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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended December 31, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________ to __________
Commission File Number: 0-22994
GUNTHER INTERNATIONAL, LTD.
(Exact name of small business issuer as specified in its charter)
DELAWARE 51-0223195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE WINNENDEN ROAD, NORWICH, CONNECTICUT 06360
(Address of principal executive offices) (Zip Code)
860-823-1427
(Issuers Telephone Number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last year)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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 X NO __
The number of shares of the Registrant's Common stock outstanding as of January
31, 1999 was 4,291,769.
Transitional Small Business Disclosure Format (check one):
YES __ NO X
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GUNTHER INTERNATIONAL, LTD.
Index
Page
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PART I - CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 1999
and March 31, 1999 3
Condensed Statements of Operations for the three and nine
months ended December 31, 1999 and 1998 4
Condensed Statements of Cash Flows for the nine
months ended December 31, 1999 and 1998 5
Notes to Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis or Plan of Operation 9-13
PART II - OTHER INFORMATION
Item 2. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
Gunther International, Ltd.
Condensed Balance Sheets
(Unaudited)
December 31, 1999 March 31, 1999
----------------- --------------
Assets
Current Assets:
Cash $ 555,360 $ 731,943
Restricted cash -- 150,000
Accounts receivable, less allowance 2,099,208 1,520,201
Costs and estimated earnings in excess
of billings on uncompleted contracts 663,502 864,525
Inventories 1,385,554 1,506,554
Prepaid expenses 203,349 95,263
------------ ------------
Total current assets 4,906,973 4,868,486
------------ ------------
Property and Equipment:
Machinery and equipment 1,752,917 1,370,552
Furniture and fixtures 384,801 320,262
Leasehold improvements 258,089 255,017
------------ ------------
2,395,807 1,945,831
Accumulated depreciation and amortization (1,323,551) (1,079,954)
------------ ------------
1,072,256 865,877
------------ ------------
Other Assets:
Excess of costs over fair value of net
assets acquired, net 2,830,759 2,998,357
Other 63,127 73,927
------------ ------------
2,893,886 3,072,284
------------ ------------
$ 8,873,115 $ 8,806,647
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Current maturities of long-term debt - related parties $ -- $ 1,000,000
Current maturities of long-term debt - other 362,737 13,440
Accounts payable 2,091,024 2,436,430
Accrued expenses 1,161,201 1,151,518
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,441,335 1,211,673
Deferred service contract revenue 2,047,531 1,521,204
Note payable to stockholder 150,000 150,000
------------ ------------
Total current liabilities 7,253,828 7,484,265
------------ ------------
Long-term debt, less current maturities:
Related parties 5,200,937 3,521,931
Other 3,136 12,319
------------ ------------
Total long-term debt 5,204,073 3,534,250
------------ ------------
Commitments and contingencies (Note 4)
Stockholders' Deficit:
Common stock 4,292 4,292
Additional paid-in capital 12,188,556 12,188,556
Accumulated deficit (15,777,634) (14,404,716)
------------ ------------
Total Stockholders' Deficit (3,584,786) (2,211,868)
------------ ------------
$ 8,873,115 $ 8,806,647
============ ============
See accompanying notes.
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Gunther International, Ltd.
Condensed Statements of Operations
(Unaudited)
December 31,
------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Sales:
Systems $ 2,102,167 $ 3,523,329 $ 7,997,491 $ 7,984,513
Maintenance 2,425,030 2,158,713 7,076,485 6,391,505
------------ ------------ ------------ ------------
Total sales 4,527,197 5,682,042 15,073,976 14,376,018
------------ ------------ ------------ ------------
Cost of sales:
Systems 1,713,842 2,275,645 5,755,618 5,788,768
Maintenance 1,979,352 1,723,598 6,204,714 4,780,398
------------ ------------ ------------ ------------
Total cost of sales 3,693,194 3,999,243 11,960,332 10,569,166
------------ ------------ ------------ ------------
Gross profit 834,003 1,682,799 3,113,644 3,806,852
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 632,952 511,901 1,370,893 1,673,994
Research and development 282,599 206,059 988,448 715,674
General and administrative 677,335 681,586 1,720,914 1,857,256
------------ ------------ ------------ ------------
Total operating expenses 1,592,886 1,399,546 4,080,255 4,246,924
------------ ------------ ------------ ------------
Operating income (loss) (758,883) 283,253 (966,611) (440,072)
Interest expense, net (145,052) (115,829) (406,307) (337,218)
------------ ------------ ------------ ------------
Income (loss) before accounting change (903,935) 167,424 (1,372,918) (777,290)
Cumulative effect of accounting change -- -- -- (622,953)
------------ ------------ ------------ ------------
Net income (loss) (903,935) 167,424 (1,372,918) (1,400,243)
============ ============ ============ ============
Income (loss) per share:
Before cumulative effect of
change in accounting principle $ (0.21) $ 0.04 $ (0.32) $ (0.18)
Cumulative effect of accounting change -- -- -- (0.15)
------------ ------------ ------------ ------------
Income (loss) per share $ (0.21) $ 0.04 $ (0.32) $ (0.33)
============ ============ ============ ============
Weighted average number of common
shares outstanding 4,291,769 4,291,269 4,291,769 4,291,269
============ ============ ============ ============
See accompanying notes.
