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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, 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)
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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)
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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 July 31,
1999 was 4,291,769.
Transitional Small Business Disclosure Format (check one):
YES NO X
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GUNTHER INTERNATIONAL, LTD.
Index
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Page
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PART I - CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1999
and March 31, 1999 3
Condensed Statements of Operations for the three
months ended June 30, 1999 and 1998 4
Condensed Statements of Cash Flows for the three
months ended June 30, 1999 and 1998 5
Notes to Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis or Plan of Operation 8-11
PART II - OTHER INFORMATION
Item 2. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
Gunther International, Ltd.
Condensed Balance Sheets
As of June 30, 1999 and March 31, 1999
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June 30, 1999 March 31, 1999
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Assets
Current Assets:
Cash $ 325,455 $ 731,943
Restricted cash 150,000 150,000
Accounts receivable, net 2,104,453 1,520,201
Costs and estimated earnings in excess
of billings on uncompleted contracts 389,476 864,525
Inventories 1,113,225 1,506,554
Prepaid expenses 102,193 95,263
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Total current assets 4,184,802 4,868,486
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Property and Equipment:
Machinery and equipment 1,464,255 1,370,552
Furniture and fixtures 358,440 320,262
Leasehold improvements 255,642 255,017
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2,078,337 1,945,831
Less - accumulated depreciation and
amortization (1,165,867) (1,079,954)
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912,470 865,877
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Other Assets:
Excess of costs over fair value of net
assets acquired, net 2,942,491 2,998,357
Other 70,327 73,927
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3,012,818 3,072,284
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$ 8,110,090 $ 8,806,647
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Current maturities of long-term debt - related parties $ 700,000 $ 1,000,000
Current maturities of long-term debt - other 13,440 13,440
Accounts payable 2,018,281 2,436,430
Accrued expenses 988,194 1,151,518
Billings in excess of costs and estimated
earnings on uncompleted contracts 678,650 1,211,673
Deferred service contract revenue 2,243,157 1,521,204
Note payable to stockholder 150,000 150,000
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Total current liabilities 6,791,722 7,484,265
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Long-term debt, less current maturities:
Related parties 3,581,180 3,521,931
Other 8,533 12,319
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Total long-term debt 3,589,713 3,534,250
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Commitments and contingencies (Note 4)
Stockholders' Equity (Deficit):
Common stock 4,292 4,292
Additional paid-in capital 12,188,556 12,188,556
Accumulated deficit (14,464,193) (14,404,716)
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Total Stockholders' Equity (Deficit) (2,271,345) (2,211,868)
------------ ------------
$ 8,110,090 $ 8,806,647
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See accompanying notes to Condensed Financial Statements.
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Gunther International, Ltd.
Condensed Statements of Operations
For the quarters ended June 30, 1999 and 1998
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1999 1998
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Sales:
Systems $ 3,418,144 $ 1,966,858
Maintenance 2,277,197 2,157,871
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Total sales 5,695,341 4,124,729
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Cost of sales:
Systems 2,353,470 1,832,018
Maintenance 2,011,776 1,435,119
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Total cost of sales 4,365,246 3,267,137
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Gross profit 1,330,095 857,592
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Operating expenses:
Selling and marketing 401,646 670,225
Research and development 359,150 203,440
General and administrative 502,291 536,034
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Total operating expenses 1,263,087 1,409,699
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Operating income (loss) 67,008 (552,107)
Interest expense, net (126,484) (105,010)
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Loss before accounting change (59,476) (657,117)
Cumulative effect of accounting change -- (622,953)
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Net loss (59,476) (1,280,070)
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Basic and Diluted Loss per share:
Loss before cumulative effect of
change in accounting principle $ (0.01) $ (0.15)
Cumulative effect of accounting change -- (0.15)
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Loss per share $ (0.01) $ (0.30)
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Weighted average number of common
shares outstanding 4,291,769 4,283,269
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See accompanying notes to Condensed Financial Statements.
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Gunther International, Ltd.
