<PAGE> 1
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, 1998
[ ] 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)
Registrant's Telephone Number Including Area Code: 860-823-1427
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 [ ] NO [X]
The number of shares of the Registrant's Common stock outstanding as of December
29, 1998 was 4,291,269. The number of shares of the Registrant's Series B Common
Stock outstanding as of December 29, 1998 was 500.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
<PAGE> 2
GUNTHER INTERNATIONAL, LTD.
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1998
and March 31, 1998 3
Condensed Statements of Operations for the three
months ended June 30, 1998 and 1997 4
Condensed Statements of Cash Flows for the three
months ended June 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
PART II - OTHER INFORMATION
Item 2. Legal proceedings 13
Item 3. Defaults Upon Senior Securities 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Gunther International, Ltd.
Condensed Balance Sheets
June 30, 1998 and March 31, 1998
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
(Unaudited) (As Restated)
(See Note 1)
<S> <C> <C>
Assets
Current Assets:
Cash $ 157,682 $ 572,368
Accounts receivable, net 1,113,902 326,128
Costs and estimated earnings in excess
of billings on uncompleted contracts 547,339 861,219
Inventories 1,198,581 1,256,852
Prepaid expenses 45,793 61,819
Note receivable from stockholder -- 40,000
------------ ------------
Total current assets 3,063,297 3,118,386
------------ ------------
Property and Equipment:
Machinery and equipment 1,243,224 1,224,856
Furniture and fixtures 265,783 249,581
Leasehold improvements 247,643 240,541
------------ ------------
1,756,650 1,714,978
Less - accumulated depreciation and
amortization (840,841) (764,934)
------------ ------------
915,809 950,044
------------ ------------
Other Assets:
Excess of costs over fair value of net
assets acquired, net 3,165,955 3,221,821
Deferred preproduction costs, net -- 622,953
Other 116,154 123,725
------------ ------------
3,282,109 3,968,499
------------ ------------
$ 7,261,215 $ 8,036,929
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Notes payable and current maturities of
long-term debt $ 612,001 $ 514,554
Accounts payable 2,617,695 2,923,468
Accrued expenses 1,096,165 996,994
Billings in excess of costs and estimated
earnings on uncompleted contracts 2,691,585 1,597,789
Deferred service contract revenue 1,480,042 1,799,066
Note payable to stockholder 150,000 150,000
------------ ------------
Total current liabilities 8,647,488 7,981,871
------------ ------------
Long-term debt, less current maturities 1,723,290 1,884,551
------------ ------------
Contingencies (Note 4)
Stockholders' Equity (Deficit):
Common stock, $.001 par value; 16,000,000
shares authorized; 4,291,269 shares issued and
outstanding at June 30, 1998 and March 31, 1998 4,291 4,291
Series B Common stock, $.001 par value; 500 shares
authorized issued and outstanding 1 1
Additional paid-in capital 11,390,818 11,390,818
Accumulated deficit (14,504,673) (13,224,603)
------------ ------------
Total Stockholders' Equity (Deficit) (3,109,563) (1,829,493)
------------ ------------
$ 7,261,215 $ 8,036,929
============ ============
</TABLE>
See accompanying notes to the Condensed Financial Statements.
3
<PAGE> 4
Gunther International, Ltd.
Condensed Statements of Operations
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
(As Restated)
(See Note 1)
<S> <C> <C>
Sales:
Systems $ 1,966,858 $ 978,178
Maintenance 2,157,871 1,513,084
----------- -----------
Total sales 4,124,729 2,491,262
----------- -----------
Cost of sales:
Systems 1,832,018 1,212,044
Maintenance 1,435,119 1,090,460
----------- -----------
Total cost of sales 3,267,137 2,302,504
----------- -----------
Gross profit 857,592 188,758
----------- -----------
Operating expenses:
Selling and marketing 670,225 467,777
Research and development 203,440 116,981
General and administrative 536,034 450,154
----------- -----------
Total operating expenses 1,409,699 1,034,912
----------- -----------
Operating loss (552,107) (846,154)
Interest expense, net (105,010) (51,276)
----------- -----------
Loss before cumulative effect of
change in accounting principle (657,117) (897,430)
Cumulative effect of accounting change (622,953) --
----------- -----------
Net loss $(1,280,070) $ (897,430)
=========== ===========
Basic and Diluted Loss per share:
Loss before cumulative effect of
change in accounting principle $ (0.15) $ (0.21)
Cumulative effect of accounting change (0.15) --
----------- -----------
Loss per share $ (0.30) $ (0.21)
=========== ===========
Weighted average number of common
shares outstanding 4,291,269 4,283,269
=========== ===========
</TABLE>
See accompanying notes to Condensed Financial Statements.
