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, 2002.
[ ] 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
31, 2003 was 19,428,428.
Transitional Small Business Disclosure Format (check one):
YES NO X
GUNTHER INTERNATIONAL LTD.
INDEX
Page
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PART I - CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements - (unaudited)
Condensed Consolidated Balance Sheets as of December 31,
2002 and March 31, 2002 3
Condensed Consolidated Statements of Operations for the
three and nine months ended December 31, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 8
Item 3. Controls and Procedures 12
PART II - OTHER INFORMATION
Item 1. Changes in securities and use of proceeds 13
Item 2. Other Information 13
Item 3. Exhibits and Reports on Form 8-K 13
Signatures 14
2
PART I. CONDENSED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GUNTHER INTERNATIONAL LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 2002 March 31, 2002
----------------- --------------
Assets
Current Assets:
Cash $ 524,857 $ 1,119,790
Restricted cash 101,489 100,054
Accounts receivable, less allowance 1,450,608 849,059
Costs and estimated earnings in excess
of billings on uncompleted contracts 204,029 776,278
Inventories 1,806,279 1,666,462
Prepaid expenses 266,849 228,265
----------- -----------
Total current assets 4,354,111 4,739,908
----------- -----------
Equipment and Leasehold Improvements:
Machinery and equipment 2,135,597 2,230,914
Furniture and fixtures 548,770 505,939
Leasehold improvements 153,612 135,962
----------- -----------
2,837,979 2,872,815
Accumulated depreciation and amortization (1,977,591) (1,518,098)
----------- -----------
860,388 1,354,717
----------- -----------
Other Assets:
Goodwill 2,551,429 2,551,429
Other, net of amortization 19,927 30,727
----------- -----------
2,571,356 2,582,156
----------- -----------
$ 7,785,855 $ 8,676,781
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt $ 27,842 $ 27,842
Notes payable to related parties 1,100,000 --
Accounts payable 1,459,242 1,977,539
Accrued expenses 1,136,955 1,188,462
Billings in excess of costs and estimated
earnings on uncompleted contracts 192,887 515,903
Deferred service contract revenue 2,237,322 1,888,830
----------- -----------
Total current liabilities 6,154,248 5,598,576
----------- -----------
Long-term debt, less current maturities 40,790 62,078
----------- -----------
Total liabilities 6,195,038 5,660,654
----------- -----------
3
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $.001 par value: 500,000 shares
authorized; none issued -- --
Common Stock, $.001 par value: 32,000,000 shares
authorized; 20,300,190 shares issued at
December 31, 2002 and 20,291,769 shares issued
at March 31, 2002, including shares held in
treasury 20,300 20,292
Treasury stock, at cost (919,569 shares) (137,935) (137,935)
Additional paid-in capital 20,052,660 20,005,119
Accumulated deficit (18,344,208) (16,871,349)
------------ -----------
Total Stockholders' Equity 1,590,817 3,016,127
------------ -----------
$ 7,785,855 $ 8,676,781
============ ===========
4
GUNTHER INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31, Nine Months Ended December 31,
------------------------------- ------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Sales:
Systems $ 1,891,523 $ 2,590,526 $ 6,847,461 $ 6,024,552
Maintenance 2,893,061 2,721,967 8,463,217 8,386,058
Supplies 830,462 364,091 2,281,693 912,077
------------ ------------ ------------ ------------
Total sales 5,615,046 5,676,584 17,592,371 15,322,687
------------ ------------ ------------ ------------
Cost of sales:
Systems 1,480,697 2,072,479 5,578,882 5,419,020
Maintenance 1,860,493 1,897,977 6,037,767 5,991,704
Supplies 691,854 288,831 1,879,049 708,097
------------ ------------ ------------ ------------
Total cost of sales 4,033,044 4,259,287 13,495,698 12,118,821
------------ ------------ ------------ ------------
Gross profit 1,582,002 1,417,297 4,096,673 3,203,866
------------ ------------ ------------ ------------
Operating expenses:
Selling and administrative 1,554,504 1,302,108 4,915,302 3,995,820
