UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 2003.
[ ] 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 July 21,
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 June 30, 2003 and
March 31, 2003 2
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows for the three
months ended June 30, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 7
Item 3. Controls and Procedures 10
PART II - OTHER INFORMATION
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 13
1
PART I. CONDENSED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GUNTHER INTERNATIONAL LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 MARCH 31, 2003
------------- --------------
Assets
Current Assets:
Cash.......................................................................... $ 3,091,074 $ 405,540
Restricted cash............................................................... 102,208 101,862
Accounts receivable, less allowance........................................... 1,053,277 905,450
Costs and estimated earnings in excess of billings on uncompleted contracts... 99,843 56,409
Inventories................................................................... 3,269,352 2,489,349
Prepaid expenses.............................................................. 207,587 163,914
------------- --------------
Total current assets........................................................ 7,823,341 4,122,524
------------- --------------
Equipment and Leasehold Improvements:
Machinery and equipment....................................................... 1,403,002 1,403,050
Furniture and fixtures........................................................ 457,531 446,256
Leasehold improvements........................................................ 128,494 128,494
------------- --------------
1,989,027 1,977,800
Accumulated depreciation and amortization....................................... (1,360,834) (1,248,165)
------------- --------------
628,193 729,635
------------- --------------
Other Assets:
Deferred royalty.............................................................. 396,772 -
Goodwill...................................................................... 2,551,429 2,551,429
Other......................................................................... 12,727 16,327
------------- --------------
2,960,928 2,567,756
------------- --------------
$ 11,412,462 $ 7,419,915
============= ==============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt - related parties........................ $ 3,974,605 $ -
Current maturities of long-term debt - other.................................. 31,264 31,264
Accounts payable.............................................................. 2,632,184 1,508,965
Accrued expenses.............................................................. 583,563 1,124,337
Billings in excess of costs and estimated earnings on uncompleted contracts... 1,046,241 195,027
Deferred service contract revenue............................................. 2,608,445 2,342,455
------------- --------------
Total current liabilities................................................... 10,876,302 5,202,048
------------- --------------
Long-Term Debt:
Related parties, less current maturities...................................... 396,772 1,100,000
Other, less current maturities................................................ 47,598 30,110
------------- --------------
444,370 1,130,110
------------- --------------
Total liabilities........................................................... 11,320,672 6,332,158
------------- --------------
Commitments (Note 5)
Stockholders' Equity:
Preferred Stock, $.001 par value: 500,000 shares authorized; none issued - -
Common Stock, $.001 par value: 32,000,000 shares authorized; 20,347,997
shares issued at June 30 and March 31, 2003, including shares held in
treasury.................................................................... 20,348 20,348
Treasury Stock, at cost (919,569 shares)...................................... (137,935) (137,935)
Additional paid-in capital.................................................... 20,067,563 20,067,563
Accumulated deficit........................................................... (19,858,186) (18,862,219)
------------- --------------
Total Stockholders' Equity.................................................. 91,790 1,087,757
------------- --------------
$ 11,412,462 $ 7,419,915
============= ==============
See accompanying notes.
2
GUNTHER INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30,
------------------------------
2003 2002
------------- -------------
Sales:
Systems............................................... $ 976,661 $ 1,773,445
Maintenance........................................... 2,930,594 2,741,095
Supplies.............................................. 564,068 640,837
------------- -------------
Total sales......................................... 4,471,323 5,155,377
------------- -------------
Cost of sales:
Systems............................................... 1,267,637 1,814,142
Maintenance........................................... 1,749,628 2,179,317
Supplies.............................................. 453,692 538,975
------------- -------------
Total cost of sales................................. 3,470,957 4,532,434
------------- -------------
Gross profit........................................ 1,000,366 622,943
------------- -------------
Operating expenses:
Selling and administrative............................ 1,468,531 1,371,609
Research and development.............................. 486,659 336,918
------------- -------------
Total operating expenses............................ 1,955,190 1,708,527
------------- -------------
Operating loss.......................................... (954,824) (1,085,584)
Interest expense, net................................. (41,143) (2,812)
------------- -------------
Net loss................................................ $ (995,967) $ (1,088,396)
============= =============
Net loss per share...................................... $ (0.05) $ (0.06)
============= =============
Weighted average number of common shares outstanding.... 19,428,428 19,383,228
============= =============
See accompanying notes.