Condensed Statements of Cash Flows
For the quarters ended June 30, 1999 and 1998
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1999 1998
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Cash flows from operating activities:
Net loss $ (59,476) $(1,280,070)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 145,379 134,064
Provision for doubtful accounts -- 40,000
Cumulative effect of accounting change -- 622,953
Changes in operating assets and liabilities:
Increase in accounts receivable (584,252) (787,774)
Decrease in inventories 393,329 58,271
Decrease (increase) in prepaid expenses (6,930) 16,026
Decrease in accounts payable (418,149) (305,773)
Increase (decrease) in accrued expenses (163,324) 99,171
Increase (decrease) in deferred service contract revenue 721,953 (319,024)
Increase (decrease) in billings in excess of costs and
estimated earnings on uncompleted contracts, net (57,974) 1,407,676
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Net cash used for operating activities (29,444) (314,480)
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Cash flows from investing activities:
Acquisitions of property and equipment (132,506) (41,672)
Preproduction costs and other assets -- (14,720)
Proceeds from sale of investment -- 20,000
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Net cash used for investing activities (132,506) (36,392)
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Cash flows from financing activities:
Repayment of notes payable and long-term debt (244,538) (63,814)
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Net cash used for financing activities (244,538) (63,814)
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Net decrease in cash (406,488) (414,686)
Cash, beginning of period 731,943 572,368
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Cash, end of period $ 325,455 $ 157,682
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Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 77,295 $ 51,522
Cash paid for income taxes -- 10,000
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See accompanying notes to Condensed Financial Statements.
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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.
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 months ended June 30, 1998 by $622,953, or $0.15 per share.
3. LONG - TERM DEBT:
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
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. In
addition, 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 is 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 shall be due on
October 1, 2003. Interest shall be 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.
To induce the New Lender to enter into the 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 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 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.
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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 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.
4. CONTINGENCIES:
On July 9, 1998, a purported class action lawsuit was filed against the
Company, James H. Whitney and Frederick W. Kolling III asserting claims under
the federal securities laws. The action was filed in the United States District
Court for the District of Connecticut and purports to be brought on behalf of
the named plaintiff, Ms. Arlene Greenberg, and all other persons and entities
who purchased shares of Company Common Stock during the period from August 14,
1997 through June 23, 1998.
On August 12, 1998, a second purported class action was filed against
the Company, James H. Whitney and Frederick W. Kolling, III asserting similar
claims under the federal securities laws. The second action also was filed in
the United States District Court for the District of Connecticut and purports to
be brought on behalf of the named plaintiff Mr. Mark Abrams for the same class
period.
On January 4, 1999, the Court consolidated the two actions into one.
The plaintiffs filed an amended consolidated complaint on May 28, 1999. The
defendants, including the Company, have been given until September 3, 1999 to
file a response.
Among other things, the complaints allege 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 SEC 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 attorney's fees
and expert fees, incurred in connection with the action.
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 for the quarter ended June 30, 1999 included 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 on the percentage of completion basis. Sales for the
inc.jet imager systems, which totaled $498,000 are recorded as systems are
shipped. Systems sales for the quarter ended June 30, 1998 included sales from
the high-speed assembly systems and upgrades to previously sold systems.
Total sales for the three months ended June 30, 1999 were $5.7 million, an
increase of 38% over the comparable period of the prior year. Systems sales for
the three months ended June 30, 1999 were $3.4 million, an increase of 74% over
the comparable period of the prior year. The increase in system sales was
primarily due to more systems in progress during the three months ended June 30,
1999 as compared to the comparable period of the prior year. Maintenance sales
for the three months ended June 30, 1999 were $2.3 million, an increase of 6%
over the comparable period of the prior year. An increase in contracted
maintenance sales of 8% was partially offset by a decrease in ancillary
maintenance services. At June 30, 1999 and 1998, 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 $2.0 million and $8.1
million, respectively. The June 30, 1999 backlog is expected to be substantially
complete by September 30, 1999. The backlog at June 30, 1998 was higher than
normal due to the cash flow difficulties the Company was experiencing prior to
the October 2, 1998 financing which made obtaining parts for systems in process
more difficult. As a result, the Company was unable to complete its outstanding
orders in a timely manner and the backlog increased to abnormal levels.
GROSS PROFIT: Gross profit as a percentage of total sales for the three months
ended June 30, 1999 increased to 23% from 21% for the comparable period of the
prior year. Gross profit as a percentage of systems sales for the three months
ended June 30, 1999 increased to 31% from 7% for the comparable period of the
prior year. The increase in the gross profit percentage was a result of more
systems in progress during the three months ended June 30, 1999 as compared to
the comparable period of the prior year resulting in less indirect manufacturing
overhead costs absorbed by each system in progress during the period. The low
gross profit percentage during the three months ended June 30, 1998 was the
result of indirect manufacturing overhead costs being absorbed by fewer systems
in progress during the period. Gross profit as a percentage of maintenance sales
for the three months ended June 30, 1999 decreased to 12% from 33% for the
comparable period of the prior year. The decrease in the gross profit percentage
is a result of an increase in 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 quarter ended
June 30, 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 anticipates the gross
profit level to improve but remain under 20% through the next quarter as the
transition continues.