Research and development 182,792 371,905 613,518 1,096,356
------------ ------------ ------------ ------------
Total operating expenses 1,737,296 1,674,013 5,528,820 5,092,176
------------ ------------ ------------ ------------
Operating loss (155,294) (256,716) (1,432,147) (1,888,310)
Interest expense, net (21,289) (131,585) (40,712) (460,420)
------------ ------------ ------------ ------------
Loss before extraordinary item (176,583) (388,301) (1,472,859) (2,348,730)
Extraordinary item - gain on
extinguishment of debt -- 1,410,868 -- 1,410,868
------------ ------------ ------------ ------------
Net income (loss) $ (176,583) $ 1,022,567 $ (1,472,859) $ (937,862)
============ ============ ============ ============
Income (loss) per share: $ (0.01) $ (0.04) $ (0.08) $ (0.39)
Loss before extraordinary item
Extraordinary item - gain on
extinguishment of debt -- 0.15 -- 0.24
------------ ------------ ------------ ------------
Net income (loss) $ (0.01) $ 0.11 $ (0.08) $ (0.15)
============ ============ ============ ============
Weighted average number of
common shares outstanding 19,380,621 9,318,579 19,377,895 5,967,372
============ ============ ============ ============
5
GUNTHER INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended December 31,
------------------------------
2002 2001
---- ----
Operating activities:
Net loss $(1,472,859) $ (937,862)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 470,293 444,145
Provision for doubtful accounts 29,517 35,000
Interest accrued on related party note payable 36,022 42,456
Gain on extinguishment of debt -- (1,410,868)
Loss on disposal of equipment -- 30,287
Deferred directors' compensation 47,549 40,000
Changes in operating assets and liabilities:
Accounts receivable (631,067) 797,839
Inventories (7,566) 423,375
Prepaid expenses (38,584) 7,326
Accounts payable (518,297) (342,357)
Accrued expenses (87,529) (203,112)
Deferred service contract revenue 348,492 (487,271)
Billings, costs and estimated earnings on
uncompleted contracts, net 249,233 296,970
----------- -----------
Net cash used for operating activities (1,574,796) (1,264,072)
----------- -----------
Investing activities:
Acquisitions of equipment and leasehold improvements (97,414) (388,157)
----------- -----------
Net cash used for investing activities (97,414) (388,157)
----------- -----------
Financing activities:
Repayment of notes payable and long-term debt (21,288) (5,688,724)
Proceeds from note payable and long-tern debt 1,100,000 300,000
Proceeds from sale of stock -- 7,817,128
Purchase of treasury stock -- (137,935)
Transfer to restricted cash (1,435) --
----------- -----------
Net cash provided by financing activities 1,077,277 2,290,469
----------- -----------
Change in cash (594,933) 638,240
Cash, beginning of period 1,119,790 759,393
----------- -----------
Cash, end of period $ 524,857 $ 1,397,633
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest $ 3,956 $ 390,959
Cash paid for income taxes $ 13,853 $ 27,028
Equipment acquired for notes payable and capital leases $ -- $ 25,801
6
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, 2002. 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, 2002 was derived from the
audited financial statements at that date.
Certain prior period amounts have been reclassified to conform to the current
presentation, including a "Series W" system, at a value of $132,000, which was
included in machinery and equipment at March 31, 2002 but was reclassified to
inventories as of June 30, 2002.
2. LIQUIDITY:
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 (including affiliates), and, from time to time, sales of its equity
securities.
Under the Company's normal sales policy pertaining to high-speed inserter
assembly systems, approximately 50% of the sales price of each system is
received by the Company within 30 days from the time an order is placed;
approximately 40% is received at the time the system is shipped 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, 2002, 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 $519,000 compared to $1.3 million at September 30,
2002 and $1.9 million at March 31, 2002.