3
GUNTHER INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDING JUNE 30,
------------------------------
2003 2002
------------- -------------
Operating activities:
Net loss..................................................... $ (995,967) $ (1,088,396)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization.............................. 141,382 166,531
Provision for doubtful accounts............................ 7,841 7,109
Directors' compensation.................................... - 15,000
Changes in operating assets and liabilities:
Accounts receivable...................................... (155,668) (75,978)
Inventories.............................................. (746,970) (89,660)
Prepaid expenses......................................... (43,673) 64,977
Accounts payable......................................... 1,123,219 340,963
Accrued expenses......................................... (391,282) (62,775)
Deferred service contract revenue........................ 265,990 (50,628)
Billings, costs and estimated earnings on uncompleted
contracts - net........................................ 807,780 (52,128)
------------- -------------
Net cash provided by (used for) operating activities... 12,652 (824,985)
------------- -------------
Investing activities:
Acquisition of equipment and leasehold improvements.......... (44,260) (18,229)
------------- -------------
Net cash used for investing activities................. (44,260) (18,229)
------------- -------------
Financing activities:
Proceeds from notes payable and long-term debt............... 2,700,000 -
Proceeds from (repayment of) notes payable and long-term debt 17,488 (6,549)
Transfer to restricted cash.................................. (346) (495)
------------- -------------
Net cash provided by (used for) financing activities... 2,717,142 (7,044)
------------- -------------
Change in cash................................................. 2,685,534 (850,258)
Cash, beginning of period...................................... 405,540 1,119,790
------------- -------------
Cash, end of period............................................ $ 3,091,074 $ 269,532
============= =============
Supplemental Cash Flow Information:
Cash paid for interest....................................... $ 1,621 $ 1,956
============= =============
Cash paid for income taxes................................... $ 28,697 $ -
============= =============
Supplemental Disclosure of Non-Cash Investing Activities:
Property and equipment acquired for notes payable............ $ 26,091 $ -
============= =============
Notes payable issued for royalties........................... $ 571,377 $ -
============= =============
See accompanying notes.
4
GUNTHER INTERNATIONAL LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
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/A for the fiscal year
ended March 31, 2003. 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, 2003 was derived from the
audited financial statements at that date.
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 June 30, 2003, 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 $2.7 million compared to $0.9 million at March
31, 2003 and $3.1 million at June 30, 2002.
At June 30, 2003, the Company had a deficiency in working capital of
$2,900,000. For the three months ended June 30, 2003, the Company incurred a net
loss of $996,000, with cash of $13,000 provided by operating activities.
On May 6, 2003, Mr. Spiegel, a board member and shareholder, loaned the
Company $500,000 under an 8% note due December 31, 2003. Effective June 19,
2003, Mr. Spiegel agreed to extend the maturity date of the note, so it is
currently due and payable on demand at any time on or after April 1, 2004. On
June 19, 2003, Mr. Spiegel loaned the Company an additional $200,000 under an 8%
note due and payable on demand at any time on or after April 1, 2004. On June
30, 2003, Gunther Partners, LLC, a shareholder, ("Gunther Partners") loaned the
Company $2,000,000 under an 8% note due and payable on demand at any time on or
after April 1, 2004.
The ability of the Company to continue as a going concern is dependent
on obtaining 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.
3. STOCK BASED COMPENSATION:
At June 30, 2003, the Company had two stock-based employee compensation
plans. The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations to
recognize compensation expense under its stock option plans. As such, no expense
is recognized if, at the date of grant, the exercise price of the option is at
least equal to the fair market value of the Company's Common Stock. No
compensation expense was recognized during the three month periods ending June
30, 2003 and 2002.
5
Pro forma information required by FAS 123, Accounting for Stock-Based
Compensation, as if the Company had applied fair value recognition provisions
follows:
THREE MONTHS ENDED
JUNE 30,
----------------------------
2003 2002
----------------------------
Net loss, as reported .................................. $ (995,967) $(1,088,396)
Stock-based compensation expense based on fair value ... 25,000 20,000
----------- ------------
Pro forma net loss ..................................... ($1,020,967) ($ 1,108,396)
=========== ============
Per share:
As reported .......................................... $ (0.05) $ (0.06)
=========== ============
Pro forma ............................................ $ (0.05) $ (0.06)
=========== ============
Fair value was estimated using a Black-Scholes option-pricing model. In
both years the weighted-average risk-free interest rate was 3% and the
weighted-average expected life assumption was five years. The volatility factor
was 115% for 2003 and 107% for 2002. There was no dividend yield for either
year.