OPERATING EXPENSES: Selling and marketing expenses, as a percentage of total
revenues, for the three months ended June 30, 1999 and 1998, were 7% and 16%,
respectively. For the three months ended June 30, 1999, these expenses decreased
by 40% to $402,00 from $670,000 for the three months ended June 30, 1998. The
decrease 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
in the inc.jet department back to research and development.. During the 1998
quarter, 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 months ended June 30, 1999 and 1998, were 6% and 5%, respectively. For the
three months ended June 30, 1999, these expenses increased by 77% to $359,000
from $203,000 for the three months ended June 30, 1998. The primary focus of the
research and development in the three months ended June 30, 1999 was the further
development of enhancements to the current product line of systems and the
inc.jet imager.
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General and administrative expenses, as a percentage of total revenues, for the
three months ended June 30, 1999 and 1998, were 9% and 13%, respectively. For
the three months ended June 30, 1999, these expenses decreased by 6% to $502,000
from $536,000 for the three months ended June 30, 1998, primarily due to a
decrease in executive salaries and professional services, partially offset by an
increase in royalties.
Interest expense, net, increased to $126,000 in the three months ended June 30,
1999 from $105,000 in the three months ended June 30, 1998 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 three months ended June 30, 1998 by approximately $620,000, or $0.15 per
share.
LIQUIDITY AND CAPITAL RESOURCES
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 three months ended June 30, 1999 and 1998, the Company had a
negative cash flow from operations of $29,000 and $314,000, respectively. The
improvement in the cash flow from operations was primarily due to the operating
income improvement of $619,000, offset by net changes in accounts payable and
accrued expenses.
During the three months ended June 30, 1999 and 1998, the Company used
cash for investing activities of $133,000 and $36,000, 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 three months ended June 30, 1999 and 1998, the Company used
cash for financing activities of $245,000 and $64,000, respectively. In 1999,
the cash was used primarily to pay down long-term debt primarily associated with
the October 2, 1998 financing transaction.
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.
Except for the financing transaction with Gunther Partners LLC (the
"New Lender"), 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 and the generation of
sufficient internally generated funds to finance its operations during the
balance of fiscal 2000 and thereafter. At June 30, 1999, the Company had cash
and cash equivalents of approximately $475,000, as well as approximately $2.1
million of accounts receivable. The Company's accounts receivable have increased
by approximately $1.2 million since the end of the prior fiscal year. The
increase was primarily attributable to an increase in inc.jet sales and an
increase in maintenance receivables.
The required payments for the remainder of fiscal year 2000 under the Loan and
Security Agreement total $700,000 in monthly installments of $100,000 from July
1999 through September 1999 and $400,000 in October 1999. The payment for July
1999 had not been made as of July 31, 1999. The New Lender, a related party, has
indicated that it would be willing to renegotiate the payment terms based upon
available cash flow such that the payment terms would be acceptable to both the
Company and the New Lender.
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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, 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.
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 sales and maintenance revenues, to meet the Company's cash needs for
the remainder of fiscal 2000. As stated above, if the Company is unable to meet
its payment obligations in accordance with the Loan and Security Agreement, the
New Lender has indicated it would be willing to renegotiate the payment terms
based upon available cash flow. 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 is continuing to assess the potential impact of the year
2000 on its internal business systems, products and operations. The Company's
year 2000 initiatives include (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.
THE COMPANY'S STATE OF READINESS
The Company has completed evaluating its critical
information-technology systems for year 2000 compliance, including its
significant computer systems, software applications and related equipment.
Important computer systems used by the Company include those used in developing
products and in communicating with and servicing customers. Important computer
systems used in financial and administrative management include the general
ledger, inventory control and purchasing. As of the date of this report, the
Company believes that substantially all of its internal operating systems are
year 2000 compliant. The remaining noncompliant systems are noncritical in
nature and have readily available solutions. The Company believes these systems
will be year 2000 compliant by December 31, 1999.
None of the Company's products have time sensitive applications. Thus,
the Company believes that all of the material products that it currently sells
are year 2000 compliant. However, as many of the Company's systems and products
are complex, interact with third-party products, and operate on computer systems
that are not under the Company's direction and control, there can be no
assurance that the Company has identified all of the year 2000 problems with its
current products. While the Company's products will continue to function through
the year 2000, the Company is testing systems in the field to determine if the
computers associated with those systems are year 2000 compliant. If a computer
or the software is not year 2000 compliant and the customer desires to upgrade
his system, there are various low cost solutions offered by the Company.
However, it is not necessary for a system to be updated in order to be able to
process the customer's applications.
The Company has identified key suppliers and vendors that are believed
to be significant to the Company's business operations in order to assess their
year 2000 readiness. As part of this effort, the Company plans to distribute
questionnaires relating to year 2000 compliance to its significant suppliers and
vendors within the next quarter. The Company also intends to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires.
