 1,529,678
===========
8. Subsequent Event - Purchase of Ivron Systems, Ltd.
On October 3, 2001, the Company caused its wholly owned subsidiary, Gentner
Ventures, Inc., to purchase all of the issued and outstanding shares of Ivron
Systems, Ltd., of Dublin, Ireland ("Ivron"). Ivron is a privately-held developer
of video conferencing technology and equipment. Following the closing, Michael
Peirce, the former chairman of Ivron, was appointed to Gentner's board of
directors. In addition, the majority of the Ivron employees remained with the
Company.
At the closing, each of the six Ivron shareholders received approximately
US$1.12 per Ivron common share. There were 5,366,637 Ivron common shares
outstanding at the time. Following June 30, 2002 each former Ivron shareholder
will receive approximately .08 shares of the Company's common stock for each
Ivron share previously held, provided that certain video product development
contingencies are met. Thereafter, for the Company's completed fiscal years 2003
and 2004, the former Ivron shareholders may share in up to US$17,000,000 of
additional consideration provided that the Company achieves certain EPS targets.
As part of the transaction, all outstanding options to purchase Ivron shares
were cancelled in consideration for an aggregate cash payment of US$650,000 to
the optionees. In addition, the former Ivron optionees who remain with Ivron are
eligible to participate in a cash bonus program that will pay bonuses based on
the performance of the Company in fiscal years 2003 and 2004. The maximum amount
payable under this bonus program is an aggregate of US$1,000,000.
The total value of the consideration paid was determined based on arm's length
negotiations between the Company and the Ivron shareholders, that took into
account a number of factors of the business including historic revenues,
operating history, products, intellectual property and other factors.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
9. Quarterly Results of Continuing Operations (Unaudited)
A summary of unaudited quarterly results of continuing operations for the three
previous fiscal years is as follows:
Fiscal 2001
-----------
For the Quarter Ended September 30, 2000
----------------------------------------
1-800 LETS
Products MEET(R) Totals
-------- --------- ------
Net sales............................................ $7,177,723 $2,155,273 $9,332,996
Cost of goods sold................................... 2,636,144 1,129,409 3,765,553
---------- ---------- ----------
Gross profit......................................... 4,541,579 1,025,864 5,567,443
Operating expenses
Marketing and selling........................... 1,257,295 654,791 1,912,086
Product development............................. 484,895 484,895
General and administrative...................... 1,091,074
----------
Total operating expenses............................. 3,488,055
----------
Operating income..................................... 2,079,388
Other income and expenses............................ 64,079
----------
Income from continuing operations before income taxes 2,143,467
Provision for income taxes........................... (799,513)
----------
Income from continuing operations.................... $1,343,954
==========
Basic earnings per share from continuing operations.. $ 0.16
==========
Diluted earnings per share from continuing operations $ 0.15
==========
For the Quarter Ended December 31, 2000
---------------------------------------
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $6,880,993 $2,799,390 $9,680,383
Cost of goods sold................................... 2,594,050 1,377,108 3,971,158
---------- ---------- ----------
Gross profit......................................... 4,286,943 1,422,282 5,709,225
Operating expenses
Marketing and selling........................... 1,323,725 587,760 1,911,485
Product development............................. 555,600 555,600
General and administrative...................... 1,405,979
----------
Total operating expenses............................. 3,873,064
----------
Operating income..................................... 1,863,161
Other income and expenses............................ 118,727
----------
Income from continuing operations before income taxes 1,954,888
Provision for income taxes........................... (752,477)
----------
Income from continuing operations.................... $1,202,411
==========
Basic earnings per share from continuing operations.. $ 0.14
==========
Diluted earnings per share from continuing operations $ 0.13
==========
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
For the Quarter Ended March 31, 2001
------------------------------------
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $6,980,329 $3,232,004 $10,212,333
Cost of goods sold................................... 2,630,342 1,697,645 4,327,987
---------- ---------- ----------
Gross profit......................................... 4,349,987 1,534,359 5,884,346
Operating expenses
Marketing and selling........................... 1,284,180 648,147 1,932,327
Product development............................. 720,426 720,426
General and administrative...................... 1,133,525
----------
Total operating expenses............................. 3,786,278
----------
Operating income..................................... 2,098,068
Other income and expenses............................ 69,277
----------
Income from continuing operations before income taxes 2,167,345
Provision for income taxes........................... (808,313)
----------
Income from continuing operations.................... $1,359,032
==========
Basic earnings per share from continuing operations.. $ 0.16
==========
Diluted earnings per share from continuing operations $ 0.15
==========
For the Quarter Ended June 30, 2001
-----------------------------------
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $7,150,567 $3,502,126 $10,652,693
Cost of goods sold................................... 2,773,420 1,664,944 4,438,364
---------- ---------- -----------
Gross profit......................................... 4,377,147 1,837,182 6,214,329
Operating expenses
Marketing and selling........................... 1,437,434 559,960 1,997,394