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Gunther International, Ltd.
Condensed Statements of Cash Flows
(Unaudited)
For the Nine Months Ended December 31,
1999 1998
----------- -----------
Operating activities:
Net loss $(1,372,918) $(1,400,243)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 421,995 406,273
Provision for doubtful accounts 19,400 40,000
Interest accrued on related party note payable 179,008 --
Cumulative effect of accounting change -- 622,953
Changes in operating assets and liabilities:
Accounts receivable (598,407) (910,868)
Inventories 121,000 (267,628)
Prepaid expenses (108,086) 16,526
Accounts payable (345,406) (1,027,500)
Accrued expenses 9,683 27,828
Deferred service contract revenue 526,327 (755,524)
Billings, costs and estimated earnings
on uncompleted contracts, net 430,685 719,805
----------- -----------
Net cash used for operating activities (716,719) (2,528,378)
----------- -----------
Investing activities:
Acquisitions of property and equipment (449,975) (59,115)
Other assets -- 18,017
Proceeds from sale of investment -- 20,000
----------- -----------
Net cash used for investing activities (449,975) (21,098)
----------- -----------
Financing activities:
Repayment of notes payable and long-term debt (509,889) (2,569,614)
Transfer to (from) restricted cash 150,000 (150,000)
Proceeds from notes payable and long-term debt 1,350,000 5,760,419
----------- -----------
Net cash provided by financing activities 990,111 3,040,805
----------- -----------
Net increase (decrease) in cash (176,583) 491,329
Cash, beginning of period 731,943 572,368
----------- -----------
Cash, end of period $ 555,360 $ 1,063,697
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 236,545 $ 214,084
Cash paid for income taxes 7,561 26,245
See accompanying notes.
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GUNTHER INTERNATIONAL, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited interim condensed
financial statements have been prepared in accordance with generally accepted
accounting principles and contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position and
the results of operations for the interim periods. These financial statements
should be read in conjunction with the financial statements and related notes
included in the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1999. The results of operations for the interim periods are not
necessarily indicative of results to be expected for the full year. The
condensed balance sheet as of March 31, 1999 was derived from the audited
financial statements at that date.
2. ACCOUNTING CHANGE:
In the first quarter of fiscal 1999, the Company changed its method of
accounting for deferred preproduction costs, in accordance with AICPA Statement
of Position No. 98-5, "Reporting on the Costs of Start-Up Activities", which
requires costs of start-up activities and organization costs to be expensed as
incurred, rather than capitalizing and subsequently amortizing such costs. The
cumulative effect of the change in accounting principle was to increase the net
loss for the three and nine months ended December 31, 1998 by $622,953, or $0.15
per share.
3. LONG - TERM DEBT AND LIQUIDITY:
On October 2, 1998, the Company entered into a $5.7 million comprehensive
financing transaction by and among the Bank of Boston, Connecticut, N.A. (the
"Bank"), the Estate of Harold S. Geneen (the "Estate") and Gunther Partners LLC
(the "New Lender"), the proceeds of which have been utilized to restructure and
replace the Company's pre-existing senior line of credit, fund a full settlement
with the Company's third party service provider and provide additional working
capital to fund the Company's ongoing business operations. Under the terms of
the transaction, the New Lender loaned an aggregate of $4.0 million to the
Company. At the same time, the Bank reached an agreement with the Estate, which
had guaranteed a portion of the Company's senior line of credit, whereby the
Estate consented to the liquidation of approximately $1.7 million of collateral
and the application of the proceeds of such collateral to satisfy and repay in
full a like amount of indebtedness outstanding under the senior credit facility.
The balance of the indebtedness outstanding under the senior credit facility,
approximately $350,000, was repaid in full from the proceeds of the new
financing. The Company executed a new promissory note in favor of the Estate
evidencing the Company's obligation to repay the amount of the collateral that
was liquidated by the Bank. The Company's obligations to the Estate are
completely subordinated to the Company's obligations to the New Lender.
