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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
AMENDMENT NO. 3 (POST-EFFECTIVE) TO FORM S-1
REGISTRATION NO. 33-42146
June 27, 1996
GENTNER COMMUNICATIONS CORPORATION
----------------------------------
(Name of small business issuer in its charter)
UTAH 3663 87-039887
- ------------------------ -------------------- ---------------
(State or other juris- (Primary Standard (I.R.S. Employer
diction of incorporation Industrial Classifi- Identification
or organization) cation Code Number) Number)
1825 RESEARCH WAY, SALT LAKE CITY, UTAH 84119 (801) 975-7200
-------------------------------------------------------------
(Address and telephone number of principal executive offices)
1825 RESEARCH WAY, SALT LAKE CITY, UTAH 84119
----------------------------------------------------
(Address of principal place of business or intended
principal place of business)
RUSSELL D. GENTNER, CHAIRMAN
1825 RESEARCH WAY, SALT LAKE CITY, UTAH 84119 (801) 975-7200
-------------------------------------------------------------
(Name, address and telephone number of agent for service)
PROSPECTUS
- ----------
GENTNER COMMUNICATIONS CORPORATION
1825 Research Way
Salt Lake City, Utah 84119
(801) 975-7200
3,750,000 SHARES OF COMMON STOCK AND
2,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Each unit ("Unit") consists of three shares of common stock, $.001 par value
("Common Stock") of Gentner Communications Corporation (the "Company"), and
two redeemable Common Stock purchase warrants of the Company ("Warrants").
Each Warrant entitles the holder to purchase one share of Common Stock at an
exercise price of $1.50 per share until September 22, 1996. The Warrants are
subject to redemption by the Company at any time at a price of $.05 per
Warrant on 30 days' prior written notice provided the closing bid price of the
Common Stock (or the last sales price if listed on the National Market System
of the National Association of Securities Dealers Automated Quotation System
("NASDAQ") or a national securities exchange) as reported by NASDAQ equals or
exceeds $2.50 per share for any 30 consecutive trading days ending within
fifteen days of the notice of redemption. The Company's Common Stock is
traded on NASDAQ under the symbol "GTNR".
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND
"DILUTION" IN THIS AMENDMENT NO. 3 TO FORM S-1.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
Per Unit . . . . . . . . . . $3.00 $.30 $2.70
Total . . . . . . . . . . . $3,750,000 $375,000 $3,375,000
(1) Does not reflect additional compensation received by the
Underwriter in the form of (i) a non-accountable expense allowance
of $129,375, or $.10 per Unit; (ii) an option, exercisable over a
period of four years commencing one year from the date of this
Prospectus, to purchase up to 125,000 Units at $3.60 per Unit (the
"Unit Purchase Option"); and (iii) a five-year preferential right
of first refusal for future equity financings. In addition, the
Company has agreed to indemnify the Underwriter against certain
civil liabilities, including liabilities under the Securities Act
of 1933, as amended.
(2) Before deducting expenses of the offering paid by the Company,
which aggregated $500,808 (approximately $.35 per Unit), including the
Underwriter's non-accountable expense allowance. The Company granted the
Underwriter an option which was exercised to purchase 187,500 additional
Units on the same terms and conditions as set forth above to cover over-
allotments. As the over-allotment option was exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company increased to $4,312,500, $431,250, and $3,880,442,
respectively.
The date of this Prospectus is June 27, 1996
Available Information
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission") under File No. 017219. Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates, and at the
following Regional Offices of the Commission: Midwest Regional Office, 500
West Madison Street, Chicago, Illinois 60661 and Northeast Regional Office, 7
World Trade Center, New York, New York 10048. The Company's stock is traded
in the over-the-counter market on the NASDAQ System, and reports concerning
the Company may also be obtained from the NASD.
Reports To Security Holders
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
accounting firm and such other periodic reports as the Company may determine
to be appropriate or as may be required by law.
Incorporation By Reference
A copy of the documents incorporated by reference other than exhibits to
such documents (unless such exhibits are specifically incorporated by
reference in the information contained in this prospectus) will be provided
without charge to each person, including any beneficial owner, to whom a copy
of this prospectus has been delivered upon the written or oral request of such
person. Requests for such copies should be made to Gentner Communications
Corporation, 1825 Research Way, Salt Lake City, Utah 84119, Attn: Secretary,
telephone number (801) 975-7200.
TABLE OF CONTENTS
Page
ITEM 3: RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4: USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . .
ITEM 5: DETERMINATION OF OFFERING PRICE . . . . . . . . . . . . .
ITEM 6: DILUTION . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7: SELLING SECURITY HOLDERS . . . . . . . . . . . . . . . . .
ITEM 8: PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . .
ITEM 9: LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . .
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS . . .
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . .
ITEM 12: DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . .
ITEM 13: INTEREST OF NAMED EXPERTS AND COUNSEL . . . . . . . . . .
ITEM 14: DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES . . . . . . . . . . . . .
ITEM 15: ORGANIZATION WITHIN LAST FIVE YEARS . . . . . . . . . . .
ITEM 16: DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . .
ITEM 17: MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . .
ITEM 18: DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . .
ITEM 19: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . .
ITEM 20: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 21: EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . .
ITEM 22: FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . .
ITEM 23: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . . . .
ITEM 24: INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . .
ITEM 25: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION . . . . . . .
ITEM 26: RECENT SALES OF UNREGISTERED SECURITIES . . . . . . . . .
ITEM 27: INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . .
ITEM 28: UNDERTAKINGS . . . . . . . . . . . . . . . . . . . . . . .
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere herein. Each prospective investor is urged to read this Prospectus
in its entirety.
The Company
Gentner Communications Corporation (the "Company") is a corporation
organized under the laws of the State of Utah in 1983. The Company develops,
markets, and distributes technologically advanced audioconferencing products
and services, along with other products, primarily for the Broadcast market
and the audio segment of the teleconferencing market. The audio segment of
the Teleconferencing market is herein referred to as the "Audioconferencing
market." Historically, the Company's primary business has been the sale of
studio and transmitter-related equipment and accessories to broadcast
facilities. The Company has applied its core digital technology gained in the
Broadcast market to the development of products for the audioconferencing
market. In addition, the Company offers a conference call service. With this
combination of products and service, the Company's vision is to provide
customers with the total audio solution for conferencing.
The Offering
Securities Offered 1,250,000 Units, each consisting of three
shares of Common Stock and two Warrants.
Each Warrant entitles the holder to purchase
one share of Common Stock at any time until
September 22, 1996 at an exercise price of
$1.50 per share. The exercise price and
number of shares issuable upon exercise of
the Warrants are subject to adjustment under
certain circumstances. See "Description of
Securities - Redeemable Warrants."
Common Stock Outstanding
Before Offering 2,979,400 shares
After Offering* 4,312,500 shares (including overallotment)
Use of Proceeds Proceeds from this offering have been and
will continue to be used for expansion
of marketing, advertising and customer
service activities, purchase of inventory,
reduction of indebtedness, research and
development, and for other working
capital and general corporate purposes
(including the financing of potential
acquisitions). See "Use of Proceeds".
Risk Factors The securities offered hereby involve a high
degree of risk and immediate substantial
dilution to public investors. See "Risk
Factors" and "Dilution."
NASDAQ Symbols Common Stock - GTNR
Warrants - GTNRW
Address and Gentner Communications Corporation
Telephone Number 1825 Research Way
Salt Lake City, Utah 84119
(801) 975-7200
- ---------------------
* Adjusted to give effect to the sale of the Units offered hereby. Does
not give effect to the exercise of the Warrants. Unless otherwise indicated,
the information in this Prospectus does not give effect to the exercise of:
(i) the Warrants; (ii) the Unit Purchase Option; or (iii) options granted
under the Company's 1990 Incentive Plan.
- ITEM 3: RISK FACTORS
The securities offered hereby are highly speculative and involve a high
degree of risk. Prospective purchasers, prior to making an investment
decision, should carefully consider, along with other matters referred to
herein, the following risk factors:
1. Experience in Marketing Audioconferencing Products
The Company has gained experience over the last several years in
marketing its Audioconferencing products; however it is subject to all of the
risks inherent in the sale and marketing of current and new products in an
evolving market. The Company must effectively allocate its resources to the
marketing and sale of these products through diverse channels of distribution.
The Company has limited experience marketing its Audioconferencing products
internationally. The Company's strategy is to establish distribution channels
in markets where it believes there is a growing need for its goods and
services. The Company has pursued this strategy in conjunction with its
international broadcast activities. There can be no assurance that this
strategy will prove successful. See "Business - Distribution."
2. Competition; Rapid Technological Change
The Radio Broadcast and Audioconferencing 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 in these markets. The Company competes
with businesses having substantial financial, research and development,
manufacturing, marketing and other resources. Competitive pressures may
necessitate price reductions which can adversely affect revenues and profits.
Furthermore, the Company has limited experience in developing, manufacturing
and marketing its teleconferencing products and is subject to all of the risks
inherent in the development, manufacture and sale of such products.
The markets in which the Company competes have historically involved the
introduction of new and technologically advanced products that cost less or
perform better than existing products. If the Company is not competitive in
its research and development efforts, its products may become obsolete or
priced above competitive levels.
Although management believes that, based on their performance and price,
its products are attractive to customers, there can be no assurance that
competitors will not introduce comparable or technologically superior products
which are priced more favorably than the Company's products. See "Business -
Competition."
3. Dependence on Distribution Network
The Company markets its products primarily through a network of
representatives and dealers. One dealer accounted for approximately 18% of
the Company's total sales in fiscal 1995 and 16% in 1994. 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 relationship with such representatives and dealers is good,
there can be no assurance that any of such representatives or dealers will
continue to offer the Company's products. Furthermore, 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, nor are
there any prohibitions on dealers offering products that are competitive with
those of the Company. Most dealers do offer competitive products. The loss
of a majority or all of such representatives or dealers could have a material
adverse effect on the Company's business. See "Business - Distribution."
4. Limited Capitalization
As of March 31, 1996, the Company had $196,590 in cash and $3,035,756 in
working capital. The Company may be required to seek additional financing if
anticipated levels of revenue are not realized, if higher than anticipated
costs are incurred in the development, manufacture or marketing of the
Company's products, or if product demand exceeds expected levels. There can
be no assurance that any additional financing thereby necessitated will be
available on acceptable terms, or at all.
In addition, the Company's revolving line of credit matures on October
31, 1996 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 an outstanding balance
payable of $1,125,382 on a $1.75 million line of credit as of March 31, 1996.
To the extent the line of credit is not extended or replaced and cash from
operations is unavailable to pay the indebtedness then outstanding under the
line of credit, the Company may be required to seek additional financing. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition and Liquidity."
5. Dependence Upon Officers
The Company is substantially dependent upon certain of its officers,
including Russell D. Gentner, its Chairman, President and Chief Executive
Officer and a principal stockholder of the Company. The loss of Mr. Gentner
by the Company could have a material adverse effect on the Company. The
Company currently has in place a key man life insurance policy on the life of
Mr. Gentner in the amount of $2,000,000. See "Management."
6. Dependence on Supplier and Single Source of Supply
The Company does not have written agreements with any suppliers.
Furthermore, certain digital microprocessor chips used in connection with the
Company's products can only be obtained from a single supplier and the Company
is dependent upon the ability of this supplier to deliver such chips in
accordance with the Company's specifications and delivery schedules. The
Company does not have a written commitment from such sole supplier to fulfill
the Company's future requirements. Although the Company maintains an
inventory of such chips in an amount which it believes is sufficient to cover
its requirements for three months and is attempting to develop alternate
sources of supply, there can be no assurance that such chips will always be
readily available, or if at all available, available at reasonable prices or
in sufficient quantities, or deliverable in a timely fashion. If such chips
or other key components become unavailable, it is likely that the company will
experience delays, which could be significant, in production and delivery of
its products unless and until the company can otherwise procure the required
component or components at competitive prices, if at all. The lack of
availability of these components could have a materially adverse effect on the
Company.
Although the Company believes that most of the key components required
for the production of its products are currently available in sufficient
production quantities, there can be no assurance that they will remain so
available. Furthermore, suppliers of some of these components are currently
or may become competitors of the Company, which might also affect the
availability of key components to the Company. It is possible that other
components required in the future may necessitate custom fabrication in
accordance with specifications developed or to be developed by the Company.
Also, in the event the Company, or any of the manufacturers whose products the
Company expects to utilize in the manufacture of its products, is unable to
develop or acquire components in a timely fashion, the Company's ability to
achieve production yields, revenues and net income will be adversely affected.
See "Business - Manufacturing and Suppliers."
7. 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. In addition, several of the Company's employees have
not signed confidentiality agreements regarding the Company's proprietary
information. 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. See "Business - Patents and Proprietary Rights."
8. Substantial Dilution
Purchasers of the Units offered hereby (at an offering price of $3.00 per
Unit) incurred an immediate dilution of approximately $.41 per share in net
tangible book value from the public offering price (attributing no value to
the Warrants included in the Units). See "Dilution."
9. Broad Discretion in Application of Warrant Proceeds
A substantial portion (approximately $1,305,000 or 39%) of the net
proceeds received by the Company in this offering were allocated to working
capital. As a result, management has broad discretion in determining how a
substantial portion of the proceeds of this offering is utilized. See "Use of
Proceeds."
10. 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. See "Dividend Policy" and "Description of Securities."
11. Non-Registration in Certain Jurisdictions of Shares Underlying the
Warrants; Need for Current Prospectus
The Company previously registered or qualified the Units and components
thereof for sale in Alabama, Colorado, Connecticut, Delaware, the District of
Columbia, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Maryland,
Nevada, New Jersey, New York, Pennsylvania, Rhode Island, South Carolina,
Utah, Virginia and West Virginia. The Warrants, constituting part of the
Units offered hereby, have been detached from the Common Stock and are traded
separately. Although the Units were not knowingly sold to purchasers in
jurisdictions in which the Units are not registered or otherwise qualified for
sale, purchasers may buy Units or the components thereof in the aftermarket
in, or may move to, jurisdictions in which the shares underlying the Warrants
are not so registered or qualified during the period in which the Warrants are
exercisable. In this event, the Company will be unable to issue shares of
Common Stock to those persons desiring to exercise their Warrants unless and
until the shares are qualified for sale in jurisdictions in which such
purchasers reside, or unless an exemption to such qualification exists in such
jurisdiction. In addition, investors in this offering will not be able to
exercise their Warrants, unless at the time of exercise the Company has a
current prospectus covering the shares of Common Stock underlying the
Warrants. Although the Company intends to maintain a current prospectus for
the purpose of allowing the holders of the Warrants the ability to exercise
the Warrants, no assurance can be given that the Company will be able to
effect any required registration or qualification or maintain a current
prospectus. See "Description of Securities - Redeemable Warrants."
12. Potential Adverse Effect of Redemption of Warrants
The Warrants may be redeemed by the Company at a redemption price of $.05
per Warrant upon 30 days' notice provided the closing price (as defined in the
Warrant Agreement) of the Common Stock equals or exceeds $2.50 for 30
consecutive trading days ending within 15 days of the date of the notice of
redemption. Redemption of the Warrants could force the holders to exercise
the Warrants and pay the exercise price at a time when it may be
disadvantageous for the holders to do so, to sell the Warrants at the then
current market price when they might otherwise wish to hold the Warrants, or
to accept the redemption price, which is likely to be substantially less than
the market value of the Warrants at the time of redemption. See "Description
of Securities - Redeemable Warrants."
13. Potential Dilutive Effect of Outstanding Options and Warrants and
Possible Negative Effect on Future Financings
For the respective terms of the Warrants, the Unit Purchase Option and
options to purchase up to 700,000 shares of Common Stock granted or available
for grant under the Company's 1990 Incentive Plan, the holders thereof 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. Further, the terms on which the Company may obtain additional
financing during such periods may be adversely affected by the existence of
the Warrants, the Unit Purchase Option and such other options. The holders of
the Warrants, the Unit Purchase Option and such other 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. In addition, holders of the Unit Purchase Option have
registration rights with respect to such option and the underlying securities,
the exercise of which may involve substantial expense to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Description of Securities" and "Underwriting."
- ITEM 4: USE OF PROCEEDS
The net proceeds (after deducting underwriting discounts and commissions
and other expenses of the offering payable by the Company) from the sale of
the 1,437,500 Units offered hereby, which were $3,380,442, after the
Underwriter's over-allotment option was exercised in full, have been used for
the following purposes and in the following order of priority:
Approximate Amount
Application of Net Proceeds
------------------------------------ ------------------
Expansion of marketing, advertising
and customer service activities(1) . . . . . . $ 675,000
Purchase of inventory(2) . . . . . . . . . . . . 500,000
Reduction of debt(3) . . . . . . . . . . . . . . 450,000
Research and development(4) . . . . . . . . . . 450,000
Working capital . . . . . . . . . . . . . . . . 1,305,442
------------
$ 3,380,442
============
- --------------------------
(1) Represents expenses to expand marketing, advertising and customer service
activities in the (i) Teleconferencing market of approximately $375,000 in
connection with advertising, establishment of possible marketing joint
ventures, dealer support and training, attendance at trade shows and the
salary of a customer support engineer, and (ii) Radio Broadcast market of
approximately $300,000 for the salaries of a sales manager and a customer
support engineer, advertising, customer road shows, dealer support and
training and increased international marketing activities.
