FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended December 31, 2001
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from __________ to __________
Commission File Number: 0-22994
GUNTHER INTERNATIONAL, LTD.
(Exact name of small business issuer as specified in its charter)
DELAWARE 51-0223195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE WINNENDEN ROAD, NORWICH, CONNECTICUT 06360
(Address of principal executive offices) (Zip Code)
860-823-1427
(Issuers Telephone Number)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last year)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO ___
The number of shares of the Registrant's Common stock outstanding as of January
21, 2002 was 19,372,200.
Transitional Small Business Disclosure Format (check one):
YES ___ NO X
GUNTHER INTERNATIONAL, LTD.
Index
Page
----
PART I - CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 2001 and March 31, 2001 3
Condensed Consolidated Statements of Operations for
the three and nine months ended December 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis or Plan of Operation 8-10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
PART I. CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements
GUNTHER INTERNATIONAL, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2001 March 31, 2001
----------------- --------------
Assets
Current Assets:
Cash $ 1,397,633 $ 759,393
Accounts receivable, less allowance 1,169,558 2,002,398
Costs and estimated earnings in excess
of billings on uncompleted contracts 678,886 601,068
Inventories 1,513,162 1,936,538
Prepaid expenses 247,226 254,552
------------ ------------
Total current assets 5,006,465 5,553,949
------------ ------------
Property and Equipment:
Machinery and equipment 2,098,158 1,811,895
Furniture and fixtures 557,471 469,737
Leasehold improvements 134,812 128,377
------------ ------------
2,790,441 2,410,009
Accumulated depreciation and
amortization (1,426,425) (1,006,350)
------------ ------------
1,364,016 1,403,659
------------ ------------
Other Assets:
Goodwill 2,551,429 2,551,429
Other 34,327 45,127
------------ ------------
2,585,756 2,596,556
------------ ------------
$ 8,956,237 $ 9,554,164
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Current maturities of long-term debt - other $ 24,462 $ 17,045
Accounts payable 2,098,080 2,440,437
Accrued expenses 1,424,853 1,507,965
Billings in excess of costs and estimated
earnings on uncompleted contracts 699,872 325,085
Deferred service contract revenue 1,295,195 1,782,466
------------ ------------
Total current liabilities 5,542,462 6,072,998
------------ ------------
Long-term debt, less current maturities:
Related parties -- 6,676,593
Other 71,741 59,400
------------ ------------
Total long-term debt 71,741 6,735,993
------------ ------------
Commitments and contingencies
Stockholders' Equity (Deficit):
Common stock 20,292 4,292
Treasury stock (137,935) --
Additional paid-in capital 19,925,214 12,188,556
Accumulated deficit (16,465,537) (15,447,675)
------------ ------------
Total Stockholders' Equity (Deficit) 3,342,034 (3,254,827)
------------ ------------
$ 8,956,237 $ 9,554,164
============ ============
See accompanying notes.
