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 September 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 October
30, 2003 was 19,428,428.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
GUNTHER INTERNATIONAL LTD.
INDEX
Page
----
PART I - CONDENSED FINANCIAL INFORMATION
Item 1. Financial Statements - (Unaudited)
Condensed Consolidated Balance Sheets as of September 30,
2003 and March 31, 2003 2
Condensed Consolidated Statements of Operations for
the three and six months ended September 30, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows for the six
months ended September 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 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
See accompanying notes.
2
PART I. CONDENSED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GUNTHER INTERNATIONAL LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 2003 MARCH 31, 2003
------------------ --------------
Assets
Current Assets:
Cash ...................................................................... $ 1,348,484 $ 405,540
Restricted cash ........................................................... 102,518 101,862
Accounts receivable, less allowance ....................................... 1,167,205 905,450
Costs and estimated earnings in excess
of billings on uncompleted contracts .................................. 808,649 56,409
Inventories ............................................................... 3,075,357 2,489,349
Prepaid expenses .......................................................... 217,356 163,914
------------------ --------------
Total current assets .................................................. 6,719,569 4,122,524
------------------ --------------
Equipment and Leasehold Improvements:
Machinery and equipment ................................................... 1,450,011 1,403,050
Furniture and fixtures .................................................... 467,864 446,256
Leasehold improvements .................................................... 134,186 128,494
------------------ --------------
2,052,061 1,977,800
Accumulated depreciation and amortization .................................... (1,489,571) (1,248,165)
------------------ --------------
562,490 729,635
------------------ --------------
Other Assets:
Deferred royalty .......................................................... 364,469 -
Goodwill .................................................................. 2,551,429 2,551,429
Other ..................................................................... 9,127 16,327
------------------ --------------
2,925,025 2,567,756
------------------ --------------
$ 10,207,084 $ 7,419,915
================== ==============
Liabilities and Stockholders' Equity (Deficit):
Current Liabilities:
Notes payable and current maturities of long-term debt - related parties... $ 3,857,366 $ -
Current maturities of long-term debt - other .............................. 36,916 31,264
Accounts payable .......................................................... 2,863,699 1,508,965
Accrued expenses .......................................................... 757,968 1,124,337
Billings in excess of costs and estimated
earnings on uncompleted contracts ..................................... 314,761 195,027
Deferred service contract revenue ......................................... 1,974,320 2,342,455
------------------ --------------
Total current liabilities ............................................. 9,805,030 5,202,048
------------------ --------------
Long-Term Debt:
Related parties, less current maturities .................................. 364,520 1,100,000
Other, less current maturities ............................................ 51,396 30,110
------------------ --------------
415,916 1,130,110
------------------ --------------
Total liabilities ..................................................... 10,220,946 6,332,158
------------------ --------------
Royalty commitment (Note 5)
Stockholders' Equity (Deficit):
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 September 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 ....................................................... (19,963,838) (18,862,219)
------------------ --------------
Total Stockholders' Equity (Deficit) ...................................... (13,862) 1,087,757
------------------ --------------
$ 10,207,084 $ 7,419,915
================== ==============
See accompanying notes.