(2) Includes initial start-up investment in additional inventory for the
PeopleLink System One(TM) and the Digital Audio Workstation Network
aggregating approximately $300,000. Also includes inventory for anticipated
growth and additional demonstration units of approximately $200,000.
(3) Represents the repayment of approximately $450,000 of the $850,000 of
principal indebtedness outstanding under the Company's revolving line of
credit at the time the offering originally became effective (September 23,
1991).
(4) Represents expenses including the hiring of a Director of Research and
Development, for the development of new teleconferencing and broadcast
products and the improvement of the Company's existing product lines.
In addition, a portion of the proceeds designated for working capital and
general corporate purposes was also used to enter into joint ventures or
acquisitions of businesses engaged in the radio broadcast equipment,
telecommunications equipment and/or professional sound equipment industries.
Prior to expenditure, the net proceeds were and will be invested in
short-term interest bearing securities or money market funds. Any proceeds
received upon exercise of the Unit Purchase Option, as well as income from
investments, will be used to fund operations.
Should all the Warrants, which are now separated from the Units, be
exercised the Company could receive as much as $4,261,038 (1). The Company
currently intends to use the proceeds for the following purposes and in the
following order of priority:
Approximate Amount
Intended Application of Net Proceeds
------------------------------------ ------------------
Reduction of short-term debt(2). . . . . . . . . $ 1,125,382
Expansion of marketing, advertising
and customer service activities(3) . . . . . . 2,000,000
Research and development(4) . . . . . . . . . . 500,000
Working capital. . . . . . . . . . . . . . . . . 635,656
------------
$ 4,261,038
============
- --------------------------
(1) Amount calculated by taking the amount of the Warrants currently
outstanding (2,874,025) and multiplying by the exercise price of $1.50, less
additional offering expenses associated with the anticipated exercise of the
Warrants, estimated at $50,000 (see "Plan of Distribution").
(2) Represents the amount payable on the Company's line of credit arrangement
as of March 31, 1996.
(3) Includes the hiring of at least four new sales and marketing managers
specializing in the Company's various customer and distribution channels.
Also includes increased amounts invested in market research and direct channel
advertising (see "Business - Marketing and Sales" and "Business -
Distribution").
(4) Includes the hiring of at least five to six engineers assigned to focus
on the development of new products and enhancements to existing product lines.
- ITEM 5: DETERMINATION OF OFFERING PRICE
The offering price of the Units and the exercise price and other terms of
the Warrants were determined by negotiation between the Company and the
Underwriter. Factors considered in determining the offering price of the
Units and the exercise price of the Warrants included the closing bid price
for the Company's Common Stock immediately prior to the effectiveness of this
offering, the business in which the Company engages, the Company's financial
condition, an assessment of management and the general condition of the
securities market.
- ITEM 6: DILUTION
Original Unit Offering
As of June 30, 1991, the Company had a net tangible book value of
$985,176, or approximately $.33 per share of Common Stock. Net tangible book
value per share represents the amount of the Company's total tangible assets,
less liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the sale of the 1,250,000 Units offered hereby, and
using an offering price of $3.00 per Unit and all estimated offering expenses,
the net tangible book value at June 30, 1991 would have been $3,947,676 or
approximately $.59 per share, representing an immediate increase in net
tangible book value of approximately $.26 per share to the present
stockholders, and an immediate dilution of approximately $.41 per share to new
public investors from the public offering price. Dilution per share
represents the difference between the public offering price and the pro forma
net tangible book value per share after the offering.
The following table illustrates the per share dilution that was incurred
by public investors from the public offering price, without regard to the
Warrants:
Public offering price $1.00
Net tangible book value before offering .33
Increase attributable to new public investors .26
Net tangible book value after offering .59
-----
Dilution to new public investors $ .41
=====
The Underwriter's over-allotment option was exercised in full, resulting
in a pro forma net tangible book value of $4,437,051 or approximately $.61 per
share, the immediate increase in net tangible book value attributable to new
public investors was $.28 per share, and the immediate dilution to new public
investors would be $.39 per share. In addition, the above discussion and
table allocate no value to the Warrants contained in the Units and assume no
exercise of the Warrants, the Unit Purchase Option or any other outstanding
options, the exercise of which will result in further dilution to new public
investors. To the extent the shares of Common Stock are issued pursuant to
the Unit Purchase Option or any other outstanding option, there may be further
dilution to the new public investors.
Warrant Exercise
As of March 31, 1996, the Company had a net tangible book value of
$4,009,240, or approximately $.52 per share of Common Stock. After giving
effect to the exercise of the 2,874,025 Warrants currently outstanding, and
using an exercise price of $1.50 per Warrant and estimated additional offering
expenses, the net tangible book value at March 31, 1996 would be $8,320,278 or
approximately $.79 per share, representing an immediate increase in net
tangible book value of approximately $.27 per share to the present
shareholders, and an immediate dilution of approximately $.71 per share to
Warrant holders from the exercise price. Dilution per share represents the
difference between the exercise price and the pro forma net tangible book
value per share, assuming all outstanding Warrants are exercised.
The following table illustrates the per share dilution which would be
incurred by holders of the Warrants from the exercise price:
Warrant exercise price $1.50
Net tangible book value before exercises .52
Increase attributable to warrant exercises .27
Net tangible book value after offering $ .79
-----
Dilution to Warrant holders $ .71
=====
- ITEM 7: SELLING SECURITY HOLDERS
None
- ITEM 8: PLAN OF DISTRIBUTION
The Company has confirmed that F.N. Wolf & Co., Inc., the original
Underwriter for the offering, has filed for bankruptcy. The Company also
understands that the Underwriter expects to emerge from bankruptcy, though not
as a registered broker-dealer, as the SEC previously revoked its broker-dealer
registration. Instead, the Underwriter intends to engage only in the business
of financial planning. In addition, published reports indicate that Mr.
Franklin Wolf has been fined by the NASD, and barred from the securities
industry for life. The Company considers F.N. Wolf & Co. to have materially
breached the Underwriting Agreement and to have no further rights thereunder.
Notwithstanding the Company's position in this regard, it is possible that
the Company may continue to have certain contractual obligations to F.N. Wolf
Co., including the Unit Purchase Option.
The Underwriter offered the Units to the public at the public offering
price set forth on the cover page of this Prospectus and it allowed selected
dealers who are members of the National Association of Securities Dealers,
Inc. concessions of not in excess of $0.12 per Unit, of which not more than
$0.06 per Unit were reallowed to certain other dealers. After the public
offering of the Units, the public offering price, concessions and reallowances
may be changed by the Underwriter.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with this offering, including liabilities under the Securities Act
of 1933 (the "Act").
The Company paid the Underwriter a non-accountable expense allowance
equal to 3% of the aggregate offering price of the Units offered hereby
(including any Units purchased pursuant to the over-allotment option), all of
which ($129,375) has been paid.
The Company granted an option to the Underwriter, exercisable during the
30-day period from the date of this Prospectus, to purchase up to 187,500
additional Units at the public offering price, less underwriting discounts and
commissions, solely to cover over-allotments in the sale of the Units. The
Underwriter exercised this option in full.
The Company agreed to sell to the Underwriter or its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 125,000
Units substantially identical to the Units offered hereby, except that the
Warrants included therein were not subject to redemption by the Company. The
Unit Purchase Option has an exercise price of $3.60, subject to adjustment in
certain events to protect against dilution, and are not transferable except to
officers of the Underwriter. The Unit Purchase Option will expire September
22, 1996. The Company has agreed to register under the Act on two separate
occasions upon request of the holder(s) of a majority of the Unit Purchase
Option, the securities issuable upon exercise of the Unit Purchase Option, the
initial such registration to be at the Company's expense and the second at
the expense of the holders. The Company has also granted certain "piggyback"
registration rights to the holder(s) of the Unit Purchase Option. To date,
the Unit Purchase Option has not been exercised.
For the life of the Unit Purchase Option, the holders are given at
nominal cost, the opportunity to profit from a rise in the market price of the
Company's securities with a resulting dilution in the interest of other
stockholders. Further, the holders may be expected to exercise the Unit
Purchase Option at a time when the Company would in all likelihood be able to
obtain equity capital on terms more favorable then those provided in the Unit
Purchase Option.
The Company and its 5% stockholders ("Principal Stockholders") have
granted the Underwriter a five-year preferential right of first refusal to
purchase for its own account or to act as underwriter or placement agent for
any subsequent public or private offering of the Company's securities by the
Company or any successor to or subsidiary of the Company, or any of its
principal stockholders. Due to the Underwriter's material breach of the
Underwriting Agreement, the Company considers this right to be canceled.
The Company previously agreed to enter into a five-year agreement
providing for the payment of a fee to the Underwriter in the event the
Underwriter is responsible for a merger or other acquisition transaction to
which the Company is a party. Due to the Underwriter's material breach of the
Underwriting Agreement, the Company considers this right to be canceled.
Upon the exercise of the Warrants after the first anniversary of the date
of this Prospectus, the Company previously agreed to pay the Underwriter a fee
of 4% of the aggregate exercise price if: (i) the market price of the Common
Stock on the date the Warrant is exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrant was solicited by a
member of the NASD; (iii) the Warrant is not held in a discretionary account;
(iv) disclosure of compensation arrangements was made both at the time of the
offering and at the time of exercise of the Warrant; and (v) the solicitation
of the Warrant was not in violation of Rule 10b-6 promulgated under the
Securities Exchange Act of 1934. Due to the Underwriter's material breach of
the Underwriting Agreement, the Company considers this right to be canceled.
- ITEM 9: LEGAL PROCEEDINGS
The Company knows of no material litigation or proceeding, pending or
threatened, to which the Company is or may become a party.
- ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
Directors and Executive Officers
The following individuals are currently directors or executives officers
of the Company:
Director
Name Age Principal Occupation Since
- ------------------ --- --------------------------------------- --------
Russell D. Gentner 40 Chairman of the Board of Directors,
Chief Executive Officer, and President 1985
Edward Dallin
Bagley* 57 Attorney 1994
Brad R. Baldwin 40 President and Chief Executive Officer
of Bank One, Utah 1988
Edward N. Bagley* 83 Vice President of Smith Barney and
Chairman of the Board of Mining Services
International 1993
Dwight H. Egan 42 President and Chief Executive Officer
of Broadcast International, Inc. 1994
K. Bradford Romney 39 President and Chief Executive Officer
of Dayna Communications, Inc. 1994
* Edward N. Bagley and Edward Dallin Bagley are father
and son, respectively.
-------------------------------------------------------
Russell D. Gentner is Chairman of the Board of Directors, Chief Executive
Officer, and President of the Company. Mr. Gentner has served in the
positions of Chairman and Chief Executive Officer since 1985, when the Company
merged with its predecessor, Gentner Engineering Company, Inc. ("GEC"). GEC
was founded by Mr. Gentner in 1981, and he served as its Chairman, Chief
Executive Officer, and President from its inception until its merger with the
Company. Mr. Gentner has served as President of the Company from 1985 to 1990
and from April 1994 to the present. Mr. Gentner earned his Bachelor of
Science degree in Electrical Engineering in 1977 from the University of Utah
and a Master of Business Administration degree from the University of Utah in
1990.
Edward Dallin Bagley has been a Director of the Company since April 1994.
Previously, Mr. Bagley served as a Director of the Company from April 1987 to
July 1991. Mr. Bagley began practicing law in 1965. He later founded Bagley
Securities, Inc., a stock brokerage firm located in Salt Lake City, Utah.
During the past five years, Mr. Bagley has served as vice president of
National Financial, a computer back-up accounting firm for health clubs. Mr.
Bagley is also currently a director of Mining Services International, a
publicly-held developer of explosives technology and supplier of chemicals to
the mining industry located in Salt Lake City, Utah, and Tunex International,
a chain of automotive engine performance and service centers. Mr. Bagley
received a Juris Doctorate in 1965 from the University of Utah College of Law.
Brad R. Baldwin has been a Director of the Company since October 1988.
Since October 1, 1994, Mr. Baldwin has served as President and Chief Executive
Officer of Bank One, Utah, a commercial bank headquartered in Salt Lake City,
Utah. Mr. Baldwin served as Senior Vice President and General Counsel of Bank
One from 1988 until his appointment as President and CEO. From 1981 to 1988,
Mr. Baldwin was engaged in the general practice of law at the firm of Biele,
Haslam & Hatch in Salt Lake City, Utah. Mr. Baldwin received a Juris
Doctorate in 1980 from the University of Washington.
Edward N. Bagley has been a director of the Company since January 1993.
Mr. Bagley is currently Vice President of Smith Barney, with whom he has been
associated since 1971. Mr. Bagley has worked in the investment industry since
1934. Mr. Bagley is also Chairman of the Board of Directors of Mining
Services International. He received a bachelors degree from Utah State
University in 1933.
Dwight H. Egan has been a director of the Company since November 1994.
Mr. Egan is currently the President, Chief Executive Officer, and Chairman of
the Board of Broadcast International, Inc., a satellite communications and
business information company located in Salt Lake City, Utah. Mr. Egan has
served as an officer and director of Broadcast International since November
1985.
K. Bradford Romney has been a Director of the Company since November
1994. Since 1991, Mr. Romney has been the President and Chief Executive
Officer of Dayna Communications, Inc., a computer networking company based in
Salt Lake City, Utah. He has been a director of Dayna since 1990. He served
as Executive Vice President of Dayna upon joining the company in 1986 until
his appointment as President and Chief Executive Officer. From 1982 to 1986,
Mr. Romney was Executive Vice President of Keith Romney & Associates. Mr.
Romney is also a director of EFI Electronics, Inc. and Magellan Technology,
Inc. Mr. Romney received a Juris Doctorate and a Master of Business
Administration degree from Brigham Young University in 1982.
Board of Director Information and Committees
All directors serve until their successors are elected and have
qualified. The Company currently pays each outside director $650 per month
for services provided as a director. Inside directors receive no additional
compensation for serving on the Board. Officers are elected to serve, subject
to the discretion of the Board, until their successors are appointed.
The Board of Directors has three committees, the Executive, Audit, and
Compensation Committees. The Executive Committee is composed of Mr. Russell
D. Gentner and has one vacancy. The Audit Committee is currently composed of
Mr. Brad R. Baldwin, Mr. Edward Dallin Bagley, and Mr. K. Bradford Romney.
The Compensation Committee is currently composed of Mr. Brad R. Baldwin, Mr.
Edward Dallin Bagley, and Mr. Dwight H. Egan. The Executive Committee
exercises all the powers and authority of the Board of Directors in the
management of the business and affairs of the Company except those which by
statute, Certificate of Incorporation or By-laws are reserved to the Board of
Directors. The Audit Committee is authorized to review proposals of the
Company's auditors regarding annual audits, recommend the engagement or
discharge of the Company's auditors, review recommendations of such auditors
concerning accounting principles and the adequacy of internal controls and
accounting procedures and practices, to review the scope of the annual audit,
to approve or disapprove each professional service or type of service other
than standard auditing services to be provided by the auditors, and to review
and discuss the audited financial statements with the auditors. The
Compensation Committee makes recommendations to the Board of Directors
regarding remuneration of the executive officers and directors of the Company
and administers the 1990 Incentive Plan for directors, officers, and key
employees.
Executive Officers
The executive officers of the Company are as follows:
NAME AGE POSITION
- ------------------ --- -----------------------------------------------
Russell D. Gentner 40 Chairman, President and Chief Executive Officer
Keldon A. Paxman 36 Chief Operating Officer and Vice President of
Engineering
David L. Harmon 39 Vice President and Chief Financial Officer
William H. Gillman 37 Vice President of Operations
For the biography of Mr. Gentner, see "Directors."
Keldon A. Paxman became Chief Operating Officer of the Company in 1996.
He has been Vice President of Engineering of the Company since 1995. He has
been with the Company since 1985, working initially in product testing,
product design, and technical customer service management. Beginning in 1990,
he was Director of Manufacturing and in 1994 became Director of Engineering,
where he coordinated new product development. He oversees all of the
Company's research and product development activities. Prior to joining
Gentner, Mr. Paxman worked as a Technical Specialist for National
Semiconductor. He received an Associate of Applied Science degree in
Electronic Technology from Utah Technical College in 1983, and a Bachelor of
Science degree in Business Administration from the University of Phoenix in
1994.
