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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X
- ---- Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1997
--------------
OR
- ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from --------------- to ---------------
Commission file number: 0-17219
-------
GENTNER COMMUNICATIONS CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
Page 1
UTAH 87-0398877
- --------------------------------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1825 RESEARCH WAY, SALT LAKE CITY, UTAH 84119
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 975-7200
---------------
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes xx No
______ ______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
CLASS OF COMMON STOCK MAY 6, 1997
---------------------- -----------
$0.001 PAR VALUE 7,662,375 SHARES
Page 2
GENTNER COMMUNICATIONS CORPORATION
INDEX
PAGE
NUMBER
---------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets
March 31, 1997 (unaudited) and June 30, 1996 4
Statements of Operations
Three Months Ended March 31, 1997 and
1996 (unaudited) 5
Statements of Operations
Nine Months Ended March 31, 1997 and
1996 (unaudited) 6
Condensed Statements of Cash Flows
Nine Months Ended March 31, 1997 and
1996 (unaudited) 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION 15
Page 3
GENTNER COMMUNICATIONS CORPORATION
BALANCE SHEETS
(Unaudited)
March 31, June 30,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . $ 292,952 $ 213,763
Accounts receivable . . . . . . . . . 1,592,031 1,556,436
Inventory . . . . . . . . . . . . . . . 2,535,611 3,229,765
Other current assets . . . . . . . . . 337,509 111,743
------------ ------------
Total current assets . . . . . . . 4,758,103 5,111,707
Property and equipment, net . . . . . . . . . 2,220,717 1,514,629
Other assets, net . . . . . . . . . . . . . . 307,191 153,874
------------ ------------
Total assets . . . . . . . . . . . $ 7,286,011 $ 6,780,210
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable . . . . . . . . . . . . . $ 1,112,370 $ 916,041
Accounts payable . . . . . . . . . . . 662,467 503,168
Accrued expenses . . . . . . . . . . . 390,220 294,729
Current portion of long-term debt . . . 222,454 163,314
Current portion of capital lease
obligations . . . . . . . . . . . . . 181,339 138,787
------------ ------------
Total current liabilities . . . . . 2,568,850 2,016,039
Long-term debt . . . . . . . . . . . . . . . 639,783 427,250
Capital lease obligations . . . . . . . . . . 396,489 163,163
------------ ------------
Total liabilities . . . . . . . . . 3,605,122 2,606,452
Shareholders' equity:
Common stock, 50,000,000 shares
authorized, par value $.001,
7,662,375 shares issued and
outstanding . . . . . . . . . . . . . 7,662 7,662
Additional paid-in capital . . . . . . 4,422,747 4,422,747
Accumulated deficit . . . . . . . . . . (749,520) (256,651)
------------ ------------
Total shareholders' equity . . . . 3,680,889 4,173,758
------------ ------------
Total liabilities and
shareholders' equity . . . . . . . $ 7,286,011 $ 6,780,210
============ ============
Page 4
See accompanying notes
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
----------------------------
1997 1996
------------- ------------
Net sales . . . . . . . . . . . . . . . . . . . $ 3,340,279 $ 2,378,502
Cost of goods sold . . . . . . . . . . . . . . . 1,751,973 1,315,558
------------- ------------
Gross profit . . . . . . . . . . . . . . . 1,588,306 1,062,944
Operating expenses:
Marketing and selling . . . . . . . . . . 936,304 540,717
General and administrative . . . . . . . . 590,199 326,940
Product development . . . . . . . . . . . 309,987 266,607
------------- ------------
Total operating expenses . . . . . . 1,836,490 1,134,264
Operating (loss) . . . . . . . . . . (248,184) (71,320)
Other income (expense):
Interest income . . . . . . . . . . . . . 4,408 500
Interest expense . . . . . . . . . . . . . (49,571) (37,357)
Other, net . . . . . . . . . . . . . . . . 4,377 (12,587)
------------- ------------
Total other income (expense) . . . . (40,786) (49,444)
------------- ------------
(Loss) before income taxes . . . . . . . . . . . (288,970) (120,764)
Provision for income taxes . . . . . . . . . . . - 26,757
------------- ------------
Net (loss) . . . . . . . . . . . . . $ (288,970) $ (94,007)