Product development............................. 741,248 741,248
General and administrative...................... 1,018,421
-----------
Total operating expenses............................. 3,757,063
-----------
Operating income..................................... 2,457,266
Other income and expenses............................ 121,064
-----------
Income from continuing operations before income taxes 2,578,330
Provision for income taxes........................... (958,542)
-----------
Income from continuing operations.................... $ 1,619,788
===========
Basic earnings per share from continuing operations.. $ 0.19
===========
Diluted earnings per share from continuing operations $ 0.18
===========
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Fiscal 2000
-----------
For the Quarter Ended September 30, 1999
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $5,199,243 $ 997,584 $6,196,827
Cost of goods sold................................... 1,820,692 594,139 2,414,831
---------- ---------- ----------
Gross profit......................................... 3,378,551 403,445 3,781,996
Operating expenses
Marketing and selling........................... 999,096 314,119 1,313,215
Product development............................. 303,005 303,005
General and administrative...................... 746,619
----------
Total operating expenses............................. 2,362,839
----------
Operating income..................................... 1,419,157
Other income and expenses............................ 31,933
----------
Income from continuing operations before income taxes 1,451,090
Provision for income taxes........................... (540,175)
----------
Income from continuing operations.................... $ 910,915
==========
Basic earnings per share from continuing operations.. $ 0.11
==========
Diluted earnings per share from continuing operations $ 0.10
==========
For the Quarter Ended December 31, 1999
---------------------------------------
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $5,611,796 $1,256,757 $6,868,553
Cost of goods sold................................... 2,075,455 678,211 2,753,666
---------- ---------- ----------
Gross profit......................................... 3,536,341 578,546 4,114,887
Operating expenses
Marketing and selling........................... 1,019,588 380,013 1,399,601
Product development............................. 3 13,154 313,154
General and administrative...................... 750,392
----------
Total operating expenses............................. 2,463,147
----------
Operating income..................................... 1,615,740
Other income and expenses............................ 31,776
----------
Income from continuing operations before income taxes 1,683,516
Provision for income taxes........................... (628,145)
----------
Income from continuing operations.................... $1,055,371
==========
Basic earnings per share from continuing operations.. $ 0.13
==========
Diluted earnings per share from continuing operations $ 0.12
==========
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
For the Quarter Ended March 31, 2000
------------------------------------
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $5,430,536 $1,667,139 $7,097,675
Cost of goods sold................................... 1,937,525 730,854 2,668,379
---------- ---------- ----------
Gross profit......................................... 3,493,011 936,285 4,429,296
Operating expenses
Marketing and selling........................... 1,154,334 514,472 1,668,806
Product development............................. 314,610 314,610
General and administrative...................... 779,953
----------
Total operating expenses............................. 2,763,369
----------
Operating income..................................... 1,665,927
Other income and expenses............................ 41,090
----------
Income from continuing operations before income taxes 1,707,017
Provision for income taxes........................... (637,286)
----------
Income from continuing operations.................... $1,069,731
==========
Basic earnings per share from continuing operations.. $ 0.13
==========
Diluted earnings per share from continuing operations $ 0.12
==========
For the Quarter Ended June 30, 2000
-----------------------------------
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $5,984,929 $1,970,429 $7,955,358
Cost of goods sold................................... 2,200,195 971,252 3,171,447
---------- ---------- ----------
Gross profit......................................... 3,784,734 999,177 4,783,911
Operating expenses
Marketing and selling........................... 1,259,738 524,557 1,784,295
Product development............................. 340,050 340,050
General and administrative...................... 855,161
----------
Total operating expenses............................. 2,979,506
----------
Operating income..................................... 1,804,405
Other income and expenses............................ 74,537
----------
Income from continuing operations before income taxes 1,878,942
Provision for income taxes........................... (613,217)
----------
Income from continuing operations.................... $1,265,725
==========
Basic earnings per share from continuing operations.. $ 0.15
==========
Diluted earnings per share from continuing operations $ 0.14
==========
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Fiscal 1999
-----------
For the Quarter Ended September 30, 1998
----------------------------------------
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $4,205,433 $ 710,179 $4,915,612
Cost of goods sold................................... 1,729,251 568,706 2,297,957
---------- ---------- ----------
Gross profit......................................... 2,476,182 141,473 2,617,655
Operating expenses
Marketing and selling........................... 751,561 221,702 973,263
Product development............................. 289,586 289,586
General and administrative...................... 635,632
----------
Total operating expenses............................. 1,898,481
----------