At December 31, 2002, the Company had a deficiency in working capital of
$1,800,000. For the nine months ended December 31, 2002, the Company incurred a
net loss of $1,473,000 and used cash of $1,575,000 in operating activities.
On July 3, August 7, September 26 and November 19, 2002 the Company borrowed
$700,000, $100,000, $200,000 and $200,000, respectively, from Mr. Robert
Spiegel, a shareholder and member of the Board of Directors, to alleviate cash
deficiencies. These borrowings were evidenced by 8% notes payable which were due
on or before December 31, 2002. The Company repaid the $100,000 note on October
10, 2002.
Prior to December 31, 2002, the Company renegotiated the three remaining notes
with a face value of $1,100,000 consolidating them into one note bearing
interest at the same rate and extending the due date to December 31, 2003. On
January 31, 2003, Mr. Spiegel assigned this note to Gunther Partners LLC.
The ability of the Company to continue as a going concern is dependent upon
obtaining ongoing financing to support its liquidity needs until it achieves a
sufficient order flow to generate profitable operating results and positive cash
flows from operating activities. The accompanying financial statements do not
include any adjustments to the amounts or classification of assets and
liabilities which might be required should the Company be unable to continue its
operations in the ordinary course of business.
7
3. SPARE PARTS:
During the three and nine month periods ended December 31, 2002, the Company was
able to obtain for a nominal cost and use certain spare parts previously sold to
customers. As a result, maintenance cost of sales were about $249,000 and
$343,000 lower for the three and nine month periods ended December 31, 2002,
respectively, than they otherwise would have been.
4. STOCK BASED COMPENSATION:
At December 31, 2002, the Company had two stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost was recognized in operating income since all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock at the date of grant. The following table illustrates the pro forma effect
as if the Company had applied the fair value recognition provisions of FASB No.
123, Accounting for Stock-based Compensation, to stock based employee
compensation.
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss), as reported $ (176,583) $ 1,022,567 $(1,472,859) $ (937,862)
Stock-based employee compensation
expense determined under fair value
based method for all rewards, net of
related tax effects (21,000) (43,000) (61,000) (128,000)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ (197,583) $ 979,567 ($1,533,859) ($1,065,862)
=========== =========== =========== ===========
Per share:
As reported $ (0.01) $ 0.11 $ (0.08) $ (0.15)
=========== =========== =========== ===========
Pro forma $ (0.01) $ 0.11 $ (0.08) $ (0.18)
=========== =========== =========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Operating results may be affected by certain accounting estimates. The most
sensitive and significant accounting estimates in the financial statements
relate to revenue recognition under sales contracts for the Company's high-speed
assembly equipment using the percentage of completion method, asset valuation
allowances (deferred income tax assets, slow moving and obsolete inventories and
accounts receivable) and accruals for product warranty expense. The Company
recognizes revenues under sales contracts for its high-speed assembly equipment
based on the ratio of incurred costs to total estimated costs. To the extent
these estimates change, sales will be affected in the period these changes are
determined. The majority of contracts for high-speed assembly equipment are
completed over no more than two quarters. Therefore, changes in revenue
resulting from changes in estimates will be limited to a two quarter period on
any one contract. Management continuously monitors uncompleted sales contracts,
performing detailed analyses of costs incurred, and estimated costs to complete,
in conjunction with measuring contract performance and recognizing contract
revenues. Similarly, management critically evaluates the potential realization
of deferred income tax benefits as well as the likely usefulness of its
inventories and the collectibility of accounts receivable. Accruals for product
warranty are based primarily on recent historical performance. There were no
significant changes in estimates for any period presented.
8
RESULTS OF OPERATIONS
Sales -
Total sales for the three months ended December 31, 2002, declined slightly to
$5.6 million from $5.7 million for the three months ended December 31, 2001.
Total sales for the nine month period ending December 31, 2002 increased 15%, to
$17.6 million from $15.3 million for the nine months ended December 31, 2001.