4. SPARE PARTS:
The Company was able to use certain spare parts previously sold to
customers and subsequently obtained for a nominal cost. As a result, maintenance
cost of sales were about $262,000 lower for the three month period ended June
30, 2003, than they otherwise would have been.
5. ROYALTY COMMITMENT:
In 1992, the Company entered into royalty agreements with seven
founding stockholders pursuant to which the Company is obligated to pay an
amount equal to 1% of all the Company's sales (as defined by the agreement)
within thirty (30) days of the receipt of the Company's audited financial
statements. An additional royalty of .5% is required to be paid to certain
founders on all the Company's sales, provided that the payment of additional
royalties does not reduce the Company's after-tax profits below 9% of sales for
the period. The Company's obligations under these agreements terminate upon the
payment of royalties aggregating $12,000,000. Royalties expensed under this
agreement total $1,725,000 through June 30, 2003.
During the quarter ended June 30, 2003, Gunther Partners reached
agreements with four of the founding stockholders (holding an aggregate interest
in the royalties equal to approximately 67.3334% of the total royalty
obligation) to purchase their future interest in the royalties for $571,377.
These agreements are effective with the fiscal 2003 royalty payments. In turn,
Gunther Partners has transferred and assigned the rights to the acquired
royalties to the Company in exchange for promissory notes in the aggregate
amount of $571,377 (the aggregate amount paid by Gunther Partners to acquire the
royalties) bearing interest at 8% with principal and interest repayments
equivalent to the amounts that would have been due and payable under the
cancelled royalty agreements. Under the terms of the original royalty
agreements, the Company has classified $175,000 of the notes as current as of
June 30, 2003. As a result of this transaction, the Company has recorded a
deferred asset, which is being amortized by an amount equivalent to the amounts
that would have been due and payable under the former royalty agreements, net of
the accrued interest on the note. For the quarters ended June 30, 2003 and 2002,
respectively, royalties expensed under these agreements were $40,000 (net of
interest expense of $5,000 on the note) and $52,000, respectively. After giving
effect to the above transactions relating to Gunther Partners and the founding
stockholders, the maximum remaining royalty that may be required to be paid to
the remaining three founding stockholders, as of June 30, 2003 is $3,400,000.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CRITICAL ACCOUNTING POLICIES
Operating results may be effected by certain accounting policies and
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 (slow moving and obsolete inventories,
accounts receivable and deferred income tax assets), and deferred maintenance
revenue recognition. Management monitors uncompleted sales contracts performing
detailed monthly analysis of costs incurred and weekly reviews of estimated
costs-to-complete in conjunction with measuring contract performance and
recognizing contract revenues. Monthly, management critically evaluates the
likely usefulness of its inventories and the collectability of accounts
receivable and performs regular reviews of the potential realization of deferred
income tax assets. A detailed analysis of deferred maintenance revenue
recognition is also performed monthly. In addition, long-lived assets, including
goodwill, are reviewed at least annually, or whenever events or changes in
circumstances indicate their carrying amounts may not be recoverable.
RESULTS OF OPERATIONS
Sales -
Total sales for the three months ended June 30, 2003, declined to $4.5
million from $5.2 million for the three months ended June 30, 2002.
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 June 30, 2003 decreased $0.8 million to $1.0 million from
$1.8 million for the same period ended June 30, 2002.
The Company uses the percentage-of-completion method for recognizing
revenue on high-speed inserter assembly systems which results in significant
differences between the timing of the receipt of an order and revenue
recognition. The chart below portrays the analysis of the backlog for the
comparable periods in fiscal 2004 and 2003. Backlog consists of total contract
price less revenue recognized to date for all signed system and upgrade orders
on hand. As can be seen in the chart below, the Company had a backlog of $0.9
million in orders at the start of the first quarter. This compares to a backlog
of $1.9 million at the start of the comparable quarter in the last fiscal year.
This difference in opening backlog was the primary reason for the decline in
revenues recognized in the first quarter of fiscal 2004. As can also be seen in
the chart below, orders received in the current fiscal quarter have lagged
somewhat behind the comparable quarter in the previous year. However, the
Company expects to close two additional orders in the near future, which
combined, will potentially increase the backlog by $1.3 million. Based upon the
actual backlog as of June 30, 2003, the Company expects the second quarter
revenues to be significantly higher than the first quarter.