3
GUNTHER INTERNATIONAL, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
December 31,
-------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
-------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ------------ ------------
Sales:
Systems $ 2,954,617 $ 3,466,202 $ 6,936,629 $ 9,854,723
Maintenance 2,721,967 2,580,753 8,386,058 7,516,941
----------- ----------- ------------ ------------
Total sales 5,676,584 6,046,955 15,322,687 17,371,664
----------- ----------- ------------ ------------
Cost of sales:
Systems 2,361,310 2,497,981 6,127,117 6,848,990
Maintenance 1,897,977 2,043,150 5,991,704 6,001,590
----------- ----------- ------------ ------------
Total cost of sales 4,259,287 4,541,131 12,118,821 12,850,580
----------- ----------- ------------ ------------
Gross profit 1,417,297 1,505,824 3,203,866 4,521,084
----------- ----------- ------------ ------------
Operating expenses:
Selling and administrative 1,382,108 1,125,870 4,075,820 3,412,335
Research and development 371,905 403,740 1,096,356 1,131,065
----------- ----------- ------------ ------------
Total operating expenses 1,754,013 1,529,610 5,172,176 4,543,400
----------- ----------- ------------ ------------
Operating loss (336,716) (23,786) (1,968,310) (22,316)
Interest expense, net (131,585) (185,659) (460,420) (506,282)
Litigation -- -- -- (178,500)
----------- ----------- ------------ ------------
Loss before extraordinary item (468,301) (209,445) (2,428,730) (707,098)
Extraordinary item - gain on early extinguishment of debt 1,410,868 -- 1,410,868 --
----------- ----------- ------------ ------------
Net income (loss) $ 942,567 $ (209,445) $ (1,017,862) $ (707,098)
=========== =========== ============ ============
Income (loss) per share:
Loss before extraordinary item $ (0.05) $ (0.05) $ (0.41) $ (0.16)
Extraordinary item 0.15 -- 0.24 --
----------- ----------- ------------ ------------
Net income (loss) $ 0.10 $ (0.05) $ (0.17) $ (0.16)
=========== =========== ============ ============
Weighted average number of common
shares outstanding 9,318,579 4,291,769 5,967,372 4,291,769
=========== =========== ============ ============
See accompanying notes.
4
GUNTHER INTERNATIONAL, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
Operating activities:
Net loss $(1,017,862) $ (707,098)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 444,145 504,523
Provision for doubtful accounts 35,000 35,000
Interest accrued on related party note payable 42,456 200,088
Gain on extinguishment of related party debt (1,410,868) --
Loss on disposal of equipment 30,287 --
Changes in operating assets and liabilities:
Accounts receivable 797,840 1,700,004
Inventories 423,375 (664,075)
Prepaid expenses 7,326 100,496
Accounts payable (342,357) 330,755
Accrued expenses (83,112) (130,877)
Deferred service contract revenue (487,271) (384,033)
Billings, costs and estimated earnings on
uncompleted contracts - net 296,969 (729,856)
----------- -----------
Net cash provided by (used for) operating activities (1,264,072) 254,927
----------- -----------
Investing activities:
Acquisitions of equipment and leasehold improvements (388,157) (553,056)
----------- -----------
Net cash used for investing activities (388,157) (553,056)
----------- -----------
Financing activities:
Repayment of notes payable and long-term debt (5,624,254) (667,919)
Transfer to restricted cash -- (200,000)
Proceeds from notes payable and long-term debt 300,000 1,300,000
Proceeds from sale of common stock 7,752,658 --
Purchase of treasury stock (137,935) --
----------- -----------
Net cash provided by financing activities 2,290,469 432,081
----------- -----------
Net change in cash 638,240 133,952
Cash, beginning of period 759,393 87,136
----------- -----------
Cash, end of period $ 1,397,633 $ 221,088
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 390,959 $ 317,436
Cash paid for income taxes 27,028 1,118
Supplemental Disclosure of Non-Cash Investing Activities:
Property and equipment acquired for notes payable $ 35,831 $ 70,740
See accompanying notes.
5
GUNTHER INTERNATIONAL, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States 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 presented. These financial statements should be
read in conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 2001. The results of operations for the interim periods are not
necessarily indicative of results to be expected for the full year. The
condensed consolidated balance sheet as of March 31, 2001 was derived from the
audited financial statements at that date.
2. NEW ACCOUNTING POLICY:
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("FAS 142"). Under the new rules, goodwill is no longer amortized but rather
will be reviewed for impairment at least annually. Other intangible assets
continue to be amortized over their useful lives.
The Company adopted FAS 142 effective April 1, 2001. Had the provisions of
FAS 142 been applied to the three and nine months ended December 31, 2000, the
net loss for the Company would have been $(154,000), or ($0.04) per share, and
$(540,000), or ($0.13) per share, respectively.