System sales consist of sales of high-speed inserter assembly systems, upgrades
to previously sold systems and inc.jet imager systems. System sales for the
three months ended December 31, 2002 decreased $0.7 million to $1.9 million from
$2.6 million for the same period ended December 31, 2001. System sales for the
nine months ended December 31, 2002 increased to $6.8 million from $6.0 million
for the nine months ended December 31, 2001.
The Company uses the percentage of completion method for recognizing revenue on
high-speed inserter assembly systems which results in a timing difference
between the receipt of the order and revenue recognition. Through the first
three quarters of this fiscal year, the Company had approximately the same
volume of orders including backlog as during the comparable period of the last
fiscal year. However, revenue recognition for the high-speed inserter systems
year to date for the current fiscal year is $1.2 million higher ($6.1 million)
than for the comparable period ended December 31, 2001 ($4.9 million). This is
the result of the timing of the receipt of the orders. The Company entered
fiscal 2003 with a higher backlog than the previous fiscal year; in addition,
orders received in the first quarter of fiscal 2003 ($2.5 million) far outpaced
the orders received in the comparable period of the prior fiscal year ($0.5
million). This resulted in higher revenue recognition during the first three
quarters of fiscal 2003 as compared to the comparable period in fiscal 2002.
However, over the past two quarters, the Company has seen the effects of the
current slump in the economy, with orders in the third quarter ($0.8 million)
substantially lower than the comparable period last year ($2.0 million). This
has resulted in lower revenue recognition in the current quarter. A summary of
orders, revenue recognized and backlog for the each of the last four fiscal
quarters for the high-speed assembly systems and related upgrades is as follows:
(in millions)
12/31/2002 9/30/2002 6/30/2002 3/31/2002
---------- --------- --------- ---------
Backlog, beginning of period $ 1.3 $ 3.1 $ 1.9 $ 2.3
Orders 0.8 1.2 2.7 1.6
Revenue recognized (1.6) (3.0) (1.5) (2.0)
Backlog, end of period $ 0.5 $ 1.3 $ 3.1 $ 1.9
Backlog consists of total contract price less revenue recognized to date for all
signed orders on hand. Based on the order backlog as of December 31, 2002, the
Company believes that fourth quarter revenues recognized for high-speed assembly
systems will be lower than the third quarter revenues stated above.
Sales of inc.jet imagers for the three months ended December 31, 2002 compared
to the same period in fiscal 2002 decreased $80,000, from $340,000 to $260,000.
For the nine months ended December 31, 2001 and 2002, respectively, imager sales
fell from $1.1 million to $0.7 million. Management believes that the decrease
has been the result of customers deferring orders in anticipation of the release
of the Company's new jet.engine imager. With the release of the new imager
during the third quarter, the Company expects sales to begin to increase during
the fourth quarter. However, the Company does not anticipate generating
significant jet.engine sales until the next fiscal year due to normal delays in
the "ramp-up" of production.
Maintenance sales consist of contracted maintenance, repair parts sales and
other miscellaneous service sales. Maintenance service contract sales increased
$251,000 and $545,000, to $2.8 million and $8.2 million, respectively, for the
three month and nine month periods ended December 31, 2002 compared to the same
periods in fiscal 2002. This increase resulted from additional contracts sold
with new machine installations and normal contract price increases. Other
service sales fell from $186,000 to $106,000, respectively, for the quarters
ended December 31, 2001 and 2002 and from $748,000 to $280,000, respectively,
for the nine months ended December 31, 2001 and 2002. The high level of other
service sales in fiscal 2002 related primarily to the conversion of a customer
to self-maintenance resulting in increased parts and training sales and sales
related to the physical move of a customer location involving seven machines.
9
Supplies sales consist of ink cartridges, bladders and miscellaneous parts and
supplies related to inc.jet. Sales have increased 128%, to $830,000 from
$360,000, quarter over quarter and from $900,000 to $2,300,000 (150%) for the
nine months ended December 31, 2001 and 2002, respectively, as a result of
aggressive pricing and a marketing campaign begun in fiscal 2002 to target the
dealer market.