QUARTER ENDED QUARTER ENDED
-------------------------------- -------------------------------
JUNE 30, 2003 MARCH 31, 2003 JUNE 30, 2002 MARCH 31, 2002
-------------------------------- -------------------------------
(IN MILLIONS)
Backlog, beginning of period............ $ 0.9 $ 0.5 $ 1.9 $ 2.3
Orders ................................. 2.4 0.8 2.8 1.6
Revenues recognized .................... (0.6) (0.4) (1.5) (2.0)
--------- --------- -------- ---------
Backlog, end of period ................. $ 2.7 $ 0.9 $ 3.2 $ 1.9
========= ========= ======== =========
Sales of inc.jet imagers for the three months ended June 30, 2003
compared to the same period in fiscal 2003 increased $108,000, from $233,000 to
$341,000. This is primarily the result of the introduction of the
jet.engine(TM).
Maintenance sales consist of contracted maintenance, repair parts sales
and other miscellaneous service sales. Maintenance service contract sales
increased $113,000 for the three month period ended June 30, 2003 compared to
the
7
same period in fiscal 2003. This sales increase resulted from additional
contracts sold to customers with new machine installations and normal contract
price increases. Other service sales rose from $77,000 to $161,000 for the
quarters ended June 30, 2002 and 2003, respectively. The increase in other
service sales results from the sale of spare parts to a customer who converted
to self-maintenance in early January 2003.
Supplies sales consist of ink cartridges, bladders and miscellaneous
parts and supplies related to inc.jet. Sales have decreased $77,000 from
$641,000 for the three month period ended June 30, 2002 to $564,000 for the
comparable period in fiscal 2004. Management believes that this is primarily due
to customers delaying purchases while working off stocks purchased at lower
prices during a sales incentive plan in late 2002 and early 2003.
Gross Profit -
The overall gross profit increased to 22% for the quarter ended June
30, 2003, compared to 12% for the same quarter in 2002.
Systems gross profit includes high-speed inserters, as well as, inc.jet
imager hardware. Systems incurred a loss of $291,000 for the first quarter of
fiscal 2004 compared to a $41,000 loss for the comparable period in fiscal 2003,
primarily due to the decline in inserter revenues for the first quarter of
fiscal 2004 as noted above.
High-speed inserter assemblies declined to a loss of $503,000 from a
loss of $182,000 for the quarters ended June 30, 2003 and 2002, respectively.
Materials costs as a percentage of revenues fell slightly from 46% to 44% and
overall labor and overhead costs fell $145,000, from $1,005,000 to $859,000, due
to continuing cost saving programs implemented in prior years. However, these
declines in expenses were not sufficient to offset the decline in revenues
recognized in the first quarter.. inc.jet imager gross profit increased by
$71,000, from $141,000 to $212,000, for the quarters ended June 30, 2003 and
2002, respectively. Gross margin has remained stable at approximately 62%.
Maintenance gross profit increased $619,000 to $1,181,000 from
$562,000, and as a percentage to 40% from 20% for the three months ended June
30, 2003 compared to 2002, respectively. The increase in both dollars and
percentage are due to three main factors: (1) an increase in new contracts with
higher margins; (2) continuing reductions in service overhead; and (3) 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 $202,000 for the three months ended June 30,
2003. Future reductions in maintenance cost of sales based on similarly obtained
parts are expected to approximate $600,000 over the next several years.
In terms of dollars, inc.jet supply gross profits have increased
slightly from $102,000 to $110,000 for the quarters ended June 30, 2003 and
2002, respectively. In terms of percentage, gross profit has increased from 16%
to 19% for the same periods. This is primarily the result of a lower volume of
sales to distributors which generate lower margins.
Expenses -
Total operating expenses increased by $246,000, to $1,955,000 from
$1,709,000, for the three months ended June 30, 2003 compared to 2002,
respectively.
Selling and administrative expenses increased $97,000 for the quarter
ended June 30, 2003 over the comparable period in fiscal 2003. Selling and
marketing expenses increased by $90,000 as a result of higher headcount and
increased commission expense. Administrative expenses remained relatively flat
quarter over quarter.
Research and development expenses for the first quarter of fiscal 2004
have increased by $150,000 compared to the comparable quarter in fiscal 2003
primarily as a result of increased development costs, primarily software, for
the jet.engine(TM).
Interest expense increased substantially during the quarter ended June
30, 2003 as a result of the additional borrowings.
8
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.
For the quarter ended June 30, 2003, the Company incurred a net loss of
$1.0 million and essentially broke even in cash flow from operating activities.
