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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 June 30, 2000
[ ] 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
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The number of shares of the Registrant's Common stock outstanding as of July 31,
2000 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 June 30, 2000
and March 31, 2000 3
Condensed Statements of Operations for the three
months ended June 30, 2000 and 1999 4
Condensed Statements of Cash Flows for the three
months ended June 30, 2000 and 1999 5
Notes to Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis or Plan of Operation 8-10
PART II - OTHER INFORMATION
Item 2. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
GUNTHER INTERNATIONAL, LTD.
CONDENSED BALANCE SHEETS
JUNE 30, 2000 AND MARCH 31, 2000
June 30, 2000 March 31, 2000
------------- --------------
Assets
Current Assets:
Cash $ 1,646,320 $ 87,136
Accounts receivable, net 1,385,092 3,315,783
Costs and estimated earnings in excess
of billings on uncompleted contracts 203,509 200,691
Inventories 1,883,811 1,798,206
Prepaid expenses 252,423 280,874
------------ ------------
Total current assets 5,371,155 5,682,690
------------ ------------
Property and Equipment:
Machinery and equipment 1,592,542 1,485,369
Furniture and fixtures 416,230 378,852
Leasehold improvements 77,798 38,589
------------ ------------
2,086,570 1,902,810
Accumulated depreciation and
amortization (912,230) (808,354)
------------ ------------
1,174,340 1,094,456
------------ ------------
Other Assets:
Excess of costs over fair value of net
assets acquired, net 2,719,027 2,774,893
Other 55,927 64,527
------------ ------------
2,774,954 2,839,420
------------ ------------
$ 9,320,449 $ 9,616,566
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Current maturities of long-term debt - other $ 21,118 $ 13,134
Note payable to related party 500,000 -
Note payable to bank 350,000 350,000
Accounts payable 1,722,360 2,502,231
Accrued expenses 1,161,413 1,385,066
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,008,754 1,052,734
Deferred service contract revenue 2,052,502 1,856,974
Note payable to stockholder 150,000 150,000
------------ ------------
Total current liabilities 6,966,147 7,310,139
------------ ------------
Long-term debt, less current maturities:
Related party 5,300,841 5,261,446
Other 93,045 15,732
------------ ------------
Total long-term debt 5,393,886 5,277,178
------------ ------------
Commitments and contingencies (Note 3)
Stockholders' Equity (Deficit):
Common Stock 4,292 4,292
Additional paid-in capital 12,188,556 12,188,556
Accumulated deficit (15,232,432) (15,163,599)
------------ ------------
Total Stockholders' Equity (Deficit) (3,039,584) (2,970,751)
------------ ------------
$ 9,320,449 $ 9,616,566
============ ============
See accompanying notes.
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Gunther International, Ltd.
Condensed Statements of Operations
For the quarters ended June 30, 2000 and 1999
2000 1999
----------- -----------
Sales:
Systems $ 3,164,224 $ 3,418,144
Maintenance 2,422,656 2,277,197
----------- -----------
Total sales 5,586,880 5,695,341
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Cost of sales:
Systems 1,928,681 2,353,470
Maintenance 1,987,764 2,011,776
----------- -----------
Total cost of sales 3,916,445 4,365,246
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Gross profit 1,670,435 1,330,095
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Operating expenses:
Selling and administrative 1,069,823 903,937
Research and development 327,863 359,150
----------- -----------
Total operating expenses 1,397,686 1,263,087
----------- -----------
Operating income 272,749 67,008
Interest expense, net (163,080) (126,484)
Litigation (Note 3) (178,500) -
----------- -----------
Net loss $ (68,831) $ (59,476)
=========== ===========
Basic and fully diluted loss per share $ (0.02) $ (0.01)
=========== ===========
Weighted average number of common
shares outstanding 4,291,769 4,291,769
=========== ===========
See accompanying notes.
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Gunther International, Ltd.