David L. Harmon was elected Vice President and Chief Financial Officer of
the Company in April 1994. From 1990 until his appointment as Chief Financial
Officer, Mr. Harmon was the Company's Controller. He is responsible for all
of the Company's accounting, tax planning, financial and management reporting,
and SEC filings. He is a certified public accountant, having spent eight
years in public accounting before joining Gentner. While a practicing CPA,
Mr., Harmon specialized in audits and financial reporting of public companies,
and was involved in tax return preparation for several types of businesses.
He graduated from the University of Utah with a Bachelor of Science degree in
Accounting.
William H. Gillman became a Vice President of Operations in 1995, in
which capacity he oversees manufacturing, purchasing, quality control, and
inventory processes. Mr. Gillman first joined the Company in 1983, was
appointed Vice President of Engineering in 1984, and joined the Board of
Directors in 1985. He was responsible for the design or redesign of a large
portion of the Company's early products. In 1991, Mr. Gillman joined Novell
as a Senior Engineer to design Novell's state-of-the-art, $12.5 million
software testing facility referred to as "Super Lab." He continued as a
Director with the Company during his time at Novell until 1994. In 1994, he
returned to the Company as a full-time employee and also resigned his position
on the Board of Directors. Mr. Gillman received an Associate of Applied
Science degree in Electronic Technology from Utah Technical College in 1980,
and, until his first employment with the Company, worked as an engineer with
several Utah radio stations. He is a member of the Aircraft Owners and Pilots
Association, the American Radio Relay League, and the Society of Broadcast
Engineers, where he holds a Senior Broadcast Engineering Certificate. He also
has an FCC General Radio/Telephone License.
- ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding ownership of
the Common Stock of the Company as of March 31, 1996 by (i) each person known
to the Company to be the beneficial owner of more than 5% of the outstanding
Common Stock of the Company, (ii) each director of the Company, (iii) the
Chief Executive Officer and each other executive officer of the Company as of
March 31, 1996 whose salary and bonus for the year ended June 30, 1995
exceeded $100,000, and (iv) all executive officers and directors of the
Company as a group. Each person has sole investment and voting power with
respect to the shares indicated, subject to community property laws where
applicable, except as otherwise indicated below.
Amount of Percentage
Names of Beneficial Owners Beneficial Ownership of Class
- -------------------------- -------------------- ----------
Russell D. Gentner 686,128(1) 9.0%
Edward Dallin Bagley 411,207(2) 5.4%
William H. Gillman 180,119(3) 2.4%
Brad R. Baldwin 79,166(4) 1.0%
Edward N. Bagley 269,833(5) 3.5%
Dwight H. Egan 5,000(6) 0.1%
K. Bradford Romney, Jr. 5,000(6) 0.1%
Directors and Executive Officers
as a Group (9 persons) 1,654,453(1,2,3,4,5,6,7) 21.6%
(1) Includes: 595,928 shares owned directly; options to purchase 90,000
shares that are exercisable within 60 days; and 200 shares owned by Mr.
Gentner's wife. Excludes: options to purchase 40,000 shares that are not
exercisable within 60 days.
(2) Includes: 306,157 shares owned directly; 100,000 shares owned by a
corporation controlled by Mr. Bagley; 50 shares owned by Mr. Bagley's wife as
custodian for one of Mr. Bagley's daughters; and options to purchase 5,000
shares that are exercisable within 60 days. Excludes: 50 shares owned by
another of Mr. Bagley's daughters; shares owned by the Bagley Family Revocable
Trust, all of which Mr. Bagley disclaims beneficial ownership; and options to
purchase 25,000 shares that are not exercisable within 60 days.
(3) Includes: 162,619 shares owned directly and options to purchase 17,500
shares that are exercisable within 60 days. Excludes: options to purchase
17,500 shares that are not exercisable within 60 days.
(4) Includes: 54,666 shares owned directly; options to purchase 17,500
shares that are exercisable within 60 days; 5,000 shares owned by Mr.
Baldwin's wife; and warrants to purchase 2,000 shares that are currently
exercisable. Excludes: options to purchase 17,500 shares that are not
exercisable within 60 days.
(5) Includes: 257,333 shares owned by the Bagley Family Revocable Trust,
of which Mr. Bagley is a co-trustee with his wife; and options to purchase
12,500 shares that are exercisable within 60 days. Excludes: shares held or
controlled by Mr. Bagley's son (Edward Dallin Bagley) and granddaughters as
described in footnote 2 above, all of which Mr. Edward N. Bagley disclaims
beneficial ownership; and options to purchase 17,500 shares that are not
exercisable within 60 days.
(6) Includes: options to acquire 5,000 shares that are exercisable within
60 days. Excludes: options to acquire 25,000 shares that are not exercisable
within 60 days.
(7) Includes: 1,000 shares owned directly and options to acquire 17,000
shares by two other officers that are exercisable within 60 days. Excludes:
options to acquire 23,000 shares by those officers that are not exercisable
within 60 days.
- ITEM 12: DESCRIPTION OF SECURITIES
Units
Each Unit consists of three shares of Common Stock and two Warrants, each
Warrant entitling the holder to purchase one share of Common Stock. The
components of the Units became separately transferable one year following the
date of the original Prospectus (the "Separation Date").
Common Stock
The Company has authorized 50,000,000 shares of Common Stock, par value
$.001 per share, 7,662,375 of which were issued and outstanding as of March
31, 1996. Each share of Common Stock is entitled to one vote on all matters
on which stockholders may vote, including the election of directors. Holders
of Common Stock are entitled to participate pro rata based on the number of
shares held, in the payment of cash dividends and in the liquidation,
dissolution or winding up of the Company. There are no preemptive,
redemption, conversion or cumulative voting rights applicable to the Common
Stock.
Redeemable Warrants
Each Warrant entitles the registered holder to purchase one share of
Common Stock at an exercise price of $1.50 at any time until 5:00 P.M., New
York City time, on September 22, 1996. Since that date falls on a non-banking
day, they may be exercised until 5:00 p.m. New York City Time on September 23,
1996. The Warrants are redeemable by the Company on thirty days prior written
notice at a redemption price of $.05 per Warrant if the "closing price" of the
Company's Common Stock equals or exceeds $2.50 per share for any 30
consecutive trading days ending within 15 days of the notice of redemption.
"Closing price" shall mean the closing bid price if listed in the over-the-
counter market or the closing sale price if listed on the National Market
System of NASDAQ or a national securities exchange.
The Warrants provide for adjustment of the exercise price and for a
change in the number of shares issuable upon exercise to protect holders
against dilution in the event of a stock dividend, stock split, combination or
reclassification of the Common Stock or upon issuance of shares of Common
Stock at prices lower than the Warrant exercise price then in effect other
than issuances upon exercise of options granted to employees, directors and
consultants to the Company, or options to be granted under the Company's 1990
Incentive Plan.
Commencing on the Separation Date, a Warrant may be exercised upon
surrender of the Warrant certificate on or prior to its expiration date (or
earlier redemption date) at the offices of American Stock Transfer & Trust
Company, New York, New York, the warrant agent, with the form of "Election to
Purchase" on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the Warrant is being exercised. Shares issued
upon exercise of Warrants and payment in accordance with the terms of the
Warrants will be fully paid and nonassessable.
The Warrants do not confer upon the Warrant holder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrant holders,
the Company has the right to reduce the exercise price or extend the
expiration date of the Warrants.
Although the Units have not knowingly been sold to purchasers in the
jurisdictions in which the Units are not registered or otherwise qualified for
sale, purchasers may buy Units or the components thereof in the aftermarket
in, or may move to, jurisdictions in which the shares underlying the Warrants
are not so registered or qualified during the period that the Warrants are
exercisable. In this event, the Company will be unable to issue shares of
Common Stock to those persons desiring to exercise their Warrants unless and
until the shares qualified for sale in jurisdictions in which such purchasers
reside, or unless an exemption to such qualification exists in such
jurisdiction. In addition, investors in this offering will not be able to
exercise their Warrants, unless at the time of exercise the Company has a
current prospectus covering the shares of Common Stock underlying the
Warrants.
Transfer Agent and Warrant Agent
American Stock Transfer & Trust Company, New York, New York, will serve
as transfer agent for the Common Stock and the Warrants.
- ITEM 13: INTEREST OF NAMED EXPERTS AND COUNSEL
None.
- ITEM 14: DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Company pursuant to the provisions of its articles
of incorporation and bylaws, of the Utah Revised Business Corporation Act, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
- ITEM 15: ORGANIZATION WITHIN LAST FIVE YEARS
See Item 19 below.
- ITEM 16: DESCRIPTION OF BUSINESS
General
Gentner Communications Corporation (the "Company") is a corporation
organized under the laws of the State of Utah in 1983. The Company develops,
markets, and distributes technologically advanced audioconferencing products
and services, along with other products, primarily for the Broadcast market
and the audio segment of the Teleconferencing market. The audio segment of
the Teleconferencing market is herein referred to as the "Audioconferencing
market." Historically, the Company's primary business has been the sale of
studio and transmitter-related equipment and accessories to broadcast
facilities. The Company has applied its core digital technology gained in the
Broadcast market to the development of products for the Audioconferencing
market. In addition, the Company offers a conference call service. With this
combination of products and service, the Company's vision is to provide
customers with the total audio solution for conferencing.
The Company currently sells four distinct product lines to the Broadcast
market. The largest product line consists of telephone interface equipment,
which is primarily used to facilitate audio teleconferences in which callers
are put on-the-air for call-in talk shows. In fiscal 1995, sales of products
to the Broadcast market accounted for 49% of the Company's total sales.
In 1991, using its technological expertise gained in the Broadcast
market, the Company commenced marketing products specifically developed by it
for the Audioconferencing market. The Company's audioconferencing products,
which are used to conduct audio teleconferences, allow users to speak into
microphones and listen through speakers without the cut-offs, distortion, and
noise associated with traditional speakerphones, providing for a more natural,
two-way conversation among participants. The Company's product line comprises
high-end audioconferencing systems installed in conference rooms, along with
economical portable units. Sales of products to the Audioconferencing market
accounted for 40% of the Company's total sales during fiscal 1995.
In fiscal 1993, the Company commenced a conference call service
operation. This service is marketed to sales organizations, law firms,
financial networks, and any business requiring conference calling.
In fiscal 1994, the Company made several difficult but essential
reorganization decisions, including significant investment in research and
development and marketing, consolidation of the Company's operations and sales
center to one location, the divestiture of the Audisk product line, and the
implementation of other cost reduction measures. These reorganization efforts
contributed to a significant increase in the Company's sales and a marked
decrease in the Company's net loss during fiscal 1995. During fiscal 1995 as
compared to fiscal 1994, sales of the Company's products and services
increased to $11.1 million from $8.8 million. Fiscal 1995's net loss was
$116,063, or $0.02 per share, compared to fiscal 1994's net loss of
$1,258,986, or $0.17 per share. The significant 1994 loss included the
disposal of a product line and other non-recurring charges (see "Management's
Discussion and Analysis"). Although fiscal 1995 began with a first quarter
loss, all succeeding quarters were profitable, and the fourth quarter's
results were record-breaking in terms of both sales and profits.
Results of Recent Operations
Sales for the nine months ended March 31, 1996 increased 3% compared to
the same period during the prior fiscal year. Shipments of new products
during the first half of the fiscal year were the primary reason for the
increase. Offsetting this sales growth during the third quarter were weather
factors and the federal government shutdown.
Business Strategy
The Company plans to continue its efforts to develop and market new
products for the Broadcast and Audioconferencing markets. Growth in broadcast
product sales is expected to come through new equipment introductions,
enhancements, and increased international distribution.
The Company believes that its largest growth potential is in the U.S.
Audioconferencing market. According to industry sources, Audioconferencing
sales are growing at an annual rate of 20%, with sales of both audio products
and conferencing services at $1.5 billion for calendar 1995. The Company plans
to allocate a large portion of its resources to develop and market products
and services for this market. Due to the larger market size and potentially
greater competition, the marketing of Audioconferencing products will continue
to require substantial marketing resources and research and development
efforts. To this end, the Company will continue to seek out highly trained
and experienced personnel. Additionally, the Company has aggressively focused
on research and development to create a superior line of products. Because of
its ability to combine sophisticated audioconferencing conference room systems
and portable units with conference call services into a package available
through a nationwide network of dealers and sales representatives, the Company
plans to offer end users a "total solution" approach, which it believes will
help it take advantage of the potential of this growing market.
Broadcast Products
The Company has four major product lines that it sells to the Broadcast
market:
-- Telephone Interface Products
-- Transmitter Site Control Products
-- Audio Routing and Distribution Products
-- Audio Processing Products
With the exception of transmitter site control products, the Company's
broadcast products are used in broadcast studios to assist in production
and/or on-air programming. Each of these product lines is discussed in
greater detail below.
Telephone Interface Products. The Company's telephone interface product
line offers a full selection of products ranging from simple single line
couplers to computerized multiple line systems used in talk show programs. An
example of the computerized multi-line system is the Company's TS612 unit,
which it began selling in fiscal 1995. Many telephone interface products
function as broadcast-oriented audioconferencing components used by
broadcasters to put callers on-the-air as part of an audio teleconference.
This product line also includes the Company's remote broadcast products.
These products allow a station to conduct broadcasts from a location away from
the station using telephone lines instead of more expensive satellite
transmissions. A sportscaster, for example, can broadcast a basketball game
from the arena, being linked to the studio by telephone.
Transmitter Site Control Products. These products help broadcasters
fulfill legal requirements for monitoring and controlling their transmitters,
which are often located in remote areas such as on mountain tops. The
Company's products provide monitoring of conditions at the transmitter site
and permit users to make adjustments to transmitters by remote control via
computer or telephone. The Company's transmitter site control products
utilize a digitally synthesized voice which reports conditions over a
telephone line. In April of 1996, the Company introduced the new GSC-3000
product series at the National Association of Broadcasters Trade Show in Las
Vegas. The new hardware and software products are designed to augment the
Company's existing transmitter site control products by permitting station
managers to monitor several different sites using PC-based networked systems.
Audio Routing and Distribution Products. These products are used to
distribute audio signals from studio to studio, and are also widely used in
the Professional Audio market (see "Description of Business - Other Markets").
These types of products are a necessary part of every audio installation in a
broadcast facility. The Company has been manufacturing and selling this
product line since its inception.
Audio Processing Products. Broadcasters use these products to tailor the
sound of their stations to suit the tastes of specific audiences. For
example, a radio station with an "Urban Contemporary" format could use these
products to significantly increase the amount of bass response in their
signal, whereas a "Light Jazz" station would use softer processing for a
uniform sound across the audio frequency spectrum. These digital products
provide a greater amount of flexibility for broadcasters who want more control
over the quality and character of the sound of their broadcasts. In addition,
they help preserve the broadcast clarity of compact disc recordings.
Audioconferencing Products
The Company's internal research into the needs of the business community,
coupled with its digital capabilities developed in the Broadcast market, led
to its development of products for the Audioconferencing market. This market
is experiencing rapid growth. Companies that conduct lengthy meetings over
the telephone have expressed dissatisfaction with the speakerphones
traditionally used in these meetings. The problems noted with traditional
speakerphones include poor audio quality, low volume levels, echoes, noise,
distortion, and speech cut-offs. The Company believes that it has
substantially addressed these problems through the development of digitally-
processed audioconferencing products.
In 1991, the Company began shipping several competitively priced
audioconferencing products and systems. The systems permit users to
communicate via professional quality microphones and speakers which, combined
with the Company's digital technology, result in higher audio quality. The
systems permit fully interactive conversations, allowing users to talk
normally (as if all participants were in the same room), without cut-offs.
The Company began shipping a new audioconferencing product in fiscal
1995. This product, the ET100, is a highly advanced, portable
audioconferencing unit that provides high quality sound, without delays, cut-
offs, or echoes, and that is designed to hook-up with virtually any phone
system. This unique capability allows users to utilize all of their telephone
functions such as hold, conference, transfer, multiple line access, etc. The
ET100 turns the existing digital PBX or analog telephone into a two-way hands
free audioconferencing device. In February 1996, the Company began shipping a
new audioconferencer, the ET-10, which is a smaller and less expensive version
of the ET-100. The ET-10 has all the features of the ET-100, but is intended
to be used in an office or cubicle with a desk telephone instead of in a
conference room.
Conference Call Service
In February 1993, the Company launched its new conference call service
operation so as to be able to provide customers with a complete offering of
audioconferencing solutions. This service can connect telephone callers
worldwide with state-of-the-art volume and clarity. Although this operation
is experiencing steady growth, it is not currently producing significant
revenues.