At June 30, 2003, the Company had a deficiency in working capital of $2.9
million. The Company's liquidity position during the first quarter was adversely
affected by a number of factors. The most significant factor was the reduced
backlog of orders coming into the first quarter of fiscal 2004. The backlog at
April 1, 2003 was $1.0 million below the prior year resulting in fewer billings
and collections during the first quarter. Additionally, as a result of the
increase in inc.jet sales volume, the Company's cash flow has been adversely
effected by the additional funding of inc.jet inventories and receivables
required to support the growth of the inc.jet business.
The timing of shortfalls in liquidity necessitated the borrowing of
funds during the first quarter of fiscal 2004. On May 6, 2003, Mr. Spiegel
loaned the Company $500,000 under an 8% note due December 31, 2003. Effective
June 19, 2003, Mr. Spiegel agreed to extend the maturity date of the note, so it
is currently due and payable on demand at any time on or after April 1, 2004.
Effective June 19, 2003, Gunther Partners extended the maturity date of its
$1,100,000 note, so it is currently due and payable on demand at any time on or
after April 1, 2004. On June 19, 2003, Mr. Spiegel also loaned the Company an
additional $200,000 under an 8% note due and payable on demand at any time on or
after April 1, 2004. Also, on June 30, 2003, Gunther Partners loaned the Company
$2,000,000 under an 8% note due and payable on demand at any time on or after
April 1, 2004. At this time, the Company is actively negotiating with a major
lending institution to replace this note with a line of credit at a more
favorable interest rate.
In connection with the September 1992 recapitalization of the Company,
the Company entered into separate royalty agreements with seven founding
stockholders (the "Founders"), pursuant to which the Company is obligated to pay
the Founders an aggregate royalty equal to 1% of all the Company's sales (as
defined) up to a maximum of $12.0 million (of which approximately $1.5 million
has been paid through June 30, 2003). See Note 5 to the Condensed Consolidated
Financial Statements of the Company. In May and June 2003, four of the Founders
who collectively held a 67.3% interest in the aggregate royalty (the "Selling
Founders") approached the Company and offered to release their future interest
in the royalty in exchange for a lump-sum payment. Based on their combined
interest in the aggregate royalty, the Selling Founders may have been entitled
to receive additional future royalty payments up to approximately $7,100,000,
but the Selling Founders offered to release their future interest in the royalty
for a lump-sum payment of $571,377. The Company did not have sufficient cash
reserves to take advantage of this opportunity, so Gunther Partners accommodated
the transaction by purchasing the royalties from the Selling Founders in
exchange for the lump-sum payment and transferring them to the Company in
exchange for promissory notes with an aggregate principal amount exactly equal
to the lump-sum payment. The notes bear interest at 8% per annum and provide for
principal and interest payments in an amount equal to the amount that otherwise
would have been due and payable under the retired royalty agreements. Thus,
while these agreements will have no effect on short-term liquidity, the Company
will realize significant savings over the term that the royalty agreements
otherwise would have remained outstanding. The maximum remaining royalty that
may be required to be paid to the remaining founders is $3,400,000.
The ability of the Company to continue as a going concern is dependent
on obtaining 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.
9
On a going forward basis, management is cautiously optimistic that the
Company's operating results will improve during the remainder of fiscal 2004.
During the fiscal quarter ended June 30, 2003, the Company received orders
totaling $2.4 million including three additional machines and has several
excellent short-term sales prospects. Additionally, spending reductions planned
in fiscal 2004 include about $300,000 less in health care costs, due to the
adoption of a fully insured plan and planned and necessary additions to
equipment and leasehold improvements in fiscal 2003 are less than $100,000.
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, including the jet.engine(TM) system; (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
Evaluation of disclosure controls and procedures -
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities and Exchange
Act of 1934) as of June 30, 2003. Based on this evaluation, our CEO and CFO
concluded that our disclosure controls and procedures were effective such that
the material information required to be included in our Securities and Exchange
Commission ("SEC") reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to the
Company, including our consolidated subsidiary, and was made known to them by
others within those entities, particularly during the period when this report
was being prepared.