Operating income..................................... 719,174
Other income and expenses............................ (35,444)
----------
Income from continuing operations before income taxes 683,730
Provision for income taxes........................... (258,366)
----------
Income from continuing operations.................... $ 425,364
==========
Basic earnings per share from continuing operations.. $ 0.05
==========
Diluted earnings per share from continuing operations $ 0.05
==========
For the Quarter Ended December 31, 1998
---------------------------------------
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $3,843,792 $ 745,154 $4,588,946
Cost of goods sold................................... 1,517,012 606,450 2,123,462
---------- ---------- ----------
Gross profit......................................... 2,326,780 138,704 2,465,484
Operating expenses
Marketing and selling........................... 718,858 218,468 937,326
Product development............................. 347,687 347,687
General and administrative...................... 553,087
----------
Total operating expenses............................. 1,838,100
----------
Operating income..................................... 627,384
Other income and expenses............................ (15,629)
----------
Income from continuing operations before income taxes 611,755
Provision for income taxes........................... (228,429)
----------
Income from continuing operations.................... $ 383,326
==========
Basic earnings per share from continuing operations.. $ 0.05
==========
Diluted earnings per share from continuing operations $ 0.05
==========
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
For the Quarter Ended March 31, 1999
------------------------------------
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $4,211,481 $ 797,320 $5,008,801
Cost of goods sold................................... 1,631,081 528,533 2,159,614
---------- ---------- ----------
Gross profit......................................... 2,580,400 268,787 2,849,187
Operating expenses
Marketing and selling........................... 925,344 223,161 1,148,505
Product development............................. 287,803 287,803
General and administrative...................... 723,669
----------
Total operating expenses............................. 2,159,977
----------
Operating income..................................... 689,210
Other income and expenses............................ (25,283)
----------
Income from continuing operations before income taxes 663,927
Provision for income taxes........................... (247,643)
----------
Income from continuing operations.................... $ 416,284
==========
Basic earnings per share from continuing operations.. $ 0.05
==========
Diluted earnings per share from continuing operations $ 0.05
==========
For the Quarter Ended June 30, 1999
-----------------------------------
1-800 LETS
Products MEET(R) Totals
-------- ---------- ------
Net sales............................................ $4,796,074 $ 958,670 $5,754,744
Cost of goods sold................................... 1,792,805 533,916 2,326,721
---------- ---------- ----------
Gross profit......................................... 3,003,269 424,754 3,428,023
Operating expenses
Marketing and selling........................... 941,662 312,884 1,254,546
Product development............................. 269,610 269,610
General and administrative...................... 632,276
----------
Total operating expenses............................. 2,156,432
----------
Operating income..................................... 1,271,591
Other income and expenses............................ (1,757)
----------
Income from continuing operations before income taxes 1,269,834
Provision for income taxes........................... (474,462)
----------
Income from continuing operations.................... $ 795,372
==========
Basic earnings per share from continuing operations.. $ 0.10
==========
Diluted earnings per share from continuing operations $ 0.09
==========
10. Stock Repurchase Program
During April 2001, the Company announced that its board of directors had
approved a stock repurchase program to purchase up to 500,000 shares of the
Company's common stock over the next six months on the open market or in private
transactions. During the fourth quarter of fiscal year 2001, the Company
repurchased 15,300 shares on the open market. During the first quarter of fiscal
year 2002, the Company repurchased 5,000 shares on the open market. All
repurchased shares were retired.
15
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF PLAN OF OPERATION
General
We develop, manufacture, market and distribute products and services for the
conferencing equipment, conferencing services, and broadcast markets. In the
fourth quarter of fiscal year 2001, we changed our reportable operating segments
to reflect how we evaluate our operating performance and allocate resources.
Prior to the fourth quarter of fiscal year 2001, our reportable segments
included RFM/Broadcast, Conferencing Products, Conferencing Services and Other.
On April 12, 2001, we sold the assets of the remote control portion of the
RFM/Broadcast division. Subsequent to this disposal, we report two segments -
Products and 1-800 LETS MEET(R). In the Product segment, we have applied our
core digital technology to the development of products for conferencing, sound
reinforcement, assistive listening and broadcast applications. During fiscal
2001, we introduced the PSR1212, the XAP(TM) 800, the ClearOne(R) conference
phone, and the VRC2500, which contributed to a 4.4% increase in product-based
revenues in the first quarter of 2002 compared to the first quarter of fiscal
2001. In the 1-800 LETS MEET(R) segment, we focused on increasing sales by
adding to our direct sales force, and by engaging new resellers and new private
label accounts. These efforts resulted in a 73.0% increase in service-based
revenues in the first quarter of fiscal 2002 compared to the first quarter of
fiscal 2001. The 1-800 LETS MEET(R) segment includes revenues and expenses from
the conferencing service bureau called 1-800 LETS MEET(R) as well as other
private label business conducted by us.