2
GUNTHER INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Sales:
Systems ............................. $ 3,097,438 $ 3,290,324 $ 4,105,939 $ 5,074,435
Maintenance ......................... 2,863,063 2,829,061 5,793,657 5,570,156
Supplies ............................ 565,402 702,564 1,097,630 1,332,735
------------ ------------ ------------ ------------
Total sales ..................... 6,525,903 6,821,949 10,997,226 11,977,326
------------ ------------ ------------ ------------
Cost of sales:
Systems ............................. 2,323,925 2,316,458 3,591,923 4,106,591
Maintenance ......................... 1,900,888 1,997,957 3,650,516 4,177,274
Supplies ............................ 478,119 615,805 931,450 1,178,789
------------ ------------ ------------ ------------
Total cost of sales ............. 4,702,932 4,930,220 8,173,889 9,462,654
------------ ------------ ------------ ------------
Gross profit .................. 1,822,971 1,891,729 2,823,337 2,514,672
------------ ------------ ------------ ------------
Operating expenses:
Selling and administrative .......... 1,480,117 1,662,747 2,948,648 3,034,356
Research and development ............ 395,235 420,250 881,894 757,168
------------ ------------ ------------ ------------
Total operating expenses ........ 1,875,352 2,082,997 3,830,542 3,791,524
------------ ------------ ------------ ------------
Operating loss ......................... (52,381) (191,268) (1,007,205) (1,276,852)
Interest expense, net ............... (53,271) (16,611) (94,414) (19,423)
------------ ------------ ------------ ------------
Net loss ............................... $ (105,652) $ (207,879) $ (1,101,619) $ (1,296,275)
============ ============ ============ ============
Basic and diluted net loss per share.... $ (0.01) $ (0.01) $ (0.06) $ (0.07)
============ ============ ============ ============
Basic and diluted weighted average
number of common shares outstanding.. 19,428,428 19,380,621 19,428,428 19,376,526
============ ============ ============ ============
See accompanying notes.
3
GUNTHER INTERNATIONAL LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
2003 2002
----------- -----------
Operating activities:
Net loss ............................................................... $(1,101,619) $(1,296,276)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization of equipment and leasehold
improvments ..................................................... 258,525 309,909
Amortization of deferred royalty ................................... 57,416 -
Amortization of other assets ....................................... 7,200 7,200
Provision for doubtful accounts .................................... 12,062 18,161
Directors' compensation ............................................ - 32,500
Changes in operating assets and liabilities:
Accounts receivable ............................................. (273,817) (627,565)
Inventories ..................................................... (570,094) (199,196)
Prepaid expenses ................................................ (53,442) (41,812)
Accounts payable ................................................ 1,354,734 504,612
Accrued expenses ................................................ (216,877) 9,593
Deferred service contract revenue ............................... (368,135) 199,304
Billings, costs and estimated earnings on
uncompleted contracts - net ................................... (632,506) (456,724)
----------- -----------
Net cash used for operating activities ........................ (1,526,553) (1,540,294)
----------- -----------
Investing activities:
Acquisitions of equipment and leasehold improvements ................... (80,355) (58,929)
----------- -----------
Net cash used for investing activities ........................ (80,355) (58,929)
----------- -----------
Financing activities:
Repayment of long-term debt - related parties .......................... (149,492) (14,419)
Proceeds from notes payable - related parties .......................... 2,700,000 1,000,000
Transfer to restricted cash ............................................ (656) (1,000)
----------- -----------
Net cash provided by financing activities ..................... 2,549,852 984,581
----------- -----------
Change in cash ............................................................ 942,944 (614,642)
Cash, beginning of year ................................................... 405,540 1,119,790
----------- -----------
Cash, end of period ....................................................... $ 1,348,484 $ 505,148
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest ................................................. $ 9,312 $ 8,270
=========== ===========
Cash paid for income taxes ............................................. $ 33,952 $ 13,833
=========== ===========
Supplemental Disclosure of Non-Cash Investing Activities:
Property and equipment acquired for notes payable ...................... $ 26,939
===========
Notes payable issued for royalties ..................................... $ 571,377
===========
See accompanying notes.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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.
Certain jet.engine(TM) customer evaluation units, at an original cost
of $33,033 and a current book value of $15,914, which were classified as
machinery and equipment at June 30, 2003, have been reclassified to inventory
during the quarter ended September 30, 2003.
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 September 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 $2,000,000 compared to $2,700,000 at
June 30, 2003 and $1,300,000 at September 30, 2002.
At September 30, 2003, the Company had a deficiency in working capital
of $3,085,461, primarily attributable to notes payable and current maturities of
long-term debt due to related parties. For the six months ended September 30,
2003, the Company incurred a net loss of $1,101,619, with cash of $1,526,553
used by operating activities.