3. EXTINGUISHMENT AND LIQUIDITY:
In November 2001, the Company consummated a Rights Offering (the "Rights
Offering"), pursuant to which the Company issued 16,000,000 shares of its Common
Stock to its existing stockholders by subscription right on a pro-rata basis at
a price of $0.50 per share. The net proceeds of the Rights Offering were used to
repay in full the notes payable to Gunther Partners LLC ($4.5 million) and to a
stockholder and director ($500,000) and to purchase from Gunther Partners
919,568 shares of the Company's Common Stock and $1.9 million of notes payable
previously held by the Estate of Harold S. Geneen for an aggregate amount of
$637,935. Gunther Partners had acquired these shares and notes payable on behalf
of the Company in July 2001 for $137,935 and $500,000, respectively. In
connection with these transactions, the Company recognized an extraordinary gain
of $1.4 million on the extinguishment of debt. The Company is able to utilize
past net operating losses to offset this income. Future net operating loss
carryforwards will be subject to an annual limitation of approximately $100,000
due to the ownership change as a result of the Rights Offering. As such, the
Company may be unable to utilize up to $8 million of federal net operating loss
carryforwards.
During the quarter ended December 31, 2001 and prior to the Rights
Offering, the Company borrowed an additional $300,000 from Gunther Partners and
one of its members. These amounts were repaid, with interest, shortly after the
consummation of the Rights Offering.
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.
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.
At December 31, 2001, 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 $2.3 million compared to $2.5 million at
September 30, 2001 and $1.3 million at March 31, 2001.
At December 31, 2001, the Company had a deficiency in working capital of
$536,000. However, the Company believes it has sufficient liquid assets at that
date coupled with anticipated positive operating cash flow for the next twelve
months if anticipated sales levels are achieved to enable it to meet all of its
obligations in the ordinary course of business as they become due.
6
4. 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 laws. The
Company reached an out-of-court settlement and contributed $215,000 to the
settlement in May 2001. The Company had previously accrued the $215,000. Of this
amount, $178,500 was expensed during the first quarter of fiscal 2001 and
$36,500 was expensed in the fourth fiscal quarter of 2000. Legal fees associated
with the claim were expensed as incurred, net of insurance proceeds.
7
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 nine months ended December 31, 2001 were $3.0
million and $6.9 million, respectively, a decrease of 15% and 30%, respectively,
over the comparable periods of the prior year. The greatest factor in this
decrease was the reduction in the sales of high speed assembly systems from $8.2
million for the nine months ended December 31, 2000 to $4.9 million for the nine
months ended December 31, 2001. The decrease in sales is attributable to a
slowdown in orders during the last quarter of fiscal 2001 and the first quarter
of fiscal 2002. A summary of orders, sales and backlog for the each of the last
four fiscal quarters for the high speed assembly systems and upgrades is as
follows:
(in millions)
-----------------------------------------------------------------------------------------------------------
December 31, 2001 September 30, 2001 June 30, 2001 March 31, 2001
-----------------------------------------------------------------------------------------------------------
Backlog, beginning of period $2.5 $ .3 $1.3 $3.7
Orders 2.0 3.2 .7 1.3
Sales (2.2) (1.0) (1.7) (3.7)
---- ---- ---- ----
Backlog, end of period $2.3 $2.5 $ .3 $1.3
==== ==== ==== ====
Backlog consists of total contract price less revenue recognized to date for all
signed orders on hand. The backlog has improved over the last two quarters but
remains well below the level existing as of the end of the last fiscal year.
Without giving effect to any additional orders that may be received, the backlog
at December 31, 2001 is expected to generate system sales of approximately $2.0
million during the quarter ending March 31, 2002.
Inc.jet sales for the three and nine months ended December 31, 2001 were $.7
million and $2.0 million, respectively, an increase of 10% and 22%,
respectively, over the comparable periods of the prior year. The increase in
sales is primarily due to increased market acceptance for the imager and an
increase in ink sales to end users.