Approximately $1.4 million of the new financing was utilized to pay a major
vendor all amounts that were due for performing maintenance on Company systems.
The principal balance of the $4.0 million debt originally was to be repaid
in monthly installments of $100,000 from November 1, 1998 and continuing to and
including September 1, 1999, $400,000 on October 1, 1999 and the balance was to
be due on October 1, 2003. Interest is paid quarterly, at the rate of 8% per
annum, beginning January 1, 1999 and continuing until the principal and interest
due is paid in full. Through June 30, 1999, the Company made principal payments
of $800,000 to the New Lender. In September 1999, the Company and the New Lender
agreed to modify the terms of the borrowing to defer payment of the $700,000 due
from July 1999 through October 1999 and to relend the Company the $800,000 of
principal that was previously repaid, thereby restoring the aggregate principal
amount of the indebtedness to the original principal amount of $4.0 million. As
amended, the total balance due of $4 million is to be repaid in nine payments as
follows: (a) $200,000 shall be paid on the first day of each month commencing on
October 1, 2001 and continuing and including April 1, 2002; (b) $100,000 shall
be paid on May 1, 2002; and (c) the balance shall be paid on October 1, 2003.
If, at any time prior to October 1, 2001, the accumulated deficit of the
Company, determined in accordance with generally accepted accounting principles,
improves by $1.0 million or more above the Company's accumulated deficit at June
30, 1999 (a "Triggering Event"), then the principal payments due on October 1,
2001 through May 1, 2002 shall be accelerated and become due in consecutive
monthly installments beginning on the first day of the second month following
the Triggering Event.
To induce the New Lender to enter into the original financing transaction,
the Company granted the New Lender a stock purchase warrant entitling the New
Lender, at any time during the period commencing on January 1, 1999 and ending
on the fifth anniversary of the transaction, to purchase up to 35% of the pro
forma, fully diluted number of shares of the Common stock of the Company,
determined as of the date of exercise. The exercise price of the warrant is
$1.50 per share. The warrant was valued at $345,000 at the
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time of the lending and was included in additional paid-in capital, reducing the
debt value to $3,655,000. The effective interest rate for the loan is 9.8%. The
imputed interest on the difference between the face value of the note and the
note value based on the effective interest rate will be added to the principal
loan balance until the full face value is recorded.
In addition, the Company, the New Lender, the Estate and certain other
shareholders (Park Investment Partners, Gerald H. Newman, Four Partners and
Robert Spiegel) entered into a separate voting agreement, pursuant to which they
each agreed to vote all shares of the Company's stock held by them in favor of
(i) that number of persons nominated by the New Lender constituting a majority
of the Board of Directors, (ii) one person nominated by the Estate and (iii) one
person nominated by Park Investment Partners.
The promissory note in favor of the Estate for approximately $1.7 million
is to be repaid at the earlier of one year after the Company's obligations to
the New Lender are paid in full or on October 2, 2004. Interest, at 5.44% per
annum, shall accrue on principal and unpaid interest, which is added to the
outstanding balance and is due at the time of principal payments. The
indebtedness is secured by a security interest in all tangible and intangible
personal property and is subordinated to all rights of the New Lender. The
Company has recorded the promissory note at an effective interest rate of 10.5%,
reducing the principal balance to $1.3 million. The balance of $453,000 was
recorded as additional paid-in capital. The imputed interest on the difference
between the face value of the note and the note value based on the effective
interest rate will be added to the principal loan balance until the full face
value is recorded.
On November 8, 1999, the Company entered into a revolving loan agreement
with a bank pursuant to which the bank has agreed to loan the Company up to
$500,000 based on a borrowing base of eligible accounts receivable. Eligible
accounts receivable include accounts receivable under 60 days past due,
excluding receivables from agencies of the United States. As of December 31,
1999, the Company has borrowed $350,000 under the revolving loan agreement.
Interest is to be paid monthly at the annual rate of prime plus 1.5%. The
revolving loan agreement contains certain covenants, including a debt service
coverage ratio of not less than 1.25 to 1. Unless extended by the bank, the
revolving loan agreement expires on August 31, 2000. As of December 31, the
Company is in default of the debt service ratio. The Company is anticipating
that a waiver will be obtained. In the event a waiver is not obtained, the
Company believes that financing similar to that under the revolving loan
agreement is available from other sources.
The Company also borrowed $200,000 from a director of the Company on a
short-term basis on December 16, 1999. The total amount plus interest at 8% was
paid back to the director prior to December 31, 1999.