Assistive Listening Products
In March 1993, the Company began shipping its new Assistive Listening
System ("ALS") products. These products provide amplification for the hearing
impaired in such places as sport stadiums, museums, libraries, theme parks,
zoos, auditoriums, convention centers, and tour buses. The demand for ALS
products is strong due to the enactment of the Americans with Disabilities
Act, which requires such aid to the hearing disabled. In fiscal 1995, the
Company expanded its ALS product line with the introduction of an additional
multi-channel receiver, a battery charger and other accessories. During
fiscal 1996, the new PTX portable transmitter was introduced. ALS products
and accessories currently are one of the Company's fastest growing product
lines.
Broadcast Market
For fiscal 1995, and so far during fiscal 1996, the Broadcast market was
still the Company's largest revenue source, generating approximately 49% of
the Company's total sales. The Company's products are targeted and sold to
radio and television stations, broadcast networks, and other broadcast-related
customers.
Based on statistics provided by the Company's wholesalers, the Company
estimates that the potential annual U.S. Broadcast market size is
approximately $100 million for all types of equipment, including the type the
Company provides. The Company's current market share is approximately 5% of
this market.
The United States is considered to be the predominant segment of the
worldwide Broadcast market, with over 12,000 radio and television stations in
operation. The Company estimates that this market will grow at an average
annual rate of approximately 5%. The Company's products are sold mainly to
renovate older studios and/or replace obsolete equipment. Although little new
broadcast station construction has taken place in the past several years in
the United States, due to the limited number of frequencies that become
available at any given time, the Company believes that it will continue to
enjoy growth in the Broadcast market as product innovations allow broadcast
stations to upgrade their existing equipment.
The Company has traditionally concentrated its efforts in selling its
products in the United States. However, while the United States is considered
to be the largest single Broadcast market segment in the world, it is believed
to represent only 20% of the total worldwide Broadcast market. The
international Broadcast market is expanding due largely to government
deregulation and privatization of stations and an expansion in the number of
frequencies available for commercial use. In 1991, the Company began focusing
efforts on expanding its international market share and has appointed dealers
located in key countries around the world (see "Description of Business -
Distribution"). Such Broadcast sales overseas now account for 19% of all
sales by the Company to the Broadcast market. Sales of all products to all
foreign markets, which includes both export sales and sales intended for
overseas installation, principally in Canada, Europe, and Asia, accounted for
13% of total fiscal 1995 sales, and have accounted for 12% of total sales
during the first three quarters of fiscal 1996.
Audioconferencing Market
The audioconferencing market is currently the Company's fastest growing
market, representing approximately 40% of total Company sales in fiscal 1995
and to-date in fiscal 1996, compared to 36% of total Company sales in fiscal
1994. The Audioconferencing market is a segment of the total Teleconferencing
market, which also includes the Videoconferencing market segment. Although it
designs and manufactures audio equipment that works in connection with the
Videoconferencing segment, the Company specializes in the Audioconferencing
segment.
Products and services sold by all companies to the Audioconferencing
market include terminal equipment, telephone bridge equipment, conference
calling services, and transmission services. The Company's primary focus is
in the terminal equipment and conference calling categories. According to
estimates compiled by the International Teleconferencing Association, the
calendar 1995 U.S. market for these specific types of Audioconferencing
products and services exceeded $1.5 billion, growing 20% over the previous
calendar year.
The Company believes that the most significant sales growth in the near
future will come through the continued sale of Audioconferencing equipment.
The Company also expects further growth in its conference call service
business.
Other Markets
In addition to the Broadcast and Audioconferencing markets, the Company's
products are sold into other markets, particularly the Professional Audio
market. The Professional Audio market includes sound contractors who install
audio and other equipment in churches, schools, auditoriums and other large
facilities. The Company sells its products into this market generally through
the same manufacturers' representatives and dealers that represent the Company
in the Audioconferencing market. The products sold to this market are
primarily audio routing and distribution products, telephone interface
products, and ALS products.
Marketing and Sales
Broadcast sales efforts have traditionally focused on domestic and
international sales of broadcast products through a worldwide network of
dealers. Such efforts included a combination of product catalogs, telephone
telemarketing, direct mail, trade advertising and direct selling. The Company
will continue to support dealers with product information, brochures, and data
sheets, and has been increasing its activities aimed at garnering the
attention of end users. The Company will continue to sponsor sales promotions
to encourage dealers to feature the Company's products, and has also focused
more on end user interaction efforts such as customer focus groups and
proactive surveys. The Company also exhibits at selected high profile
industry trade shows to ensure that the Company's products remain highly
visible to dealers and broadcasters.
Audioconferencing and ALS product sales efforts are primarily aimed at,
respectively, domestic businesses and organizations required to offer their
patrons equipment designed to assist the hearing impaired. The Company has
been reaching these customers through a representative and dealer network that
regularly interacts with potential end users in the target market. However,
since digital audioconferencing products and services are relatively new
concepts in a growing new industry, the Company intends to devote
significantly more marketing efforts toward end users. Although the Company
has begun actively participating, alongside its representatives and dealers,
in communication forums, trade shows, and industry promotions, the Company has
begun researching the audioconferencing market in depth so as to establish
new, direct sales and distribution channels (see "Description of Business -
Distribution").
Customer support, which is generally provided over the telephone,
provides timely, interactive help to customers needing operational or
technical assistance with their products. The customer support team regularly
communicates with the Company's engineering and manufacturing groups to ensure
up-to-date information is being given to the customers and to provide feedback
to the Company that can be useful in initiating product improvements.
Distribution
Broadcast Products. The Company's broadcast products are generally sold
in the United States through non-exclusive independent broadcast equipment
dealers. Customers generally place orders with a dealer by calling a toll
free number. The market is highly competitive and it is not unusual for a
customer to call several dealers to get the best possible price. Once a
customer orders equipment, a dealer then either ships the product to the
customer from the dealer's inventory or orders the product from the Company to
be shipped directly to the customer. Only the Company's largest dealer,
Harris/Allied, a division of Harris Corporation, is also a manufacturer of
communications systems and equipment. Harris/Allied is the Company's
predominant dealer in the Broadcast market and is believed by the Company to
be the dominant supplier of equipment for radio stations in the United States.
Sales to Harris/Allied represent a significant portion of Company sales,
accounting for approximately 7% of the Company's total sales so far in fiscal
1996, and 18% and 16% of sales during fiscal 1995 and fiscal 1994,
respectively. However, the Company believes that if it were to lose
Harris/Allied as a dealer, it could sell its products to customers either
directly or through other dealers. With respect to international sales, the
Company has established international relationships with dealers for its
broadcast products, of which several are located in Europe, two are in Canada,
and several are located throughout Asia, the South Pacific, and Latin America.
Audioconferencing and ALS Products and Services. The Company sells its
Audioconferencing and ALS products, along with conference call services
through independent representatives and dealers. The Company also telemarkets
customers directly with respect to its conference calling service. Currently,
most of the Company's Audioconferencing and ALS sales are in the United
States. The Company's primary strategy for foreign expansion is to establish
distribution channels in markets where it believes there is a growing need for
products and services of the type offered by the Company. The Company has
pursued this strategy in conjunction with its international broadcast
activities and has established dealerships in the same geographic locations.
The Company has recently announced the introduction of a new portable
audioconferencer that will likely appeal to a mass market. Accordingly, in
the near future, the Company intends to establish retail sales channels for
this product, through stores or catalogs or otherwise.
Competition
The principal competitive factors in the Company's markets include
innovative product design, product quality, established customer
relationships, name recognition, distribution, and price.
In the Broadcast market, the Company has several competitors in each of
its four product lines. There is not, however, any single competitor who
directly competes with the Company in all such product lines. Although some
of the Company's competitors are smaller in terms of annual revenues and
capitalization, such competitors are usually focused on a single product line
and can therefore devote their resources to products that are directly
competitive with, and which may adversely impact sales of, the Company's
products. However, the Company possesses a high name-recognition factor with
respect to its Broadcast products, particularly with its telephone interface
equipment. This advantage, coupled with the Company's size, enables it to
preserve and enhance its efforts in increasing Broadcast market share.
The Company believes that its ability to successfully compete in the
Audioconferencing market is essential to the Company's growth and market
development. The Company knows that there are other companies with
substantial financial, technical, manufacturing and marketing resources
currently engaged in the development and marketing of similar products and
services. Some of these companies have launched products competitive with
those being developed and manufactured by the Company. However, the Company
has capitalized on, and enhanced its core acoustic digital technology
developed for the Broadcast market into what it believes are conference room
installed Audioconferencing systems and equipment of superior performance. It
also believes its new line of portable audioconferencers have significant
competitive advantages (see "Description of Business - Audioconferencing
Products"). By offering both these types of products, combined in various
types of packages with conference calling services, the Company feels it can
uniquely position itself in this rapidly expanding Audioconferencing market.
Research and Development
The Company is highly committed to research and development. The Company
views its investment in research and development as the key to long-term
business success. The Company expended $802,062 and $920,079 on research and
development in fiscal years ended June 30, 1995 and 1994, respectively.
During the first nine months of fiscal 1996, the Company expended $718,819.
The Company is continually working on developing new products and
services. Current new research and development efforts are focused on the
broadcast telephone interface and Audioconferencing product lines. The
Company also heavily invests resources in technically sustaining and refining
existing products. Moreover, the Company continues to allocate resources to
obtain and maintain product regulatory compliance.
The Company's core technological competencies include many areas of
telecommunications and audio processing. The Company has developed the
ability to interface many types of products to the public telephone network.
The Company's capability to use Digital Signal Processing ("DSP") technology
to perform audio processing operations is also a core competence. This
technology is critical to the performance of the Company's products. The
Company maintains an internal computer aided design ("CAD") team. This team
creates the necessary electrical schematics, printed circuit board designs,
mechanical designs, and manufacturing documentation to support the research
and development efforts. The Company's CAD and product design teams use
networked computing systems and sophisticated software programs to facilitate
all aspects of product development.
The Company believes that ongoing development of its core technological
competencies is vitally important to future sales.
Patents and Proprietary Rights
Trade secrets, proprietary information, and technical know-how are
important to the Company's scientific and commercial success. The Company
currently relies on a combination of trade secrets and nondisclosure
agreements to establish and protect its proprietary rights in its products.
The Company also has a U.S. trademark registration for "PeopleLink," the name
used on one of the Company's telephone interface products.
Government Regulation
The Company designs and manufactures its equipment in accordance with the
technical design standards of Federal Communications Commission ("FCC") Rules
Part 15, Class A and Part 68. Part 15 governs the levels of electromagnetic
radiation emanating from commercial computing equipment. The Company
endeavors to conform all of its products covered by Rule 15 with the Rule 15
standards based on internal testing. Part 68 sets forth certain standards for
telephone equipment that is to be used within the United States
telecommunications system, such as line isolation and surge protection
standards. The Company's applicable telecommunications products are each
certified by independent inspectors to meet the Part 68 standards.
The Company also designs and manufactures its equipment pursuant to
Underwriters Laboratories and industry product safety standards.
Several of the Company's products are currently registered for sale in
various international markets. The Company must conform with design standards
similar to those of the FCC in each of the foreign countries in which its
products are sold.
Manufacturing and Supplies
The Company currently manufactures and/or assembles its products using
purchased or leased manufacturing equipment. Most of the equipment presently
being used will continue to be utilized for several years. The Company's
manufacturing facility incorporates modern, modular assembly work stations and
work accessories that enhance the efficiency and quality of the manufacturing
process. If sales increase substantially, the Company would be required to
invest in additional manufacturing equipment. Subject to financial
considerations, the Company does not believe it would experience any
difficulty in obtaining any additional equipment that might be needed as a
result of any substantial sales increase (see "Management's Discussion and
Analysis -- Financial Condition and Liquidity").
The Company generally purchases its assembly components from
distributors, but also buys a limited amount directly from manufacturers.
Printed circuit boards and metal work are purchased directly from local
suppliers. Its principal suppliers are Hamilton Hallmark, Arrow Electronics,
Bell Industries, Standard Supply Company, Precise Metal Products Company, and
Precision Technology. Of these principal suppliers, only Precise Metal
Products, which does all of the Company's metal stamping work, is single
source. Precise Metal Products could be replaced by at least three local and
eight regional metal stamping companies with little disruption in the
manufacturing process. The Company's general policy is to have a minimum of
two vendor sources. Many of the components utilized are bonded by certain
distributors and manufacturers. This bonding process places ordered products
on the distributors' shelves until the product is required by the Company.
This allows the Company to reduce its inventory while maintaining available
stock.
The Company uses a real time computer system to monitor its manufacturing
process, which allows the Company to utilize cost accounting for each product
and to monitor profitability in each phase of the manufacturing process. Both
the equipment and the software are covered under maintenance contracts. The
Company has developed an extensive software back-up system that provides for
daily back-ups housed in a fire-proof safe.
Warranty and Service
The Company provides one and two-year warranties on its products which
cover both parts and labor. The Company, at its option, repairs or replaces
products that are defective during the warranty period if the proper
preventative maintenance procedures have been followed by customers. Repairs
that are necessitated by misuse of such products or are required outside the
warranty period are not covered by the Company's warranty.
In cases of defective products, the customer typically returns them to
the Company's facility in Salt Lake City, Utah. The Company's service
personnel then replace or repair the defective items and ship them back to the
customer. Generally, all servicing is done at the Company's plant, and it
charges its customers a fee for those service items that are not covered by
warranty. The Company does not offer its customers any formal written service
contracts.
Backlog
As of March 31, 1996, the Company's backlog was approximately $450,000,
all of which is scheduled to be delivered throughout fiscal 1996 and the first
half of fiscal 1997. Backlog figures include signed purchase orders. All
orders are subject to cancellation without penalty. On most orders, payment
is due within 30 days of shipment. The Company has occasionally experienced
some cancellations or postponements of a minor sort regarding its backlog.
The backlog is not seasonal in nature.
Employees
As of March 31, 1996, the Company had 93 employees, all of which were
full-time employees. None of the Company's employees are subject to a
collective bargaining agreement.
- ITEM 17: MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Nine Months Ended March 31, 1996 Compared to Nine Months Ended March 31, 1995
Sales for the nine months ended March 31, 1996 increased 3% compared to
the same period during the prior fiscal year. Shipments of new products
during the first half of the fiscal year were the primary reasons for the
increase. Offsetting this sales growth during the third quarter were weather
factors and the federal government shutdown.
Broadcast market sales for the nine months end March 31, 1996 were up 6%
over the same comparable period during fiscal 1995. Increased sales from
earlier in the fiscal year were due to the Company's new TS612 talk show
telephone system. The Company has received favorable customer response to
this product, and has finalized new enhancements which it introduced during
the last three months. Increased sales also resulted from another new
product, the Company's recently introduced Telehybrid telephone interface
unit. This new product allows broadcasters to make easy connections to either
digital or analog phone lines in various "on-air" broadcast applications.
These sales increases during the first half of the fiscal year were tempered
by severe winter weather conditions in the Northeastern United States. The
Company distributes a significant amount of its broadcast products through
dealers located in this area, and during the month of January, weather
conditions affected several of these businesses and their customers who
postponed orders. In addition, capital investment plans by broadcast
customers were uncertain due to anticipated changes in station ownership
provisions included in the then pending Telecommunications Act of 1996. After
the Telecommunications legislation passed, the approval of any such ownership
changes were then interrupted by the temporary shutdown of the Federal
Communications Commission. The Company feels that these circumstances
resulted in a temporary slowdown, and feels that Broadcast sales will be
higher in the future. Sales during the coming fiscal year are also
anticipated to increase as a result of the new GSC-3000 product series that
was unveiled at the April National Association of Broadcasters trade show in
Las Vegas. The new hardware and software products are designed to augment the
Company's existing transmitter site control products by allowing station
managers to monitor several different sites using PC-based networked systems.
Sales to the audio segment of the Teleconferencing market (the
"Audioconferencing" market) remained comparatively the same during the first
nine months as compared to the same period during the previous fiscal year.
The Company experienced higher sales during the first six months of the
current fiscal year primarily due to shipments of the new AVT line of
products. These units were designed specifically for use in conjunction with
videoconferencing and distance learning. Also contributing to
Audioconferencing sales throughout the current fiscal year were shipments of
the ET100 portable audioconferencer. The Company spent time earlier in the
1996 fiscal year making design modifications and improvements to the ET100,
and released version 2.0 during the second fiscal quarter. During the current
fiscal year's third quarter, weather conditions caused similar problems with
customers in this market as were caused in the broadcast market. However,
these sales decreases were affected more by the federal government shutdown.
A significant number of the Company's audioconferencing systems are utilized
in distance learning applications located at higher education facilities. The
Company's dealers bid many of these systems to universities and colleges who
purchase the equipment using federal grants. While grant approvals at federal
agencies were temporarily suspended, time-sensitive bids expired requiring
dealers to prepare new bid packages. The Company expects sales of its
audioconferencing products to increase, particularly its portable
audioconferencers such as its recently announced ET10 portable
audioconferencer. The ET10 is the first full duplex conferencing product
designed for use in an individual office or cubicle, and the Company began
shipments during February of 1996.