============= ============
Net (loss) per common share . . . . . . . . . . $ (0.04) $ (0.01)
============= ============
Page 5
See accompanying notes
STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
March 31,
--------------------------
1997 1996
------------ ------------
Net sales . . . . . . . . . . . . . . . . . . $ 9,838,158 $ 8,228,662
Cost of goods sold . . . . . . . . . . . . . 5,222,302 4,388,949
------------ ------------
Gross profit . . . . . . . . . . . . . 4,615,856 3,839,713
Operating expenses:
Marketing and selling . . . . . . . . . 2,747,481 1,704,123
General and administrative . . . . . . 1,488,153 1,026,935
Product development . . . . . . . . . . 737,128 718,818
------------ ------------
Total operating expenses . . . . 4,972,762 3,449,876
Operating income (loss) . . . . . (356,906) 389,837
Other income (expense):
Interest income . . . . . . . . . . . . 4,408 1,988
Interest expense . . . . . . . . . . . (123,558) (135,882)
Other, net . . . . . . . . . . . . . . (16,814) (24,691)
------------ ------------
Total other income (expense) . . (135,964) (158,585)
------------ ------------
Income (loss) before income taxes . . . . . . (492,870) 231,252
Provision for income taxes . . . . . . . . . - -
Net income (loss) . . . . . . . . $ (492,870) $ 231,252
============ ============
Net earnings (loss) per common share . . . . $ (0.06) $ 0.03
============ ============
Page 6
See accompanying notes
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
----------------------------
1997 1996
------------- -------------
Cash flows from operating activities:
Cash received from customers . . . . . $ 9,727,056 $ 8,518,852
Cash paid to suppliers and employees . (8,918,092) (8,150,951)
Interest received . . . . . . . . . . . 1,227 3,862
Interest paid . . . . . . . . . . . . . (124,382) (144,178)
Income taxes refunded (paid) . . . . . 24,100 (25,900)
------------- -------------
Net cash provided by
operating activities . . . . . . 709,909 201,685
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment . . (742,931) (109,925)
Issuance of note receivable . . . . . . (139,745) -
Increase in other assets . . . . . . . (74,226) 25,944
------------- -------------
Net cash used in investing
activities . . . . . . . . . . . (956,902) (83,981)
------------- -------------
Cash flows from financing activities:
Proceeds from employee stock
option exercises . . . . . . . . . . - 142,313
Net borrowings (repayments)
under line of credit . . . . . . . . 196,329 (99,618)
Principal payments of short-term
notes to vendors . . . . . . . . . . - (283,687)
Proceeds from issuance of
long-term debt . . . . . . . . . . . 425,195 400,000
Principal payments of capital
lease obligations . . . . . . . . . . (141,820) (103,542)
Principal payments of long-term debt . (153,522) (95,818)
------------- -------------
Net cash provided by (used in)
financing activities . . . . . . 326,182 (40,352)
------------- -------------
Net increase in cash . . . . . . . . . . . . 79,189 77,352
Cash at the beginning of the year . . . . . . 213,763 119,238
------------- -------------
Cash at the end of the period . . . . . . . . $ 292,952 $ 196,590
============= =============
Supplemental disclosure of cash flow information:
Property and equipment financed by
capital leases . . . . . . . . . . . $ 417,698 $ 25,490
============= =============
Page 7
See accompanying notes
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB of Regulation S-B.
Accordingly, certain information and footnote disclosures normally included in
complete financial statements have been condensed or omitted. These financial
statements should be read in conjunction with the financial statements and
footnotes thereto included in the Company's 1996 Annual Report on Form 10-KSB.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for interim periods are not necessarily
indicative of the results of operations to be expected for the full year.
2. Earnings (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 was 7,662,375 and 7,662,375 respectively, for the three months
ended March 31, 1997 and 1996. For the nine month periods then ended, the
amounts were 7,662,375 and 7,632,030, respectively. Stock options and
warrants to purchase common stock have been excluded from the presented
computation of per share amounts inasmuch as the effects are either immaterial
or antidilutive.
