<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 September 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
The number of shares of the Registrant's Common stock outstanding as of October
31, 2000 was 4,291,769.
Transitional Small Business Disclosure Format (check one):
YES NO X
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GUNTHER INTERNATIONAL, LTD.
<TABLE>
<CAPTION>
Index
Page
<S> <C> <C>
PART I - CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 2000
and March 31, 2000 3
Condensed Statements of Operations for the three and six
months ended September 30, 2000 and 1999 4
Condensed Statements of Cash Flows for the six
months ended September 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 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
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PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
GUNTHER INTERNATIONAL, LTD.
Condensed Balance Sheets
September 30, 2000 and March 31, 2000
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
------------------ --------------
<S> <C> <C>
Assets
Current Assets:
Cash $ 1,233,578 $ 87,136
Restricted cash 200,000 -
Accounts receivable, net 2,275,224 3,315,783
Costs and estimated earnings in excess
of billings on uncompleted contracts 360,348 200,691
Inventories 2,176,357 1,798,206
Prepaid expenses 307,331 280,874
------------ -----------
Total current assets 6,552,838 5,682,690
------------ -----------
Property and Equipment:
Machinery and equipment 1,790,686 1,485,369
Furniture and fixtures 467,285 378,852
Leasehold improvements 100,880 38,589
------------ -----------
2,358,851 1,902,810
Accumulated depreciation and
amortization (1,022,741) (808,354)
------------ -----------
1,336,110 1,094,456
------------ -----------
Other Assets:
Excess of costs over fair value of net
assets acquired, net 2,663,161 2,774,893
Other 52,327 64,527
------------ -----------
2,715,488 2,839,420
------------ -----------
$ 10,604,436 $ 9,616,566
============ ===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Current maturities of long-term debt - other $ 19,976 $ 13,134
Note payable to related party 500,000 -
Note payable to bank 500,000 350,000
Accounts payable 2,475,446 2,502,231
Accrued expenses 1,255,374 1,385,066
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,749,911 1,052,734
Deferred service contract revenue 1,972,970 1,856,974
Note payable to stockholder 150,000 150,000
------------ -----------
Total current liabilities 8,623,677 7,310,139
------------ -----------
Long-term debt, less current maturities:
Related parties 5,362,493 5,261,446
Other 86,672 15,732
Total long-term debt 5,449,165 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 (15,661,254) (15,163,599)
------------ -----------
Total Stockholders' Equity (Deficit) (3,468,406) (2,970,751)
------------ -----------
$ 10,604,436 $ 9,616,566
============ ===========
</TABLE>
See accompanying notes.
3
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Gunther International, Ltd.
Condensed Statements of Operations
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales:
Systems $3,224,296 $2,477,180 $6,388,521 $5,895,324
Maintenance 2,513,532 2,374,258 4,936,187 4,651,455
--------------- --------------- --------------- ---------------
Total sales 5,737,828 4,851,438 11,324,708 10,546,779
--------------- --------------- --------------- ---------------
Cost of sales:
Systems 2,422,328 1,688,306 4,351,009 4,041,776
Maintenance 1,970,676 2,213,586 3,958,440 4,225,362
--------------- --------------- --------------- ---------------
Total cost of sales 4,393,004 3,901,892 8,309,448 8,267,138
--------------- --------------- --------------- ---------------
Gross profit 1,344,824 949,546 3,015,260 2,279,641
--------------- --------------- --------------- ---------------
Operating expenses:
Selling and administrative 1,216,640 901,755 2,286,465 1,781,520
Research and development 399,463 322,528 727,326 705,848
--------------- --------------- --------------- ---------------
Total operating expenses 1,616,103 1,224,283 3,013,791 2,487,368
--------------- --------------- --------------- ---------------
Operating income (loss) (271,279) (274,737) 1,469 (207,727)
Interest expense, net (157,542) (134,771) (320,622) (261,255)
Litigation (Note 3) - - (178,500) -
--------------- --------------- --------------- ---------------
Net loss $(428,821) $(409,508) $(497,653) $(468,982)
=============== =============== =============== ===============
Basic and fully diluted loss per share $ (0.10) $ (0.10) $ (0.12) $ (0.11)
=============== =============== =============== ===============
Weighted average number of common
shares outstanding 4,291,769 4,291,769 4,291,769 4,291,769
=============== =============== =============== ===============
</TABLE>
See accompanying notes.
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Gunther International, Ltd.