During the first quarter of fiscal 2004, Mr. Spiegel, a board member
and shareholder, loaned the Company an aggregate of $700,000 under two 8% notes
due and payable on demand at any time on or after April 1, 2004. On October 7,
2003, Mr. Spiegel assigned and transferred these notes to Gunther Partners, a
shareholder. 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. The Company is currently in negotiations with Gunther Partners to extend
the due dates of these notes to a date that is beyond March 31, 2005. The
Company does not currently have sufficient funds available to repay an
appreciable portion of the amounts owed to Gunther Partners and still meet its
other obligations.
The ability of the Company to continue as a going concern is dependent
on extending the due dates of amounts due to Gunther Partners or obtaining other
long-term 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.
5
3. STOCK BASED COMPENSATION:
At September 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 and six month periods
ending September 30, 2003 and 2002.
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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss, as reported ............. $ (105,652) $ (207,879) $(1,101,619) $(1,296,275)
Stock-based compensation expense
based on fair value ............ 20,000 20,000 45,000 40,000
----------- ----------- ----------- -----------
Pro forma net loss ................ $ (125,652) $ (227,879) $(1,146,619) $(1,336,275)
=========== =========== =========== ===========
Basic and diluted per share:
As reported .................... $ (0.01) $ (0.01) $ (0.06) $ (0.07)
=========== =========== =========== ===========
Pro forma ...................... $ (0.01) $ (0.01) $ (0.06) $ (0.07)
=========== =========== =========== ===========
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 104% 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 $152,000 and $414,000 lower, respectively, for the
three and six month periods ended September 30, 2003, than they otherwise would
have been. For the three and six month periods ended September 30, 2002, cost of
sales were similarly reduced by $94,000.
5. ROYALTY COMMITMENT:
In 1992, the Company entered into an agreement with seven founding
stockholders whereby the Company was obligated to pay these individuals an
annual royalty equal to 1% of total revenues up to an aggregate total of
$12,000,000. During the first quarter of fiscal 2004, Gunther Partners acquired
the rights to approximately 67% of the future royalty payments, including fiscal
year 2003 royalties, from four of the seven founding stockholders for a lump-sum
payment of $571,377. Subsequently, Gunther Partners assigned the rights to
receive those royalties to the Company in exchange for notes bearing 8%
interest. (These notes include $149,492 of royalties previously accrued but not
paid in fiscal 2003.) The principal and interest repayments on the notes are
equivalent to the amounts that would have been due and payable under the
cancelled royalty agreements. 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 notes. Under the terms of the
original agreement with the remaining three founders and the notes to Gunther
Partners, during the second quarter, the Company paid $72,596 and $149,492,
respectively, for the fiscal 2003 royalties and debt repayment. The Company has
classified $57,366 of the notes as current as of September 30, 2003. For the
periods ended September 30, 2003 and 2002, royalties expensed under these
agreements were $93,000 (net of interest expense of $14,000 on the notes) and
$119,000, respectively. After giving effect to the above transactions, the
maximum remaining royalty that may be required to be paid to the remaining three
founding stockholders contingent upon the Company attaining certain revenues, is
$3,400,000.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CRITICAL ACCOUNTING POLICIES
Operating results may be affected 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 monthly,
performing detailed 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 for impairment 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 September 30, 2003 declined to
$6,500,000 from $6,800,000 for the three months ended September 30, 2002. Sales
for the six month period ended September 30, 2003 declined from $12,000,000 to
$11,000,000.
Systems sales consist of sales of high-speed inserter assembly systems,
upgrades to previously sold systems and inc.jet imager systems. Systems sales
for the three months ended September 30, 2003 decreased $200,000 to $3,100,000
from $3,300,000 for the same period ended September 30, 2002. Year-to-date
systems sales through September 30, 2003 also declined from $5,100,000 to
$4,100,000.