Discontinued Operations
On April 12, 2001, we sold the assets of the remote control portion of the
RFM/Broadcast division to Burk Technology, Inc. of Littleton, MA ("Burk") for
$3.2 million, including $750,000 in cash at closing, and $1.75 million in the
form of a seven (7) year promissory note, with interest at the rate of nine
percent (9%), secured by a subordinate security interest in the personal
property of Burk. The gain associated with the note receivable is recognizable
for book purposes but not for tax purposes until cash is received. As such, we
have established a deferred tax liability for $511,000 in connection with this
deferred gain. In addition, up to $700,000 more is payable by Burk as a
commission over a period of up to seven years. The commission is based upon
future net sales of Burk over base sales established within the agreement. This
amount will be recognized as received. We realized a gain on the sale of
$1,220,024, net of applicable income taxes of $725,788.
Summary operating results of the discontinued operations are as follows:
Quarter Ended September 30,
2001 2000 1999
Net sales.................................. $ - $ 696,462 $ 887,446
Cost of goods sold......................... - 261,271 300,786
Marketing and selling...................... - 95,737 158,683
Product development........................ - 43,243 157,672
---------- ---------- ----------
Income before income taxes................. - 296,211 270,305
Provision for income taxes................. - (110,487) (100,824)
---------- ---------- ----------
Net income from discontinued operations.... $ - $ 185,724 $ 169,481
========== ========== ==========
Basic earnings per share from
discontinued operations.................. $ 0.00 $ 0.02 $ 0.02
Diluted earnings per share from
discontinued operations.................. $ 0.00 $ 0.02 $ 0.02
Consolidated Results of Continuing Operations
Sales from continuing operations in the first quarter of fiscal 2002 increased
20.2% to $11,220,383 from $9,332,996 in the first quarter of fiscal 2001.
Product revenues grew 4.4% in the first quarter of fiscal 2002 to $7,491,317
from $7,177,723 in the first quarter of fiscal 2001. This increase was mainly
due to continued success of the Audio Perfect(R) product line, as well as the
introduction of new products, including the PSR1212 and the XAP(TM) 800. 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. Examples of typical applications using our products are corporate
16
conference rooms, distance learning rooms, and courtrooms. We have realized more
of the revenue associated with such applications as a result of this expanded
product line. During the second quarter of fiscal 2001, we began shipping the
PSR1212, a digital matrix mixer for the sound reinforcement marketplace. During
the fourth quarter of fiscal 2001, we introduced our next generation audio
product--the XAP(TM) 800. Sales of these products have continued strongly into
fiscal 2002. Product revenues also include telephone interface products, which
are used to connect telephone line audio to broadcast audio equipment, and
assistive listening products, which provide enhanced audio for people with
hearing difficulties.
The 1-800 LETS MEET(R) segment experienced sales growth of 73.0% in the first
quarter of fiscal 2002 as compared to the first quarter of fiscal 2001. Revenues
were $3,729,066 for the three-month period ended September 30, 2001 as compared
to $2,155,273 for the three-month period ended September 2000. We offer
operator-assisted conferencing; on-demand, reservationless conference calling;
Webconferencing; and audio and video streaming. We attributed the growth in
sales to an increased customer base due in part to an increase in sales staff
for marketing conference calling services, an increase in resellers selling our
services, and an overall increase in market size during the past year. Our
conference calling services are being marketed not only to corporate clients but
also to telephone service providers for resale.
Our gross profit margin from continuing operations was 59.2% in the first
quarter of fiscal 2002 compared to 59.7% in the first quarter of fiscal 2001.
The decrease in gross margins is the result of two factors. First, we
implemented a blanket purchase order program for our dealers during the third
quarter of fiscal year 2001. This program offers higher discounts off list price
in exchange for larger quantity orders. The dealers then have 12 months to take
delivery of the product, however, revenue is recorded upon shipment. This
program is intended to enable us to better predict our manufacturing schedule,
expense levels and net revenues. The second factor is that our 1-800 LETS
MEET(R) segment has a higher cost-of-goods rate. As this segment becomes a
larger portion of the total revenue, it will create a lower overall gross margin
percentage.
We believe that most of the key components required for the production of our
products are currently available in sufficient quantities to meet our needs. We
have experienced long component lead times in the past, resulting in increased
purchases of these longer lead-time parts. We are now seeing moderating lead
times on many components. As lead times decline, inventory levels should also
decrease in the future. We also continue to focus on locating other sources for
raw materials and enhancing vendor relationships to further ensure adequate
materials.