Condensed Statements of Cash Flows
For the quarters ended June 30, 2000 and 1999
2000 1999
----------- ---------
Cash flows from operating activities:
Net loss $ (68,831) $ (59,476)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 163,342 145,379
Provision for doubtful accounts (22,624) --
Interest accrued on related party note payable 60,510 59,250
Changes in operating assets and liabilities:
Accounts receivable 1,953,315 (584,252)
Inventories (85,605) 393,329
Prepaid expenses 28,451 (6,930)
Accounts payable (779,871) (418,149)
Accrued expenses (223,653) (163,324)
Deferred service contract revenue 195,528 721,953
Billings in excess of costs and estimated earnings on
uncompleted contracts, net (46,798) (57,974)
----------- ---------
Net cash provided by operating activities 1,173,764 29,806
----------- ---------
Cash flows from investing activities:
Acquisitions of equipment and leasehold improvements (108,020) (132,506)
----------- ---------
Net cash used for investing activities (108,020) (132,506)
----------- ---------
Cash flows from financing activities:
Repayment of notes payable and long-term debt (156,560) (303,788)
Proceeds from notes payable and long-term debt 650,000 --
----------- ---------
Net cash provided by (used for) financing activities 493,440 (303,788)
----------- ---------
Net increase (decrease) in cash 1,559,184 (406,488)
Cash, beginning of period 87,136 731,943
----------- ---------
Cash, end of period $ 1,646,320 $ 325,455
=========== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 93,828 $ 77,295
Cash paid for income taxes 1,118 --
Supplemental Disclosure of Non-Cash Investing Activities:
Property and equipment acquired for notes payable $ 70,740 --
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 and cash flows 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, 2000. 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, 2000 was derived from the
audited financial statements at that date.
2. LONG - TERM DEBT AND LIQUIDITY:
In 1999, in exchange for cash of $4.0 million the Company issued an 8% note
payable to Gunther Partners LLC with a face value of $4.0 million and also
granted Gunther Partners LLC a warrant to purchase up to 35% of the pro forma,
fully diluted number of shares of the Company's Common Stock, determined as of
the date of exercise, at any time through November 2003 at $1.50 a share. The
warrant was valued at $345,000 and has been included in additional paid-in
capital. The note was valued at $3,655,000, which resulted in an effective
interest rate of 9.8%. The debt discount on the note is being amortized by the
effective interest method. Interest on the note payable to Gunther Partners LLC
is paid quarterly at the stated rate of 8%. Through June 30, 1999, the Company
made principal payments of $800,000 on this note. In September 1999, the Company
and Gunther Partners LLC agreed to modify the terms of the note. In connection
therewith Gunther Partners LLC loaned the Company $800,000. As amended, the
outstanding balance due Gunther Partners LLC is due in principal installments of
$200,000 commencing on October 1, 2001 through April 1, 2002; $100,000 on May 1,
2002; and $2,500,000 on October 1, 2003. If, at any time prior to October 1,
2001, the accumulated deficit of the Company improves by $1.0 million or more
compared to the amount at June 30, 1999 of $14.4 million (a "Triggering Event"),
then the principal payments otherwise due from October 1, 2001 through May 1,
2002 shall be become due in consecutive monthly installments beginning on the
first day of the second month following the Triggering Event. The debt is
secured by a first priority interest in all tangible and intangible personal
property (excluding accounts receivable, patents and trademarks) and a secondary
interest in accounts receivable, patents and trademarks. In April 2000, the
Company borrowed an additional $500,000 from Gunther Partners LLC which is
payable on demand; however, Gunther Partners LLC has agreed to defer payment
until April 1, 2001 if the Company's cash flow will not support the repayment.
On November 8, 1999, the Company entered into a revolving loan agreement
with a bank. Under the agreement the Company may borrow up to $500,000 at prime
plus 1% (11.0% at June 30, 2000) based on eligible accounts receivable, as
defined. As of June 30, 2000, $350,000 was outstanding. 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 agreement expires on
August 31, 2000. As of June 30, 2000, the Company is in default of the debt
service ratio. The lender agreed to waive the default through August 31, 2000.
The Company is currently negotiating with the bank to extend the expiration date
of the agreement and expects to reach a mutually acceptable agreement. This
indebtedness is secured by a first priority interest in accounts receivable and
a secondary interest in all other personal property.
On April 21, 2000, the Company borrowed $150,000 from a director. This
amount, together with interest at the rate of 8% per annum, was repaid in full
on April 28, 2000.