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 for all signed system and upgrade orders on hand (excluding imagers) less
revenue recognized to date. Revenue recognized on inserter sales year-to-date
through September 30, 2003 has been $3,100,000 compared to $4,600,000 for the
comparable period in fiscal 2003. As can be seen in the chart below, the Company
had a $1,000,000 lower backlog at the most recently completed quarter as
compared to the comparable quarter in the last fiscal year. While orders
received during the current fiscal year ($4,200,000) have surpassed the orders
received for the same period last year by $300,000, the difference in opening
backlog resulted in a decline in revenues during the first six months of fiscal
2004.
As can be seen below, the Company has a strong backlog coming into the
third quarter. This coupled with a growing prospect list makes the Company
anticipate stronger revenue growth through the third quarter.
QUARTER ENDED
-------------------------------------------------------
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30,
2003 2003 2002 2002
(IN MILLIONS) ------------ ------- ------------ --------
Backlog, beginning of period... $ 2.7 $ 0.9 $ 3.1 $ 1.9
Orders ........................ 1.8 2.4 1.1 2.8
Revenues recognized ........... (2.5) (0.6) (3.0) (1.6)
------------ ------- ------------ --------
Backlog, end of period ........ $ 2.0 $ 2.7 $ 1.2 $ 3.1
============ ======= ============ ========
7
Sales of inc.jet imagers for the six months ended September 30, 2003
compared to the same period in fiscal 2003 increased $394,000, from $539,000 to
$933,000. This is primarily the result of the introduction of the jet.engine(TM)
which now represents over 50% of imager sales. With the introduction of the
jet.engine(TM) over the past few months at annual trade shows, the Company
believes that imager sales volumes will increase substantially over the
remainder of the fiscal year.
Maintenance sales consist of contracted maintenance, repair parts sales
and other miscellaneous service sales. Total maintenance revenues for the
quarter ended September 30, 2003 have increased $35,000 from September 30, 2002
and have increased $224,000 for the six months ended September 30, 2003 compared
to the comparable period in fiscal 2003.
Contracted maintenance revenues decreased $24,000 for the three month
period ended September 30, 2003 compared to the same period in fiscal 2003. This
decrease resulted from reductions in services provided to a nominal number of
customers offset by normal contract price increases. Service contract revenue
for the six months ended September 30, 2003 has increased $88,000 over the same
period last year due to increased new equipment installations. Repair parts and
other miscellaneous service sales rose from $89,000 to $148,000 for the quarters
ended September 30, 2002 and 2003, respectively and from $174,000 to $309,000
for the six month periods ended September 30, 2003 and 2002, respectively. The
increase in other service sales year-to-date results from the sale of spare
parts to a customer who converted to self-maintenance in early January 2003. In
addition, additional revenues were realized in August due to service assistance
in the relocation of a customer system.
Supplies sales consist of ink cartridges, bladders and miscellaneous
parts and supplies related to inc.jet. Sales have decreased $137,000 from
$702,000 for the three month period ended September 30, 2002 to $565,000 for the
comparable period in fiscal 2004. In addition, supplies revenues have decreased
by $235,000 from the six months ended September 30, 2002 to 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. While supplies sales
have not recovered in total to prior year levels, volume has begun to increase
slowly over the past quarter and management believes that this trend will
continue.
Gross Profit -
The overall gross profit remained relatively flat at 28% for the
quarter ended September 30, 2003, compared to the same period in 2002. For the
year-to-date period ended September 30, 2003, gross profit as a percentage of
sales rose to 26% compared to 21% for the comparable period last fiscal year.
Systems gross profit includes high-speed inserters, as well as, inc.jet
imager hardware. Systems gross profit was $774,000 for the second quarter of
fiscal 2004 compared to a profit of $974,000 for the comparable period in fiscal
2003. For the six month period ended September 30, 2003, systems gross profit
declined to $514,000 from $968,000 for the same period last year.