4
<PAGE> 5
Gunther International, Ltd.
Condensed Statements of Cash Flows
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
-------- -------------
(As Restated)
(See Note 1)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,280,070) $ (897,430)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 134,064 153,042
Provision for doubtful accounts 40,000 --
Cumulative effect of accounting change 622,953 --
Changes in operating assets and liabilities:
Increase in accounts receivable (787,774) (167,219)
Decrease (increase) in inventories 58,271 (505,720)
Decrease (increase) in prepaid expenses 16,026 (4,400)
Increase (decrease) in accounts payable (305,773) 728,741
Increase (decrease) in accrued expenses 99,171 (84,944)
Increase (decrease) in deferred service contract revenue (319,024) 153,702
Increase in billings in excess of costs and
estimated earnings on uncompleted contracts, net 1,407,676 720,048
----------- -----------
Net cash provided by (used for) operating activities (314,480) 95,820
----------- -----------
Cash flows from investing activities:
Acquisitions of property and equipment (41,672) (60,776)
Preproduction costs and other assets (14,720) (86,410)
Proceeds from sale of investment 20,000 --
----------- -----------
Net cash used for investing activities (36,392) (147,186)
----------- -----------
Cash flows from financing activities:
Repayment of notes payable and long-term debt (63,814) (26,656)
----------- -----------
Net decrease in cash (414,686) (78,022)
Cash, beginning of period 572,368 261,700
----------- -----------
Cash, end of period $ 157,682 $ 183,678
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 51,522 $ 61,911
Cash paid for income taxes 10,000 --
</TABLE>
See accompanying notes to Condensed Financial Statements.
5
<PAGE> 6
Gunther International Ltd.
Notes to Condensed Financial Statements
1. Restatement:
On June 23, 1998, the Company announced that, during the course of completing
its year-end audit, certain errors had been discovered in the way in which the
Company accounted for the accumulation of contract costs. In addition, certain
items of expense were not properly accounted for. As a result, the Company
announced that the previously issued interim financial statements for the fiscal
year ended March 31, 1998 should not be relied upon. The Company subsequently
announced that similar deficiencies were discovered during the course of
preparing its accounts for the first quarter of fiscal 1999 and that, as a
result, the financial statements and corresponding audit report for the fiscal
year ended March 31, 1998 also should not be relied upon. At that time, the
Audit Committee initiated a review into the accuracy of prior financial
statements. The Audit Committee's review has since been completed and it has
been determined that accounts receivable were overstated and accounts payable
and deferred service revenues were understated at March 31, 1997 and costs and
estimated earnings in excess of billings on uncompleted contracts were
overstated at March 31, 1998. As a result, the accompanying financial statements
and management's discussion and analysis of financial condition and results of
operations include restated results for the three months ended June 30, 1997 and
a restated balance sheet as of March 31, 1998. Also, certain amounts were
reclassified between selling and administrative expenses, cost of sales, and
research and development expenses to more appropriately reflect the results of
operations. The following represents the restated quarterly amounts for each
quarter in the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------ Year Ended
June 30, September 30, December 31, March 31, March 31,
1997 1997 1997 1998 1998
------------ ------------ ------------ ------------ ------------
(As restated) (As restated)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales:
Systems $ 978,178 $ 1,317,264 $ 2,383,776 $ 3,950,885 $ 8,630,103
Maintenance 1,513,084 1,576,307 1,630,288 1,735,037 6,454,716
------------ ------------ ------------ ------------ ------------
Total Sales 2,491,262 2,893,571 4,014,064 5,685,922 15,084,819
------------ ------------ ------------ ------------ ------------
Cost of Sales:
Systems 1,212,044 1,440,406 1,613,265 2,764,377 7,030,092
Maintenance 1,090,460 1,159,150 1,231,010 1,291,072 4,771,692
------------ ------------ ------------ ------------ ------------
Total Cost of Sales 2,302,504 2,599,556 2,844,275 4,055,449 11,801,784
------------ ------------ ------------ ------------ ------------
Gross Profit 188,758 294,015 1,169,789 1,630,473 3,283,035
------------ ------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 467,777 391,772 766,322 686,015 2,311,886
Research and development 116,981 172,004 209,717 120,033 618,735
General and administrative 450,154 638,609 756,543 893,671 2,738,977
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,034,912 1,202,385 1,732,582 1,699,719 5,669,598
------------ ------------ ------------ ------------ ------------
Operating loss (846,154) (908,370) (562,793) (69,246) (2,386,563)
Interest expense, net (51,276) (53,298) (47,991) (92,987) (245,552)
------------ ------------ ------------ ------------ ------------
Net loss $ (897,430) $ (961,668) $ (610,784) $ (162,233) $ (2,632,115)
============ ============ ============ ============ ============
Net loss per share $ (0.21) $ (0.22) $ (0.14) $ (0.04) $ (0.61)
============ ============ ============ ============ ============
Net income (loss)
as previously reported $ (227,580) $ 43,778 $ 125,026 $ (2,643,043) $ (2,701,819)
============ ============ ============ ============ ============
</TABLE>
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
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.