In the current and certain prior periods, the Company incurred net
operating losses. Further, cash of $717,000 was used by operating activities for
the nine months ended December 31,1999 compared to $2.5 million for the
comparable period last year. As of December 31, 1999, the Company has a
deficiency in working capital and net assets of $2.3 million and $3.6 million,
respectively. These conditions raise doubt about the Company's ability to meet
its obligations as they become due in the ordinary course of business. Despite
the incurred losses of $904,000 and $1,373,000 for the three and nine month
periods ended December 31, 1999, the Company believes it has made significant
improvements to its production processes which will result in reduced production
time and assembly costs. Also, as of December 31, 1999 the Company's backlog has
grown to $4.5 million. As the backlog is completed, the Company will receive
$4.0 million during the next two fiscal quarters under the payment terms of the
contracts. Lastly, the Company believes that additional funding, if necessary,
may be made available to it from existing lenders and investors.
4. COMMITMENTS AND CONTINGENCIES:
As previously reported, a purported class action lawsuit was filed against
the Company, its then-current chief executive officer and its then-current chief
financial officer asserting claims under the federal securities laws. The action
was filed in the United States District Court for the District of Connecticut.
Among other things, the complaint alleges that the Company's financial
statements for the first three quarters of fiscal 1998 were materially false and
misleading in violation of Section 10(b) of the Securities Exchange Act of 1934
(the "Exchange Act") and Rule 10b-5 promulgated thereunder, and Section 20(a) of
the Exchange Act. The plaintiffs are seeking compensatory damages and
reimbursement for the reasonable costs and expenses, including attorneys' fees,
incurred in connection with the action.
On December 17, 1999, the plaintiffs requested leave to file a second
amended and consolidated complaint. On January 21, 2000, the Company filed a
formal objection to this request. The Company's objection is currently pending
before the Court.
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Although the Company believes the complaint is without merit and will
vigorously defend the action, it is not possible to predict with certainty the
final outcome of this proceeding.
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Item 2. Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
SALES: Systems sales include sales of high-speed assembly systems, upgrades to
previously sold systems and inc.jet imager systems and ancillary products. Sales
for high-speed assembly systems and upgrades are recorded by the percentage of
completion method. Sales are typically recognized over a period of six months or
less. Sales for the inc.jet imager systems and ancillary products are recorded
as systems are shipped.
Total sales for the three and nine months ended December 31, 1999 were $4.5
million and $15.1 million, respectively, a decrease of 20% and an increase of 5%
over the comparable periods of the prior year. Systems sales for the three and
nine months ended December 31, 1999 were $2.1 million and $8.0 million,
respectively, a decrease of 40% and no change over the comparable periods of the
prior year. The decrease in systems sales for the three months ended December
31, 1999 was primarily due to a decrease of 48% in high speed assembly systems
and related upgrades, partially offset by a 67% increase in inc.jet sales.
Inc.jet sales comprised 18% of total systems sales for the three months ended
December 31, 1999 as compared to 7% over the comparable period of the prior
year. Total system sales for the nine months ended December 31, 1999 remained
relatively stable as compared to the nine months ended December 31, 1998. Sales
of high speed assembly systems in the nine months ended December 31, 1999
decreased 12% over the comparable period of the prior year and inc.jet sales
increased $966,000 in the nine months ended December 31, 1999 over the
comparable period of the prior year. Inc.jet sales comprised 16% of total
systems sales for the three months ended December 31, 1999 as compared to 4%
over the comparable period of the prior year. The decrease in system sales for
the three and nine months ended December 31, 1999 is primarily due to a slow
period of system orders as indicated by the backlog reported in last two
previous quarters. The backlog, consisting of total contract price less revenue
recognized to date for all signed orders on hand, at December 31, 1999 is $4.5
million , compared to $4.9 million at December 31, 1998, $2.0 million at June
30, 1999 and September 30, 1999. The increase in the backlog at December 31,
1999, as compared to June 30, 1999 and September 30, 1999, was primarily due to
an increase in system orders during the quarter. Substantially all of the
backlog at December 31, 1999 is expected to be completed no later than June 30,
2000. Maintenance sales for the three and nine months ended December 31, 1999
were $2.4 million and $7.1 million, respectively, an increase of 12% and 11%
over the comparable periods of the prior year. The increase was primarily due to
an increase in contract services on a larger installed base of systems. A
summary of orders, sales and backlog for each of the last three fiscal quarters
for the high speed assembly systems and related upgrades is as follows:
December 31, 1999 September 30, 1999 June 30, 1999
----------------- ------------------ -------------
(in millions)
Backlog, beginning of period $ 2.0 $ 2.0 $ 4.3
Orders 4.2 2.1 .6
Sales (1.7) (2.1) (2.9)
----- ----- -----