Our operating expenses increased 29.0% comparing the first quarter of fiscal
2002 to the first quarter of fiscal 2001. Continuing operations expense for the
first quarter of fiscal 2002 were $4,501,045, as compared to $3,488,056 for the
first quarter of fiscal 2001.
Marketing and selling expenses for the first quarter of fiscal 2002 were
$2,469,427 as compared to $1,912,087 for the first quarter of fiscal 2001. As a
percentage of revenues, marketing and selling expenses increased to 22.0% for
the first quarter of fiscal 2002, compared to 20.5% for the first quarter of
fiscal 2001. The year-over-year increase in marketing and selling expenses was
primarily due to our commitment to increase resources for marketing and selling
to increase momentum for our new products.
Product development expenses increased 55.1% when comparing the first quarter of
fiscal 2002 to the first quarter of fiscal 2001. Product development expenses
for the first quarter of fiscal 2002 were $751,951, as compared to $484,895 for
the first quarter of fiscal 2001. As a percentage of revenues, product
development expenses increased to 6.7% for the first quarter of fiscal 2002 up
from 5.2% for the first quarter of fiscal 2001. The increase in product
development expenses is due to increased salaries associated with additional
personnel and development costs associated with new product development.
General and administrative expenses increased 17.3% for the first quarter of
fiscal 2002 as compared to the first quarter of fiscal 2001. Expenses for the
first quarter of fiscal 2002 were $1,279,667 as compared to $1,091,074 for the
first quarter of fiscal 2001. General and administrative expenses were 11.4% of
revenues for the first quarter of fiscal 2002, compared to 11.7% for the first
quarter of fiscal 2001. The increase in dollars were the costs incurred in
hiring personnel to support increased sales volume and the infrastructure costs
associated with the hiring of such new personnel.
Interest income increased 46.3% for the first quarter of fiscal 2002 as compared
to the first quarter of fiscal 2001. This increase is due to the increase in
cash and cash equivalents.
Interest expense decreased 60.3% when comparing the first quarter of fiscal 2002
to the first quarter of fiscal 2001, due to the maturing of certain of our
capital leases.
During the first quarter of fiscal 2002, income tax expense for continuing
operations was calculated at a combined federal and state effective tax rate of
approximately 38.2%, resulting in an income tax expense of $870,581. This
compares to the first quarter of fiscal 2001, where the effective tax rate was
37.3%, and the income tax expense for continuing operations was $799,513.
17
Net income from continuing operations for the first quarter of fiscal 2002 was
$1,411,706, or an increase of 5.0%, compared to net income from continuing
operations of $1,343,954 for the first quarter of fiscal 2001. These results are
due to increased revenues offset by increases in expenses as described above.
Financial Condition and Liquidity
We have cash and cash equivalents of $7.9 million on September 30, 2001, which
represents an increase of $1.0 million compared to cash and cash equivalents of
$6.9 million on and June 30, 2001. Based upon continuing operations, net
operating activities provided cash of $1.4 million in the first quarter of
fiscal 2002. Net investing activities used cash of $0.4 million primarily due to
expenditures for property and equipment. Net cash used for financing activities
was $0.1 million.
We have an available revolving line of credit of $5.0 million, which is secured
by our accounts receivable and inventory. The interest rate on the line of
credit is variable (250 basis points over the London Interbank Offered Rate
(LIBOR) or prime less 0.25 percent, whichever we choose). The borrowing rate was
5.16 percent on September 30, 2001. There was no outstanding balance on
September 30, 2001. 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. We were in compliance with
these covenants on September 30, 2001.
During April 2001, we announced that our board of directors had approved a stock
repurchase program to purchase up to 500,000 shares of our common stock over the
following six months. These purchases are discretionary on the part of
management and are to be made on the open market or in private transactions. In
the first quarter of fiscal 2002, we repurchased and subsequently retired 5,000
shares for $52,964. Prior to that time, we had repurchased and retired 15,300
shares.
We believe that our working capital, bank line of credit and cash flows from
operating activities will be sufficient to meet our operating and capital
expenditure requirements for continuing operations for the next twelve months.
In the longer term, or if we experience a decline in revenue, or in the event of
other unforeseen events, we 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 us. See
"Factors that May Affect Future Results - Limited Capitalization".
Subsequent Event - Purchase of Ivron Systems, Ltd.