For the quarter ended June 30, 2000 and year ended March 31, 2000, the
Company incurred net losses of $69,000 and $759,000, respectively. At June 30,
2000, the Company has a deficiency in working capital of $1.6 million and a
stockholders' deficit of $3.0 million. While these conditions may raise doubt
about the Company's ability to meet its obligations as they become due in the
ordinary course of business, management believes there are several mitigating
factors that will enable it to meet its obligations through the balance of the
fiscal year. For the fourth quarter of fiscal 2000, based on unaudited financial
data, the Company recognized net income of $614,000 on sales of $6.5 million
generating a gross profit of $2.1 million but used cash of $438,000 for
operating activities. For the quarter ended June 30, 2000, the Company
recognized a net loss of $69,000, which includes a charge of $178,500
attributable to a litigation reserve, on sales of $5.6 million generating a
gross profit of $1.7 million and cash provided by operating activities was $1.3
million. The improvement in operating results over the last two quarters
reflects the benefits of higher sales volume coupled with reduced production
time gained through enhanced processes. At June 30, 2000, backlog for high-speed
assembly system and upgrade orders, consisting of total contract price less
revenue recognized to date for all signed orders on hand, was $3.4 million. The
increase in cash flow provided by operations resulted primarily from the
collection of accounts receivable, including payments of
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approximately $1.0 million on three systems shipped prior to March 31, 2000.
Prior to the collection of the larger receivables the Company borrowed $500,000
from Gunther Partners LLC which is payable on demand; however, Gunther Partners
LLC has agreed to defer payment until April 1, 2001 if the Company's cash flow
will not support the repayment. The ability of the Company to achieve
consistently profitable operations in the future is dependent on attaining
sufficient future sales volumes. In addition, the Company has obtained
commitments for $500,000 of additional financing, if necessary.
3. COMMITMENTS AND CONTINGENCIES:
In fiscal 1999, two purported class action lawsuits were filed against the
Company, its then-current chief executive officer and its then-current chief
financial officer asserting claims under the federal securities law. The actions
were filed in the United States District Court for the District of Connecticut.
On January 4, 1999, the two actions were consolidated. 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. Although the Company is vigorously defending the action, it has reserved
$215,000 based on management's best estimate of potential settlement costs and
expenses that are likely to be incurred by the Company in connection with the
litigation, $178,500 of which was expensed during the current period.
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Item 2. Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
Systems sales include sales of high-speed assembly systems, upgrades to
previously sold systems and inc.jet imager systems and ancillary products.
Systems sales for the quarter ended June 30, 2000 decreased $254,000, or 7%, to
$3.2 million from $3.4 million for the quarter ended June 30, 1999. Sales of
high speed assembly systems and upgrades for the quarter ended June 30, 2000
decreased to $2.7 million, or 7%, from $2.9 million for the quarter ended June
30, 1999. Backlog consists of total contract price less revenue recognized to
date for all signed orders on hand. A summary of orders, sales and backlog for
the each of the last four fiscal quarters for the high speed assembly systems
and upgrades is as follows:
(in millions)
June 30, 2000 March 31, 2000 December 31, 1999 September 30, 1999
------------- -------------- ----------------- ------------------
Backlog, beginning of period $ 4.2 $ 4.5 $ 2.0 $ 2.0
Orders 1.9 3.1 4.2 2.1
Sales (2.7) (3.4) (1.7) (2.1)
----- ----- ----- -----
Backlog, end of period $ 3.4 $ 4.2 $ 4.5 $ 2.0
===== ===== ===== =====
Maintenance sales increased $145,000, or 6%, to $2.4 million for the quarter
ended June 30, 2000 from $2.3 million for the quarter ended June 30, 1999 as a
result of a larger number of systems under service contract from shipments
during the year and an increase in service coverage for several clients.
Gross profit increased by $340,00, or 26%, to $1.7 million for the quarter ended
June 30, 2000 from $1.3 million for the quarter ended June 30, 1999. The gross
margin on systems sales increased to 39% for the quarter ended June 30, 2000
from 31% for the quarter ended June 30, 1999. The increase in gross margin on
systems sales is attributable to an increase in the gross margin on sales of
high speed assembly systems to 34% for the quarter ended June 30, 2000 from 25%
for the quarter ended June 30, 1999. There was an increase in the average sales
price of a system over the prior year quarter due to customer requirements for
increased functionality in specific systems. The more custom nature of these
systems led to a higher gross margin. The gross margin on maintenance sales
increased to 18% for the quarter ended June 30, 2000 from 12% for the quarter
ended June 30, 1999. The increase in gross margin on maintenance sales is
attributable to the increase in service revenues while costs of maintenance
sales remained relatively stable.
Selling and administrative expenses increased $166,000, or 18%, to $1.1 million
for the quarter ended June 30, 2000 from $903,000 for the quarter ended June 30,
1999. Selling and administrative expenses, as a percentage of total revenues,
for fiscal years 2000 and 1999 were 19% and 16%, respectively. The increase in
selling and administrative expenses is primarily attributable to an increase in
personnel costs, promotional expenses related to the Company's biennial Users'
Conference and education costs related to the Company's quality initiative.