The Company is continuing to evaluate the potential year 2000 impact on
its facilities, including its building and utility systems. To date, the Company
does not believe there are any significant issues that could seriously disrupt
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operations. Any problems that are identified will be prioritized and remediated
based on their assigned priority. The Company will continue periodic testing of
its critical internal business systems and facilities in an effort to minimize
operating disruptions due to year 2000 issues.
ESTIMATED COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
To date, the costs incurred by the Company in connection with the year 2000
issue have not been material. The Company does not expect total year 2000
remediation costs to be material, but there can be no assurance that the Company
will not encounter unexpected costs or delays in achieving year 2000 compliance.
The Company does not track internal costs incurred in its year 2000 compliance
project. Such costs are principally for related payroll costs for information
systems employees.
CONTINGENCY PLANS
The Company is assessing the need to develop contingency plans in
various operating areas that will allow its primary business operations to
continue despite potential disruptions due to year 2000 issues. These plans may
include identifying and securing other suppliers, increasing inventories and
modifying production facilities and schedules. As the Company continues to
evaluate year 2000 readiness of its business systems and facilities, products,
and significant suppliers, vendors and customers, it will modify and adjust its
contingency plan as may be required.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, 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. While the Company expects that the remaining upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
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.
The Company's research and development, production, distribution, financial,
administrative and communications operations might be disrupted. There is
expected to be a significant amount of litigation relating 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.
11
<PAGE> 12
GUNTHER INTERNATIONAL, LTD.
PART II - OTHER INFORMATION
Item 2. Legal Proceedings.
On July 9, 1998, a purported class action lawsuit was filed against the
Company, James H. Whitney and Frederick W. Kolling III asserting claims under
the federal securities laws. The action was filed in the United States District
Court for the District of Connecticut and purports to be brought on behalf of
the named plaintiff, Ms. Arlene Greenberg, and all other persons and entities
who purchased shares of Company Common Stock during the period from August 14,
1997 through June 23, 1998.
On August 12, 1998, a second purported class action was filed against
the Company, James H. Whitney and Frederick W. Kolling, III asserting similar
claims under the federal securities laws. The second action also was filed in
the United States District Court for the District of Connecticut and purports to
be brought on behalf of the named plaintiff Mr. Mark Abrams for the same class
period.
On January 4, 1999, the Court consolidated the two actions into one.
The plaintiffs filed an amended consolidated complaint on May 28, 1999. The
defendants, including the Company, have been given until September 3, 1999 to
file a response.
Among other things, the complaints allege 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 SEC 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 attorney's fees
and expert fees, incurred in connection with the action.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
A. The 1998 Annual Meeting of Shareholders was held on April 12, 1999
at The Regency hotel in New York, New York.
B. The following individuals were elected as directors at the Annual
Meeting:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
1. J. Kenneth Hickman 2,406,542 4,000
2. Steven S. Kirkpatrick 2,406,542 4,000
3. Gerald H. Newman 2,406,542 4,000
4. Marc I. Perkins 2,405,542 5,000
5. Robert Spiegel 2,406,542 4,000
6. George A. Snelling 2,406,542 4,000
7. Thomas M. Steinberg 2,406,542 4,000
</TABLE>
C. Arthur Andersen LLP, independent certified public accountants, were
ratified as independent auditors for the fiscal year ending March
31, 1999 by a vote of 2,408,032 for, 2,500 against and 10
abstentions.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27. Financial Data Schedule
(B) Reports on Form 8-K
None.
12
<PAGE> 13
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 12, 1999
----------------------
Michael M. Vehlies
Chief Financial Officer and Treasurer
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 325,425
<SECURITIES> 0
<RECEIVABLES> 2,127,853
<ALLOWANCES> 23,400
<INVENTORY> 1,113,225
<CURRENT-ASSETS> 4,184,802
<PP&E> 2,078,337
<DEPRECIATION> 1,165,867
<TOTAL-ASSETS> 8,110,090
<CURRENT-LIABILITIES> 6,791,722
<BONDS> 3,589,713
0
0
<COMMON> 4,292
<OTHER-SE> (2,275,637)
<TOTAL-LIABILITY-AND-EQUITY> 8,110,090
<SALES> 3,418,144
<TOTAL-REVENUES> 5,695,341
<CGS> 2,353,470
<TOTAL-COSTS> 4,365,246
<OTHER-EXPENSES> 359,150
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126,484
<INCOME-PRETAX> (59,476)
<INCOME-TAX> 0
<INCOME-CONTINUING> (59,476)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59,476)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