The Company's gross profit margin percentage increased from 42% to 47%
during the nine months ended March 31, 1996, as compared to the same period
during the prior fiscal year. Some of the difference stems from a moderate
sales price increase of the Company's products which took effect on July 1,
1995. In addition, the prior year's third quarter gross profit margin was
lower than normal. During the three months ended March 31, 1995, the Company
made several improvements in manufacturing processes. Included therein were
extensive revisions and updates made to the standard costs of several products
and product subassemblies. These adjustments resulted in a devaluation of the
total recorded inventory cost by approximately $160,000. Accordingly, the
Company reflected the change as additional cost of goods sold during that
quarter. The revised product costs, coupled with the price increase, resulted
in improved margins over the next three quarters ended June 30, September 30,
and December 31, 1995, when gross profit margins were 46%, 48%, and 47%,
respectively. These improvements have resulted in the current fiscal year-to-
date profit margin improvement. As anticipated, slightly lower profit margins
of new products introduced during the quarter ended March 31, 1996, along with
the aforementioned lower sales of other audioconferencing products resulted in
a 45% gross profit margin experienced during that quarter. The Company
believes that margins experienced during the rest of the 1996 calendar year
will be at approximately this same level or slightly lower as sales of these
new products become more significant. However, the Company also anticipates
higher gross profits resulting from the overall increase in sales.
For the nine-month period ended March 31, 1996 operating expenses overall
were down by 3% compared to the same period a year earlier, mainly as a result
of a 21% decrease in general and administrative costs. Such expenses were
lower as a result of cost saving efforts and efficiencies gained by modifying
the organizational structure, a process which began yielding results during
the latter half of fiscal 1995. Offsetting these savings, however, were
increases in product development costs year-to-date, which were up 26%. This
was due primarily to expenses incurred during the current fiscal year's second
and third quarters associated with new product and product enhancements, and
also as a result of lower product development costs during the third quarter
of fiscal 1995. The reason for the decrease during that period was the
approximately $75,000 of software development costs that were capitalized.
Had such costs been expensed, product development expenses would have
increased by only 13%. Marketing and selling expenses remained virtually flat
year-to-date.
The difference in interest expense incurred during the nine-month period
ended March 31, 1996 compared to the same period during fiscal 1995 stemmed
from differences in usage of the Company's line of credit facility. In
addition, due to utilizing much of its excess cash beginning in fiscal 1995,
the Company earned significantly less interest income during the first half of
fiscal 1996.
Year Ended June 30, 1995 Compared to Year Ended June 30, 1994.
The Company experienced a 26% increase in total sales during the year
ended June 30, 1995 ("fiscal 1995"), compared to the year ended June 30, 1994
("fiscal 1994"). Sales to the Company's two major markets, the Broadcast and
Audioconferencing markets, grew significantly during the year. The increases
in both markets were primarily due to the Company shipping two new products
that had been announced during the previous fiscal year.
Sales to the Broadcast market increased 26% over the previous fiscal
year. The principal factor contributing to the growth was sales of the
Company's new TS612 multiline telephone system. Created specifically for
broadcast talk shows and satellite business video conferencing, the product
has won trade show awards and wide customer acceptance. The Company plans on
introducing new TS612 enhancements and accessories during the next fiscal
year. Sales of other broadcast products also grew as a result of increased
marketing and product availability. Some of these increases, however, were
offset by the absence of any fiscal 1995 sales of its Audisk product line
which was sold during fiscal 1994. The Company plans on introducing more
Broadcast products during the coming fiscal year.
Audioconferencing market sales grew as a result of product sale increases
across the board, most notably of the new portable ET100 Audioconferencing
unit. The increases resulted from improved product availability and better
results achieved by the Company's distribution network of sales reps and
dealers. Together with increases in GT300, GT700, and TI7200 equipment and
system sales, the ET100 contributed to fiscal 1995's 40% increase in all
Audioconferencing sales compared to fiscal 1994. Although sales of the ET100
did not meet management's original fiscal 1995 internal forecasts, the Company
remains optimistic about its future potential and believes it will achieve
improved sales as a result of continued emphasis and fine tuning. The Company
believes total Audioconferencing sales will increase further as a result of
new product service introductions anticipated during the coming fiscal year.
Higher product sales, along with steady increases in the Gentner Conference
Call teleconferencing service, resulted in Audioconferencing sales
representing a record 40% of all of the Company's fiscal 1995 sales. This
compares to 36% of total sales in fiscal 1994, and 21% in fiscal 1993.
The Company's gross profit margin percentage increased from 42% in fiscal
1994, to 43% in fiscal 1995. The slight increase in gross profit was due
primarily to a different sales mix in effect during the period, as described
above. Additionally, during fiscal 1995 the Company no longer sold Audisk
products which had earned lower profit margins than most of the Company's
other Broadcast and Audioconferencing products.
Fiscal 1995 operating expenses decreased by 7% compared to fiscal 1994.
However, the prior year's results included a loss on the disposal of the
Audisk product line totaling $754,424. In addition, the Company incurred
approximately $450,000 of certain nonrecurring costs in fiscal 1994's fourth
quarter which were associated with unique organizational and structural
changes accomplished at that time. These costs were virtually all included in
general and administrative expenses. Exclusive of these two amounts, total
operating expenses in fiscal 1995 as compared to fiscal 1994 actually
increased by 22%. The increases resulted from the following factors:
Marketing and sales expenses rose 46% over the prior year.
The higher expenses, which include sales commissions, are due
mainly to the significant sales increases experienced during
the year and also because of increased activities directed to
promoting new products, primarily the TS612 and ET100.
Product development costs decreased 13 % compared to fiscal
1994. Contributing to the decrease, however, was the
capitalization of certain costs related to software
development. Had these costs been included in expenses,
product development costs would have experienced a decline of
only 5 % during fiscal 1995 over fiscal 1994. The decrease
reflects reduced outside development costs, primarily during
the latter part of fiscal 1995, as opposed to the previous
year when the Company had devoted significant resources to
the development of the two aforementioned products.
During the first half of fiscal 1995, general and
administrative expenses were higher than during the first
half of fiscal 1994 as the Company's efforts to restructure
took effect. This process, begun during fiscal 1994's third
and fourth quarters, was intended to allow the Company better
capacity to manage an increasing focus on customer relations
and overall business development. In addition, certain cost
saving measures were initiated, such as moving out of the
Company's Salt Lake downtown facility. During the latter
half of fiscal 1995, this cost reduction effort began to
yield results, with the net effect that general and
administrative expenses, exclusive of the non-recurring items
mentioned above, decreased 2% during the entire fiscal 1995
year compared to fiscal 1994.
Interest income during fiscal 1995 declined 80% when compared to fiscal
1994 due to reduced cash investment balances maintained by the Company in
fiscal 1995. During fiscal 1995, the Company utilized much of its excess cash
pursuant to the sales growth activities described above. In connection
therewith, the Company also tapped into its line of credit significantly more
during fiscal 1995, also in part to finance higher levels of inventory to
accommodate the higher sales, resulting in a 157% increase in interest expense
over the previous year.
The Company's statutory minimum provision for state income taxes was
calculated using the rate of 0.8%. The rate was different than that which
would normally have been applied (34%) to derive a tax benefit from the loss
incurred, primarily as a result of the accounting limitations imposed by FASB
Statement No. 109, "Accounting for Income Taxes." The Company adopted the new
accounting standard at the beginning of fiscal 1994. In the Company's case,
the new rules allow the Company to currently recognize a tax benefit only to
the extent of the Company's ability to carry back a portion of the loss in
order to recover taxes paid in previous years. All recoverable taxes were
already collected by the Company during fiscal 1995. The fiscal 1995 taxable
loss of approximately $700,000 is available to be carried forward to future
years and recognized as a benefit against future taxable income. In addition,
the Company also has approximately $180,000 in research and development tax
credit carryforwards. Both carryfoward amounts will fully expire by the year
2010.
Year Ended June 30, 1994 Compared to Year Ended June 30, 1993.
Sales for the fiscal year ended June 30, 1994 increased 1% to $8.78
million from $8.71 million for the year ended June 30, 1993 ("fiscal 1993").
Although the total sales level did not materially change during the year, the
Company's overall sales mix shifted dramatically. Sales to the
Audioconferencing market increased during fiscal 1994, while Broadcast market
sales declined. In addition, sales increased significantly to the
Professional Audio market, traditionally a minor portion of total Company
sales in the past.
Audioconferencing market sales rose during the year as a result of
several new products introduced just prior to the beginning of fiscal 1994.
The Company's GT300, GT700, and TI7200 lines of Audioconferencing equipment
and systems began shipping in May 1993, and in June 1994 the products won an
award for Special Recognition from the International Teleconferencing
Association. Sales of these products were the main reason Audioconferencing
market sales grew 79% over the prior year's sales. The Company's service
department, Gentner Conference Call ("GCC"), also showed steady growth in
fiscal 1994, though sales were not yet as significant as product sales. Sales
to the Audioconferencing market were 36% of all fiscal 1994 sales, compared to
21% for fiscal 1993. The Company plans on increasing Audioconferencing sales
further by shipping new Audioconferencing products during fiscal 1995. In
November 1993, the Company unveiled its new ET100, an economical, portable
Audioconferencing unit. This new product does not require the use of a
separate, dedicated phone line, and the Company began shipments during the
fall of 1994. The Company believes that the Audioconferencing market offers
the highest potential for increased overall sales.
In years prior to fiscal 1994, sales to the Professional Audio market
usually comprised approximately 9% of total Company sales. During fiscal
1994, however, this number increased to 17% as a result of a 94% increase in
Professional Audio sales. Most of the increase was attributable to sales of
the Company's new Assistive Listening System ("ALS") products. Introduced
during the late spring of 1993, the products are designed to help
organizations comply with the Americans with Disabilities Act, specifically as
it relates to the hearing impaired. The Company expects that improved product
designs, new product offerings, and significant new focus in sales and
marketing efforts will contribute to ALS sales increases during fiscal 1995.
During fiscal 1994, the Company reviewed its position in the Broadcast
market with respect to its Audisk product line. Management concluded that the
Company could better utilize its core technological competencies in areas
other than computer network-type systems such as Audisk. Accordingly, the
Company sold the product line to the Audisk system's hardware component
manufacturer, who desired to continue selling the systems and support existing
customers. As a result of this decision, Audisk sales were eventually reduced
to zero, beginning in the second quarter of the fiscal year, from total sales
in fiscal 1993 of $1,750,575. The sale of the Audisk product line is the
primary reason why sales to the Broadcast market declined 34% during fiscal
1994 compared to the previous year. The Audisk product line was acquired in
1992 at a cost to the Company of $229,000.
Sales to the Broadcast market in the future are expected to be
strengthened by the introduction of a recently announced new telephone
interface product, the TS612 telephone system. Created specifically for
broadcast talk shows and satellite business video conferencing, the TS612 won
two awards for excellence at the March National Association of Broadcasters
trade show in Las Vegas. The Company began shipments in the fall of 1994.
The Company's gross profit margin percentage increased from 38% in fiscal
1993 to 42% in fiscal 1994. The increase in gross profit was due to a shift
in sales mix during fiscal 1994, primarily away from the lower margin Audisk
products. Offsetting the Audisk sales decline was the increase in sales to
the Audioconferencing market of the new Audioconferencing products that carry
higher profit margins.
As a result of the aforementioned sale of the Audisk product line, the
Company wrote off certain capitalized costs formerly included in accounts
receivable, inventory, and other assets. Furthermore, the Company incurred
certain expenses associated with terminating the employment agreement of the
individual from whom the Audisk product was originally acquired. The
aggregate amount of these costs totaled $754,424, shown as a separate line
item on the accompanying 1994 Statement of Operations.
Operating expenses, not including those associated with the Audisk
disposal, increased during fiscal 1994 in the aggregate by 35% when compared
to fiscal 1993. The increases comprised a number of factors as follows:
Product development costs increased 40%, stemming from the
introduction of new products, most notably the ET100
Audioconferencer and the TS612 telephone system. These two
products represent an improvement in the Company's
traditional product structure. Rather than in the usual,
rack-mount metal boxes, significant components are housed in
molded plastic casings and have been designed utilizing
newer, surface mount circuit board technology. Although more
expensive to design, the Company believes these changes will
result in improved performance and greater customer
acceptance of the products. The latter is particularly
important with respect to the ET100, as it is targeted to a
much more end user-oriented segment of the Audioconferencing
market.
Operating expenses also rose during fiscal 1994 over fiscal
1993 as a result of hiring additional administrative
employees needed to manage increases in domestic and
international orders and to improve customer service. In
addition, the Company incurred higher rent and utility costs
associated with the Company's downtown Salt Lake City
facility. In April 1994, the Company determined it was in
its best long-term interest to move out of the downtown
offices and bring all sales and administrative groups
together at the Research Way location. This move is expected
to allow the Company to focus more on customer needs and
satisfaction, while saving on occupancy costs in the long
run.
The Company also incurred some singular costs during the
fourth quarter associated with certain organizational and
structural changes. Including the office move referred to
above, these changes were made to improve the Company's
ability to accommodate future growth and improve its
operational efficiency. In addition, the Company incurred
certain costs associated with the separation of the Company's
former President, Chief Financial Officer and Chief Operating
Officer, William V. Trowbridge. The total of all these
significant reorganization, moving, and severance expenses
totaled approximately $450,000.
The Company incurred additional product development and marketing expenses
during the first part of fiscal 1995, primarily associated with the ET100 and
the TS612.
During the year ended June 30, 1994, interest income declined 27% when
compared to the prior fiscal year due to lower interest rates on lower
investment balances. Interest expense decreased 10% from a combination of two
factors. First, the Company increased its long-term capital leases and notes
since the previous year. These arrangements were entered into principally to
finance the Company's conference call service department. Second, the
increased interest expense incurred by these obligations was more than offset
by a decrease in interest expense on the short-term line of credit, which the
Company did not utilize as much during fiscal 1994.
The Company's effective income tax rate (i.e., a benefit of 12%) used to
calculate the tax benefit derived from fiscal 1994's operating loss, was
different than the expected federal statutory income tax rate of 34%, again
primarily as a result of the accounting limitations imposed by FASB Statement
No. 109.
Financial Condition and Liquidity
The Company's current ratio increased from 1.8:1 to 2.3:1 during the nine
months since June 30, 1995. The factor contributing most to the change was an
adjustment of short-term debt which occurred during fiscal 1996's first
quarter. The Company obtained permanent long-term financing for several items
of furniture and equipment acquired over the previous two years, and applied
the proceeds towards the short-term line of credit. This enabled the Company
during the second quarter of fiscal 1996 to significantly reduce the amounts
owing to vendors, thus reducing the accounts payable balance by 18% by
December 31, 1995. Accounts payable balances were then reduced by another 21%
during this last third quarter in part by using funds collected from
customers, thereby reducing the balance in accounts receivable. Inventory has
increased 8% during the nine-month period as a result of the Company
continuing its efforts of providing adequate finished product availability to
satisfy current and expected customer demand. Yet the Company also expects to
continue benefiting from ongoing inventory management programs started during
fiscal 1995. Such efforts, intended to improve raw material purchasing
efficiencies and reduced inventory size overall, began yielding results during
the second quarter of fiscal 1996, and served to reduce raw materials 21%
during the three months ended March 31, 1996. Unfortunately, the sales
decline during the same period resulted in finished goods inventory levels
rising during the quarter by 35%, a rate faster than anticipated. As a
result, the Company adjusted purchasing and manufacturing schedules in an
effort to temporarily reduce the production of finished goods until sales
decreased the stock on hand. The 16% decline in work in progress inventory
reflects these efforts.
During the first quarter of fiscal 1996, the Company renewed its line of
credit arrangement with a commercial bank. The terms of the arrangement
remained the same as before, with $1.75 million available at 1% over prime,
maturing on October 31, 1996. There was $1.13 million payable at March 31,
1996.
The Company is continuing to maximize its efforts to maintain stable cash
flows during an overall period of sales growth and ongoing product
development. By reducing its short-term debt, the Company has been able to
increase available cash reserves. The Company believes that its cash flows
will also improve if the Company can achieve its projected level of
profitability following last fiscal year's period of operational expansion and
intense product promotion. Already the Company has seen the positive
operational cash flow results from this course of action. As sales continue
to increase and profits are achieved, the Company anticipates that it can
achieve its business plan through a combination of internally generated funds,
and short-term and/or long-term borrowing, if necessary.
As described in the footnotes to the financial statements, the Company
has certain commitments relating to capital expenditures. These commitments
are in the form of obligations classified as long-term debt and capital
leases, both related to the financing of furniture and equipment. Together,
the current obligations on these commitments were $240,251 in fiscal 1995 and
will be $265,664 in fiscal 1996.