Gross Profit -
Total gross profit increased to 28% from 24% and to 23% from 21%, respectively,
for the quarter and nine months ended December 31, 2002 and 2001.
The gross profit percentage on system sales increased to 22% ($411,000) from 19%
($490,000) for the three months ended December 31, 2002 and 2001and from 10%
($579,000) to 19% ($1,269,000) for the nine months ended December 31, 2001 and
2002, respectively. The higher margin rates in fiscal 2003 resulted from greater
production efficiencies. The lower margin dollars for the third quarter of
fiscal 2003 was a direct result of the decline in orders between the two years
for both high speed inserters and inc.jet imagers, whereas the higher margin
dollars reflect the timing of the orders received between the two fiscal years
as discussed above.
The gross profit percentage on high-speed inserter assemblies increased to 16%
from 11% on the same gross profit dollars ($250,000) for the quarters ended
December 31, 2002 and 2001, respectively. For the nine months ended December 31,
2002, the gross profit on high-speed inserters increased to a profit of $821,000
(13%) from a loss of $206,000 in the comparable nine month period ended December
31, 2001.
inc.jet imager gross profit decreased for the quarters and nine months ended
December 31, 2001 and 2002 from $241,000 (70%) to $158,000 (60%) and $785,000
(71%) to $447,000 (62%), respectively, as a result of lower sales volume and
price pressure in advance of the jet.engine introduction.
The gross profit on maintenance revenues increased $208,000 (from 30% to 36%)
for the three months ended December 31, 2002 and 2001. For the nine months ended
December 31, 2001 and 2002, maintenance profits were stable at 29% (an increase
of $30,000). The increase in gross margin in the third quarter of FY2003 over
the same period in fiscal year 2002 is the direct result of the use of certain
spare parts obtained for a nominal cost as discussed in Note 3 of the "Notes to
Condensed Consolidated Financial Statements" above resulting in a reduction in
parts cost of sales of $249,000 and $343,000 for the three and nine months ended
December 31, 2002, respectively. Future reductions in maintenance cost of sales
based on similarly obtained parts are expected to range from $0.5 million to
$1.0 million over the next several years.
In terms of dollars, inc.jet supply gross profits have increased by $63,000 from
the quarter ended December 31, 2001 to the quarter ended December 31, 2002, and
from $204,000 to $403,000 for the nine months ended December 2001 and 2002,
respectively as a result of higher sales volume. In terms of percentage,
however, inc.jet supplies gross profits have declined from 21% to 17% quarter
over quarter and from 22% to 18% for the nine months ended December 31, 2001 and
2002, respectively, primarily as a result of price pressure in the marketplace
as well as an increase in sales volume to dealers generating lower margins.
Expenses -
Selling and administrative expenses increased $151,000 and $652,000 for the
three and nine months ended December 31, 2002. Selling and administrative
expenses, as a percentage of total revenues, for the three and nine months ended
December 31, 2002 were 28%, compared to 25% and 28% for the same periods in
fiscal 2002. The quarter over quarter increase is attributable to an increase in
expenses related to inc.jet ($100,000), an increase in professional fees
($80,000) offset by a decrease in computer expenses ($35,000). In the quarter
ended December 31, 2001, the Company charged certain legal and professional fees
related to the Company's November 2001 rights offering which had previously been
expensed against the proceeds of the offering. This resulted in lower than
normal expenses for the quarter. The decrease in computer expense is related to
the installation of the Company's management information system in fiscal 2002.
The increase in selling and administrative costs of $652,000 from the nine
months ended December 31, 2001 to the same period for 2002 is primarily the
result of an increase in inc.jet sales, marketing and administrative costs of
$482,000. The cause for the increase is twofold: (1) in general, expenses were
lower in fiscal 2002 as a result of the ramp-up of the business in the second
quarter of the fiscal year; (2) in fiscal 2003, significant expenses were
incurred on the development of the "jet.engine" imager. The remainder of the
increase in SG&A is related to increased health insurance costs ($150,000) and
other miscellaneous expense increases.