Backlog, end of period $ 4.5 $ 2.0 $ 2.0
===== ===== =====
GROSS PROFIT: Gross profit as a percentage of total sales for the three months
ended December 31, 1999 decreased to 18% from 30% for the comparable period of
the prior year. Gross profit as a percentage of total sales for the nine months
ended December 31, 1999 decreased to 21% from 26% for the comparable period of
the prior year. Gross profit as a percentage of systems sales for the three
months ended December 31, 1999 decreased to 18% from 35% for the comparable
period of the prior year. Gross profit as a percentage of systems sales for the
nine months ended December 31, 1999 remained relatively stable at 28% as
compared to the comparable period of the prior year. The decrease in the gross
profit percentage for the three months ended December 31, 1999 as compared to
December 31, 1998 was primarily due to fewer systems in the manufacturing
process during 1999 which resulted in an increase in unabsorbed fixed
manufacturing overhead. Material costs and direct labor on systems remained
relatively stable between the periods. Gross profit as a percentage of
maintenance sales for the three and nine months ended December 31, 1999
decreased to 18% and 12% respectively, from 20% and 25%, respectively, for the
comparable periods of the prior year. The decrease in the gross profit
percentage is primarily a result of an increase the cost of
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sales of maintenance. The increase in the maintenance expenses related to the
transition of the service function from the third party service provider to the
Company's own internal maintenance personnel. The transition of maintenance
services began on April 1, 1999 and is expected to be completed by March 31,
2000. During the nine months ended December 31, 1999, the Company's transition
expenses were higher than expected because the number of customer service
engineers expected to transition from the third party service provider to the
Company was less than anticipated. This resulted in the Company having to
recruit and train more personnel than anticipated and to incur additional
expenses to provide customer support from the Connecticut location to customer
sites. The Company has also incurred an increase in service parts costs during
this transition period. As sites are transitioned, Company personnel are
performing preventive maintenance reviews on the systems at the various sites.
The Company has found that in certain sites a substantial amount of time and
materials were required to bring the systems to the higher level of operation
the Company considers appropriate for that site. The Company expects that until
the transition is completed, maintenance costs will be abnormally high,
resulting in lower than normal gross margins.
OPERATING EXPENSES: Selling and marketing expenses, as a percentage of total
revenues, for the three and nine months ended December 31, 1999 were 14% and
24%, respectively, as compared to 9% and 24%, respectively, for the comparable
periods of the prior year. For the three months ended December 31, 1999, these
expenses increased by 24% as compared to the comparable period of the prior year
and for the nine months ended December 31, 1999, these expenses decreased 18% as
compared to the comparable period of the prior year. The increase in the three
months ended December 31, 1999 as compared to comparable period of the prior
year was primarily due to a increase in costs associated with the Company's
attendance at the largest industry trade show. The Company was able to increase
its presence at the show through larger booth space, new literature and an
increase in personnel attending the show. In the prior year, costs allocated to
the show were restricted due to Company finances. The decrease in the nine
months ended December 31, 1999 as compared to a comparable period of the prior
year was primarily due to a decrease in personnel costs, including wages and
commissions, related benefits and travel costs, as well as a shift in personnel
from the inc.jet department back to research and development. During the 1998
period, inc.jet personnel were concentrating on bringing the new imager to
market. After the introduction of the inc.jet imager to the market, a majority
of the inc.jet personnel have concentrated their efforts on enhancements to the
inc.jet imager.
Research and development expenses, as a percentage of total revenues, for the
three and nine months ended December 31, 1999 were 6% and 17%, respectively, as
compared to 4% and 13%, respectively, for the comparable periods of the prior
year. For the three and nine months ended December 31, 1999, these expenses
increased by 37% and 38% as compared to the comparable periods of the prior
year. The primary focus of the research and development in the three and nine
months ended December 31, 1999 was the further development of enhancements to
the current product line of systems and the inc.jet imager.
General and administrative expenses, as a percentage of total revenues, for the
three and nine months ended December 31, 1999 were 15% and 30% respectively, as
compared to 12% and 33%, respectively, for the comparable periods of the prior
year. For the three and nine months ended December 31, 1999, these expenses
decreased by 1% and 7% as compared to the comparable periods of the prior year
primarily due to a decrease in the number of executive officers and a reduction
in normal operating expenses.
Interest expense, net, in the three and nine months ended December 31, 1999
increased to $145,000 and $406,000, respectively, from $116,000 and $337,000 in
the three and nine months ended December 31, 1998, respectively, due to the
interest on the debt from the October 2, 1998 financing transaction described
below.