High speed inserter assembly gross profit declined from $750,000 to
$331,000 for the quarters ended September 30, 2003 and 2002, respectively. For
the six months ended September 30, 2003 and 2002, gross profit declined to a
loss of $173,000 from a profit of $568,000. The primary reason for the decline
both for the quarter and year-to-date was the reduction in sales volume.
Offsetting the decline in sales, cost of sales decreased by $63,000 for the
quarter and $646,000 year-to-date for the period ended September 30, 2003
compared to the comparable periods last year. Materials costs as a percentage of
revenues for the quarter increased to 44% from 38% from the comparable period
last year. This primarily resulted from the use of completed modules in
production. Over the past year, the Company has been producing modules for stock
in anticipation of system orders. The use of these modules in production changes
the timing of material costs into production but overall significantly decreases
the production time. Overall, labor and overhead costs for the quarter fell
$26,000, from $1,066,000 to $1,040,000. Year-to-date, labor and overhead cost
have decreased from $2,100,000 to $1,900,000 due to continuing cost saving
programs.
8
inc.jet imager gross profit increased by $164,000, from $251,000 to
$415,000, for the quarters ended September 30, 2003 and 2002, respectively. For
the same periods, gross profit as a percentage of sales has decreased from 82%
to 70%. Gross profit for the six month periods ended September 30, 2003 and 2002
has increased from $425,000 to $650,000, respectively. For the six month
periods, gross profit as a percent of sales has also declined to 70% from 79%.
While the increase in gross profit is driven by the increased sales volume, the
decline in gross profit as a percentage of sales is primarily the result of
reduced pricing on the older model imagers and also a slightly higher cost for
the jet.engine(TM) imager.
Maintenance gross profit increased $131,000, to $962,000 from $831,000,
for the three month periods ended September 30, 2003 and 2002, respectively and
increased $750,000 for the six months ended September 30, 2003 compared to the
same period in fiscal year 2003. Gross profit as a percentage of revenues
increased to 34% from 29% for the three months ended September 30, 2003 compared
to September 30, 2002. The gross profit percentage for the six month period
ended September 30, 2003 also increased to 37% from 25% during the comparable
period in fiscal 2003. 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 $141,000 for the three months ended September 30, 2003
compared to $94,000 in the similar period last year. The effect of the usage of
these parts over the six month period ended September 30, 2003 was $403,000
compared to $94,000 for the same period last year. Future reductions in
maintenance cost of sales based on similarly obtained parts are expected to
approximate $350,000 over the next several years.
In terms of dollars, inc.jet supply gross profit has remained fairly
stable at $87,000 for the quarters ended September 30, 2003 and 2002,
respectively. For the six months ended September 30, 2003, gross profit has
increased $12,000, from $154,000 to $166,000. In terms of percentage, gross
profit has increased from 12% to 15% both for the quarter and year-to-date. The
increase in gross profit percent is mainly due to a reduction in sales discounts
from year to year.
Operating Expenses -
Total operating expenses decreased by $208,000 from $2,083,000 to
$1,875,000 for the three month periods ended September 30, 2003 and 2002,
respectively. Operating expenses year-to-date have increased slightly by $39,000
from $3,792,000 to $3,831,000.
Selling and administrative expenses include selling and marketing
expenses as well as general administrative costs. These expenses have declined
for both the quarter and year-to-date periods compared to the comparable periods
in the prior year. For the quarter, expenses declined $183,000 from the
comparable period last year and year-to-date have declined $86,000.
Selling and marketing expenses have increased over the comparable
periods last year by $99,000 quarter to quarter and $192,000 year-to-date. The
increases in both periods are the result of higher commissions paid on orders
booked.
Administrative expenses have decreased by $282,000 for the quarter and
$278,000 year-to-date. The decreases arise from a number of factors. Healthcare
costs have declined $109,000 for the quarter and $139,000 year-to-date. At
September 30, 2002, the Company had just changed its medical insurance coverage
to fully insured from self-funded. At that time, the Company was paying both the
premiums for the new coverage and also funding the remaining claims under the
old policy. In addition, the Company's agreement with Connecticut Innovations,
Inc. expired as of December 31, 2002. As of the quarter and six months ended
September 30, 2002, the Company had accrued $44,000 and $87,000, respectively.