10
Research and development expenses for the third quarter of fiscal 2003 and year
to date have decreased $72,000 and $76,000, respectively, from the comparable
periods in fiscal 2002 as a result of decreased costs related to the development
of the Series W high-speed sorter.
Interest expense declined substantially between the three and nine month periods
ended December 31, 2002 and 2001 as a result of the extinguishment of the debt
previously owed to Gunther Partners, LLC and various other parties in connection
with the Company's November 2001 rights offering.
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 (including affiliates) and, from time to time, sales of its equity
securities.
Under the Company's normal sales policy pertaining to high-speed inserter
assembly systems, approximately 50% of the sales price of each high-speed
assembly system is received by the Company within 30 days from the time an order
is placed; approximately 40% is received at the time the system is shipped 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. In general, the Company's cash flows from operating
activities are significantly affected by the timing of the billings of customer
receivables and the payments to vendors for systems under production.
At December 31, 2002, the Company had a deficiency in working capital of
$1,800,000. For the nine months then ended, the Company incurred a net loss of
$1,473,000 and used cash of $1,575,000 in operating activities. The Company's
liquidity position through the first nine months of the current fiscal year has
been adversely affected by several factors. The most significant factor
contributing to the cash shortfall is the slowdown in the number of orders
received. The Company is experiencing a reduced order level as a result of the
current slowdown in the economy. Through the end of September, the Company had
received the same number of orders for equivalent units as in the previous
fiscal year. However, in the third quarter, the number of orders has decreased
from the prior year level with only two new equivalent units in the quarter
compared to five in the comparable quarter of the prior fiscal year. Also, the
Company, as of September 1, 2002, switched from a self-insured employee medical
plan to a fully insured plan. During this time, the Company has incurred
substantial additional costs as a result of higher claims experience and the
run-out of claims under the prior plan as well as funding the current premiums
under the new plan. Additionally, as a result of the increase in inc.jet sales
volume, the Company's cash flow has been adversely affected by the funding of
inc.jet inventories and receivables required to support the growth of the
inc.jet business.
On July 3, August 7, September 26 and November 19, 2002 the Company borrowed
$700,000, $100,000, $200,000 and $200,000, respectively, from Mr. Robert
Spiegel, a shareholder and member of the Board of Directors, to alleviate cash
deficiencies. These borrowings were evidenced by 8% notes payable which were due
on or before December 31, 2002. The Company repaid the $100,000 note on October
10, 2002.
Prior to December 31, 2002, the Company renegotiated the three remaining notes
with a face value of $1,100,000 consolidating them into one note bearing
interest at the same rate and extending the due date to December 31, 2003. On
January 31, 2003, Mr. Spiegel assigned this note to Gunther Partners LLC.
Management believes that unless it sees a significant change in the number of
system orders in the fourth quarter, it may not have sufficient cash to fund its
obligations throughout the balance of the fiscal year which would result in
additional borrowings. The Company also believes that the timing of the cash
receipts could be such that it may need to borrow additional funds during the
remainder of the year to cover short-term deficiencies in its cash position.
Should the Company experience a shortfall in its cash position, the Company has
been assured orally by a shareholder and Gunther Partners, LLC that, if
required, additional funds will be provided so as to permit the Company to fund
its obligations.
The Company's cash needs may be affected by a number of factors many of which
are beyond the control of management. See "Forward Looking Statements," below.