In the first quarter of fiscal 1999, the Company changed its method of
accounting for deferred preproduction costs, in accordance with AICPA Statement
of Position No. 98-5, "Reporting on the Costs of Start-Up Activities", which
requires costs of start-up activities and organization costs to be expensed as
incurred, rather than capitalizing and subsequently amortizing such costs. The
effect of the change in accounting principle was to increase the net loss for
the nine months ended December 31, 1998 by approximately $623,000, or $0.15 per
share.
LIQUIDITY AND CAPITAL RESOURCES
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In the current and certain prior periods, the Company incurred net operating
losses. Further, cash of $717,000 was used by operating activities for the nine
months ended December 31,1999 compared to $2.5 million for the comparable period
last year. As of December 31, 1999, the Company has a deficiency in working
capital and net assets of $2.3 million and $3.6 million, respectively. These
conditions raise doubt about the Company's ability to meet its obligations as
they become due in the ordinary course of business. Despite the incurred losses
of $904,000 and $1,373,000 for the three and nine month periods ended December
31, 1999, the Company believes it has made significant improvements to its
production processes which will result in reduced production time and assembly
costs. Also, as of December 31, 1999 the Company's backlog has grown to $4.5
million. As the backlog is completed, the Company will receive $4.0 million
during the next two fiscal quarters under the payment terms of the contracts.
Lastly, the Company believes that additional funding, if necessary, may be made
available to it from existing lenders and investors.
The Company's primary need for liquidity is to fund operations while it
endeavors to increase sales and achieve profitability. Historically, the Company
has derived liquidity through system and maintenance sales (including customer
deposits), bank borrowings, financing arrangements with third parties and, from
time to time, sales of its equity securities.
During the nine months ended December 31, 1999 and 1998, the Company had
negative cash flows from operating activities of $717,000 and $2.5 million,
respectively. The increase in the cash flows from operating activities is
primarily due to the deferred contract service revenue and the timing of
payments on accounts payable. Accounts payable were at an abnormally high level
at March 31, 1998 due to the Company's finances. After the comprehensive
financing transaction was consummated on October 2, 1998 (described in detail
below), the Company was able to pay down the accounts payable to a more typical
level.
Under the Company's normal pricing policy, approximately 50% of the purchase
price of each system is received by the Company at the time an order is placed
by a customer and machine specifications are completed, approximately 40% of the
purchase price is received at the time the system is shipped to the customer and
the remaining 10% of the purchase price is received approximately 30 days after
delivery of the system. As a result, the Company receives a significant cash
flow benefit from the receipt of new orders. In a period when costs incurred on
contracts are greater than the billings and subsequent receipts, there will be a
negative impact on the period's cash flows from operating activities. In a
period when billings and their subsequent receipts are greater than the costs
incurred on contracts, there will be a positive impact on the period's cash
flows from operating activities. During the nine months ended December 31, 1999
and 1998, billings and subsequent receipts exceeded costs on contracts and had a
positive impact of $431,000 and $720,000 on cash flows from operating
activities. During the three months ended December 31, 1999, the Company
received three orders from agencies of the United States government, with
payment terms that did not include the Company's typical deposit of 50% upon the
contract signing and completion of the system specification. Payment is expected
in full on each of these systems during the next two fiscal quarters. The
acceptance of these orders had an adverse impact on cash flows from operating
activities. The payment terms under these contracts does not affect the payment
terms for non-government contracts.
During the nine months ended December 31, 1999 and 1998, the Company used cash
for investing activities of $450,000 and $59,000, respectively, to purchase
machinery and equipment. Machinery and equipment purchased during 1999 includes
the construction of a training system to train incoming customer service
engineers.
During the nine months ended December 31, 1999 the Company used cash for
financing activities of $510,000 to pay down long-term debt. The Company also
received an additional $1,350,000 as described below.