3. 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 except as described in Note 1) 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/A for the fiscal year ended March 31, 1998. The results of operations for
the interim periods are not necessarily indicative of results to be expected for
the full year.
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 Court
also granted the plaintiffs until February 18, 1999 in which to file an amended
complaint. The defendants, including the Company, were given 45 days after the
filing of the amended complaint in which to file a response.
6
<PAGE> 7
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 prayers for relief request 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.
5. Subsequent Event:
On October 2, 1998, the Company entered into a $5.7 million comprehensive
financing transaction with 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
subordinated to the Company's obligations to the New Lender.
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. The debt is secured by a first priority interest in all tangible
and intangible (excluding patents and trademarks) personal property and a
secondary interest in patents and trademarks.
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.
In addition, the Company, the New Lender, the Estate and certain 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 Gunther 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 all tangible and intangible personal property of the Company but is
subordinated to all rights of the New Lender.
Long-term debt in the accompanying financial statements includes current
maturities of long-term debt as of June 30, 1998 which were refinanced on a
long-term basis with the above described October 2, 1998 comprehensive
refinancing agreement.
7
<PAGE> 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On June 23, 1998, the Company announced that, during the course of completing
its year-end audit, certain errors had been discovered in the way in which the
Company accounted for the accumulation of contract costs. In addition, certain
items of expense were not properly accounted for. As a result, the Company
announced that the previously issued interim financial statements for the fiscal
year ended March 31, 1998 should not be relied upon. The Company subsequently
announced that similar deficiencies were discovered during the course of
preparing its accounts for the first quarter of fiscal 1999 and that, as a
result, the financial statements and corresponding audit report for the fiscal
year ended March 31, 1998 also should not be relied upon. At that time, the
Audit Committee initiated a review into the accuracy of prior financial
statements. The Audit Committee's review has since been completed and it has
been determined that accounts receivable were overstated and accounts payable
and deferred service revenues were understated at March 31, 1997 and costs and
estimated earnings in excess of billings on uncompleted contracts were
overstated at March 31, 1998. As a result, the accompanying financial statements
and management's discussion and analysis of financial condition and results of
operations include restated results for the three months ended June 30, 1997 and
a restated balance sheet as of March 31, 1998. Also, certain amounts were
reclassified between selling and administrative expenses, cost of sales, and
research and development expenses to more appropriately reflect the results of
operations. The following represents the restated quarterly amounts for each
quarter in the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------ Year Ended
June 30, September 30, December 31, March 31, March 31,
1997 1997 1997 1998 1998
------------ ------------ ------------ ------------ ------------
(As restated) (As restated)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Sales:
Systems $ 978,178 $ 1,317,264 $ 2,383,776 $ 3,950,885 $ 8,630,103
Maintenance 1,513,084 1,576,307 1,630,288 1,735,037 6,454,716
------------ ------------ ------------ ------------ ------------
Total Sales 2,491,262 2,893,571 4,014,064 5,685,922 15,084,819
------------ ------------ ------------ ------------ ------------
Cost of Sales:
Systems 1,212,044 1,440,406 1,613,265 2,764,377 7,030,092
Maintenance 1,090,460 1,159,150 1,231,010 1,291,072 4,771,692
------------ ------------ ------------ ------------ ------------
Total Cost of Sales 2,302,504 2,599,556 2,844,275 4,055,449 11,801,784
------------ ------------ ------------ ------------ ------------
Gross Profit 188,758 294,015 1,169,789 1,630,473 3,283,035
------------ ------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 467,777 391,772 766,322 686,015 2,311,886
Research and development 116,981 172,004 209,717 120,033 618,735
General and administrative 450,154 638,609 756,543 893,671 2,738,977
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,034,912 1,202,385 1,732,582 1,699,719 5,669,598
------------ ------------ ------------ ------------ ------------
Operating loss (846,154) (908,370) (562,793) (69,246) (2,386,563)
Interest expense, net (51,276) (53,298) (47,991) (92,987) (245,552)
------------ ------------ ------------ ------------ ------------
Net loss $ (897,430) $ (961,668) $ (610,784) $ (162,233) $ (2,632,115)
============ ============ ============ ============ ============
Net loss per share $ (0.21) $ (0.22) $ (0.14) $ (0.04) $ (0.61)
============ ============ ============ ============ ============
Net income (loss)
as previously reported $ (227,580) $ 43,778 $ 125,026 $ (2,643,043) $ (2,701,819)
============ ============ ============ ============ ============
</TABLE>
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.