Maintenance sales for the three and nine months ended December 31, 2001 were
$2.7 million and $8.4 million, respectively, an increase of 5% and 12% over the
comparable periods of the prior year. The increase is primarily attributable to
the increased number of systems under service contract resulting from shipments
made during the year and an increase in service coverage for several clients.
Gross profit for the three and nine months ended December 31, 2001 was $1.4
million and $3.2 million, respectively, a decrease of 6% and 29% over the
comparable periods of the prior year. The gross margin as a percentage of system
sales decreased to 20% for the quarter ended December 31, 2001 from 28% for the
quarter ended December 31, 2000. The gross margin as a percentage of system
sales decreased to 12% for the nine months ended December 31, 2001 from 31% for
the nine months ended December 31, 2000. This was primarily due to a decrease in
volume of high-speed assembly systems in production during the period. Overhead
costs during the period remained relatively stable while the number of systems
in production decreased. In an effort to not jeopardize future production
levels, certain overhead expenses were not reduced in response to the low volume
of production. The gross margin on maintenance sales increased to 30% and 29%,
respectively, for the three and nine months ended December 31, 2001 from 21% and
20% for the comparable periods of the prior year. The increase in gross margin
on maintenance sales is attributable to the increase in revenues described above
while costs remained relatively stable. Direct labor on service contracts
remained relatively stable even though revenues increased.
Selling and administrative expenses for the three and nine months ended December
31, 2001 were $1.4 million and $4.1 million, respectively, an increase of 23%
and 19%, respectively, (29% and 26%, respectively, after giving effect to the
change in goodwill amortization) over the comparable periods of the prior year.
Selling and administrative expenses, as a percentage of total revenues, for the
three and nine months ended December 31, 2001 were 24% and 27%, respectively, as
compared to 19% and 20% for the comparable periods of the prior year. Selling
and
8
administrative expenses for fiscal 2001 include goodwill amortization expense of
$56,000 and $168,000 for the three and nine months ended December 31, 2000.
Effective April 1, 2001, the Company adopted new rules on accounting for
goodwill and other intangible assets promulgated by the Financial Accounting
Standards Board (see Footnote 2 to the Condensed Consolidated Financial
Statements). The increases in selling and administrative expenses is primarily
attributable to an increase in marketing expenses related to the inc.jet product
line, personnel costs related to inc.jet sales, an increase in health insurance
claims under the Company's self-insured health plan, other increases in
personnel costs related to administration and professional fees relating to the
upgrade of the Company's business information systems. Also, during the nine
months ended December 31, 2000, the Company recorded reimbursements and
adjustments for legal fees associated with litigation and costs associated with
a building lease totaling approximately $125,000, thereby reducing expenses in
that period.
Research and development expenses for the three and nine months ended December
31, 2001 were $0.4 million and $1.1 million, respectively, a decrease of 8% and
3%, respectively, over the comparable periods of the prior year. Research and
development expenses, as a percentage of total revenues, for the three and nine
months ended December 31, 2001 were 7% as compared to 7% and 6% for the
comparable periods of the prior year. Research and development expenses for the
three and nine months ended December 31, 2000 were primarily attributable to the
development of the new Series W system introduced at the industry trade show in
October 2000. Research and development efforts in the current year relate to the
completion of certain features on the Series W, documentation for the production
of the Series W, development of new operating software for high-speed assembly
systems and development of the next line of inc.jet imagers.
Interest expense for the three and nine month periods ended December 31, 2001
decreased 29% and 9% over the comparable periods of the prior year. Upon
completing the Rights Offering (See Liquidity and Capital Resources) , the
Company used a portion of the net proceeds to repay all the outstanding related
party debt. Interest expense on existing equipment and vehicle loans will be
approximately $3,000 a quarter in future quarters.