As previously reported, the Company completed a $5.7 million comprehensive
financing transaction on October 2, 1998, the proceeds of which have been
utilized to restructure and replace the Company's then-existing senior line of
credit, fund a full settlement with the Company's third-party service provider
and provide additional working capital to fund the Company's ongoing business
operations. See Note 3 to the financial statements. In September 1999, the
Company and the New Lender agreed to modify the terms of the borrowing to defer
payment of the $700,000 due from July 1999 through October 1999 and to relend
the Company the $800,000 of principal that was previously repaid, thereby
restoring the aggregate principal amount of the indebtedness to the original
principal amount of $4.0 million. As amended, the total balance due of $4
million is to be repaid in nine payments as follows: (a) $200,000 shall be paid
on the first day of each month commencing on October 1, 2001 and continuing and
including April 1, 2002; (b) $100,000 shall be paid on May 1, 2002; and (c) the
balance shall be paid on October 1, 2003. If, at any
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time prior to October 1, 2001, the accumulated deficit of the Company,
calculated in accordance with generally accepted accounting principles, improves
by $1.0 million or more above the Company's accumulated deficit at June 30, 1999
(a "Triggering Event"), then the principal payments due on October 1, 2001
through May 1, 2002 shall be accelerated and become due in consecutive monthly
installments beginning on the first day of the second month following the
Triggering Event.
On November 8, 1999, the Company entered into a revolving loan agreement with a
bank pursuant to which the bank has agreed to loan the Company up to $500,000
based on a borrowing base of eligible accounts receivable. Eligible accounts
receivable include accounts receivable under 60 days past due, excluding
receivables from agencies of the United States. As of December 31, 1999, the
Company has borrowed $350,000 under the loan agreement. Interest is to be paid
monthly at the annual rate of prime plus 1.5%. The loan agreement contains
certain covenants, including a debt service coverage ratio of not less than 1.25
to 1. Unless extended by the bank, the loan agreement expires on August 31,
2000. As of December 31, the Company is in default of the debt service ratio.
The Company is anticipating that a waiver will be obtained. In the event a
waiver is not obtained, the Company believes that financing similar to that
under the revolving loan agreement is available from other sources.
The Company also borrowed $200,000 from a director of the Company on a
short-term basis on December 16, 1999. The total amount plus interest at 8% was
paid back to the director prior to December 31, 1999.
Except for the financing transaction with the New Lender and the revolving line
of credit with the bank, the Company does not have commitments for outside
funding of any kind. In addition, the Loan and Security Agreement entered into
between the Company and the New Lender expressly prohibits the Company from
incurring any additional indebtedness from any person or entity other than the
New Lender. The Company must depend, therefore, on current cash balances, the
generation of sufficient internally generated funds and the revolving line of
credit to finance its operations during the balance of fiscal 2000 and
thereafter. At December 31, 1999, the Company had cash and cash equivalents of
approximately $555,000, as well as approximately $2.1 million of accounts
receivable.
The need to borrow funds during the three months ended December 31, 1999 was
primarily due to a reduction in the order flow during the previous two quarters.
In addition, the Company has had to fund the manufacture of the three systems
for the agencies of the United States government without the typical deposit
received on non-government contracts. The total of the deposits, had they been
on typical payment terms, would have been $740,000. The Company believes this
would have reduced, or possibly eliminated, its need for outside funding during
the quarter. Cash flows in future periods will be favorably impacted by the
receipt of this amount. On a going forward basis, management believes that the
Company has sufficient cash and cash equivalents, together with the cash
expected to be derived from the completion of existing contracts, additional
sales and maintenance revenues, to meet the Company's cash needs for the
remainder of fiscal 2000. The Company's cash needs may be affected by a number
of factors, however, many of which are beyond the control of management. See
"Forward Looking Statements," below. Thus, there can be no assurance that the
Company will not need significantly more cash than is presently forecasted by
management or that the Company's current and expected sources of cash will be
sufficient to fund the Company's ongoing operations.
INFLATION
The effect of inflation on the Company has not been significant during the last
two fiscal years.
YEAR 2000
The Company undertook a project designed to assess the potential impact of the
year 2000 on its internal business systems, products and operations. The
Company's year 2000 initiatives included (i) testing and upgrading internal
business systems and facilities, (ii) testing and developing necessary upgrades
for the Company's products; (iii) contacting key suppliers, vendors and
customers to determine their year 2000 compliance status; and (iv) developing
contingency plans. All phases of the project were completed before December 31,
1999.
The costs incurred by the Company in connection with the year 2000 issue have
not been material, and the Company does not expect any remaining year 2000
remediation costs to be material. However, the Company has not
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separately tracked the internal costs incurred in its year 2000 project. Such
costs are principally for payroll and related costs for management and
information systems employees.