RESULTS OF OPERATIONS
Sales: The Company's sales are derived from the sale of systems, which includes
new systems and upgrades to existing systems, and related maintenance. Total
sales for the three months ended June 30, 1998 were $4.1 million, an increase of
66% over the comparable period of the prior year. Systems sales for the three
months ended June 30, 1998 were $2.0 million, an increase of 101% over the
comparable period of the prior year. The increase in system sales was primarily
due to more systems in progress and an increase in sales from upgrades to
existing systems during the three months ended June 30, 1998 as compared to the
comparable period of the prior year. Maintenance sales for the three months
ended June 30, 1998 were $2.2 million, an increase of 46% over the comparable
period of the prior year. The increase in maintenance sales was primarily due to
an increase in the number of systems being serviced and an increase in service
requests outside of contracted maintenance agreements, including the moving of
systems and client requested maintenance support during unusually high volume
periods.
Gross profit: Gross profit as a percentage of total sales for the three months
ended June 30, 1998 increased to 21% from 8% for the comparable period of the
prior year. Gross profit as a percentage of systems sales for the three months
ended June 30, 1998 increased to 7% from negative 24% 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, 1998 as compared
to the comparable period of the prior year resulting in less indirect
manufacturing overhead costs being allocated to each system. The low gross
profit percentages in both periods were the result of indirect manufacturing
overhead costs that were not absorbed by systems in progress during the periods,
which was not readily apparent due to the accounting issues described above.
During the three months ended June 30, 1998, job cost estimates were revised
upward for an increase in indirect manufacturing costs and the result was to
recognize less revenues than anticipated on certain systems in progress that
were begun in the previous fiscal year. As new system orders are
8
<PAGE> 9
introduced to the manufacturing cycle and the Company has more accurate
financial data, the gross profit as a percentage of sales is expected to
increase. Gross profit as a percentage of maintenance sales for the three months
ended June 30, 1998 increased to 33% from 28% for the comparable period of the
prior year. The increase in the gross profit percentage resulted from an
increase in the number of systems being directly serviced by the Company rather
than a third party service provider. The Company will be assuming the
maintenance services on predominantly all current and future maintenance
contracts. By assuming the maintenance services, management believes gross
profit as a percentage of maintenance sales will increase by eliminating certain
duplicate costs associated with the Company and the third party service
provider. An increase in the maintenance gross profit margin from the transition
of maintenance services is not expected to result until the first quarter of
fiscal 2000. The transition of maintenance services is to begin on April 1, 1999
and be completed by March 31, 2000. During the fourth quarter of fiscal 1999,
the Company expects to incur certain costs to build a service department
infrastructure, including the hiring of additional support personnel, while
still incurring costs from the third party service provider. These costs are
currently expected to total between $120,000 and $180,000 for the quarter.
Operating Expenses: Operating expenses include selling and marketing, research
and development, and general and administrative expenses.
Selling and marketing expenses, as a percentage of total revenues, for the three
months ended June 30, 1998 and 1997, were 16% and 9%, respectively. For the
three months ended June 30, 1998, these expenses increased by 43% to $670,000
from $468,000 for the three months ended June 30, 1997. The increase was
primarily due to an increase in commissions as a result of a higher sales volume
and an increase in the number of sales personnel.
Research and development expenses, as a percentage of total revenues, for the
three months ended June 30, 1998 and 1997, were 5% and 5%, respectively. For the
three months ended June 30, 1998, these expenses increased by 74% to $203,000
from $117,000 for the three months ended June 30, 1997. The primary focus of the
research and development in the three months ended June 30, 1998 was the
continued development of the Inc.jet Imager and the Series III system. Both
products were available for general release in the third quarter of fiscal 1999.
General and administrative expenses, as a percentage of total revenues, for the
three months ended June 30, 1998 and 1997, were 13% and 8%, respectively. For
the three months ended June 30, 1998, these expenses increased by 19% to
$536,000 from $450,000 for the three months ended June 30, 1997, primarily due
to an increase in royalties and professional services.