Condensed Statements of Cash Flows
For the six months ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- ---------
<S> <C> <C>
Operating activities:
Net loss $ (497,653) $(468,982)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 333,319 293,112
Provision for doubtful accounts 19,519 --
Interest accrued on related party note payable 121,020 118,500
Changes in operating assets and liabilities:
Accounts receivable 1,021,040 327,175
Inventories (378,151) 294,917
Prepaid expenses (26,457) (68,815)
Accounts payable (26,785) (545,209)
Accrued expenses (129,692) (107,840)
Deferred service contract revenue 115,996 86,350
Billings, costs and estimated earnings on
uncompleted contracts - net 537,520 (405,625)
----------- ---------
Net cash provided by (used for) operating activities 1,089,676 (476,417)
----------- ---------
Investing activities:
Acquisitions of equipment and leasehold improvements (380,301) (318,054)
----------- ---------
Net cash used for investing activities (380,301) (318,054)
----------- ---------
Financing activities:
Repayment of notes payable and long-term debt (162,933) (306,380)
Proceeds from notes payable and long-term debt 800,000 800,000
----------- ---------
Net cash provided by financing activities 637,067 493,620
----------- ---------
Net increase (decrease) in cash 1,346,442 (300,851)
Cash, beginning of period 87,136 731,943
----------- ---------
Cash, end of period $ 1,433,578 $ 431,092
=========== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 211,677 $ 152,977
Cash paid for income taxes 1,118 5,062
Supplemental Disclosure of Non-Cash Investing Activities:
Property and equipment acquired for notes payable $ 70,740 $ --
</TABLE>
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:
During the quarter ended December 31, 1999, in exchange for cash of $4.0
million, the Company issued an 8% note payable to Gunther Partners LLC ("Gunther
Partners") with a face value of $4.0 million and also granted Gunther Partners 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 an exercise price of $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 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 agreed to modify the terms of the note. In connection therewith,
Gunther Partners loaned the Company $800,000, thereby restoring the principal
amount of the loan to $4.0 million. As amended, the outstanding balance 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 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 which is payable on demand; however, Gunther Partners 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 September 30, 2000) based on eligible accounts receivable, as
defined. As of September 30, 2000, $500,000 was outstanding. The revolving loan
agreement contains certain covenants, including a debt service coverage ratio of
not less than 1.25 to 1. As of September 30, 2000, the Company is in default of
the debt service ratio. The lender has agreed to waive the default through
November 30, 2000. The Company anticipates that an alternative financing source
will be required at that time. 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 six months ended September 30, 2000 and year ended March 31, 2000,
the Company incurred net losses of $498,000 and $759,000, respectively. At
September 30, 2000, the Company has a deficiency in working capital of $2.1
million and a stockholders' deficit of $3.5 million. The Company must repay the
bank $500,000 by November 30, 2000. 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 mitigating factors that will
enable it to meet its obligations through September 30, 2001. For the six months
ended September 30, 2000, the Company recognized a net loss of $498,000, which
includes a charge of $178,500 attributable to litigation, on sales of $11.3
million generating a gross profit of $3.0 million and cash provided by operating
activities of $1.1 million. At September 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 $5.6 million, of
which 95% is expected to be completed by March 31, 2001 and the balance
completed shortly thereafter. With continued orders at current levels, the
Company expects to generate sufficient cash flows
6
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from operating activities to meet its obligations through the next twelve
months. In addition, the Company has obtained commitments through April 1, 2001
for $500,000 of additional financing, if necessary. Further, the Company
believes this may be extended until October 1, 2001. The ability of the Company
to achieve consistently profitable operations in the future is dependent on
attaining sufficient future sales volumes.
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, of which $178,500 was expensed during the first quarter of the current
fiscal year, 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.
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<PAGE> 8
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 three and six months ended September 30, 2000 were $3.2
million and $6.4 million, respectively, an increase of 30% and 7%, respectively,
over the comparable periods of the prior year. Sales of high speed assembly
systems and upgrades for the three and six months ended September 30, 2000 were
$2.7 million and $5.4 million, respectively, an increase of 27% and 7% over the
comparable periods of the prior year. 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:
<TABLE>
<CAPTION>
(in millions)
September 30, 2000 June 30, 2000 March 31, 2000 December 31, 1999
------------------ ------------- -------------- -----------------
<S> <C> <C> <C> <C>
Backlog, beginning of period $3.4 $4.2 $4.5 $2.0
Orders 4.9 1.9 3.1 4.2
Sales (2.7) (2.7) (3.4) (1.7)
----- ----- ----- -----
Backlog, end of period $5.6 $3.4 $4.2 $4.5
===== ===== ===== =====
</TABLE>
Maintenance sales for the three and six months ended September 30, 2000 were
$2.5 million and $4.9 million, respectively, an increase of 6% over the
comparable periods of the prior year. The increase is primarily attributable to
a larger number of systems under service contract from shipments during the year
and an increase in service coverage for several clients.