3. Inventory
Inventory is summarized as follows:
(Unaudited)
March 31, June 30,
1997 1996
------------ ------------
Raw Materials . . . . . . . . . . . . . . . . $ 688,233 $ 962,504
Work in progress. . . . . . . . . . . . . . . 778,337 866,279
Finished Goods. . . . . . . . . . . . . . . . 1,069,041 1,400,982
------------ ------------
Total inventory . . . . . . . . . . . . . $ 2,535,611 $ 3,229,765
============ ============
Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales for the three months ended March 31, 1997 increased 40% compared to
the same three-month period last year. This growth was made up of a 66%
increase in the Teleconferencing segment (including both product and service),
a 30% increase in the Broadcast segment and a 12% increase in the Assisted
Listening Systems (ALS) segment. Year-to-date sales increased 20% compared to
the corresponding period last year due to sales growth in these same product
segments.
Sales in the Teleconferencing segments, including both product and
service, increased 66% comparing third quarter of this fiscal year to the same
quarter last year. This increase is primarily due to sales of the new GT724
Teleconferencing product. The company began shipping this product June 1996,
and sales have exceeded the Company's projections. The GT724 is used in many
different teleconferencing applications, particularly distance learning,
telemedicine and courtrooms. For the third quarter, the company's
Teleconferencing Service (1-800 LETS MEET)(TM) experienced a 115% sales growth
over the same quarter last fiscal year. This increase in sales is a result of
the company hiring a dedicated sales staff and aggressive marketing to
promote its conference calling service. For the nine months ending March 31,
1997, sales in the Teleconferencing segment increased 25% over the same
nine-month period last fiscal year. The nine month comparative increase is
made up of a 25% increase in Teleconferencing products and a 63% increase in
the 1-800 LETS MEET (TM) service. The year-to-date sales increases are due to
the same reasons as the increases for the third quarter.
The Broadcast segment sales, which include Telephone and Site Control
products, increased 30% for third quarter of this year as compared to the
third quarter of last year. The GSC3000 Site Control product began shipping
during the second quarter, and has produced significant sales for the Company.
The GSC3000 allows a broadcaster to monitor and control several different
remote transmitter sites using one networked system. More than half the
increase in Broadcast sales is due to Site Control sales improvements. The
TS612 multi-line talk show product accounted for the remainder of the
Broadcast sales increase. Year-to-date sales in the Broadcast segment are up
28% compared to the same period last year.
The Assisted Listening segment continues to show steady sales growth.
Third quarter ALS sales grew 12% and year-to-date sales grew 35% compared to
the corresponding periods during last fiscal year. This increase is a result
of new product introductions and continued aggressive marketing.
Additionally towards the end of the third quarter, the Company signed two OEM
agreements with companies that want the Company to produce their private label
ALS products.
Page 9
The Company's gross profit margin percentage was 48% for the third
quarter of this year, compared to 45% for the same quarter last year. This
increase is primarily due to new products having a higher gross profit margin,
as well as a different product mix.
Operating expenses for the quarter grew 62%, and increased 44%
year-to-date compared to the same periods last year. According to the
Company's plan, most of the increased expenses came in the Sales and Marketing
area, which grew 73% for the quarter and 61% year-to-date, compared to
corresponding periods last year. The balance of the increase is in the
General and Administrative area, which grew 80% for the quarter, and 45% for
the year, compared to last year.
Sales and Marketing third quarter expenses increased 73% over the prior
years third quarter, primarily due to increased advertising, human resources
and travel expenditures. Also during the third quarter this year, the
independent representative commissions increased due to increased
teleconferencing sales. Year-to-date Sales and Marketing expenses increased
61% compared to last year as the Company continues its investment in Sales and
Marketing.
Third quarter General and Administrative expenses are up 80%, and
year-to-date expenses are up 45% compared to the same periods last year. This
increase is primarily due to the Company's move into its expanded facility in
November 1996. The new space is double the space originally occupied by the
Company, and as a result, occupancy costs have increased significantly.
Interest expense for the quarter is up 33% compared to the same quarter
last year. This increase is due to higher line of credit usage and increased
debt balances. The Company did not increase its outstanding debt until the
third quarter, hence interest expense year-to-date is down 9%.
In the third quarter of last fiscal year, the Company made a commitment
to invest a significant amount in its Sales and Marketing, product development
and infrastructure. The plan was to incur losses for the next several
quarters with the expectation that this investment would increase future
sales. The Company has experienced sales increases, and is now shifting its
focus to profitability. With the investment phase completed, the Company is
focused on controlling expenses and generating profits.