On October 3, 2001, we caused our wholly owned subsidiary, Gentner Ventures,
Inc., to purchase all of the issued and outstanding shares of Ivron Systems,
Ltd., of Dublin, Ireland ("Ivron"). Ivron is a privately-held developer of video
conferencing technology and equipment. Following the closing, Michael Peirce,
the former chairman of Ivron, was appointed to our board of directors. In
addition, the majority of the Ivron employees remained with us.
At the closing, each of the six Ivron shareholders received approximately
US$1.12 per Ivron common share. There were 5,366,637 Ivron common shares
outstanding at the time. Following June 30, 2002 each former Ivron shareholder
will receive approximately .08 shares of our common stock for each Ivron share
previously held, provided that certain video product development contingencies
are met. Thereafter, for our completed fiscal years 2003 and 2004, the former
Ivron shareholders may share in up to US$17,000,000 of additional consideration
provided that we achieve certain EPS targets.
As part of the transaction, all outstanding options to purchase Ivron shares
were cancelled in consideration for an aggregate cash payment of US$650,000 to
the optionees. In addition, the former Ivron optionees who remain with Ivron are
eligible to participate in a cash bonus program that will pay bonuses based on
our performance in fiscal years 2003 and 2004. The maximum amount payable under
this bonus program is an aggregate of US$1,000,000.
The total value of the consideration paid was determined based on arm's length
negotiations between us and the Ivron shareholders, that took into account a
number of factors of the business including historic revenues, operating
history, products, intellectual property and other factors.
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 OUR 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 OUR
MARKETS AND MARKET SHARE, DEMAND FOR OUR PRODUCTS AND SERVICES, FCC ACTIONS,
18
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 MATERIALLY 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. WE CAUTION 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. WE UNDERTAKE NO RESPONSIBILITY TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES
AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
Rapid Technological Change
The products and services markets are highly competitive and characterized by
rapid technological change. Our future performance will depend in large part
upon our 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.
We 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 or services could
materially harm our business.
The markets in which we compete have historically involved the introduction of
new and technologically advanced products and services that cost less or perform
better. If we are not competitive in our research and development efforts, our
products may become obsolete or be priced above competitive levels.
Although we believe that, based on performance and price, our products and
services are currently attractive to customers, there can be no assurance that
competitors will not introduce comparable or technologically superior products
or services, which are priced more favorably than ours.
Competition
The markets for our products and services are highly competitive. These markets
include our traditional dealer channel, the conferencing services market, and
the retail market. We compete with businesses having substantially greater
financial, research and development, manufacturing, marketing, and other
resources. If we fail to maintain or enhance our competitive position, we could
experience pricing pressures and reduced sales, margin, profits, and market
share, each of which could materially harm us.
General Economic Condition
As our business has grown, we have become increasingly subject to adverse
changes in general economic conditions, which can result in reductions in
capital expenditures by customers, longer sales cycles, deferral or delay of
purchase commitments for products, and increased price competition. Although
these factors have not materially impacted us in recent years, if the current
economic slowdown continues or worsens, these factors could adversely affect our
business and results of operations.
Marketing
We are subject to the risks inherent in the marketing and sale of current and
new products and services in an evolving marketplace. We must effectively
allocate our resources to the marketing and sale of these products through
diverse channels of distribution. Our current strategy is to establish
distribution channels and direct selling efforts in markets where we believe
there is a growing need for our products and services. For example, with the
acquisition of the ClearOne assets we have expanded our products to include the
retail market. There can be no assurance that this strategy will prove
successful.
Difficulties in Managing Growth
We are experiencing a period of significant expansion in personnel, facilities
and infrastructure, and we anticipate 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, we may need to
improve our transaction processing, operational and financial systems,
procedures and controls. Our current and planned personnel, systems, procedures
and controls may not be adequate to support our future operations. Difficulties
in managing these challenges could adversely affect our financial performance.
19
Difficulties in Estimating Customer Demand Could Harm Our Operating Results
Orders from our resellers are based on demand from end-users. Prospective
end-user demand is difficult to measure. This means that any period could be
adversely impacted by lower end-user demand, which could in turn negatively
affect orders we receive from resellers. Our expectation for both short- and
long-term future net revenues are based on our own estimate of future demand as
well as backlog based on the blanket purchase order program, as discussed above.
We also base expense levels on those revenue estimates. If our estimates are not
accurate, our financial performance could be adversely affected.
Dependence on Distribution Network
We market our products primarily through a network of dealers and master
distributors. All of our agreements regarding such dealers and distributors are
non-exclusive and terminable at will by either party. Although we believe that
our relationships with such dealers and distributors are good, there can be no
assurance that any or all such dealers or distributors will continue to offer
our products.
Price discounts to our distribution channel are based on performance. However,
there are no obligations on the part of such dealers and distributors to provide
any specified level of support to our products or to devote any specific time,
resources or efforts to the marketing of our products. There are no prohibitions
on dealers or distributors offering products that are competitive with ours.