Thus, there can be no assurance that the Company will
11
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 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: (i) general economic conditions and
growth rates in the finishing and related industries; (ii) competitive factors
and pricing pressures; (ii) changes in the Company's product mix; (iii)
technological obsolescence of existing products and the timely development and
acceptance of new products; (iv) inventory risks due to shifts in market
demands; (v) component constraints and shortages; (vi) the continued improvement
and expansion of manufacturing capacity and efficiency; (vii) the continued
availability of financing; (viii) the ability to generate increased sales
meeting or exceeding projected levels; (ix) continued adherence with the
Company's current pricing policy, which generally calls for the payment of a 50%
deposit on all orders of high-speed assembly systems; and (ix) the timely
receipt of customer payments on or near the due dates for such payments. 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.
ITEM 3. CONTROLS AND PROCEDURES
We maintain a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of our published financial statements
and other disclosures included in this report. Within the 90 day period prior to
the date of this report, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-14
adopted under the Securities Exchange Act of 1934. Based upon that evaluation,
our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including subsidiaries) that is
required to be included in this quarterly report on Form 10-QSB
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date that we carried out our evaluation.
12
GUNTHER INTERNATIONAL LTD.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended December 31, 2002, the Company credited an
aggregate of 88,236 shares of Common Stock to the accounts of six
directors who were participating in the Gunther International Ltd.
Directors' Equity Plan (the "Plan"). In accordance with the terms of the
Plan, each participating director is entitled to receive grants of Common
Stock in lieu of a quarterly cash retainer. The number of shares which
each director is entitled to receive each fiscal quarter is equal to (a)
$2,500, divided by (b) the fair market value of a share of Common Stock as
of the last business day of the quarter. The fair market value of the
Common Stock on the last business day of the quarter was $0.17 per share.
Each director elected to defer receipt of the shares credited to his
account. No underwriters were used in connection with any of the foregoing
transactions and, accordingly, there were no underwriting discounts or
commissions. The issuance of these securities was exempt from registration
under the Securities Act of 1933 in reliance upon Section 4(2) thereof and
the rules and regulations promulgated thereunder.
ITEM 5. OTHER INFORMATION.
Gerald H. Newman resigned as a member of the Board of Directors of the
Company, effective as of October 9, 2002. The resignation did not result
from any disagreement with the Company relating to the Company's
operations, policies or practices.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. Exhibits required by Item 601 of Regulation S-B:
3.1 Restated Certificate of Incorporation of the registrant, dated
as of December 29, 1993 (filed as Exhibit 3.1 to the
registrant's Form 10-QSB for the period ended December 31,
2001 and incorporated herein by reference).
3.2 Certificate of Amendment to the registrant's Restated
Certificate of Incorporation dated as of October 22, 2001
(filed as Exhibit 3.2 to the registrant's Form 10-QSB for the
period ended December 31, 2001, and incorporated herein by
reference).
10.1 Promissory Note, dated November 19, 2002, made by the
registrant to the order of Robert Spiegel.
10.2 Amended and restated promissory note, dated December 31, 2002,
made by the registrant to the order of Robert Spiegel.
10.3 Assignment of amended and restated promissory note from Robert
Spiegel to Gunther Partners LLC dated January 31, 2003.
99.1 Certification of Marc I. Perkins, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of John K. Carpenter, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
B. Reports on Form 8-K.
None
13
GUNTHER INTERNATIONAL LTD.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GUNTHER INTERNATIONAL LTD.
(Registrant)
/s/ John K. Carpenter Date: February 05, 2003
----------------------------
John K. Carpenter
Chief Financial Officer and Treasurer
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
14
RULE 13A-14 CERTIFICATION
CERTIFICATION
I, Marc I. Perkins, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Gunther
International Ltd;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
upon our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors or
persons performing the equivalent functions:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors which could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 05, 2003
/s/ Marc I. Perkins
-------------------------------
Marc I. Perkins
Chief Executive Officer
RULE 13A-14 CERTIFICATION
CERTIFICATION
I, John K. Carpenter, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Gunther
International Ltd;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
upon our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors or
persons performing the equivalent functions:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors which could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 05, 2003
/s/ John K. Carpenter
-------------------------------
John K. Carpenter
Senior Vice President, Chief
Financial Officer, Treasurer
and Secretary