Since January 1, 2000, the Company has not experienced any significant problems
associated with the change in the century, and management does not anticipate
that any such problems will develop. Nonetheless, there can be no assurance that
year 2000 issues will not have a material adverse impact on the Company's
business, operations or financial condition. Despite the Company's efforts to
ensure that its material current products are year 2000 compliant, the Company
may see an increase in warranty and other claims, especially those related to
Company products that incorporate, or operate using, third-party hardware or
software. If any of the Company's significant suppliers, vendors or customers
experience business disruptions due to year 2000 issues, the Company might also
be materially adversely affected. In addition, the Company's research and
development, production, distribution, financial, administrative and
communications operations might be disrupted. There is expected to be a
significant issue amount of litigation related to the year 2000 issue and there
can be no assurance that the Company will not incur material costs in defending
or bringing lawsuits. Any unexpected costs or delays arising from the year 2000
issue could have a significant adverse impact on the Company's business,
operations and financial condition.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. In general, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements within the meaning of Section
21E. Without limiting the generality of the foregoing, the words "believes,"
"anticipates," "plans," "expects," and other such similar expressions are
intended to identify forward-looking statements. Investors should be aware that
such forward-looking statements are based on the current expectations of
management and are inherently subject to a number of risks and uncertainties
that could cause the actual results of the Company to differ materially from
those reflected in the forward-looking statements. Some of the important factors
which could cause actual results to differ materially from those projected
include, but are not limited to, the following: general economic conditions and
growth rates in the finishing and related industries; competitive factors and
pricing pressures; changes in the Company's product mix; technological
obsolescence of existing products and the timely development and acceptance of
new products; inventory risks due to shifts in market demands; component
constraints and shortages; the ramp-up and expansion of manufacturing capacity;
the continued availability of financing; and the expenses associated with Year
2000 compliance. The Company does not undertake to update any forward-looking
statement made in this report or that may from time-to-time be made by or on
behalf of the Company.
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GUNTHER INTERNATIONAL, LTD.
PART II -- Other Information
Item 1. Legal Proceedings.
As previously reported, a purported class action lawsuit was filed against
the Company, its then-current chief executive officer and its then-current chief
financial officer asserting claims under the federal securities laws. The action
was filed in the United States District Court for the District of Connecticut.
Among other things, the complaint alleges that the Company's financial
statements for the first three quarters of fiscal 1998 were materially false and
misleading in violation of Section 10(b) of the Securities Exchange Act of 1934
(the "Exchange Act") and Rule 10b-5 promulgated thereunder, and Section 20(a) of
the Exchange Act. The plaintiffs are seeking compensatory damages and
reimbursement for the reasonable costs and expenses, including attorneys' fees,
incurred in connection with the action.
On December 17, 1999, the plaintiffs requested leave to file a second
amended and consolidated complaint. On January 21, 2000, the Company filed a
formal objection to this request. The Company's objection is currently pending
the Court.
Although the Company believes the complaint is without merit and will
vigorously defend the action, it is not possible to predict with certainty the
final outcome of this proceeding.
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Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits required by Item 601 of Regulation S-B:
10.1 Revised Commitment Letter, dated as of August 27, 1999
from People's Bank to the Registrant, as amended by
(i) a letter to the People's Bank from the Registrant
dated September 2, 1999 and (ii) a letter to People's
Bank from the Registrant dated October 23, 1999
10.2 Commercial Loan Agreement,dated as of October 23, 1999,
between the Registrant and People's Bank.
10.3 Promissory Note, dated as of October 23, 1999, between the
Registrant and People's Bank.
10.4 Commercial Revolving Loan Agreement, dated as of October
23, 1999, between the Registrant and People's Bank.
10.5 Security Agreement, dated as of October 23, 1999, between
the Registrant and People's Bank.
10.6 Subordination and Intercreditor Agreement, dated as of
October 23, 1999, between People's Bank, Gunther Partners,
LLC and the Registrant.
10.7 Subordination and Intercreditor Agreement, dated as of
October 23, 1999, between People's Bank and June H.
Geneen, Phil E. Gilbert, Jr., Thomas W. Keesee and the
United States Trust Company of New York, as Co-Executors
of the Estate of Harold S. Geneen, late of New York, New
York and the Registrant.
10.8 Subordination and Intercreditor Agreement, dated as of
October 23, 1999, between People's Bank, Connecticut
Innovations, Inc. and the Registrant.
10.9 Employment Agreement, dated as of October 3, 1999, between
the Registrant and Marc I. Perkins.
10.10 Promissory Note, dated December 16, 1999, between the
Registrant and Robert Spiegel.
27.1 Financial Data Schedule
B. Reports on Form 8-K.
On November 15, 1999, the Registrant filed a Form 8-K reporting a
change in the Registrant's Certifying Accountant.
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GUNTHER INTERNATIONAL, LTD.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GUNTHER INTERNATIONAL, LTD.
(Registrant)
/s/ Michael M. Vehlies Date: February 14, 2000
Michael M. Vehlies
Chief Financial Officer and Treasurer
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
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