To the extent any statement presented herein deals with information that
is not historical, such statement is necessarily forward-looking. As such,
it is subject to the occurrence of many events outside of the Company's
control or to the various risk factors included elsewhere in this
prospectus that could cause the Company's results to differ materially from
those anticipated.
- ITEM 18: DESCRIPTION OF PROPERTY
All of the Company's operations, including its executive offices,
Audioconferencing call service, product sales, research and development, and
manufacturing, are conducted in a 20,000 square foot facility located south of
Salt Lake City (the "Research Way facility"). The Research Way facility
currently is a modern building leased by the Company. The base annual rent
for this facility currently is approximately $11,000. The facility is in good
condition and the Company believes the facility will be reasonably adequate to
meet its immediate needs. The Company has negotiated with the landlord of the
Research Way facility to build an expansion to the existing building.
Construction on the new addition began May 23, 1996, and the Company expects
to occupy the new space by the end of the calendar year. Monthly rent on the
entire 40,000 sq. ft. space at that time will be approximately $20,500. The
new facilities will allow the Company to grow steadily through the next 10
years, because the landlord has granted certain expansion options to the
Company with respect to adjacent building space.
- ITEM 19: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Gentner Research Ltd. ("GRL"), is a related limited partnership, formed
in August 1985, in which the Company is the general partner and Russell
Gentner, Edward Dallin Bagley and, among other unrelated parties, and certain
members of their families, are the limited partners. In 1987 and 1988, GRL
sold to the Company proprietary interests in the VRC-1000 (now VRC-2000),
VRC-1000 Modem (now VRC-2000), and Digital Hybrid in exchange for royalty
payments. Royalty expense with GRL for the years ending June 30, 1995 and
1994 was $17,900 and $21,300 respectively. The following directors and/or
executive officers and members of their immediate families have purchased the
following interests in GRL:
Russell D. Gentner (Pres/CEO/Director) . . . . . . . . . . . 5.21%
Edward Dallin Bagley (Director). . . . . . . . . . . . . . . 10.42%
Edward N. Bagley (Director). . . . . . . . . . . . . . . . . 5.21%
Hyrum S. Gentner (father of Russell Gentner) . . . . . . . . 5.21%
Robert O. Baldwin (father of Brad Baldwin) . . . . . . . . . 10.42%
The Company also formed a second related limited partnership, Gentner
Research II, Ltd. ("GR2L"), also in which it acts as general partner. New
products are nearing completion, and once shipments begin, the Company intends
to enter into royalty agreements similar to those entered into with GRL. GR2L
received approximately $150,000 in investment capital. The following
directors and/or executive officers and members of their immediate families
have purchased the following interests in GR2L:
William H. Gillman (Vice President). . . . . . . . . . . . . 6.39%
Brad R. Baldwin (Director) . . . . . . . . . . . . . . . . . 3.19%
Robert O. Baldwin (father of Brad Baldwin) . . . . . . . . . 9.58%
Hyrum S. Gentner (father of Russell Gentner) . . . . . . . . 3.19%
Edward D. Bagley (Director). . . . . . . . . . . . . . . . . 6.39%
Edward N. Bagley (father of Edward D. Bagley) . . . . . . . 6.39%
On June 30, 1995, the Company issued 117,000 shares of the Company's
common stock to four related parties in a private stock issuance. Two of the
investors were directors, Edward D. Bagley and Brad R. Baldwin, the third was
the son of Edward D. Bagley, and the fourth was a family trust of another
director, Edward N. Bagley. The shares were sold at $0.625 per share, for a
total offering of $73,125. The price represented the fair market value for
such restricted stock. The funds were used to partially pay down the
outstanding balance of a line of credit.
- ITEM 20: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's common stock is traded in the over-the-counter market on
the NASDAQ System under the symbol "GTNR." Warrants are traded under the
symbol "GTNRW." The following table sets forth quotations for the common
stock for the last two fiscal years.
Fiscal 1996 High Low
----------- ---- -----
First Quarter $1.94 $0.78
Second Quarter 1.63 0.88
Third Quarter 1.31 0.94
Fiscal 1995
--------------
First Quarter $0.84 $0.59
Second Quarter 0.81 0.56
Third Quarter 1.22 0.72
Fourth Quarter 1.03 0.69
Fiscal 1994
--------------
First Quarter $2.06 $1.56
Second Quarter 2.06 1.31
Third Quarter 1.68 0.94
Fourth Quarter 1.06 0.75
The above inter-dealer quotations were obtained from the National Association
of Securities Dealers (NASD), do not reflect markups, markdowns, or
commissions, and may not represent actual transactions.
The Company does not pay a cash dividend and does not anticipate doing so
in the foreseeable future. Currently, the Company's line of credit
arrangement prohibits the payment of dividends.
As of March 31, 1996 there were approximately 3,500 holders of common
stock of the Company.
- ITEM 21: EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth the compensation of the Chief Executive
Officer of the Company and the other most highly compensated executive
officers of the Company for each of the Company's last three fiscal years
ended June 30, 1995, whose total salary and bonus for the year exceeded
$100,000 for services rendered in all capacities to the Company during such
fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation
Other
Annual
Fiscal Compen-
Name and Position Year Salary Bonus sation
- --------------------- ------ ------ ----- -------
Russell D. Gentner 1994-95 $150,000 $15,000 none
Chairman, 1993-94 $150,000 $15,000 none
CEO, President 1992-93 $150,000 $35,000 none
William H. Gillman 1994-95 $100,000 none none
Vice-President 1993-94 $ 12,827 none none
of Operations 1992-93 - - -
Long Term Compensation
Other
Restricted Annual
Stock Options LTIP Compen-
Name and Position Awards /SARS Payouts sation*
- --------------------- ---------- ------- ------- -------
Russell D. Gentner 1994-95 none none $890
Chairman, 1993-94 none none $890
CEO, President 1992-93 $100,000 none $890
William H. Gillman 1994-95 none none $538
Vice-President 1993-94 none none none
of Operations 1992-93 - - -
*These amounts reflect the Company's contributions to the deferred
compensation plan (401(k) plan).
Stock Options/SARS
The following table sets forth the stock option and SAR grants to the
named executive officers in the last fiscal year:
OPTION/SAR GRANTS IN FISCAL YEAR ENDED JUNE 30, 1995
(INDIVIDUAL GRANTS)
Percent
of total
options/SARs Exercise
Options/SARs granted to or base Expir-
Granted employees in price ation
Name and Position (Number) fiscal year ($/share) Date
- ------------------- ------------ ----------- --------- ------
Russell D. Gentner -0- -- -- --
Chairman,
CEO, President
William H. Gillman -0- -- -- --
Vice-President
of Operations
Aggregated Stock Option/SAR Exercises
The following table sets forth the aggregated stock options and SARs
exercised by the named executive officers in the last fiscal year and the
year-end value of unexercised options and SARs:
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR ENDED JUNE 30, 1995
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of
Shares unexercised Value of
acquired on options/SARs unexercised
exercise # Value at FY-end (#) in-the-money
exercisable/ realized exercisable options/SARs
Name and Position unexercisable ($) unexercisable at FY-end
- ------------------ ------------- --------- ------------- ----------
Russell D. Gentner -0- -- 90,000/40,000 $11,250/
Chairman, $5,000
CEO, President
William H. Gillman -0- -- 17,500/7,500 $ 2,187/
Vice-President $938
of Operations
- ITEM 22: FINANCIAL STATEMENTS
Index to Financial Statements
Annual Financial Statements
---------------------------
Report of Independent Auditors
Balance Sheets for June 30, 1995 and 1994.
Statements of Operations for fiscal years ended June 30, 1995,
1994, and 1993.
Statements of Cash Flows for fiscal years ended June 30, 1995,
1994, and 1993.
Statements of Shareholders' Equity for fiscal years ended June
30, 1995, 1994, and 1993.
Notes to Financial Statements
Interim Financial Statements
----------------------------
Balance Sheets for March 31, 1996 (unaudited) and June 30, 1995.
Statements of Operations for the nine months ended March 31,
1996 and 1995 (unaudited).
Condensed Statements of Cash Flows for the nine months ended March
31, 1996 and 1995 (unaudited).
Notes to Financial Statements
ANNUAL FINANCIAL STATEMENTS
- ---------------------------
[Ernst & Young letterhead]
Report of Independent Auditors
The Board of Directors and Shareholders
GENTNER COMMUNICATIONS CORPORATION
We have audited the accompanying balance sheets of Gentner Communications
Corporation as of June 30, 1995 and 1994, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years
in the period ended June 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gentner Communications
Corporation at June 30, 1995 and 1994, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1995,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
/s/
Salt Lake City, Utah
August 4, 1995
GENTNER COMMUNICATIONS CORPORATION
BALANCE SHEETS
June 30,
------------------------
1995 1994
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . $ 119,238 $ 433,824
Accounts receivable, less allowances
of $130,000 in 1995 and $320,000
in 1994 . . . . . . . . . . . . . . . . 1,644,376 1,337,118
Refundable income taxes. . . . . . . . . . - 245,343
Inventory. . . . . . . . . . . . . . . . . 3,324,866 2,443,444
Other current assets . . . . . . . . . . . 140,088 99,372
---------- ----------
Total current assets . . . . . . . . 5,228,568 4,559,101
Property and equipment, net . . . . . . . . . 1,829,161 1,498,641
Other assets, net . . . . . . . . . . . . . . 140,731 139,479
---------- ----------
Total assets. . . . . . . . . . . . . $7,198,460 $6,197,221
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable. . . . . . . . . . . . . . . $1,508,687 $ -
Accounts payable . . . . . . . . . . . . . 943,723 1,288,007
Accrued expenses . . . . . . . . . . . . . 297,426 574,361
Current portion of long-term debt. . . . . 93,506 39,343
Current portion of capital lease
obligations . . . . . . . . . . . . . . . 128,486 155,434
---------- ----------
Total current liabilities . . . . . . 2,971,828 2,057,145
Long-term debt. . . . . . . . . . . . . . . . 229,372 81,385
Capital lease obligations . . . . . . . . . . 283,799 302,292
---------- ----------
Total liabilities . . . . . . . . . . 3,484,999 2,440,822
Commitments
Shareholders' equity:
Common stock, 50,000,000 shares
authorized, par value $.001,
7,455,375 and 7,338,375 shares
issued and outstanding at
June 30, 1995 and 1994. . . . . . . . . 7,455 7,338
Additional paid-in capital . . . . . . . . 4,244,641 4,171,633
Accumulated deficit. . . . . . . . . . . . (538,635) (422,572)
---------- ----------
Total shareholders' equity. . . . . . 3,713,461 3,756,399
---------- ----------
Total liabilities and
shareholders' equity . . . . . . . . $7,198,460 $6,197,221
========== ==========
See accompanying notes
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
Years ended June 30,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
Net sales . . . . . . . . . . . . . . . $11,106,078 $ 8,779,522 $ 8,711,827
Cost of goods sold. . . . . . . . . . . 6,346,348 5,074,926 5,394,508
----------- ----------- -----------
Gross profit . . . . . . . . . . . . 4,759,730 3,704,596 3,317,319
Operating expenses:
Marketing and selling. . . . . . . . 2,355,900 1,618,887 1,582,624
General and administrative . . . . . 1,539,291 1,766,082 945,220
Product development. . . . . . . . . 802,062 920,079 656,957
Loss on disposal of Audisk
product line. . . . . . . . . . . . - 754,424 -
----------- ----------- -----------
Total operating expenses. . . . . 4,697,253 5,059,472 3,184,801
----------- ----------- -----------
Operating income (loss) . . . . . 62,477 (1,354,876) 132,518
Other income (expense):
Interest income. . . . . . . . . . . 11,479 56,577 77,867
Interest expense . . . . . . . . . . (183,790) (71,497) (79,143)
Other, net . . . . . . . . . . . . . (5,329) (54,190) (107,835)
----------- ----------- ----------
Total other income
(expense). . . . . . . . . . . . (177,640) (69,110) (109,111)
----------- ----------- ----------
Income (loss) before taxes. . . . . . . (115,163) (1,423,986) 23,407
Provision (benefit) for
income taxes . . . . . . . . . . . . . 900 (165,000) 661
----------- ----------- -----------
Net income (loss) . . . . . . . . $ (116,063) $(1,258,986) $ 22,746
=========== =========== ===========
Earnings (loss) per
common share . . . . . . . . . . . . . $ (0.02) $ (0.17) $ -
=========== =========== ===========
See accompanying notes
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
Years ended June 30,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
Cash flows from operating activities:
Cash received from customers . . . . $10,624,914 $ 8,506,138 $ 8,088,101
Cash paid to suppliers and
employees . . . . . . . . . . . . (11,937,537) (8,657,630) (8,396,825)
Interest received. . . . . . . . . . 10,229 55,952 78,537
Interest paid. . . . . . . . . . . . (176,075) (72,675) (78,821)
Income taxes (paid) refunded . . . . 243,643 5,421 (140,097)
----------- ----------- -----------
Net cash used in operating
activities . . . . . . . . . . . (1,234,826) (162,794) (449,105)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of investment securities . - - (57,275)
Conversion of investment fund to
money market fund - cash equivalent - - 1,135,544
Purchases of property and equipment (632,397) (337,308) (216,052)
Increase in capitalized software
development and purchased
software costs. . . . . . . . . . . (95,700) - -
Proceeds from the sale of equipment
and other assets. . . . . . . . . . - 304 1,000
Issuance of notes receivable . . . . (45,320) (34,115) -
Repayment of notes receivable. . . . 6,665 21,384 -
Decrease (increase) in other assets 75,584 (26,633) (13,851)
----------- ----------- -----------
Net cash provided by (used in)
investing activities . . . . . . (691,168) (376,368) 849,366
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock . . . . . . . . . . . . . . 73,125 - -
Exercise of warrants and employee
stock options . . . . . . . . . . - 19,180 -
Net (repayment) borrowing under
line of credit. . . . . . . . . . 1,225,000 - (350,000)
Net financing of trade payables
with short-term notes . . . . . . 283,687 - -
Proceeds from issuance of
long-term debt. . . . . . . . . . 282,500 - 162,606
Principal payments of capital
lease obligations . . . . . . . . (172,554) (219,948) (192,951)
Principal payments of
long-term debt. . . . . . . . . . (80,350) (86,191) (40,541)
----------- ----------- -----------
Net cash provided by (used in)
financing activities . . . . . 1,611,408 (286,959) (420,886)
----------- ----------- -----------
Net decrease in cash and
cash equivalents . . . . . . . (314,586) (826,121) (20,625)
Cash and cash equivalents at the
the beginning of the year. . . . . . 433,824 1,259,945 1,280,570
----------- ----------- -----------
Cash and cash equivalents at the
end of the year. . . . . . . . . . . $ 119,238 $ 433,824 $ 1,259,945
=========== =========== ===========
Reconciliation of net income (loss)
to net cash used in operating
activities:
Net income (loss). . . . . . . . . $ (116,063) $(1,258,986) $ 22,746
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization
of property and equipment. . . 427,355 283,266 260,462
Amortization of other assets. . 23,265 60,505 45,946
Loss on investments . . . . . . - - 15,905
Loss on disposal of Audisk
product line . . . . . . . . . - 754,424 -
Other . . . . . . . . . . . . . 1,635 24,739 20,361
Changes in operating assets
and liabilities, exclusive of
Audisk-related amounts:
Accounts receivable . . . . (307,258) (260,617) (504,843)
Refundable income taxes. . . 245,343 (157,136) (88,207)
Inventory . . . . . . . . . (881,422) (274,432) (691,149)
Prepaid expenses . . . . . . (6,462) 10,736 101,756
Accounts payable and
accrued expenses. . . . . . (621,219) 657,150 373,210
Deferred income taxes. . . . - (2,443) (5,292)
----------- ----------- -----------
Net cash used in operating
operating activities. . . $(1,234,826) $(162,794) $(449,105)
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Years ended June 30,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
Property and equipment financed by
capital leases . . . . . . . . . . . $ 127,113 $62,094 $489,986
=========== =========== ===========
See accompanying notes
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Common Stock Additional Earnings Investment
----------------- Paid-In (Accumulated Valuation
Shares Amount Capital Deficit) Allowance
--------- ------ ---------- -------- ---------
Balances at June 30, 1992 7,313,900 $7,314 $4,152,477 $813,668 $(29,541)
Market valuation
adjustment for
long-term
securities. . . . . - - - - 29,541
Net income . . . . . - - - 22,746 -
--------- ------ ---------- -------- ---------
Balances at June 30, 1993 7,313,900 7,314 4,152,477 836,414 -
Exercise of warrants
and employee stock
options . . . . . . 24,475 24 19,156 - -
Net loss . . . . . . - - - (1,258,986) -
--------- ------ ---------- -------- ---------
Balances at June 30, 1994 7,338,375 7,338 4,171,633 (422,572) -
Issuance of common
stock (no offering
costs incurred) . . 117,000 117 73,008 - -
Net loss . . . . . . - - - (116,063) -
--------- ------ ---------- -------- ---------
Balances at June 30, 1995 7,455,375 $7,455 $4,244,641 $(538,635) $ -
========= ====== ========== ======== =========
See accompanying notes
GENTNER COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Gentner Communications Corporation (the Company), designs and
manufactures high-technology electronic equipment for the Broadcast,
Audioconferencing, and Professional Audio markets. The Company also provides
domestic and international conference calling services. The Company grants
credit without requiring collateral to substantially all its customers within
these markets.