Financial Condition and Liquidity
The Company's current ratio decreased from 2.5:1 on June 30, 1996 to
1.9:1 on March 31, 1997. This decrease in current ratio was caused primarily
by decreasing inventory levels and increasing short term debt. As the Company
maintains its focus on improving inventory turns, the level of raw materials
continues to decrease, falling 29% since June 30, 1996. Finished goods
inventory is at a level that the Company believes will continue to support
anticipated sales levels. Other factors affecting the current ratio are the
increase in Notes Payable of 21% and Accounts Payable of 32% since the end of
Page 10
last fiscal year. These increases are a result of increased operating
expenses. Furthermore, during the past several months, the Company used its
credit line to finance property and equipment additions. The Company is
planning on financing these long term assets with long-term debt, and expects
the current ratio to improve once this change is made.
The Company has an outstanding line of credit of $2.5 million. The
interest rate on the line is a variable interest rate (anywhere from three to
five basis points over the London Interbank Offered Rate (LIBOR)). As of
March 31, 1997 the outstanding balance was $1.1 million at an interest rate of
8.87%. The term of this line is a one year term, expiring October 24, 1997.
The Company continues to experience improved operating cash flows this
fiscal year compared to the last fiscal year. Increasing sales and a
successful inventory management plan have contributed to positive operating
cash flows. As sales continue to increase, the Company expects to finance its
business plan through a combination of internally generated funds and
short-term or long-term borrowings, if necessary.
Forward Looking Statements and Risk Factors
To the extent any statement presented herein deals with information that
is not historical, such statement is necessarily forward looking. As such, it
is subject to occurrence of many events outside of the Company's control.
These occurrences could cause the Company's results to differ materially from
those anticipated. A sample listing of such occurrences follows:
Competition - Rapid Technological Change
The Broadcast, Teleconferencing and ALS 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.
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.
Page 11
Marketing
The Company has gained experience over the last several years in
marketing its 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's
strategy is to establish distribution channels in markets where it believes
there is a growing need for its goods and services. There can be no assurance
that this strategy will prove successful.
Dependence on Distribution Network
The Company markets its products primarily through a network of
representatives, dealers and master distributors. All of the Company's
agreements retaining such representatives and dealers are non-exclusive and
terminable at will by either party. Although the Company believes that its
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 Company reserves the right to maintain house
accounts which are sold direct, however, the loss of a majority or all
representatives or dealers could have a material adverse effect on the
Company's business.
Limited Capitalization
As of March 31, 1997, the company had $292,952 in cash and $2,189,253 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
24, 1997 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 $1,112,370 on a $2.5 million line of credit as of March 31, 1997.
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.
Page 12
Dependence Upon Officers and Key Employees
The Company is substantially dependent upon certain of its officers and
key employees, 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.
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.
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
Page 13
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.
Dividends Unlikely
The Company has never paid cash dividends on its securities and does not
intend to declare or pay cash dividends in the foreseeable future. Earnings
are expected to be retained to finance and expand its business. Furthermore,
the Company's revolving line of credit prohibits the payment of dividends on
its Common Stock.
Potential Dilutive Effect of Outstanding Options and Warrants and Possible
Negative Effect of Future Financing
The Company has outstanding Options, Warrants and a Unit Purchase Option.
The outstanding options are issued under the Company's 1990 Incentive plan
which includes options to purchase up to 1,500,000 shares of Common Stock
granted or available for grant. The Company issued Warrants that allow the
holder to purchase one share of Common Stock at an exercise price of $1.50.
There currently are 2,875,000 Warrants outstanding. They expire September 22,
1997. The Company also granted the underwriter of the warrants an option to
purchase a total of 125,000 units (a unit consists of three shares of common
stock and warrants to purchase two shares of common stock) at $3.60 per unit.
Holders of these Options, Warrants and Unit Purchase Options are given an
opportunity to profit from a rise in the market price of the Company's Common
Stock with a resulting dilution in the interests of the other stockholders.
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.
Page 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1935,
the registant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENTNER COMMUNICATIONS CORPORTATION
[S]Susie Strohm
Assistant VP - Finance
Date: May 6, 1997