Research and development expenses decreased $31,000 or 9%, to $328,00 for the
quarter ended June 30, 2000 from $359,000 for the quarter ended June 30, 1999.
The decrease in the research and development expenses was primarily attributable
to a decrease in materials required on research and development projects.
Interest expense increased $37,000 to $163,000 for the quarter ended June 30,
2000 from $126,000 for the quarter ended June 30, 1999. The increase was due to
an increase in debt.
The Company has reserved $215,000 based on management's best estimate of
potential settlement costs and expenses that are likely to be incurred
by the Company in connection with the litigation, $178,000 of which was expensed
during the current period. See Item I of Part II, below.
LIQUIDITY AND CAPITAL RESOURCES
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The Company's primary need for liquidity is to fund operations while it
endeavors to increase sales and achieve consistent profitability. Historically,
the Company has derived liquidity through systems and maintenance sales
(including customer deposits), financing arrangements with banks and other third
parties and, from time to time, sales of its equity securities.
For the quarter ended June 30, 2000 and year ended March 31, 2000, the Company
incurred net losses of $69,000 and $759,000, respectively. At June 30, 2000, the
Company has a deficiency in working capital of $1.6 million and a stockholders'
deficit of $3.0 million. While these conditions may raise doubt about the
Company's ability to meet its obligations as they become due in the ordinary
course of business, management believes there are several mitigating factors
that will enable it to meet its obligations through the balance of the fiscal
year. For the fourth quarter of fiscal 2000, based on unaudited financial data,
the Company recognized net income of $614,000 on sales of $6.5 million
generating a gross profit of $2.1 million but used cash of $438,000 for
operating activities. For the quarter ended June 30, 2000, the Company
recognized a net loss of $69,000, which includes a charge of $178,500
attributable to a litigation reserve, on sales of $5.6 million generating a
gross profit of $1.7 million and cash provided by operating activities was $1.3
million. The improvement in operating results over the last two quarters
reflects the benefits of higher sales volume coupled with reduced production
time gained through enhanced processes. At June 30, 2000, backlog for high-speed
assembly system and upgrade orders, consisting of total contract price less
revenue recognized to date for all signed orders on hand, was $3.4 million. The
increase in cash flow provided by operations resulted primarily from the
collection of accounts receivable, including payments of approximately $1.0
million on three systems shipped prior to March 31, 2000. Prior to the
collection of the larger receivables the Company borrowed $500,000 from Gunther
Partners LLC which is payable on demand; however, Gunther Partners LLC has
agreed to defer payment until April 1, 2001 if the Company's cash flow will not
support the repayment. The ability of the Company to achieve consistently
profitable operations in the future is dependent on attaining sufficient future
sales volumes. In addition, the Company has obtained commitments for $500,000 of
additional financing, if necessary.
On November 8, 1999, the Company entered into a revolving loan agreement with a
bank. Under the agreement the Company may borrow up to $500,000 at prime plus 1%
(11.0% at June 30, 2000) based on eligible accounts receivable, as defined. As
of June 30, 2000, $350,000 was outstanding. 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 agreement expires on August
31, 2000. As of June 30, 2000, the Company is in default of the debt service
ratio. The lender agreed to waive the default through August 31, 2000. The
Company is currently negotiating with the bank to extend the expiration date of
the agreement and expects to reach a mutually acceptable agreement. This
indebtedness is secured by a first priority interest in accounts receivable and
a secondary interest in all other personal property.
Under the Company's normal sales pricing policy, approximately 50% of the sales
price of each system is received by the Company within 30 days from the time an
order is placed by a customer; approximately 40% is received at the time the
system is shipped to the customer and the remaining 10% 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.
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
additional system sales and maintenance contracts, to meet the Company's cash
needs for the balance of the fiscal year. Further, the Company has commitments
for up to $500,000 of additional funding, if necessary. 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.
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 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
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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; and the continued availability of financing. 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 law. 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.
Although the Company is vigorously defending the action, it
has established a litigation reserve aggregating $215,000 to cover the
settlement costs and expenses that management believes are likely to be incurred
by the Company in connection with the litigation, $178,500 of which was expensed
during the current period.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits required by Item 601 of Regulation S-B:
10.1 Amendment, dated April 6, 2000, to Lease,
dated as of July 31, 1996, between UNC, Inc.
and the Registrant.
27.1 Financial Data Schedule
B. Reports on Form 8-K.
None.
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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: August 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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