Summary of Significant Accounting Policies
Cash Equivalents - The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Inventory - Inventories are stated at the lower of cost (first-in, first-out)
or market.
Revenue Recognition - Revenue from product sales is recognized at the time
product is shipped by the Company to its customers, including distributors,
all of which are unaffiliated, and net of allowances for returns and
uncollectible accounts.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization are provided over the estimated useful lives of
the respective assets using the straight-line method.
Other Assets - Other assets consist primarily of intangible assets which are
stated at cost less accumulated amortization. The Company amortizes these
costs on a straight-line basis over three to ten years.
Earnings (Loss) Per Common Share - Earnings (loss) per common share was
calculated using the modified treasury stock method, and was based on weighted
average equivalent shares outstanding of 7,338,697, 7,330,488, and 7,313,900,
for the years ended June 30, 1995, 1994, and 1993. Stock options and warrants
to purchase common stock have been excluded from the computation of per share
amounts in years when the effect was antidilutive.
Research and Development Costs - Research and development costs are expensed
as incurred.
Software Development Costs - The Company capitalizes a portion of its software
development costs. Both capitalized software development costs and purchased
software costs are amortized on a straight-line basis over the estimated
useful life of three years or the ratio of current revenue to the total of
current and anticipated future revenue, whichever is greater. Amortization
generally commences when the related products begin shipping. The total of
purchased software costs and software development costs capitalized during the
year ended June 30, 1995 was $95,700. Capitalizable costs in prior periods
were immaterial. Amortization expense recorded during that same year was
$13,292. Unamortized costs are stated at the lower of cost or net realizable
value and are included in other assets for 1995 net of accumulated
amortization.
Income Taxes - Effective July 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the liability method
required by FASB Statement No. 109, "Accounting for Income Taxes." As
permitted under the new rules, prior years' financial statements have not been
restated. The cumulative effect of adopting Statement 109 was not
significant.
Reclassifications - Certain reclassifications have been made to prior years'
amounts to conform with the current year presentation.
2. SIGNIFICANT CUSTOMER
The Company sells a substantial portion of its products to a major
distributor in the Broadcast market. For the fiscal years ended June 30,
1995, 1994, and 1993, sales to this distributor aggregated $1,946,775 (18%),
$1,385,110 (16%), and $2,478,140 (28%), respectively. At the end of those
years amounts due from this customer were $239,976, $83,014, and $292,713,
respectively.
3. INVENTORY
Inventory is summarized as follows:
June 30,
------------------------
1995 1994
---------- ----------
Raw materials. . . . . . . . . . . . . . $ 959,478 $ 882,388
Work in progress . . . . . . . . . . . . 1,380,393 849,949
Finished goods . . . . . . . . . . . . . 984,995 711,107
---------- ----------
Total inventory. . . . . . . . . . . . $3,324,866 $2,443,444
========== ==========
4. PROPERTY AND EQUIPMENT
Major classifications of property and equipment and estimated useful
lives are as follows:
June 30,
------------------------
1995 1994
---------- ----------
Office furniture and equipment -
5 to 10 years . . . . . . . . . . . . . $2,175,283 $1,893,890
Manufacturing and test equipment -
5 to 10 years . . . . . . . . . . . . . 1,051,043 800,529
Telephone bridging equipment -
10 years. . . . . . . . . . . . . . . . 417,434 205,855
Vehicles - 3 to 5 years. . . . . . . . . 16,753 16,753
---------- ----------
3,660,513 2,917,027
Accumulated depreciation and amortization (1,831,352) (1,418,386)
---------- ----------
Net property and equipment . . . . . $1,829,161 $1,498,641
========== ==========
5. OTHER ASSETS
Other assets consist principally of deposits, officer notes receivable,
insurance policy cash values, capitalized software costs, and purchased
technology. Amortization is computed on a straight-line basis over three to
ten years for those assets with limited useful lives. Accumulated
amortization was $74,331 and $52,720 at June 30, 1995 and 1994, respectively.
6. LINE OF CREDIT
The Company maintains a line of credit ($1,225,000 outstanding and
$1,750,000 available at June 30, 1995, none outstanding and $1,500,000
available at June 30, 1994) with a commercial bank, which expires October 31,
1995 and which the Company anticipates renewing beyond that date. Any
borrowings accrued interest at the rate of 1% over prime (10% as of June 30,
1995). The terms of the line of credit prohibit the payment of dividends and
require the Company to maintain other defined financial ratios and restrictive
covenants. No compensating balance arrangements are required.
7. LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
------------------------
1995 1994
---------- ----------
8.5% note due to a financial institution,
with monthly payments of $4,008, due
April 1997, secured by manufacturing and
test equipment with a book value of
$62,157. . . . . . . . . . . . . . . . . $ 81,395 $ 120,728
1.5% over prime note due to a financial
institution, with monthly payments of
$5,846, due July 1999, secured by
manufacturing and test equipment with a
book value of $225,543 . . . . . . . . . 241,483 -
---------- ----------
322,878 120,728
Less current portion . . . . . . . . . . (93,506) (39,343)
---------- ----------
Total long-term debt . . . . . . . . $ 229,372 $ 81,385
========== ==========
Annual principal installments of long-term debt are $93,506, $94,470,
$60,999, $66,556, and $7,347 for the years ending June 30, 1996, 1997, 1998,
1999, and 2000, respectively.
8. LEASES
The Company has entered into capital leases with finance companies to
finance the purchase of certain furniture and equipment. Property and
equipment under capital leases are as follows:
June 30,
------------------------
1995 1994
---------- ----------
Office furniture and equipment . . . . . $ 353,217 $ 353,746
Manufacturing equipment. . . . . . . . . 92,582 92,582
Telephone bridging equipment . . . . . . 320,050 192,937
---------- ----------
765,849 639,265
Accumulated amortization . . . . . . . . (279,155) (163,281)
---------- ----------
Net property and equipment under
capital leases . . . . . . . . . . $ 486,694 $ 475,984
========== ==========
Future minimum lease payments under capital leases and noncancelable
operating leases with initial terms of one year or more are as follows:
Capital Operating
---------- ----------
For years ending June 30:
1996 . . . . . . . . . . . . . . . . . $ 172,158 $ 283,642
1997 . . . . . . . . . . . . . . . . . 160,828 273,688
1998 . . . . . . . . . . . . . . . . . 117,263 241,202
1999 . . . . . . . . . . . . . . . . . 34,932 33,304
2000 . . . . . . . . . . . . . . . . . 7,885 7,799
Thereafter . . . . . . . . . . . . . . - -
---------- ----------
Total minimum lease payments. . . . 493,066 $ 839,635
==========
Less use taxes . . . . . . . . . . . . . (29,004)
----------
Net minimum lease payments. . . . . 464,062
Less amount representing interest. . . . (51,777)
----------
Present value of net minimum lease
payments . . . . . . . . . . . . . 412,285
Less current portion . . . . . . . . . . (128,486)
----------
Capital lease obligations . . . . . 283,799
==========
Certain operating leases contain escalation clauses based on the
consumer price index. Rental expense, which was composed of minimum rentals
under operating lease obligations, was $146,755, $223,139, and $192,012, for
the years ended June 30, 1995, 1994, and 1993, respectively. The Company's
operating lease on its facility, which expires August 31, 1998, provides for a
renewal option extending the terms an additional two years. Rates charged
would be at prevailing market rates at the time of renewal.
9. ROYALTY AGREEMENTS
The Company is the general partner of two limited partnerships, Gentner
Research Ltd. ("GRL"), and Gentner Research II, Ltd. ("GR2L"), both related
parties. GRL sold the proprietary interest in a remote control product line
to the Company in exchange for royalty agreements in 1987 and 1988. Royalty
expense under the agreements with GRL for the years ended June 30, 1995, 1994,
and 1993, was $17,900, $21,300, and $31,200, respectively. Once new product
is developed, the Company plans on entering into similar arrangements with
GR2L, which is now in the development stage. At June 30, 1995, GR2L owed the
Company $27,970 in start-up and other incidental expenses.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
June 30,
------------------------
1995 1994
---------- ----------
Deferred tax liabilities:
Tax over book depreciation . . . . . . $ 126,000 $ 164,000
Unamortized software costs . . . . . . 32,000 -
---------- ----------
Total deferred tax liabilities . . . 158,000 164,000
---------- ----------
Deferred tax assets:
Accounts receivable and other reserves 34,000 98,000
Capital loss carryforward. . . . . . . - 19,000
UNICAP inventory costs . . . . . . . . - 12,000
Inventory reserves . . . . . . . . . . 41,000 78,000
Product warranty accruals. . . . . . . 4,000 4,000
Net operating loss carryforwards . . . 413,000 136,000
Tax credit carryforwards . . . . . . . 186,000 240,000
---------- ----------
Total deferred tax assets. . . . . . 678,000 587,000
Valuation allowance for deferred tax
assets. . . . . . . . . . . . . . . . (520,000) (423,000)
---------- ----------
Net deferred tax assets. . . . . . . 158,000 164,000
---------- ----------
Net deferred taxes . . . . . . . . . $ - $ -
========== ==========
Significant components of the provision (benefit) for income taxes for
the fiscal years ended June 30 are as follows:
Liability Method Deferred
------------------- Method
1995 1994 1993
------ --------- -------
Current:
Federal. . . . . . . . . . . . . . $ - $(140,000) $ 3,754
State. . . . . . . . . . . . . . . 900 (25,000) 2,199
------ --------- -------
Total current. . . . . . . . . . 900 (165,000) 5,953
------ --------- -------
Deferred:
Federal. . . . . . . . . . . . . . - - (3,013)
State. . . . . . . . . . . . . . . - - (2,279)
------ --------- -------
Total deferred . . . . . . . . . - - (5,292)
------ --------- -------
$ 900 $(165,000) $ 661
====== ========= =======
The components of the benefit for deferred income taxes for the year
ended June 30, 1993 are as follows:
Depreciation expense deducted for tax
returns in periods different than for
financial reporting. . . . . . . . . . . . . . . . . . . $ 2,739
Reserves deducted for tax returns in periods
different than for financial reporting . . . . . . . . . (7,588)
Inventory costs deducted for tax returns in
periods different than for financial reporting . . . . . (959)
Tax credits utilized. . . . . . . . . . . . . . . . . . . -
Other, net. . . . . . . . . . . . . . . . . . . . . . . . 516
-------
Benefit for deferred income taxes . . . . . . . . . . . $(5,292)
=======
The reconciliation of income tax computed at the U.S. federal statutory
tax rate to income tax expense (benefit) for the years ended June 30 is:
Liability Method Deferred
------------------- Method
1995 1994 1993
------ ------ --------
Tax at federal statutory rate. . . . (34.0)% (34.0)% 34.0%
Increase (reduction) in computed
tax rate resulting from:
State income tax, net of federal
effect . . . . . . . . . . . . . (3.5) (3.5) (.4)
Valuation allowance . . . . . . . 20.0 28.5 -
Nondeductible expenses applicable
to R & D tax credit . . . . . . 12.1 .8 -
Statutory tax disallowance of
entertainment expenses . . . . . 3.4 .1 9.6
Nondeductible life
insurance premiums . . . . . . . .8 .1 7.0
Write-off of certain intangible
assets . . . . . . . . . . . . . - - (41.6)
Nondeductible intangible asset
amortization and other . . . . . 2.0 .2 25.0
R & D tax credit. . . . . . . . . - - (15.0)
Income taxed at other than the
statutory rate . . . . . . . . . - (3.8) (15.8)
------ ------ --------
0.8% (11.6)% 2.8%
====== ====== ========
At June 30, 1995, for income tax purposes the Company had net operating
loss and research and development tax credit carryforwards of approximately
$1,120,000 and $180,000, respectively, that expire in 2010.
11. STOCK OPTIONS
The Company's 1990 Incentive Plan has available 700,000 shares of common
stock for issuance to employees and directors, including the grant of stock
options. Changes in the number of stock options under the Plan are as
follows:
Price Range
Shares Per Share
------- --------------
Year ended June 30,
1995:
Granted . . . . . . . . . . . . . 25,000 $0.81
Exercised . . . . . . . . . . . . - -
Expired and canceled. . . . . . . (11,000) $0.81 to $0.88
Outstanding . . . . . . . . . . . 490,000 $0.69 to $1.81
Exercisable . . . . . . . . . . . 396,500 $0.69 to $1.81
1994:
Granted . . . . . . . . . . . . . 60,000 $1.81
Exercised . . . . . . . . . . . . (23,500) $0.69 to $1.00
Expired and canceled. . . . . . . (153,000) $0.69 to $1.81
Outstanding . . . . . . . . . . . 476,000 $0.69 to $1.81
Exercisable . . . . . . . . . . . 332,000 $0.69 to $1.81
1993:
Granted . . . . . . . . . . . . . 320,000 $0.69
Exercised . . . . . . . . . . . . - -
Expired and canceled. . . . . . . (48,000) $0.69 to $1.25
Outstanding . . . . . . . . . . . 592,500 $0.69 to $1.25
Exercisable . . . . . . . . . . . 252,000 $0.69 to $1.25
On June 30, 1993, the Company registered with the Securities and
Exchange Commission all shares of common stock previously issued or issuable
under the Plan.
12. RESTRICTED STOCK OFFERING
On June 30, 1995, the Company issued 117,000 shares of common stock to
certain members of the Company's Board of Directors and a family member of one
Director. The shares were sold at $0.625 per share, with proceeds from the
sale aggregating $73,125. The price reflected the fair market value of the
shares, which are restricted in terms of their resale under Rule 144 of the
Securities Act of 1933. The funds were used to pay down the Company's line of
credit.
13. WARRANTS
During 1991, the Company filed a registration statement with the
Securities and Exchange Commission in connection with a secondary public
offering of 1,437,500 units. Each unit consisted of three shares of common
stock and two redeemable common stock purchase warrants. As of June 30, 1995,
there were 2,874,025 warrants outstanding. No warrants were exercised during
fiscal 1995, and 975 were exercised during fiscal 1994.
Each warrant entitles the registered holder to purchase one share of the
Company's common stock at an exercise price of $1.50 until September 22, 1996.
The warrants are redeemable by the Company on 30 days prior written notice at
a redemption price of $.05 per warrant if the NASDAQ closing bid price of the
common stock equals or exceeds $2.50 per share for any 30 consecutive trading
days ending within 15 days of the redemption notice.
The Company also granted the underwriter an option to purchase a total
of 125,000 units at $3.60 per unit, each unit consisting of three shares of
common stock and warrants to purchase shares of common stock. The option
expires September 22, 1996. On exercise of all or a portion of the option,
these particular warrants would carry an exercise price of $3.60 per share of
common stock, would not be redeemable, and would expire on September 22, 1996.
14. INTERNATIONAL SALES
The Company operates substantially in one business segment and product
area - electronic audio processing and conferencing communications equipment -
which is sold in the Broadcast, Audioconferencing, and Professional Audio
markets. These products are all marketed, distributed from, designed, and
manufactured at the Company's facilities in Salt Lake City.
The Company ships products to unaffiliated distributors in worldwide
markets. In fiscal 1995, 1994 and 1993, respectively, such international
sales were $1,420,000, $1,189,000, and $1,697,000, and accounted for 13%, 14%,
and 19% of total sales. During those years the Company shipped the following
amounts, respectively, to the following areas: Canada - $341,900, $272,800,
and $390,630; Asia - $579,800, $355,390, and $466,000; Europe - $197,900,
$227,720, and $501,890; Latin America - $78,800, $115,500, and $196,150; Other
areas - $221,600, $217,590, and $142,330.
15. RETIREMENT SAVINGS AND PROFIT SHARING PLAN
The Company has a 401(k) retirement savings and profit sharing plan in
which it makes discretionary matching contributions, as authorized by the
Board of Directors. All full-time employees who are at least 21 years of age
and have a minimum of six months of service with the company at the plan date
are eligible to participate in the plan. Matching contributions, if made, are
based upon amounts participating employees contribute to the plan. The
Company's retirement plan contributions for the 1995, 1994, and 1993 fiscal
years totaled $10,375, $10,851, and $10,018, respectively.