Finally, other various expense categories are significantly lower than prior
years, including professional fees, royalties and depreciation.
R & D Expense -
R & D expense has declined $25,000 quarter over quarter as a result of
the completion of the Series W project in late fiscal 2003. The expense has
increased $125,000 during the six month period ended September 30, 2003 compared
to the same period last year due to the on-going development expenses related to
the inc.jet jet.engine(TM).
9
Interest Expense -
Interest expense has increased for the quarter and year to date as a
result of the additional borrowings primarily during the first quarter of fiscal
2004.
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 to
customers and the payments to vendors for systems under production.
For the six months ended September 30, 2003, the Company incurred a net
loss of $1,101,619. In addition, the Company used $1,526,553 of cash for
operating activities and had a deficiency in working capital at September 30,
2003 of $3,085,461, primarily attributable to notes payable and current
maturities of long-term debt due to related parties.
In fiscal 2003, Gunther Partners, a shareholder, loaned the company
$1,100,000 under an 8% note. During the first quarter of fiscal 2004, the note
was made payable on demand at any time on or after April 1, 2004. During the
first quarter of fiscal 2004, Mr. Spiegel, a board member and shareholder,
loaned the Company an aggregate of $700,000 under two 8% notes due and payable
on demand at any time on or after April 1, 2004. As of October 7, 2003, Mr.
Spiegel assigned these notes to Gunther Partners. On June 30, 2003, Gunther
Partners loaned the Company an additional $2,000,000 under an 8% note due and
payable on demand at any time on or after April 1, 2004. The Company is
currently in negotiations with Gunther Partners to extend the due dates of these
notes to a date that is beyond March 31, 2005. The Company does not currently
have sufficient funds available to repay an appreciable portion of the amounts
owed to Gunther Partners and still meet its other obligations.
In September 1992, 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 $12,000,000 (of which
approximately $1,500,000 has been paid through September 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 the
rights to the royalties 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 contingent upon the Company attaining certain revenue levels is
$3,400,000.
The ability of the Company to continue as a going concern is dependent
on extending the due dates of amounts due to Gunther Partners or 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.
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On a going forward basis, management is cautiously optimistic that the
Company's operating results will improve during the remainder of fiscal 2004.
The Company has several excellent short-term sales prospects. Also, as can be
seen from the quarterly results, there are a number of significant decreases in
operating expenses which are expected to be realized over the remainder of the
fiscal year. The Company believes that the improvement in operating results
combined with cash on hand of $1,300,000 as of September 30, 2003 will be
sufficient to fund operations for the remainder of fiscal 2004, provided that
the Company is able to negotiate an extension of the due dates of the notes
payable to Gunther Partners.
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; (x)
the timely receipt of customer payments on or near the due dates for such
payments; and, (xi) the ability to extend the due dates of the notes payable to
Gunther Partners. 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 September 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A. The 2003 Annual Meeting of Stockholders was held on September 18, 2003
at the Company's corporate office in Norwich, Connecticut.
B. The following individuals were elected as directors at the Annual
Meeting:
Name Votes For Votes Withheld
---- --------- --------------
James A. Cotter, Jr. 19,134,204 1,950
Edward F. Hacker 19,134,204 1,950
Steven S. Kirkpatrick 19,134,204 1,950
Marc I. Perkins 19,134,204 1,950
Robert Spiegel 19,134,204 1,950
Thomas M. Steinberg 19,134,204 1,950
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 registrant's Quarterly Report on Form 10-QSB for the
fiscal quarter ended December 31, 1998, and incorporated
herein by reference).
10.1 Transfer and assignment to Gunther Partners LLC dated October
7, 2003 of Promissory Notes originally dated May 6 and June
19, 2003 made by the registrant to Robert Spiegel.
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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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: November 11, 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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