Most dealers do offer competitive products. We reserve the right to maintain
house accounts, which are for products sold directly to customers. The loss of
dealers or distributors could have a material adverse effect on our business.
Limited Capitalization
As of September 30, 2001, we had $7.9 million in cash and $18.5 million in
working capital. We 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 our products, or if
product demand exceeds expected levels. There can be no assurance that any
additional financing would be available on acceptable terms, or at all.
In addition, our $5 million revolving line of credit matures in December of 2001
and there can be no assurance that we will be able to extend the maturity date
of the line of credit or obtain a replacement line of credit from another
commercial institution. We have no outstanding balance payable on the line of
credit as of September 30, 2001. To the extent the line of credit is not
extended or replaced and cash from operations is insufficient to fund
operations, we may be required to seek additional financing.
Telecommunications and Information Systems Network
We are highly reliant on our network equipment, telecommunications providers,
data, and software, to support all of our functions. Our conference calling
services rely 100 percent on the network for our revenues. While we endeavor 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 we experience such a failure, it could
seriously jeopardize our ability to continue operations. In particular, should
our conference calling services experience even a short term interruption of our
network or telecommunication providers, our ongoing customers may choose a
different provider, and our reputation may be damaged, reducing our
attractiveness to new customers.
Dependence on Supplier and Single Source of Supply
Certain electronic components used in connection with our products can only be
obtained from single manufacturers and we are dependent upon the ability of
these manufacturers to deliver such components to our suppliers so that they can
meet our delivery schedules. We do not have written commitments from such
suppliers to fulfill our future requirements. Our 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 we will experience delays,
which could be significant, in production and delivery of our products unless
and until we 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 us.
We believe that most of the key components required for the production of our
products are currently available in sufficient quantities. We have experienced
long component lead times in the past, but have experienced improved lead times
on many products. Even though we have purchased more of these "longer-lead-time"
parts to ensure continued delivery of products, reduction in these inventories
have tracked with the reduction of lead times. Suppliers of some of these
components are currently or may become our competitors, which might also affect
the availability of key components. It is possible that other components
20
required in the future may necessitate custom fabrication in accordance with
specifications developed or to be developed by us. Also, in the event we, or any
of the manufacturers whose products we expect to utilize in the manufacture of
our products, are unable to develop or acquire components in a timely fashion,
our ability to achieve production yields, revenues and net income may be
adversely affected.
Software Risks
We have developed custom software for our products and have 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. Our inability to do so could harm our business.
Manufacturing Process Risks
While we have substantial experience in designing and manufacturing our
products, we 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
Our financial performance is dependent in part on our 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 we use to receive necessary
components or other materials or to ship our products also could impair our
ability to deliver products on a timely and cost-effective basis.
Lack of Patent Protection
We currently rely primarily on a combination of trade secret, copyright,
trademark, and nondisclosure agreements to establish and protect our proprietary
rights in our products. There can be no assurance that others will not
independently develop similar technologies, or duplicate or design around
aspects of our technology. We believe that our 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. In the event of a claim, we might be required to
license third party technology or redesign our products, which may not be
possible or economically feasible.
Government Funding and Regulation
In the conferencing market, we are dependent on government funding to place our
distance learning sales and courtroom equipment sales. In the event government
funding was stopped, these sales would be negatively impacted. Additionally,
many of our products are subject to governmental regulations. New regulations
could significantly adversely impact sales.
Dividends Unlikely
We have never paid cash dividends on our securities and do not intend to declare
or pay cash dividends in the foreseeable future. Earnings are expected to be
retained to finance and expand our business. Furthermore, our revolving line of
credit prohibits the payment of dividends on our Common Stock.
Potential Dilutive Effect of Outstanding Options and Possible Negative Effect of
Future Financing
We have outstanding options issued under our 1990 Incentive Plan and the 1998
Stock Option Plan, which include options to purchase up to 3,200,000 shares of
Common Stock granted or available for grant. As of September 30, 2001, the Plans
have 1,957,798 options outstanding. Holders of these options are given an
opportunity to profit from a rise in the market price of our 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 we might be able to obtain
additional capital through a new offering of securities on terms more favorable
than those provided therein.
21
Dependence Upon Key Employees
We are substantially dependent upon certain of our employees, including Frances
M. Flood, President and Chief Executive Officer and a director and shareholder.
The loss of Ms. Flood could have a material adverse effect on us. We currently
have in place a key person life insurance policy on the life of Ms. Flood in the
amount of $5,000,000.