Interest expense, net: Interest expense, net, increased to $105,000 in the three
months ended June 30, 1998 from $51,000 in the three months ended June 30, 1997
primarily due to the interest on past due invoices to the third party service
provider. The obligations were paid in full during the third quarter of fiscal
1999.
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, 1998, the Company had a negative cash
flow from operations of $314,000, compared to a positive cash flow from
operations of $96,000 for the three months ended June 30, 1997. The decrease in
the cash flow from operations is primarily related to the decrease in accounts
payable as outstanding accounts payable resulting from prior cash shortages were
paid.
During the three months ended June 30, 1998 and 1997, the Company used cash for
investing activities of $36,000 and $147,000, respectively, to purchase
machinery and equipment and in 1997 to facilitate the further development of
product enhancements.
9
<PAGE> 10
During the three months ended June 30, 1998 and 1997, the Company used cash for
financing activities of $64,000 and $27,000, respectively, to pay down long-term
debt. As of June 30, 1998, the Company was in default under the Revolving Loan
and Security Agreement, originally dated as of June 4, 1996 (as amended, the
"Revolving Credit Facility"), between the Company and the Bank of Boston,
Connecticut, N.A. (the "Bank"). The total outstanding debt under the Revolving
Credit Facility as of June 30, 1998 was $2,150,000. As described in the
following paragraphs, all amounts payable to the Bank were repaid in connection
with the October 2, 1998 financing transaction.
On October 2, 1998, the Company entered into a $5.7 million comprehensive
financing transaction with 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 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 subordinated to the Company's
obligations to the New Lender.
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. The debt is secured by a first priority interest in all tangible
and intangible (excluding patents and trademarks) personal property and a
secondary interest in patents and trademarks.
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.
In addition, the Company, the New Lender, the Estate and certain 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 Gunther 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 all tangible and intangible personal property of the Company but is
subordinated to all rights of the New Lender.
Except for the financing transaction with the New Lender described above, the
Company does not have commitments for outside funding of any kind. The Loan and
Security Agreement entered into between the Company and the New Lender also
expressly prohibits the Company from incurring any additional indebtedness from
any person or entity other than the New Lender. The Company must depend,
therefore, upon the generation of sufficient internally generated funds to
finance its operations during the balance of fiscal 1999 and thereafter. Under
the Company's current 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
10
<PAGE> 11
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
the delivery of the system. As a result, the Company receives a significant cash
flow benefit from the receipt of new orders. Although there can be no assurances
in this regard, management believes that the Company will be able to generate
sufficient additional sales to meet the Company's cash needs for the balance of
the fiscal year.
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 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.
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 is in the process of testing and
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 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 expected to be
upgraded or replaced by the end of the fiscal quarter ended June 30, 1999, at
which time the Company expects that all of its material information-technology
systems will be year 2000 compliant.
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.
The Company is in the process of identifying and contacting suppliers, vendors
and customers 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 is developing and plans to distribute questionnaires relating to
year
11
<PAGE> 12
2000 compliance to its significant suppliers, vendors and customers during the
fourth quarter of fiscal 1999. The Company also intends to follow-up and monitor
the year 2000 compliance progress of significant suppliers, vendors and
customers that indicate that they are not year 2000 compliant or that do not
respond to the Company's questionnaires.
The Company is currently in the process of evaluating the potential year 2000
impact on its facilities, including its building and utility systems. 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 intends to develop a contingency plan 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.
12
<PAGE> 13
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
Court also granted the plaintiffs until February 18, 1999 in which to file an
amended complaint. The defendants, including the Company, were given 45 days
after the filing of the amended complaint in which 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 prayers for relief request 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 3. Defaults Upon Senior Securities.
As previously disclosed, the Company was in default under the Revolving
Credit Facility with its senior lender. The Revolving Credit Facility contained
several affirmative and negative covenants pursuant to which the Company, among
other things, was required to have operating profits. On October 2, 1998, the
Company entered into a $5.7 million comprehensive financing transaction with the
New Lender, a portion of the proceeds of which have been utilized to restructure
and replace the Revolving Credit Facility. Please see the Liquidity and Capital
Resources section of the Management's Discussion and Analysis.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27. Financial Data Sheet
(B) Reports on Form 8-K
On June 23, 1998, the Registrant filed a Current Report on Form
8-K dated June 23, 1998, to report under Item 5 (Other Events)
the Company's announcement that it did not expect to release its
final results for the fourth quarter and the full fiscal year
ended March 31, 1998 until later in July 1998.
13
<PAGE> 14
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: January 14, 1999
----------------------
Michael M. Vehlies
Chief Financial Officer and Treasurer
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
14
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