During the three months ended December 31, 2001, the Company recognized a gain
of $1.4 million on the early extinguishment of debt when it paid $500,000 to
repurchase the debt originally issued to the Estate of Harold S. Geneen (the
"Estate").
LIQUIDITY AND CAPITAL RESOURCES
In November 2001, the Company consummated a Rights Offering (the "Rights
Offering"), pursuant to which the Company issued 16,000,000 shares of its Common
Stock to its existing stockholders by subscription right on a pro-rata basis at
a price of $0.50 per share. The net proceeds of the Rights Offering were used to
repay in full the notes payable to Gunther Partners LLC ($4.5 million) and to a
stockholder and director ($500,000) and to purchase from Gunther Partners
919,568 shares of the Company's Common Stock and $1.9 million of notes payable
previously held by the Estate of Harold S. Geneen for an aggregate amount of
$637,935. Gunther Partners had acquired these shares and notes payable on behalf
of the Company in July 2001 for $137,935 and $500,000, respectively. In
connection with these transactions, the Company recognized an extraordinary gain
of $1.4 million on the extinguishment of debt. The Company is able to utilize
past net operating losses to offset this income. Future net operating loss
carryforwards will be subject to an annual limitation of approximately $100,000
due to the ownership change as a result of the Rights Offering. As such, the
Company may be unable to utilize up to $8 million of federal net operating loss
carryforwards.
During the quarter ended December 31, 2001 and prior to the Rights Offering, the
Company borrowed an additional $300,000 from Gunther Partners and one of its
members. These amounts were repaid, with interest, shortly after the
consummation of the Rights Offering.
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.
9
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.
At December 31, 2001, 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 $2.3 million compared to $2.5 million at September
30, 2001 and $1.3 million at March 31, 2001.
At December 31, 2001, the Company had a deficiency in working capital of
$536,000. However, the Company believes it has sufficient liquid assets at that
date coupled with anticipated positive operating cash flow for the next twelve
months if anticipated sales levels are achieved to enable it to meet all of its
obligations in the ordinary course of business as they become due. The Company's
cash needs may be affected by a number of factors, however, many of which are
beyond the control of management. See "Forward Looking Statements," below. Thus,
there can be no assurance that the Company will not need significantly more cash
than is presently forecasted by management or that the Company's current and
expected sources of cash will be sufficient to fund the Company's ongoing
operations.
INFLATION
The effect of inflation on the Company has not been significant during the last
two fiscal years.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. In general, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements within the meaning of Section
21E. Without limiting the generality of the foregoing, the words "believes,"
"anticipates," "plans," "expects," and other similar expressions are intended to
identify forward-looking statements. Investors should be aware that such
forward-looking statements are based on the current expectations of management
and are inherently subject to a number of risks and uncertainties that could
cause the actual results of the Company to differ materially from those
reflected in the forward-looking statements. Some of the important factors which
could cause actual results to differ materially from those projected include,
but are not limited to, the following: general economic conditions and growth
rates in the finishing and related industries; competitive factors and pricing
pressures; changes in the Company's product 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.
10
GUNTHER INTERNATIONAL, LTD.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits required by Item 601 of Regulation S-B:
10.1 Standby Purchase Agreement, dated October 24, 2001,
between the registrant and Gunther Partners, LLC (filed as
Exhibit 10.17 to the registrant's amendment no. 1 to its
registration statement (SEC File No. 333-65956) on Form S-3
on October 3, 2001, and incorporated herein by reference).
B. Reports on Form 8-K.
On November 30, 2001, the Registrant filed a Current Report on Form
8-K reporting that it had completed its previously announced rights
offering to stockholders.
11
GUNTHER INTERNATIONAL, LTD.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GUNTHER INTERNATIONAL, LTD.
(Registrant)
/s/ Michael M. Vehlies Date: February 14, 2002
-----------------------------
Michael M. Vehlies
Chief Financial Officer and Treasurer
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
12