Gross profit for the three and six months ended September 30, 2000 was $1.3
million and $3.0 million, respectively, an increase of 42% and 32% over the
comparable periods of the prior year. The gross margin as a percentage of system
sales decreased to 25% for the quarter ended September 30, 2000 from 32% for the
quarter ended September 30, 1999. The gross margin as a percentage of system
sales increased to 32% for the six months ended September 30, 2000 from 31% for
the quarter ended September 30, 1999. The decrease in gross margin on systems
sales for the three months ended September 30, 2000 is attributable to materials
costs on certain systems which are highly customized being greater than
anticipated. The Company believes the decrease in margin will be limited to
these systems. The gross margin on maintenance sales increased to 22% and 20%
for the three and six months ended September 30, 2000, respectively, from 7% and
9% for the comparable periods of the prior year. The increase in gross margin on
maintenance sales is attributable to a decrease in service parts costs and
direct labor while revenues increased.
Selling and administrative expenses for the three and six months ended September
30, 2000 were $1.2 million and $902,000, respectively, an increase of 35% and
28% over the comparable periods of the prior year. Selling and administrative
expenses, as a percentage of total revenues, for the three and six months ended
September 30, 2000 were 21% and 20%, respectively, as compared to 19% and 17%
for the comparable periods of the prior year. The increase in selling and
administrative expenses is primarily attributable to an increase in personnel
costs, royalties, promotional expenses related to the Company's biennial Users'
Conference and education costs related to the Company's quality initiative.
Research and development expenses for the three and six months ended September
30, 2000 were $399,000 and $727,000, respectively, an increase of 24% and 3%
over the comparable periods of the prior year. Research and development
expenses, as a percentage of total revenues, for the three and six months ended
September 30, 2000 were 7% and 6%, respectively, as compared to 7% for the
comparable periods of the prior year. The increase in the research and
development expenses was primarily attributable to an increase in materials
required on research and development projects during the three months ended
September 30, 2000.
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Interest expense increased $23,000 to $158,000 for the quarter ended September
30, 2000 from $135,000 for the quarter ended September 30, 1999. Interest
expense increased $59,000 to $321,000 for the six months ended September 30,
2000 from $261,000 for the quarter ended September 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 (see Footnote 3), $178,500 of which
was expensed during the first quarter of the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
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 six months ended September 30, 2000 and year ended March 31, 2000, the
Company incurred net losses of $498,000 and $759,000, respectively. At September
30, 2000, the Company has a deficiency in working capital of $2.1 million and a
stockholders' deficit of $3.5 million. The Company must repay the bank $500,000
by November 30, 2000. 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 mitigating factors that will enable it
to meet its obligations through September 30, 2001. For the six months ended
September 30, 2000, the Company recognized a net loss of $498,000, which
includes a charge of $178,500 attributable to litigation, on sales of $11.3
million generating a gross profit of $3.0 million and cash provided by operating
activities of $1.1 million. At September 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 $5.6 million, of
which 95% is expected to be completed by March 31, 2001 and the balance
completed shortly thereafter. With continued orders at current levels, the
Company expects to generate sufficient cash flows from operating activities to
meet its obligations through the next twelve months. In addition, the Company
has obtained commitments through April 1, 2001 for $500,000 of additional
financing, if necessary. Further, the Company believes this may be extended
until October 1, 2001. The ability of the Company to achieve consistently
profitable operations in the future is dependent on attaining sufficient future
sales volumes.
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 next twelve months. Further, the Company has commitments through
April 1, 2001 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
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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 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.
Item 4. Submission of Matters to a Vote of Security Holders
A. The 2000 Annual Meeting of Shareholders was held on September 7, 2000
at Loew's New York 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 3,730,124 4,750
2. Steven S. Kirkpatrick 3,730,124 4,750
3. Gerald H. Newman 3,730,124 4,750
4. Marc I. Perkins 3,730,124 4,750
5. Robert Spiegel 3,730,124 4,750
6. George A. Snelling 3,730,124 4,750
7. Thomas M. Steinberg 3,730,124 4,750
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits required by Item 601 of Regulation S-B:
10.1 Letter from People's Bank to the Registrant extending the
maturity date of the loan
27.1 Financial Data Schedule
B. Reports on Form 8-K.
None.
11
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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: November 14, 2000
-----------------------
Michael M. Vehlies
Chief Financial Officer and Treasurer
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
12