Possible Control by Officers and Directors
Our officers and directors together had beneficial ownership of approximately
26.9 percent of our Common Stock (including options that are currently
exercisable or exercisable within sixty (60) days) as of November 1, 2001. This
significant holding in the aggregate places the officers and directors in a
position, when acting together, to effectively control us and could delay or
prevent a change in control.
Collectability of Outstanding Receivables
We grant credit without requiring collateral to substantially all of our
customers. Although the possibility of a large percentage of customers
defaulting exists, we believe this scenario to be highly unlikely.
International Sales and Related Risks
International sales represent a significant portion of our total revenue. For
example, international sales represented 11 percent of our total sales for the
first quarter of fiscal 2002 and 12 percent for the first quarter of fiscal
2001. If we are unable to maintain international market demand, our results of
operations could be materially harmed. Our 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, we established Gentner Communications EuMEA GmbH, a wholly
owned subsidiary headquartered in Nuremberg, Germany. The subsidiary began
operations during December 2000. Gentner EuMEA focuses on distribution,
technical support, and training in Europe, the Middle East and Africa.
Our sales in the international market are denominated in U.S. Dollars and,
Gentner EuMEA transacts business in U.S. Dollars; however, its financial
statements are prepared in the Euro according to German accounting principles.
Consolidation of Gentner EuMEA's financial statements with ours, under United
States generally accepted accounting principles, requires remeasurement to U.S.
Dollars which is subject to exchange rate risks.
Euro Conversion
On January 1, 1999, eleven member countries of the European Union established
fixed conversion rates between their existing currencies ("legal currencies")
and one common currency, the Euro. The Euro is now trading on currency exchanges
and may be used in certain transactions such as electronic payments. Beginning
in January 2002, new Euro-denominated notes and coins will be used, and legacy
currencies will be withdrawn from circulation. The conversion to the Euro has
eliminated currency exchange rate risk for transactions between the member
countries, which for us primarily consists of sales to certain customers and
payments to certain suppliers. We are currently addressing the issues involved
with the new currency, which include converting information technology systems,
recalculating currency risk, and revising processes for preparing accounting and
taxation records. Based on the work completed so far, we do not believe the Euro
conversion will have a significant impact on the results of our operations or
cash flows.
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New Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS 141
establishes new standards for accounting and reporting requirements for business
combinations and supersedes APB Opinion No. 16, "Business Combinations" and SFAS
No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interest method is now prohibited. The statement applies to any
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001 or later, modifies the criteria for recognizing
intangible assets and expands disclosure requirements. We are continuing to
evaluate the impact of this statement on our financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 eliminates amortization of goodwill and intangible assets
with indefinite lives and instead sets forth methods to periodically evaluate
goodwill for impairment. SFAS No. 142 provides guidance for testing goodwill and
intangible assets that will not be amortized for impairment. The amortization
provisions of Statement 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, companies are required to adopt Statement 142 in their
fiscal year beginning after December 15, 2001 (i.e., January 1, 2002 for
calendar year companies). Early adoption is permitted for companies with fiscal
years beginning after March 15, 2001 provided that their first quarter financial
statements have not been issued. We plan to adopt this statement on
July 1, 2002 and, as such, we are continuing to evaluate the impact of
this statement on our financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations and Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that opinion). This Statement also amends ARB No. 51, "Consolidated
Financial Statements," to eliminate the consolidation for a subsidiary for which
control is likely to be temporary. We are required to adopt SFAS No. 144
effective July 1, 2002. We are currently evaluating the impact of this
statement on our financial statements.
QUALITATIVE AND QUANTITATIVE
DISCOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. Changes in these factors could cause
fluctuations in the results of our operations and cash flows. In the ordinary
course of business, we are exposed to foreign currency and interest rate risks.
These risks primarily relate to the sale of products and services to foreign
customers and changes in interest rates on our capital leases.
We currently have limited market-risk-sensitive instruments related to interest
rates. Our capital lease obligations total $167,000 at September 30, 2001. We do
not have significant exposure to changing interest rates on these capital leases
because interest rates for the majority of the capital leases are fixed. We have
not undertaken any additional actions to cover interest rate market risk and are
not a party to any other interest rate market risk management activities. A
hypothetical 10 percent change in market interst rates of the next year would
not impact our earnings or cash flows as the interest rates on the majority of
the capital leases are fixed.
We do not purchase or hold any derivative financial instruments for trading
purposes.
23
PART II - OTHER INFORMATION
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)
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
-------------------
A report on Form 8-K was filed on October 18, 2001, to announce the purchase of
Ivron Systems, Ltd.
24
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/ Randall J. Wichinski
--------------------------------------------
Randall J. Wichinski
Chief Financial Officer and Vice President
Date: November 12, 2001
25