16. AUDISK PRODUCT LINE
In 1992, the Company acquired all products, product rights, and related
technology of MacroMedia, Inc. ("MacroMedia") of Northfield, Minnesota. These
assets were collectively represented by a product line known as Audisk, a
digital audio storage system used in AM and FM radio systems. The transaction
also included the execution of a four-year employment agreement with the
president of MacroMedia, which provided for 2% royalty payments based on
certain Audisk sales.
During fiscal 1994, the Company sold its Audisk product line and, as a
result, wrote off certain capitalized amounts included in accounts
receivable, inventory, and other assets. Furthermore, the Company incurred
certain expenses associated with terminating the aforementioned employment
agreement. Accordingly, the Company wrote off $754,424, representing the
aggregate amount of these costs.
INTERIM FINANCIAL STATEMENTS
- ----------------------------
GENTNER COMMUNICATIONS CORPORATION
BALANCE SHEETS
(Unaudited)
March 31, June 30,
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . $ 196,590 $ 119,238
Accounts receivable. . . . . . . . . . . . . 1,316,678 1,644,376
Inventory. . . . . . . . . . . . . . . . . . 3,596,578 3,324,866
Other current assets . . . . . . . . . . . . 192,763 140,088
--------- ---------
Total current assets . . . . . . . . . . . 5,302,609 5,228,568
Property and equipment, net. . . . . . . . . . 1,577,123 1,829,161
Other assets, net. . . . . . . . . . . . . . . 129,486 140,731
--------- ---------
Total assets . . . . . . . . . . . . . . . $ 7,009,218 $ 7,198,460
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable. . . . . . . . . . . . . . . . $ 1,125,382 $ 1,508,687
Accounts payable . . . . . . . . . . . . . . 614,266 943,723
Accrued expenses . . . . . . . . . . . . . . 223,247 297,426
Current portion of long-term debt. . . . . . 167,829 93,506
Current portion of capital lease obligations 136,129 128,486
--------- ---------
Total current liabilities. . . . . . . . . 2,266,853 2,971,828
Long-term debt . . . . . . . . . . . . . . . . 459,231 229,372
Capital lease obligations. . . . . . . . . . . 198,104 283,799
--------- ---------
Total liabilities. . . . . . . . . . . . . 2,924,188 3,484,999
Shareholders' equity:
Common stock, 50,000,000 shares authorized, par
value $.001, 7,662,375 and 7,455,375 shares
issued and outstanding at March 31, 1996
and June 30, 1995 . . . . . . . . . . . . . 7,662 7,455
Additional paid-in capital . . . . . . . . . 4,386,747 4,244,641
Accumulated deficit. . . . . . . . . . . . . (309,379) (538,635)
--------- ---------
Total shareholders' equity . . . . . . . . 4,085,030 3,713,461
--------- ---------
Total liabilities and shareholders' equity $ 7,009,218 $ 7,198,460
========= =========
GENTNER COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
March 31,
-----------------------
1996 1995
--------- ---------
Net sales . . . . . . . . . . . . . . . . . . $ 8,228,662 $ 7,985,150
Cost of goods sold . . . . . . . . . . . . . . 4,388,948 4,651,902
--------- ---------
Gross profit . . . . . . . . . . . . . . . 3,839,714 3,333,248
Operating expenses:
Marketing and selling. . . . . . . . . . . . 1,706,118 1,707,853
General and administrative . . . . . . . . . 1,026,936 1,291,859
Product development . . . . . . . . . . . . 718,819 570,856
--------- ---------
Total operating expenses . . . . . . . . . 3,451,873 3,570,568
--------- ---------
Operating income (loss) . . . . . . . . . 387,841 (237,320)
Other income (expense):
Interest income. . . . . . . . . . . . . . . 1,987 11,495
Interest expense . . . . . . . . . . . . . . (135,882) (116,861)
Other, net . . . . . . . . . . . . . . . . . (24,690) 2,509
--------- ---------
Total other income (expense) . . . . . . . (158,585) (102,857)
--------- ---------
Income (loss) before income taxes. . . . . . . 229,256 (340,177)
Provision (benefit) for income taxes . . . . . - -
--------- ---------
Net income (loss). . . . . . . . . . . . . $ 229,256 $ (340,177)
========= =========
Net earnings (loss) per common share . . . . . $ 0.03 $ (0.05)
========= =========
GENTNER COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
-------------------------
1996 1995
---------- ----------
Cash flows from operating activities:
Cash received from customers . . . . . . . $ 8,518,852 $ 7,547,888
Cash paid to suppliers and employees . . . (8,150,951) (9,523,333)
Interest received. . . . . . . . . . . . . 3,862 10,370
Interest paid. . . . . . . . . . . . . . . (144,178) (111,873)
Income taxes refunded (paid) . . . . . . . (25,900) 243,743
---------- ----------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . 201,685 (1,833,205)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment. . . . (109,925) (592,584)
Increase in capitalized software development
and purchased software costs. . . . . . . - (95,700)
Decrease (increase) in other assets. . . . 25,944 (17,697)
---------- ----------
Net cash used in investing activities. . (83,981) (705,981)
---------- ----------
Cash flows from financing activities:
Proceeds from employee stock option exercises 142,313 -
Net borrowings (repayments) under line of
credit. . . . . . . . . . . . . . . . . . (99,618) 1,450,000
Issuance of short-term notes to vendors. . - 602,902
Principal payments of short-term notes to
vendor. . . . . . . . . . . . . . . . . . (283,687) -
Proceeds from issuance of long-term debt . 400,000 282,500
Principal payments of capital lease
obligations . . . . . . . . . . . . . . . (103,542) (130,049)
Principal payments of long-term debt . . . (95,818) (59,149)
---------- ----------
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . (40,352) 2,146,204
---------- ----------
Net increase (decrease) in cash. . . . . . . 77,352 (392,982)
Cash at the beginning of the year. . . . . . 119,238 433,824
---------- ----------
Cash at the end of the period. . . . . . . . $ 196,590 $ 40,842
========== ==========
Supplemental disclosure of cash flow information:
Property and equipment financed by capital
leases. . . . . . . . . . . . . . . . . . $ 25,490 $ 127,113
========== ==========
GENTNER COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions for interim financial
statements contained in Regulation S-B. Accordingly, certain information and
footnote disclosures normally included in complete financial statements have
been condensed or omitted. These financial statements should be read in
conjunction with the annual financial statements and footnotes thereto
included elsewhere in this prospectus.
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 (Loss) Per Common Share
Earnings (loss) per common share was calculated using the modified
treasury stock method. The weighted average number of common shares
outstanding for the nine months ended March 31, 1996 and 1995 was 7,632,139
and 7,338,375, respectively. Stock options and warrants to purchase common
stock have been excluded from the presented per share amounts for both periods
inasmuch as the effects were antidilutive.
3. Inventory
Inventory is summarized as follows:
(Unaudited)
March 31, June 30,
1996 1995
--------- ---------
Raw materials. . . . . . . . . . . . . . $ 987,496 $ 959,478
Work in progress . . . . . . . . . . . . 971,578 1,380,393
Finished goods . . . . . . . . . . . . . 1,637,504 984,995
--------- ---------
Total inventory. . . . . . . . . . . . $ 3,596,578 $ 3,324,866
========= =========
- ITEM 23: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
- ITEM 24: INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 16-10a-841 of the Utah Revised Business Corporation Act ("URBCA")
provides, in general, that a corporation may eliminate or limit, with certain
exceptions, the liability of the directors to the corporation or its
shareholders for money damages.
Sections 16-10a-902 of the URBCA provides, in general, that a corporation
may indemnify a director who is a party to a proceeding if the director's
conduct was in good faith and not opposed to the corporation's best interests.
Section 16-10a-904 of the URBCA provides, in general, that a corporation
may advance expenses to a director who is made a party to a proceeding if the
corporation concludes based on facts then known to it that the director
qualifies for indemnification under Section 16-10a-902. Section 16-10a-903
provides, in general, that a corporation must indemnify a director for his
expenses if the director has been successful, on the merits or otherwise, in
the defense of any proceedings.
Section 16-10a-907 of the URBCA provides, in general, that officers who
are directors shall have no less indemnification protection than is provided
to directors and that non-director officers may have even broader
indemnification so long as it is consistent with law.
Section 16-10a-908 of the URBCA provides, in general, that a corporation
may purchase and maintain insurance on behalf of directors and officers, among
others, against liabilities imposed on them by reason of actions in their
official capacity or arising from service performed on behalf of the
corporation.
Article Thirteenth of the Company's Articles of Incorporation, as
amended, gives a director or officer the right to be indemnified by the
Company to the fullest extent permitted under Utah law.
Article Fourteenth of the Company's Articles of Incorporation, as
amended, provides that a director of the Company shall not be personally
liable to the Company or its shareholders for money damages for breach of
fiduciary duty as a director, except for (a) any breach of the director's duty
of loyalty to the Company or its shareholders, (b) acts or omissions which are
not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) authorizing the unlawful payment of a dividend or other
distribution on the Company's capital stock or the unlawful purchase of its
capital stock, and (d) any transaction from which the director derived an
improper personal benefit.
- ITEM 25: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The original expenses of this offering, all of which have been paid by
the Company in connection with the issuance and distribution of the securities
being registered, were approximately as follows:
SEC Registration Fee . . . . . . . . . . . . . $ 2,800
NASD Filing Fee . . . . . . . . . . . . . . . 1,600
Printing and Engraving Expenses . . . . . . . 70,000
Accounting Fees and Expenses . . . . . . . . . 60,000
Legal Fees and Expenses . . . . . . . . . . . 90,000
Blue Sky Fees and Expenses . . . . . . . . . . 35,000
Transfer Agent's Fees and Expenses . . . . . . 5,000
Miscellaneous Expenses . . . . . . . . . . . . 36,000
--------
Total . . . . . . . . . . . . . . . . . $300,400
========
Pursuant to the amendment of this prospectus, the Company anticipates
additional expenses of approximately $50,000 in legal, accounting, and Blue
Sky fees in connection with the filing of the registration statement, exercise
of the warrants, and the related issuance of shares of common stock.
- ITEM 26: RECENT SALES OF UNREGISTERED SECURITIES
On June 30, 1995, the Company issued 117,000 shares of common stock to
certain members of the Company's Board of Directors and a family member of one
Director. The shares were sold at $0.625 per share, with proceeds from the
sale aggregating $73,125. The price reflected the fair market value of the
shares. The shares were sold pursuant to the exemption contained in Section
4(2) of the Securities Act and are restricted in terms of their resale under
Rule 144 of the Securities Act of 1933.
- ITEM 27: INDEX TO EXHIBITS
The following exhibits are hereby incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989.
The exhibit numbers shown are those in the 1989 Form 10-K as originally filed.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation and all amendments thereto through
March 1, 1988.
10.4 VRC-1000 Purchase Agreement between Gentner Engineering Company,
Inc. (a former subsidiary of the Company which was merged into
the Company) and Gentner Research Ltd., dated January 1, 1987.
10.6 Commercial Lease between the Company and Dell S. Nichols, dated
January 15, 1988.
10.8 Form of Split-Dollar Insurance Agreement.
The following exhibit is hereby incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990.
The exhibit number shown is the one in the 1990 Form 10-K as originally filed.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Dealer Agreement between the Company and Allied Broadcast
Equipment, dated January 19, 1990.
The following exhibits are hereby incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1991.
The exhibit number shown is the one in the 1990 Form 10-K as originally
filed.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amendment to Articles of Incorporation, dated July 1, 1991.
10.1 Internal Modem Purchase Agreement between Gentner Engineering
Company, Inc. and Gentner Research, Ltd., dated October 12,
1987.
10.2 Digital Hybrid Purchase Agreement between Gentner Engineering,
Inc. and Gentner Research, Ltd., dated September 8, 1988.
The following exhibits are incorporated by reference to the Company's
Form 10-KSB for the fiscal year ended June 30, 1992. The exhibit numbers
shown are those in the 1992 From 10-KSB as originally filed.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Revolving Credit Agreement with West One Bank, dated December
5, 1991.
10.2 Asset Purchase Agreement with MacroMedia, Inc., dated March
16, 1992.
The following exhibits are incorporated by reference to the Company's
Form 10-KSB for the fiscal year ended June 30, 1993. The exhibit numbers
shown are those in the 1993 From 10-KSB as originally filed.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3 Bylaws, as amended on August 24, 1993.
10.1 1990 Incentive Plan, as amended on June 30, 1993.
10.2 Employment Agreement with Russell D. Gentner, dated December
20, 1992.
The following exhibits are incorporated by reference to the Company's
Form 10-KSB for the fiscal year ended June 30, 1994. The exhibit numbers
shown are those in the 1994 From 10-KSB as originally filed.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1 Business Loan Agreement, as amended, and Promissory Note with
West One Bank, dated October 29, 1993.
The following exhibits are incorporated by reference to the Company's
Form 10-KSB for the fiscal year ended June 30, 1995. The exhibit numbers
shown are those in the 1995 10-KSB as originally filed:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
11 Statement re computation of per share earnings
23 Consent of Ernst & Young LLP, Independent Auditors
- ITEM 28: UNDERTAKINGS
NONE
SIGNATURES
In accordance with the requirements of the Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in Salt Lake City, State of
Utah, on June 27, 1996.
GENTNER COMMUNICATIONS CORPORATION
By: /s/ Russell D. Gentner
--------------------------
Russell D. Gentner
Chief Executive Officer
In accordance with the requirements of the Act, this registration
statement was signed by the following persons in the capacities and on the
dates stated.
Signature Title Date
- --------------------------- ----------------------- -----------------
/s/ Russell D. Gentner Director, Chairman of June 27, 1996
- --------------------------- the Board of Directors,
Russell D. Gentner Chief Executive Officer
/s/ David L. Harmon June 27, 1996
- --------------------------- Chief Financial Officer
David L. Harmon (Principal Accounting Officer)
/s/ Brad R. Baldwin
- --------------------------- Director June 27, 1996
Brad R. Baldwin
/s/ Edward Dallin Bagley
- --------------------------- Director June 27, 1996
Edward Dallin Bagley
/s/ Edward N. Bagley
- --------------------------- Director June 27, 1996
Edward N. Bagley
/s/ Dwight H. Egan
- --------------------------- Director June 27, 1996
Dwight H. Egan
/s/ K. Bradford Romney
- --------------------------- Director June 27, 1996
K. Bradford Romney
GENTNER COMMUNICATIONS CORPORATION
COMPUTATION OF PER SHARE EARNINGS (LOSS)
Years ended June 30,
---------------------------------------
1995 1994 1993
----------- ------------ ------------
Primary Earnings (loss):
Net income (loss) . . . . . . . $ (116,063) $(1,258,986) $ 22,746
Assumed interest expense
reduction on retirement
of acquirable long-term
liabilities . . . . . . . . . - 27,314 -
Assumed interest income
increase on purchase of
investments . . . . . . . . . - 65,251 -
----------- ------------ ------------
Adjusted net income (loss) $ (116,063) $(1,166,421) $ 22,746
=========== ============ ============
Shares:
Weighted average number of
common shares outstanding . . 7,338,697 7,330,488 7,313,900
Assumed exercise of weighted
average number of options
and warrants outstanding. . . - 2,044,750 -
Assumed repurchase of common
shares. . . . . . . . . . . . - (732,814) -
----------- ------------ ------------
Adjusted weighted average
number of common
shares outstanding. . . . 7,338,697 8,642,424 7,313,900
=========== ============ ============
Primary Earnings (Loss)
Per Share . . . . . . . . . . $ (0.02) $ (0.13) $ -
=========== ============ ============
Fully Diluted:
Earnings (loss):
Net income (loss) . . . . . . . $ (116,063) $(1,258,986) $ 22,746
Assumed interest expense
reduction on retirement
of acquirable long-term
liabilities . . . . . . . . . - 47,581 51,183
Assumed interest income
increase on purchase of
investments . . . . . . . . . - 102,283 63,974
----------- ------------ ------------
Adjusted net income (loss) $ (116,063) $(1,109,122) $ 137,903
=========== ============ ============
Shares:
Weighted average number of
common shares outstanding . . 7,338,697 7,330,488 7,313,900
Assumed exercise of weighted
average number of options
and warrants outstanding. . . - 4,062,403 3,486,786
Assumed repurchase of common
shares. . . . . . . . . . . . - (1,466,652) (1,462,780)
----------- ------------ ------------
Adjusted weighted average
number of common
shares outstanding . . . . 7,338,697 9,926,239 9,337,906
=========== ============ ============
Fully Diluted Earnings (Loss)
Per share . . . . . . . . . . $ (0.02) $ (0.11) $ 0.01
=========== ============ ============
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated August 4, 1995, in the Registration
Statement (Form SB-2 Amendment No. 3 to Form S-1 No. 33-42146) and related
prospectus of Gentner Communications Corporation for the registration of
3,750,000 shares of common stock and 2,500,000 redeemable common stock
purchase warrants.
ERNST & YOUNG LLP
/s/
Salt Lake City, Utah
June 25, 1996