Changes in internal control -
There have been no changes in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company maintains the Gunther International Ltd. Directors' Equity
Plan (the "Plan"), pursuant to which each participating director receives shares
of Common Stock of the Company as compensation for each quarter in which the
director serves on the Board. The number of shares issued for each quarter has a
value equal to $2,500, calculated based on the fair market value of the
Company's Common Stock at the end of such quarter. Each director may elect to
defer receipt of the shares credited to his account. All non-employee directors
are eligible to participate in the Plan. An eligible director may make an
irrevocable election not to participate in the Plan in any year and instead
receive a quarterly cash retainer of $1,250. For the fiscal year ending March
31, 2004, all eligible directors have elected not to participate in the Plan and
to instead receive the quarterly cash retainer.
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).
3.3 By-Laws of the Company, as amended (filed as Exhibit 3(iv) to
the Company's Quarterly Report on Form 10-QSB for the fiscal
quarter ended December 31, 1998, and incorporated herein by
reference).
10.1 Promissory Note, dated May 6, 2003, made by the registrant to
the order of Robert Spiegel (filed as Exhibit 10.25 to the
registrant's annual report on Form 10-KSB filed on June 30,
2003, and incorporated herein by reference).
10.2 Assignment and Consent Agreement by and among the registrant,
William H. Gunther, Jr., and Gunther Partners LLC, dated May
14, 2003 (filed as Exhibit 10.26 to the registrant's annual
report on Form 10-KSB filed on June 30, 2003, and incorporated
herein by reference).
10.3 Assignment and Consent Agreement by and among the registrant,
Christine E. Gunther, Jr., and Gunther Partners LLC, dated May
14, 2003 (filed as Exhibit 10.27 to the registrant's annual
report on Form 10-KSB filed on June 30, 2003, and incorporated
herein by reference).
10.4 Transfer and assignment of Agreement dated May 14, 2003
between Gunther Partners LLC and the registrant (filed as
Exhibit 10.28 to the registrant's annual report on Form 10-KSB
filed on June 30, 2003, and incorporated herein by reference).
10.5 Promissory Note, dated May 14, 2003 made by the registrant to
the order of Gunther Partners LLC (filed as Exhibit 10.29 to
the registrant's annual report on Form 10-KSB filed on June
30, 2003, and incorporated herein by reference).
10.6 Assignment and Consent Agreement by and among the registrant,
William H. Gunther III and Gunther Partners LLC, dated June
11, 2003 (filed as Exhibit 10.30 to the registrant's annual
report on Form 10-KSB filed on June 30, 2003, and incorporated
herein by reference).
10.7 Assignment and Consent Agreement by and among the registrant,
Susan G. Hotkowski, and Gunther Partners LLC, dated June 11,
2003 (filed as Exhibit 10.31 to the registrant's annual report
on Form 10-KSB filed on June 30, 2003, and incorporated herein
by reference).
10.8 Transfer and assignment of Agreement dated June 11, 2003
between Gunther Partners LLC and the registrant (filed as
Exhibit 10.32 to the registrant's annual report on Form 10-KSB
filed on June 30, 2003, and incorporated herein by reference).
10.9 Promissory Note, dated June 11, 2003 made by the registrant to
the order of Gunther Partners LLC (filed as Exhibit 10.33 to
the registrant's annual report on Form 10-KSB filed on June
30, 2003, and incorporated herein by reference).
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10.10 Extension of Note dated May 6, 2003 made by Robert Spiegel to
the registrant (filed as Exhibit 10.34 to the registrant's
annual report on Form 10-KSB filed on June 30, 2003, and
incorporated herein by reference).
10.11 Extension of Note dated January 31, 2003 and commitment letter
made by Gunther Partners LLC to the registrant (filed as
Exhibit 10.35 to the registrant's annual report on Form 10-KSB
filed on June 30, 2003, and incorporated herein by reference).
10.12 Promissory Note dated June 19, 2003 made by the registrant to
the order of Robert Spiegel (filed as Exhibit 10.36 to the
registrant's annual report on Form 10-KSB filed on June 30,
2003, and incorporated herein by reference).
10.13 Promissory Note dated June 30, 2003 made by the registrant to
the order of Gunther Partners LLC (filed as Exhibit 10.37 to
the registrant's annual report on Form 10-KSB filed on June
30, 2003, and incorporated herein by reference).
31.1 Certification of Marc I. Perkins, Chief Executive Officer,
pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934.
31.2 Certification of John K. Carpenter, Chief Financial Officer,
pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934.
32.1 Certifications of Marc I. Perkins, Chief Executive Officer and
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
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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/ John K. Carpenter Date: August 6, 2003
--------------------------------
John K. Carpenter
Chief Financial Officer and Treasurer
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
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